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: 811-4304
Exact name of registrant as specified in charter:
Delaware Group Government Fund
Address of principal executive offices:
2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service:
Richelle S. Maestro, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: July 31
Date of reporting period: July 31, 2005
Item 1. Reports to Stockholders
Delaware
Investments(R)
-----------------------------------
A member of Lincoln Financial Group
FIXED INCOME
ANNUAL REPORT JULY 31, 2005
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DELAWARE AMERICAN GOVERNMENT BOND FUND
[LOGO] POWERED BY RESEARCH(R)
TABLE
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARY 2
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DISCLOSURE OF FUND EXPENSES 4
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SECTOR ALLOCATION 5
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FINANCIAL STATEMENTS:
Statement of Net Assets 6
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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OTHER FUND INFORMATION 20
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BOARD OF TRUSTEES/DIRECTORS AND OFFICERS 22
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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) 2005 Delaware Distributors, L.P.
PORTFOLIO DELAWARE AMERICAN GOVERNMENT BOND FUND
MANAGEMENT REVIEW August 8, 2005
FUND MANAGERS
Steven R. Cianci
Portfolio Manager
Paul Grillo
Portfolio Manager
Q: PLEASE DESCRIBE THE NATURE OF THE FIXED INCOME MARKETS DURING THE 12-MONTH
PERIOD ENDED JULY 31, 2005.
A: During the last five months of 2004, interest rates steadily trended downward
as evidence of economic weakness, as with soft auto and retail sales, and crude
oil prices continued to rise, pressing $50 per barrel. These factors generally
led market participants to lower their expectations for economic expansion.
Beginning this period at 4.48%, 10-year Treasury yields dropped to a low of
3.99% after September's disappointing non-farm payroll number before rising to a
year-ending 4.24%. During November, crude oil prices declined by 5% after
reaching $55 per barrel in early October. Already trending downward, the U.S.
dollar continued to weaken over the final three months of 2004, declining -9.0%
and -7.2% versus the euro and yen, respectively (source: Bloomberg L.P.).
Furthermore, the Federal Reserve Board remained committed to raising rates at "a
measured pace." The fed-funds rate had risen from 1.25% at the fiscal year's
start to 2.25% by calendar year-end (source: St. Louis Federal Reserve Bank).
From the onset of 2005 until July 31, 10-year Treasury yields first moved
downward, to a seven-month low of 3.91%, before beginning their ascent to 4.28%
by fiscal year-end. During this period, a "bull flattening" trend was largely in
place, with the yield spread between two- and 30-year Treasuries narrowing,
given market uncertainty over U.S. economic growth prospects (source: Bloomberg
L.P.).
In our opinion, foreign demand, European economic slowdown, and investor
perceptions of an "inflation fighting" Federal Reserve Board fueled the tendency
toward relatively low long-term yields. Perhaps Federal Reserve Chairman Alan
Greenspan put it best, when in attempting to describe the sense of disconnect
between rising short-term rates and muted longer-term bond yield, he employed
the term "conundrum" (source: Reuters Group PLC).
Mid-high grade corporates, along with agency and mortgage bonds, were the top
performers during the fiscal year, while asset-backed securities (ABS) and
Treasury Inflation-Protected Securities (TIPS) were some of the top
underperformers (source: Citigroup Global Markets Inc.).
Q: HOW WELL DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK AND PEER GROUP?
A: Delaware American Government Bond Fund performed in line relative to its
benchmark and peer group, returning +4.60% (Class A shares at net asset value
with distributions reinvested) for the fiscal year ended July 31, 2005. The
Fund's performance benchmark - the Lehman Brothers Government Bond Index -
returned +4.39% and its peer group - as measured by the Lipper General U.S.
Government Funds Average - returned +4.75% (source: Lipper Inc.).
Q: WHAT FACTORS INFLUENCED FUND PERFORMANCE FOR THE FISCAL YEAR PERIOD?
A: With regard to the Federal Reserve Board and its policy of raising short-term
rates in 25-basis point (0.25%) increments, we believed the front-end of the
yield curve would be susceptible to coupon-type returns, in which price
appreciation would play little, if any, role in influencing Fund performance.
Conversely, we believed the back-end of the yield curve could potentially
benefit from the confluence of key forces at work within the fixed income
markets, as with the Federal Reserve's continued endorsement of higher rates,
rising petroleum prices, and demand from foreign investors for long-dated
domestic debt. We viewed the combination of these factors as supporting the
thesis of a gearing down of the global economy, resulting in this year's notable
"bull flattening trade."
Q: DESCRIBE SOME BROAD DECISIONS YOU APPLIED TO THE FUND'S PORTFOLIO.
A: In 2005, for example, we believed Fund performance focused on security and
sector decisions, as well as yield curve placement, and less on interest rate
considerations. We favored a high-quality exposure in the front-end of the yield
curve, allocating assets to mortgage-backed securities (MBS). To a lesser
degree, we employed asset-backed securities (ABS); to a greater degree, we used
agency bonds.
Q: WHAT INFLUENCED PERFORMANCE IN THE FUND?
A: TIPS retreated during the second quarter of 2005, thereby taking back the
gains they had experienced earlier in the year. On the other hand, we believe
the Fund benefited from investments we positioned strategically along the yield
curve. In the short end, we believe hybrid mortgages aided Fund return. In the
middle, Fannie Mae subordinated debt benefited from the flattening yield curve,
as did agency zero-coupon bonds, specifically REFCO strips, in the long end.
Q: HOW MIGHT YOU MANAGE THE FUND IF SHORT-TERM RATES STABILIZE?
A: With the prospect of the Federal Reserve Board ending its campaign of raising
short-term rates - likely in our view in the 3.75% to 4.00% range - we would
anticipate to unravel the bias that's currently in the Fund, gearing it toward a
flattening yield curve. We may instead favor a "bullet" investment strategy,
whereby bond maturities may tend to be focused on one point of the yield curve.
1
PERFORMANCE SUMMARY
DELAWARE AMERICAN GOVERNMENT BOND FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. Please obtain the performance data for the most recent month end by
calling 800 523-1918 or visiting our web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges and expenses of the investment carefully before
investing. The Delaware American Government Bond Fund prospectus contains this
and other important information about the investment company. Please request a
prospectus by calling 800 523-1918. Read it carefully before you invest or send
money. Performance includes reinvestment of all distributions.
FUND PERFORMANCE
Average Annual Total Returns
Through July 31, 2005 Lifetime 10 Years Five Years One Year
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Class A (Est. 8/16/85)
Excluding Sales Charge +6.64% +5.74% +6.36% +4.60%
Including Sales Charge +6.39% +5.25% +5.38% -0.10%
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Class B (Est. 5/2/94)
Excluding Sales Charge +5.14% +5.14% +5.61% +3.87%
Including Sales Charge +5.14% +5.14% +5.37% -0.13%
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Class C (Est. 11/29/95)
Excluding Sales Charge +4.79% +5.60% +3.87%
Including Sales Charge +4.79% +5.60% +2.87%
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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 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%. Lifetime and 10-year performance figures for
Class B shares reflect conversion to Class A shares after eight years.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
The average annual total returns for the lifetime and one-year periods ended
July 31, 2005 for Delaware American Government Bond Fund's Class R shares were
1.78% and 4.41%, 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%. However, as of August 1, 2005, the Distributor has contracted to limit
this amount to 0.50% through October 31, 2006.
The average annual total returns for the lifetime (since 8/16/85), 10-year,
five-year, and one-year periods ended July 31, 2005 for Delaware American
Government Bond Fund's Institutional Class were +6.90%, +6.05%, 6.67%, and
+4.91%, respectively. The Institutional Class shares were first made available
on June 1, 1992 and are available without sales or asset-based distribution
charges only to certain eligible institutional accounts. Institutional Class
performance prior to June 1, 1992 for Delaware American Government Bond Fund is
based on Class A performance and was adjusted to eliminate the sales charges,
but not the asset-based distribution charge of Class A shares.
An expense limitation was in effect for all classes of Delaware American
Government Bond Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DUGIX
Nasdaq Class R symbol: DUGRX
2
FUND BASICS
As of July 31, 2005
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FUND OBJECTIVE:
To provide high current income consistent with safety of principal by investing
primarily in debt obligations issued or guaranteed by the U.S. government, its
agencies, or instrumentalities.
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TOTAL FUND NET ASSETS:
$150.8 million
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NUMBER OF HOLDINGS:
221
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FUND START DATE:
August 16, 1985
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YOUR FUND MANAGERS:
Stephen R. Cianci joined Delaware Investments in 1992. He holds both a B.S. and
a MBA from Widener University. He became co-manager of the Fund in January 1999.
Mr. Cianci is an Adjunct Professor of Finance at Widener University and is a CFA
charterholder.
Paul Grillo joined Delaware Investments in 1993, after serving as a mortgage
strategist and trader at Dreyfus Corporation. He holds a bachelor's degree from
North Carolina State University and a MBA from Pace University. Mr. Grillo is
also a CFA charterholder.
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NASDAQ SYMBOLS:
Class A DEGGX
Class B DEGBX
Class C DUGCX
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PERFORMANCE OF A $10,000 INVESTMENT
July 31, 1995 through July 31, 2005
DELAWARE
AMERICAN
GOVERNMENT
ANNUAL BOND FUND - ANNUAL LEHMAN BROTHERS GOVERNMENT
RETURN CLASS A SHARES RETURN BOND INDEX
Jul-95 $ 9,550 $10,000
Jul-96 4.09% $ 9,941 5.20% $10,520
Jul-97 9.77% $10,912 8.59% $11,424
Jul-98 6.50% $11,621 6.83% $12,204
Jul-99 0.59% $11,690 4.05% $12,698
Jul-00 4.88% $12,260 5.16% $13,353
Jul-01 12.14% $13,748 11.73% $14,920
Jul-02 7.67% $14,803 8.60% $16,203
Jul-03 3.83% $15,370 4.03% $16,856
Jul-04 3.74% $15,945 2.74% $17,318
Jul-05 4.60% $16,678 2.51% $17,752
Chart assumes $10,000 invested on July 31, 1995 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. The chart also assumes $10,000 invested in the Lehman Brothers
Government Bond Index. Returns plotted on the chart were as of the last day of
each successive month shown. The Lehman Brothers Government Bond Index is an
unmanaged index that generally tracks the performance of U.S. Government bonds.
An index is unmanaged and does not reflect the costs of operating a mutual fund,
such as the costs of buying, selling, and holding securities. You cannot invest
directly in an index. The performance graph does not reflect the deduction of
taxes the shareholder would pay on fund distributions or redemption of Fund
shares. An expense limitation was in effect for all classes of the Delaware
American Government Bond Fund during the period shown. Performance would have
been lower had the expense limitation not been in effect. Past performance is
not a guarantee of future results.
3
DISCLOSURE For the Period February 1, 2005 to July 31, 2005
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 February 1, 2005 to July 31, 2005.
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 expenses shown in the table assume reinvestment of all dividends and
distributions.
DELAWARE AMERICAN GOVERNMENT BOND FUND
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 2/1/05 to
2/1/05 7/31/05 Ratio 7/31/05*
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ACTUAL FUND RETURN
Class A $1,000.00 $1,008.50 1.10% $5.48
Class B 1,000.00 1,005.00 1.80% 8.95
Class C 1,000.00 1,005.00 1.80% 8.95
Class R+ 1,000.00 1,007.00 1.40% 6.97
Institutional Class 1,000.00 1,010.00 0.80% 3.99
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HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,019.34 1.10% $5.51
Class B 1,000.00 1,015.87 1.80% 9.00
Class C 1,000.00 1,015.87 1.80% 9.00
Class R+ 1,000.00 1,017.85 1.40% 7.00
Institutional Class 1,000.00 1,020.83 0.80% 4.01
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* "Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).
+ The table above reflects Class R distribution and service (12b-1) fees of
0.60%. Effective August 1, 2005, DDLP has contracted to limit distribution and
service fees through November 30, 2006 in order to prevent distribution and
service fees of Class R shares from exceeding 0.50% of average daily net
assets.
4
SECTOR ALLOCATION As of July 31, 2005
DELAWARE AMERICAN GOVERNMENT BOND FUND
Sector designations may be different than the sector designations presented in
other Fund materials.
PERCENTAGE
SECTOR OF NET ASSETS
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AGENCY ASSET-BACKED SECURITIES 2.29%
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AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 21.65%
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AGENCY MORTGAGE-BACKED SECURITIES 18.66%
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AGENCY OBLIGATIONS 16.15%
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COMMERCIAL MORTGAGE-BACKED SECURITIES 1.88%
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CORPORATE BONDS 1.54%
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Banking 1.18%
Energy 0.36%
Finance 0.00%
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MUNICIPAL BONDS 0.15%
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NON-AGENCY ASSET-BACKED SECURITIES 0.78%
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NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 7.59%
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U.S. TREASURY OBLIGATIONS 28.55%
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REPURCHASE AGREEMENTS 1.59%
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TOTAL MARKET VALUE OF SECURITIES 100.83%
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LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (0.83)%
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TOTAL NET ASSETS 100.00%
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8
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF NET ASSETS July 31, 2005
Principal Market
Amount Value
AGENCY ASSET-BACKED SECURITIES - 2.29%
oSLMA Student Loan Trust
Series 1997-2 A2 3.631% 1/25/10 $ 279,642 $ 279,991
Series 2004-1 A1 3.69% 1/26/15 2,101,623 2,103,389
Series 2004-5 A2 3.68% 4/25/14 1,069,228 1,069,806
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TOTAL AGENCY ASSET-BACKED SECURITIES
(cost $3,452,183) 3,453,186
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AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 21.65%
Fannie Mae
Series 1988-15 A 9.00% 6/25/18 2,690 2,873
Series 1996-46 ZA 7.50% 11/25/26 329,563 352,340
Series 2001-50 BA 7.00% 10/25/41 419,124 437,870
Series 2003-122 AJ 4.50% 2/25/28 285,984 283,767
Fannie Mae Grantor Trust
Series 2001-T8 A2 9.50% 7/25/41 900,577 991,685
Series 2001-T10 A1 7.00% 12/25/41 449,476 469,821
Series 2002-T1 A2 7.00% 11/25/31 243,463 254,620
Fannie Mae Strip
Series 35-2 12.00% 7/1/18 145,539 164,052
Series C-2 12.00% 5/1/09 217,608 235,249
Series D-2 11.00% 4/1/09 153,353 163,079
Series F-2 11.50% 5/1/09 99,753 106,959
Series H-2 11.50% 5/1/09 160,504 172,053
Series J-1 7.00% 11/1/10 9,426 9,567
Fannie Mae Whole Loan
Series 2002-W1 2A 7.50% 2/25/42 278,735 293,873
Series 2004-W3 A2 3.75% 5/25/34 695,000 686,985
Series 2004-W9 2A1 6.50% 2/25/44 315,804 326,767
Freddie Mac
Series 2552 KB 4.25% 6/15/27 910,763 909,039
Series 2575 PT 4.50% 6/15/24 1,000,000 994,338
Series 2889 OE 5.00% 1/15/30 1,470,000 1,458,372
Series 2902 LC 5.50% 12/15/17 375,000 380,405
Series 2936 PC 5.00% 9/15/30 1,095,000 1,087,005
Series 2981 NC 5.00% 4/15/31 1,310,000 1,299,588
Freddie Mac Structured Pass
Through Securities
Series T-42 A5 7.50% 2/25/42 95,365 100,927
Series T-58 2A 6.50% 9/25/43 1,794,455 1,852,926
GNMA
Series 2002-28 B 5.779% 7/16/24 4,000,000 4,158,227
Series 2002-61 BA 4.648% 3/16/26 3,000,000 2,995,437
Series 2003-43 B 4.374% 4/16/33 5,000,000 4,887,937
Series 2003-72 C 4.86% 2/16/30 2,500,000 2,510,358
Series 2003-78 B 5.11% 10/16/27 5,000,000 5,057,908
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TOTAL AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (cost $32,782,341) 32,644,027
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AGENCY MORTGAGE-BACKED SECURITIES - 18.66%
Fannie Mae
5.50% 1/1/13 655,406 667,900
6.215% 6/1/08 636,744 658,235
7.41% 4/1/10 4,845,584 5,337,713
10.50% 6/1/30 36,467 41,345
oFannie Mae ARM TBA 5.057% 8/1/15 475,000 473,316
Fannie Mae Relocation 30 yr 5.00%
9/1/33 to 11/1/33 2,020,149 2,014,466
Principal Market
Amount Value
AGENCY MORTGAGE-BACKED SECURITIES (continued)
Fannie Mae S.F. 15 yr
6.00% 6/1/17 $ 1,264,592 $ 1,307,272
6.50% 6/1/16 49 51
8.00% 10/1/16 680,038 727,428
Fannie Mae S.F. 15 yr TBA 4.50% 8/1/20 40,000 39,350
Fannie Mae S.F. 30 yr
8.00% 2/1/30 67,279 72,262
10.00% 7/1/20 to 4/1/34 908,455 1,025,719
Fannie Mae S.F. 30yr TBA 5.50% 8/1/35 1,760,000 1,769,349
Freddie Mac 6.00% 1/1/17 370,902 381,450
Freddie Mac Relocation 15 yr
3.50% 9/1/18 to 10/1/18 3,032,486 2,857,170
Freddie Mac Relocation 30 yr
5.00% 9/1/33 2,643,173 2,635,738
Freddie Mac S.F. 15 yr 9.00% 12/1/05 310 312
Freddie Mac S.F. 20 yr 5.50% 9/1/24 1,379,170 1,396,839
Freddie Mac S.F. 30 yr
7.00% 11/1/33 183,370 192,596
8.00% 5/1/11 499,266 515,492
8.50% 12/1/09 34,729 35,988
9.00% 9/1/30 457,097 506,234
10.00% 1/1/19 38,500 43,084
11.50% 6/1/15 to 3/1/16 237,741 269,628
GNMA GPM
11.00% 3/15/13 37,870 41,539
12.00% 1/15/13 7,933 9,014
12.25% 3/15/14 11,787 13,135
GNMA S.F. 15 yr 6.50% 7/15/14 152,322 159,415
GNMA S.F. 30 yr
6.00% 4/15/33 767,588 789,896
7.00% 5/15/28 565,262 598,118
7.50% 12/15/23 to 1/15/32 681,611 731,067
8.00% 5/15/30 40,840 44,044
9.50% 9/15/17 to 3/15/23 290,123 321,628
10.00% 3/15/16 to 9/15/18 46,823 52,616
11.00% 12/15/09 to 9/15/15 190,008 208,418
11.50% 7/15/15 7,042 7,867
12.00% 12/15/12 to 12/15/15 554,012 624,499
12.50% 5/15/10 to 1/15/16 96,833 108,932
GNMA II GPM
10.75% 3/20/16 to 2/20/18 30,173 33,012
12.00% 1/20/14 23,393 26,683
GNMA II S.F. 15 yr 9.00% 10/20/05 118 119
GNMA II S.F. 30 yr
6.00% 11/20/28 294,129 302,126
6.50% 2/20/30 397,723 414,254
7.50% 9/20/30 83,595 88,977
8.00% 6/20/30 44,737 48,023
10.00% 11/20/15 to 6/20/21 94,727 106,494
10.50% 3/20/16 to 7/20/21 100,689 114,056
11.00% 5/20/15 to 7/20/19 52,180 57,609
12.00% 3/20/14 to 5/20/15 67,703 77,872
12.50% 10/20/13 to 7/20/15 172,814 193,722
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TOTAL AGENCY MORTGAGE-BACKED SECURITIES
(cost $27,992,898) 28,142,072
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6
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
AGENCY OBLIGATIONS - 16.15%
Fannie Mae
5.00% 4/15/15 $ 2,745,000 $ 2,841,034
^5.21% 10/9/19 9,920,000 4,749,984
5.25% 8/1/12 2,030,000 2,094,105
^Financing Corporation Interest Strip 12
4.264% 6/6/12 12,775,000 9,412,696
^Financing Corporation Principal Strips
PRN 2 5.031% 11/30/17 8,460,000 4,729,758
PRN 15 5.24% 3/7/19 1,000,000 521,683
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TOTAL AGENCY OBLIGATIONS
(cost $24,393,036) 24,349,260
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 1.88%
Bank of America Commercial Mortgage
Series 2005-1 A3 4.877% 11/10/42 815,000 818,872
oSeries 2005-2 AJ 4.953% 7/10/43 175,000 173,900
General Electric Capital Commercial
Mortgage Series 2005-C2 A2
4.706% 5/10/43 820,000 819,349
oMerrill Lynch Mortgage Trust Series
2004-BPC1 A3 4.467% 10/12/41 235,000 230,192
MorganStanley Capital I Series
2005-HQ6 A2A 4.882% 8/13/42 255,000 256,400
Wachovia Bank Commercial Mortgage
Trust Series 2005-C18 A2
4.657% 4/15/42 540,000 537,924
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TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(cost $2,854,449) 2,836,637
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CORPORATE BONDS - 1.54%
Banking - 1.18%
CitiFinancial 10.00% 5/15/09 1,500,000 1,773,052
-----------
1,773,052
-----------
Energy - 0.36%
Apache Finance 7.00% 3/15/09 500,000 546,621
-----------
546,621
-----------
Finance - 0.00%
Berkshire Hathaway Finance 4.125% 1/15/10 5,000 4,896
-----------
4,896
-----------
TOTAL CORPORATE BONDS (cost $2,540,264) 2,324,569
-----------
MUNICIPAL BONDS - 0.15%
oMassachusetts State Special Obligation
Revenue Loan 5.27% 6/1/22 (FSA) 200,000 219,016
-----------
TOTAL MUNICIPAL BONDS (cost $221,341) 219,016
-----------
Non-Agency Asset-Backed Securities - 0.78%
oNovastar Home Equity Loan
Series 2004-4 A2B 3.80% 3/25/35 650,000 652,125
oResidential Funding Mortgage Securities II
Series 2005-HI2 A1 3.60% 5/25/35 530,706 530,623
-----------
TOTAL NON-AGENCY ASSET-BACKED SECURITIES
(cost $1,180,706) 1,182,748
-----------
Principal Market
Amount Value
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 7.59%
Bank of America Alternative Loan Trust
Series 2003-10 2A1 6.00% 12/25/33 $ 1,568,439 $ 1,594,907
Series 2004-11 1CB1 6.00% 12/25/34 1,068,687 1,088,213
Series 2005-5 2CB1 6.00% 6/25/35 299,994 304,750
oBank of America Mortgage Securities
Series 2004-E 1A1 3.524% 6/25/34 526,413 519,556
Series 2005-F 2A3 4.742% 7/25/35 665,002 659,287
Credit Suisse First Boston Mortgage
Securities Series 2003-29 5A1
7.00% 12/25/33 382,924 394,292
First Horizon Asset Securities
Series 2003-5 1A17 8.00% 7/25/33 268,977 284,974
#GSMPS Mortgage Loan Trust 144A
Series 1998-2 A 144A 7.75% 5/19/27 333,949 353,970
Series 1999-3 A 144A 8.00% 8/19/29 686,267 733,300
Series 2005-RP1 1A4 144A 8.50% 1/25/35 796,859 870,531
#MASTR Reperforming Loan Trust
Series 2005-1 1A5 144A
8.00% 8/25/34 487,793 521,987
#MASTR Specialized Loan Trust
Series 2005-2 A2 144A 5.15% 7/25/35 610,074 603,973
Residential Asset Mortgage Products
Series 2004-SL1 A3 7.00% 11/25/31 385,317 395,125
Series 2004-SL4 A3 6.50% 7/25/32 350,482 359,020
Structured Asset Securities
oSeries 2002-22H 1A 6.999% 11/25/32 901,713 919,669
Series 2004-12H 1A 6.00% 5/25/34 721,597 730,617
oWashington Mutual Series 2005-AR3 A1
4.654% 3/25/35 764,720 758,328
Washington Mutual Alternative Mortgage
Pass-Through Certificate
Series 2005-1 5A2 6.00% 3/25/35 278,684 281,208
Series 2005-1 6A2 6.50% 3/25/35 73,304 74,325
-----------
TOTAL NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (cost $11,552,677) 11,448,032
-----------
U.S. TREASURY OBLIGATIONS - 28.55%
U.S. Treasury Bond 5.375% 2/15/31 7,290,000 8,286,113
U.S. Treasury Inflation Index Bond
2.375% 1/15/25 577,560 609,913
U.S. Treasury Inflation Index Notes
1.625% 1/15/15 1,069,037 1,045,568
2.00% 7/15/14 2,067,857 2,090,798
U.S. Treasury Notes
3.625% 6/15/10 3,170,000 3,101,154
(infinity)3.875% 5/15/10 23,390,000 23,111,332
4.125% 5/15/15 4,870,000 4,809,890
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(cost $43,204,810) 43,054,768
-----------
7
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
REPURCHASE AGREEMENTS - 1.59%
With BNP Paribas 3.25% 8/1/05
(dated 7/29/05, to be repurchased
at $1,406,380, collateralized by
$816,000 U.S. Treasury Bills due
1/5/06, market value $803,873 and
$641,000 U.S. Treasury Bills due
1/19/06, market value $630,438) $1,406,000 $ 1,406,000
With UBS Warburg 3.23% 8/1/05
(dated 7/29/05, to be repurchased
at $987,266, collateralized by
$665,000 U.S. Treasury Notes
2.00% due 8/31/05, market value
$670,165 and $340,000 U.S. Treasury
Notes 2.50% due 9/30/06, market
value $337,777) 987,000 987,000
------------
TOTAL REPURCHASE AGREEMENTS
(cost $2,393,000) 2,393,000
------------
TOTAL MARKET VALUE OF SECURITIES - 100.83%
(cost $152,567,705) 152,047,315
LIABILITIES NET OF RECEIVABLES AND
OTHER ASSETS - (0.83%) (1,250,941)
------------
NET ASSETS APPLICABLE TO 19,653,019 SHARES
OUTSTANDING - 100.00% $150,796,373
============
Net Asset Value - Delaware American Government Bond Fund
Class A ($94,776,732 / 12,351,885 Shares) $7.67
-----
Net Asset Value - Delaware American Government Bond Fund
Class B ($21,847,476 / 2,847,521 Shares) $7.67
-----
Net Asset Value - Delaware American Government Bond Fund
Class C ($7,222,281 / 941,212 Shares) $7.67
-----
Net Asset Value - Delaware American Government Bond Fund
Class R ($135,614 / 17,658 Shares) $7.68
-----
Net Asset Value - Delaware American Government Bond Fund
Institutional Class ($26,814,270 / 3,494,743 Shares) $7.67
-----
COMPONENTS OF NET ASSETS AT JULY 31, 2005:
Shares of beneficial interest
(unlimited authorization -- no par) $167,722,529
Undistributed net investment income 221,638
Accumulated net realized loss on investments (16,696,460)
Net unrealized depreciation of investments (451,334)
------------
Total net assets $150,796,373
============
oVariable rate securities. The interest rate shown is the rate as of July 31,
2005.
#Security exempt from registration under Rule 144A of the Securities Act of
1933.
See Note 10 in "Notes to Financial Statements."
^Zero coupon security. The interest rate shown is the yield at the time of
purchase.
(infinity)Fully or partially pledged as collateral for financial
futures contracts.
SUMMARY OF ABBREVIATIONS:
ARM - Adjustable Rate Mortgage
FSA - Insured by Financial Security Assurance
GNMA - Government National Mortgage Association
GPM - Graduate Payment Mortgage
SLMA - Student Loan Marketing Association
S.F. - Single Family
PRN - Principal Only Strip
TBA - To be announced
yr - Year
NET ASSET VALUE AND OFFERING PRICE PER SHARE --
DELAWARE AMERICAN GOVERNMENT BOND FUND
Net asset value Class A (A) $7.67
Sales charge (4.50% of offering price) (B) 0.36
-----
Offering price $8.03
=====
(A) Net asset value per share, as illustrated, is the amount which would be paid
upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
The following futures contracts were outstanding at July 31, 2005:
FUTURES CONTRACTS(1)
Notional Unrealized
Contracts to Cost Notional Expiration Appreciation
Buy (Sell) (Proceeds) Value Date (Depreciation)
- ---------- ---------- ------- ------ --------------
(52) U.S.Treasury
2 year notes $(10,788,037) $(10,737,188) 10/05/05 $50,849
(103) U.S. Treasury
5 year notes (11,110,440) (11,041,922) 9/30/05 68,518
(69) U.S.Treasury
10 year notes (7,684,565) (7,657,922) 9/30/05 26,643
41 U.S. Treasury
long bond 4,804,767 4,727,813 9/30/05 (76,954)
-------
$69,056
=======
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional
amounts presented above represent the Fund's total exposure in such contracts,
where only the net unrealized appreciation (depreciation) is reflected in the
Fund's net assets.
(1)See Note 7 in "Notes to Financial Statements."
See accompanying notes
8
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF OPERATIONS Year Ended July 31, 2005
INVESTMENT INCOME:
Interest $7,209,805
----------
EXPENSES:
Management fees $888,103
Distribution expenses -- Class A 307,678
Distribution expenses -- Class B 247,159
Distribution expenses -- Class C 76,345
Distribution expenses -- Class R 543
Dividend disbursing and transfer agent fees and expenses 244,273
Reports and statements to shareholders 100,112
Registration fees 55,485
Accounting and administration expenses 54,680
Legal and professional fees 36,852
Custodian fees 16,852
Insurance fees 10,472
Pricing fees 8,868
Trustees' fees 8,698
Other 8,573 2,064,693
--------
Less expenses absorbed or waived (169,710)
Less expense paid indirectly (7,048)
----------
Total operating expenses 1,887,935
----------
NET INVESTMENT INCOME 5,321,870
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments 3,344,905
Futures contracts (385,880)
Swap agreements 195,799
----------
Net realized gain 3,154,824
Net change in unrealized appreciation/depreciation of investments (941,626)
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,213,198
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,535,068
==========
See accompanying notes
9
STATEMENTS DELAWARE AMERICAN GOVERNMENT BOND FUND
OF CHANGES IN NET ASSETS
Year Ended
7/31/05 7/31/04
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 5,321,870 $ 6,260,004
Net realized gain (loss) on investments 3,154,824 (2,572,936)
Net change in unrealized appreciation/depreciation of investments (941,626) 4,608,718
------------ ------------
Net increase in net assets resulting from operations 7,535,068 8,295,786
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (4,481,736) (5,322,346)
Class B (907,449) (1,108,293)
Class C (280,118) (310,855)
Class R (3,658) (1,559)
Institutional Class (1,249,511) (1,347,990)
Return of capital:
Class A -- (476,374)
Class B -- (100,061)
Class C -- (27,064)
Class R -- (169)
Institutional Class -- (101,032)
------------ ------------
(6,922,472) (8,795,743)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 13,247,311 23,433,436
Class B 1,513,191 1,841,149
Class C 1,219,419 1,774,343
Class R 84,106 78,018
Institutional Class 4,315,357 9,534,793
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 3,334,037 4,392,646
Class B 670,864 857,889
Class C 244,525 294,822
Class R 3,615 1,668
Institutional Class 1,233,007 1,402,231
------------ ------------
25,865,432 43,610,995
------------ ------------
Cost of shares repurchased:
Class A (39,818,885) (60,896,348)
Class B (8,524,213) (17,109,323)
Class C (2,906,338) (4,039,598)
Class R (14,800) (15,319)
Institutional Class (7,707,191) (25,084,967)
------------ ------------
(58,971,427) (107,145,555)
------------ ------------
Decrease in net assets derived from capital share transactions (33,105,995) (63,534,560)
------------ ------------
NET DECREASE IN NET ASSETS: (32,493,399) (64,034,517)
NET ASSETS:
Beginning of year 183,289,772 247,324,289
------------ ------------
End of year (including undistributed net investment income of $221,638 and $--, respectively) $150,796,373 $183,289,772
============ ============
See accompanying notes
10
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware American Government Bond Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/05 7/31/04 7/31/03 7/31/02(1) 7/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.263 0.211 0.249 0.339 0.433
Net realized and unrealized gain on investments 0.086 0.077 0.050 0.227 0.418
------ ------ ------ ------ ------
Total from investment operations 0.349 0.288 0.299 0.566 0.851
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.339) (0.302) (0.349) (0.406) (0.431)
Return of capital -- (0.026) -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.339) (0.328) (0.349) (0.406) (0.431)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.670 $7.660 $7.700 $7.750 $7.590
====== ====== ====== ====== ======
TOTAL RETURN(2) 4.60% 3.77% 3.85% 7.66% 12.14%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $94,777 $117,567 $151,135 $141,771 $96,539
Ratio of expenses to average net assets 1.08% 1.05% 1.05% 1.05% 1.61%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.18% 1.60% 1.69% 1.64% 1.61%
Ratio of net investment income to average net assets 3.38% 3.02% 3.17% 4.43% 5.82%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 3.28% 2.47% 2.53% 3.84% 5.82%
Portfolio turnover 283% 303% 501% 316% 186%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets by 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect this change in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
11
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware American Government Bond Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/05 7/31/04 7/31/03 7/31/02(1) 7/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.208 0.161 0.194 0.283 0.380
Net realized and unrealized gain on investments 0.086 0.073 0.049 0.227 0.418
------ ------ ------ ------ ------
Total from investment operations 0.294 0.234 0.243 0.510 0.798
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.284) (0.252) (0.293) (0.350) (0.378)
Return of capital -- (0.022) -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.284) (0.274) (0.293) (0.350) (0.378)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.670 $7.660 $7.700 $7.750 $7.590
====== ====== ====== ====== ======
TOTAL RETURN(2) 3.87% 3.05% 3.12% 6.88% 11.36%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $21,847 $28,087 $42,543 $46,486 $23,556
Ratio of expenses to average net assets 1.78% 1.75% 1.75% 1.75% 2.31%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.88% 2.30% 2.39% 2.34% 2.31%
Ratio of net investment income to average net assets 2.68% 2.32% 2.47% 3.73% 5.12%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 2.58% 1.77% 1.83% 3.14% 5.12%
Portfolio turnover 283% 303% 501% 316% 186%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets by 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect this change in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
12
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware American Government Bond Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/05 7/31/04 7/31/03 7/31/02(1) 7/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.208 0.161 0.193 0.281 0.380
Net realized and unrealized gain on investments 0.086 0.073 0.050 0.227 0.418
------ ------ ------ ------ ------
Total from investment operations 0.294 0.234 0.243 0.508 0.798
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.284) (0.252) (0.293) (0.348) (0.378)
Return of capital -- (0.022) -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.284) (0.274) (0.293) (0.348) (0.378)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.670 $7.660 $7.700 $7.750 $7.590
====== ====== ====== ====== ======
TOTAL RETURN(2) 3.87% 3.05% 3.12% 6.85% 11.36%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $7,222 $8,634 $10,641 $8,728 $4,145
Ratio of expenses to average net assets 1.78% 1.75% 1.75% 1.75% 2.31%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.88% 2.30% 2.39% 2.34% 2.31%
Ratio of net investment income to average net assets 2.68% 2.32% 2.47% 3.73% 5.12%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 2.58% 1.77% 1.83% 3.14% 5.12%
Portfolio turnover 283% 303% 501% 316% 186%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets by 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect this change in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
13
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware American Government Bond Fund Class R
- ------------------------------------------------------------------------------------------------------
6/2/03(1)
Year Ended to
7/31/05 7/31/04 7/31/03
NET ASSET VALUE, BEGINNING OF PERIOD $7.660 $7.700 $8.040
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.239 0.187 0.051
Net realized and unrealized gain (loss) on investments 0.096 0.075 (0.355)
------ ------ ------
Total from investment operations 0.335 0.262 (0.304)
------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.315) (0.278) (0.036)
Return of capital -- (0.024) --
------ ------ ------
Total dividends and distributions (0.315) (0.302) (0.036)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.680 $7.660 $7.700
====== ====== ======
TOTAL RETURN(2) 4.41% 3.43% (3.79%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $136 $63 $--
Ratio of expenses to average net assets 1.38% 1.35% 1.35%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.48% 1.90% 2.35%
Ratio of net investment income to average net assets 3.08% 2.72% 2.07%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 2.98% 2.17% 1.07%
Portfolio turnover 283% 303% 501%
(1) Commencement of operations. Ratios and portfolio turnover have been
annualized and total return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share
for 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
14
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware American Government Bond Fund Institutional Class
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/05 7/31/04 7/31/03 7/31/02(1) 7/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.286 0.233 0.272 0.361 0.454
Net realized and unrealized gain on investments 0.086 0.079 0.050 0.228 0.418
------ ------ ------ ------ ------
Total from investment operations 0.372 0.312 0.322 0.589 0.872
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.362) (0.324) (0.372) (0.429) (0.452)
Return of capital -- (0.028) -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.362) (0.352) (0.372) (0.429) (0.452)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.670 $7.660 $7.700 $7.750 $7.590
====== ====== ====== ====== ======
TOTAL RETURN(2) 4.91% 4.08% 4.15% 7.99% 12.46%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $26,814 $28,939 $43,006 $41,225 $33,337
Ratio of expenses to average net assets 0.78% 0.75% 0.75% 0.75% 1.31%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 0.88% 1.30% 1.39% 1.34% 1.31%
Ratio of net investment income to average net assets 3.68% 3.32% 3.47% 4.73% 6.12%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 3.58% 2.77% 2.83% 4.14% 6.12%
Portfolio turnover 283% 303% 501% 316% 186%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets by 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect this change in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for the period and assumes reinvestment of dividends and distributions at
net asset value. Total investment return reflects waivers 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 AMERICAN GOVERNMENT BOND FUND
TO FINANCIAL STATEMENTS July 31, 2005
Delaware Group Government Fund (the "Trust") is organized as a Delaware
statutory trust and offers two series: Delaware American Government Bond Fund
and Delaware Inflation Protected Bond Fund. These financial statements and the
related notes pertain to Delaware American Government Bond Fund (the "Fund").
The Trust is an open-end investment company. The Fund is considered diversified
under the Investment Company Act of 1940, as amended, and offers Class A, Class
B, Class C, Class R and Institutional Class shares. Class A shares are sold with
a front-end sales charge of up to 4.50%. Class B shares are sold with a
contingent deferred sales charge that declines from 4% to zero depending upon
the period of time the shares are held. Class B shares will automatically
convert to Class A shares on a quarterly basis approximately eight years after
purchase. Class C shares are sold with a contingent deferred sales charge of 1%,
if redeemed during the first 12 months. Class R and Institutional shares are not
subject to a sale charge and are offered for sale exclusively to a limited group
of investors.
The investment objective of the Fund is to seek high current income consistent
with safety of principal by investing primarily in debt obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation -- U.S. government and agency securities are valued at the
mean between the bid and asked prices. Other long-term debt securities are
valued by an independent pricing service and such prices are believed to reflect
the fair value of such securities. Short-term debt securities having less than
60 days to maturity are valued at amortized cost, which approximates market
value. Futures contracts and options on futures contracts are valued at the
daily quoted settlement prices. Swap agreements and other securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith under the direction of the Fund's Board of Trustees.
In determining whether market quotations are readily available or fair valuation
will be used, various factors will be taken into consideration, such as market
closures, or with respect to foreign securities, aftermarket trading or
significant events after local market trading (e.g., government actions or
pronouncements, trading volume or volatility on markets, exhanges among dealers,
or news events).
Federal Income Taxes -- The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting -- Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund on the basis of
daily net assets of each class. Distribution expenses relating to a specific
class are charged directly to that class.
Repurchase Agreements -- The Fund may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. 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(R) 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. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. Realized gains (losses) on
paydowns of mortgage- and asset-backed securities are classified as interest
income. The Fund declares dividends daily from net investment income and pays
such dividends monthly and declares and pays distributions from net realized
gain on investments, if any, annually.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The earnings
credits for the year ended July 31, 2005 were approximately $7,048. The expense
paid under the above arrangement is included in custodian fees on the Statement
of Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.55% on the first $500 million of average daily net assets of the Fund,
0.50% on the next $500 million, 0.45% on the next $1.5 billion, and 0.425% on
average daily net assets in excess of $2.5 billion.
DMC has contractually 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 November 28, 2005.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. Effective June
1, 2005, the Fund pays DSC a monthly fee computed at the annual rate of 0.04% of
the Fund's average daily net assets for accounting and administration services.
Prior to June 1, 2005, the Fund paid DSC a monthly fee based on average net
assets subject to certain minimums for accounting and administration services.
The Fund pays DSC a monthly fee based on the number of shareholder accounts for
dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Class A shares, 1.00% of the average daily net assets of the Class
B and C shares and 0.60% of the average daily net assets of the Class R shares.
Institutional Class shares pay no distribution and service expenses. Effective
August 1, 2005, DDLP has contracted to limit distribution and service fees
through November 30, 2006 in order to prevent distribution and service fees of
Class R shares from exceeding 0.50% of average daily net assets.
The Board of Trustees has adopted a formula for calculating 12b-1 plan fees for
the Fund's Class A shares that went into effect on June 1, 1992. The total 12b-1
fees to be paid by Class A shareholders of the Fund will be the sum of 0.10% of
the average daily net assets representing shares that were acquired prior to
June 1, 1992 and 0.30% of the average daily net assets representing shares that
were acquired on or after June 1, 1992. All Class A shareholders will bear 12b-1
fees at the same rate, the blended rate based upon the allocation of the 0.10%
and 0.30% rates described above.
16
NOTES DELAWARE AMERICAN GOVERNMENT BOND FUND
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
At July 31, 2005, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $78,055
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses payable to DSC 31,750
Other expenses payable to DMC and affiliates* 75,707
*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 July 31, 2005, the Fund was
charged $8,800 for internal legal services provided by DMC.
For the year ended July 31, 2005, DDLP earned $10,182 for commissions on sales
of the Fund's Class A shares. For the year ended July 31, 2005, DDLP received
gross contingent deferred sales charge commissions of $--, $59,850 and $276 on
redemption of the Fund's Class A, Class B and Class C shares, respectively, and
these commissions were entirely used to offset up-front commissions previously
paid by DDLP to broker-dealers on sales of those shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. INVESTMENTS
For the year ended July 31, 2005, the Fund made purchases of $197,714,082 and
sales of $238,353,646 of investment securities other than long-term U.S.
government securities and short-term investments. For the year ended July 31,
2005, the Fund made purchases of $264,437,791 and sales of $263,006,556 of
long-term U.S. government securities. At July 31, 2005, the cost of investments
for federal income tax purposes was $153,334,428.
At July 31, 2005, the net unrealized depreciation was $1,287,113 of which
$663,128 related to unrealized appreciation of investments and $1,950,241
related to unrealized depreciation of investments.
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the years
ended July 31, 2005 and 2004 was as follows:
2005 2004
---------- ----------
Ordinary income $6,922,472 $8,091,043
Return of capital -- 704,700
---------- ----------
$6,922,472 $8,975,743
========== ==========
As of July 31, 2005, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $167,722,529
Undistributed ordinary income 221,638
Capital loss carryforwards (15,658,139)
Post-October losses (202,542)
Unrealized depreciation of investments (1,287,113)
------------
Net assets $150,796,373
============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales, mark-to-market
on futures contracts and tax treatment of market discount and premium on debt
instruments.
Post-October losses represent losses realized on investment transactions from
November 1, 2004 through July 31, 2005 that, in accordance with federal income
tax regulations, the Fund has elected to defer and treat as having arisen in the
following fiscal year.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of market discount and premium on certain debt instruments
and paydowns of mortgage- and asset-backed securities. Results of operations and
net assets were not affected by these reclassifications. For the year ended July
31, 2005, the Fund recorded the following reclassifications:
Undistributed net investment income $1,822,240
Accumulated net realized gain (loss) 549,334
Paid-in-capital (2,371,574)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. $2,371,574 expired in 2005.
Capital loss carry forwards will expire as follows: $3,195,086 expires in 2007;
$6,907,431 expires in 2008; $1,219,236 expires in 2009; $2,497,064 expires in
2012, and $1,839,322 expires in 2013.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Year Ended
7/31/05 7/31/04
Shares sold:
Class A 1,710,037 3,022,977
Class B 195,457 237,322
Class C 157,520 228,490
Class R 10,817 10,050
Institutional Class 558,128 1,231,246
Shares issued upon reinvestment of
dividends and distributions:
Class A 430,340 566,213
Class B 86,590 110,566
Class C 31,555 38,004
Class R 466 215
Institutional Class 159,136 180,839
---------- ----------
3,340,046 5,625,922
---------- ----------
Shares repurchased:
Class A (5,140,021) (7,867,124)
Class B (1,102,040) (2,205,653)
Class C (375,256) (521,129)
Class R (1,915) (1,976)
Institutional Class (1,001,450) (3,218,511)
---------- ----------
(7,620,682) (13,814,393)
---------- ----------
Net decrease (4,280,636) (8,188,471)
========== ==========
For the years ended July 31, 2005 and 2004, 134,156 Class B shares were
converted to 134,156 Class A shares valued at $1,037,538 and 220,824 Class B
shares were converted to 220,824 Class A shares valued at $1,721,971,
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.
17
NOTES DELAWARE AMERICAN GOVERNMENT BOND FUND
TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
The Fund, along with certain other funds in the Delaware Investments(R) 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 July 31, 2005, or at any time during the
year.
7. FUTURES CONTRACTS
The Fund may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, the
Fund deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. (In some cases, due to the form of the futures agreement, initial
margin is held in a segregated account with the Fund's custodian, rather than
directly with the broker.) Subsequent payments are received from the broker or
paid to the broker (or added to the segregated account) each day, based on the
daily fluctuation in the market value of the contract. These receipts or
payments are known as "variation margin" and are recorded daily by the Fund as
unrealized gains or losses until the contracts are closed. When the contracts
are closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk of entering into futures contracts include potential
imperfect correlation between the futures contracts and the underlying
securities and the possibility of an illiquid secondary market for these
instruments.
8. OPTIONS WRITTEN
The Fund may enter into options contracts in accordance with its investment
objectives. When the Fund writes an option, a premium is received and a
liability is recorded and adjusted on a daily basis to reflect the current
market value of the options written. Premiums received from writing options that
expire unexercised are treated by the Fund on the expiration date as realized
gains. The difference between the premium received and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
treated as realized gain or loss. If a call option is exercised, the premium is
added to the proceeds from the sale of the underlying security in determining
whether the Fund has a realized gain or loss. If a put option is exercised, the
premium reduces the cost basis of the securities purchased by the Fund. The
Fund, as writer of an option, bears the market risk of an unfavorable change in
the price of the security underlying the written option.
The Fund had no options contract outstanding at July 31, 2005 or at any time
during the year.
9. SWAP AGREEMENTS
During the year ended July 31, 2005, the Fund entered into total return swap
agreements in accordance with its investment objectives. A swap is an agreement
to exchange the return generated by one instrument for the return generated by
another instrument. Total return swaps involve commitments to pay interest in
exchange for a market linked return based on a notional amount. To the extent
the total return of the security, instrument or basket of instruments underlying
the transaction exceeds the offsetting interest obligation, the Fund will
receive a payment from the counterparty. To the extent the total return of the
security, instrument or basket of instruments underlying the transaction falls
short of the offsetting interest obligation, the Fund will make a payment to the
counterparty. The change in value of swap agreements outstanding, if any, is
recorded as unrealized appreciation or depreciation daily. A realized gain or
loss is recorded on maturity or termination of the swap agreement.
The Fund had no swap agreements outstanding at July 31, 2005.
10. CREDIT AND MARKET RISK
The Fund may invest up to 20% of net assets in high quality non-government
securities. Non-government securities include corporate bonds, certificates of
deposit, corporate commercial paper, asset-backed securities and mortgage-backed
securities that are not directly guaranteed by the U.S government in any way.
Some of these securities are collateralized mortgage obligations (CMOs). CMOs
are debt securities issued by U.S. government agencies or by financial
institutions and other mortgage lenders, which are collateralized by a pool of
mortgages held under an indenture. Prepayment of mortgages may shorten the
stated maturity of the obligations and can result in a loss of premium, if any
has been paid. Certain of these securities may be stripped (securities, which
provide only principal or interest feature of the underlying security). The
yield to maturity on an interest-only CMO is extremely sensitive not only to
changes in prevailing interest rates, but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. A rapid rate
of principal payments may have a material adverse effect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investments in these securities even if the securities are rated in the highest
rating categories.
The Fund may invest up to 10% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so. At
July 31, 2005, Rule 144A securities represented approximately 2.04% of total net
assets. None of these securities has been determined to be illiquid under the
Fund's Liquidity Procedures. While maintaining oversight, the Board of Trustees
has delegated to DMC the day-to-day functions of determining whether individual
Rule 144A securities are liquid for purposes of the Fund's limitation on
investments in illiquid assets. Illiquid securities have been denoted on the
Statement of Net Assets.
11. CONTRACTUAL OBLIGATIONS
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
12. TAX INFORMATION (UNAUDITED)
The information set forth below is for the Fund's fiscal year as required
by federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2005, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total
Distributions Distributions Distributions
(Tax Basis) (Tax Basis) (Tax Basis)
------------- ------------- -------------
-- 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
18
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Delaware Group Government Funds - Delaware American
Government Bond Fund
We have audited the accompanying statement of net assets of Delaware American
Government Bond Fund (one of the series constituting Delaware Group Government
Funds) (the "Fund") as of July 31, 2005, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of July 31, 2005, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Delaware American Government Bond Fund of Delaware Group Government Funds at
July 31, 2005, 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
September 16, 2005
19
OTHER DELAWARE AMERICAN GOVERNMENT BOND FUND
FUND INFORMATION
PROXY RESULTS
The shareholders of Delaware Group Government Fund (the "Trust") voted on the
following proposals at the special meeting of shareholders on March 23, 2005 or
as adjourned. The description of each proposal and number of shares voted are as
follows:
1. To elect a Board of Trustees for the Trust (shareholders of all series of the
Trust voting together).
Shares Voted
Shares Voted For Withheld Authority
---------------- ------------------
Thomas L. Bennett 16,016,270 312,153
Jude T. Driscoll 16,016,027 316,396
John A. Fry 16,014,284 314,139
Anthony D. Knerr 16,010,874 317,550
Lucinda S. Landreth 16,026,233 302,190
Ann R. Leven 16,017,443 310,980
Thomas F. Madison 16,008,181 320,242
Janet L. Yeomans 16,027,387 301,037
J. Richard Zecher 16,016,340 312,084
2. To approve the use of a "manager of managers" structure whereby the
investment manager of each Fund will be able to hire and replace subadvisers
without shareholder approval.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
Delaware American Government Bond Fund 12,180,679 867,617 501,417 2,378,708
BOARD CONSIDERATION OF DELAWARE AMERICAN GOVERNMENT BOND FUND INVESTMENT
ADVISORY AGREEMENT
At a meeting held on May 18-19, 2005 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the Delaware
American Government Bond Fund (the "Fund"). In making its decision, the Board
considered information furnished throughout the year at regular Board meetings,
as well as information prepared specifically in connection with the Annual
Meeting. Information furnished and discussed throughout the year included
reports detailing Fund performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Fund, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board separately received and reviewed
independent historical and comparative reports prepared by Lipper Inc.
("Lipper"), an independent statistical compilation organization. The Lipper
reports compared the Fund's investment performance and expenses with those of
other comparable mutual funds. The Board also requested and received certain
supplemental information regarding management's policy with respect to advisory
fee levels and its philosophy with respect to breakpoints; the structure of
portfolio manager compensation; the investment manager's profitability organized
by client type, including the Fund; and any constraints or limitations on the
availability of securities in certain investment styles which might inhibit the
advisor's ability to fully invest in accordance with the Fund's policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Jude Driscoll, Chairman
of the Delaware Investments(R) Family of Funds, and Chairman and Chief Executive
Officer of the investment advisor, was present to respond to questions raised by
Lipper and the independent Trustees. While the Board considered the Investment
Advisory Agreements for all of the funds in the Delaware Investments(R) Family
of Funds at the same Board meeting, information was provided and considered by
the Board for each fund individually. In approving the continuance of the
Investment Advisory Agreement for the Fund, the Board, including a majority of
independent Trustees, determined that the existing advisory fee structure was
fair and reasonable and that the continuance of the Investment Advisory
Agreement was in the best interests of the Fund and its shareholders. While
attention was given to all information furnished, the following discusses the
primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Fund and its shareholders. In reviewing
the nature, extent and quality of services, the Board emphasized reports
furnished to it throughout the year at regular Board meetings covering matters
such as the compliance of portfolio managers with the investment policies,
strategies and restrictions for the Fund, the compliance of management personnel
with the Code of Ethics adopted throughout the Delaware Investments(R) Family of
Funds complex, the adherence to fair value pricing procedures as established by
the Board, and the accuracy of net asset value calculations. The Board noted
that it was pleased with the current staffing of the Fund's investment advisor
during the past year, the emphasis on research and the compensation system for
advisory personnel. Favorable consideration was given to DMC's efforts to
maintain, and in some instances increase, financial and human resources
committed to fund matters. Other factors taken into account by the Board were
Delaware Investments' preparedness for, and response to, legal and regulatory
matters. The Board also considered the transfer agent and shareholder services
provided to Fund shareholders by Delaware Investments' affiliate, Delaware
Service Company, Inc., noting the receipt by such affiliate of the DALBAR
Pyramid Award in four of the last six years
20
OTHER DELAWARE AMERICAN GOVERNMENT BOND FUND
FUND INFORMATION (CONTINUED)
BOARD CONSIDERATION OF DELAWARE AMERICAN GOVERNMENT BOND FUND INVESTMENT
ADVISORY AGREEMENT (CONTINUED)
and the continuing expenditures by Delaware Investments to increase and improve
the scope of shareholder services. Additionally, the Board noted the extent of
benefits provided to Fund shareholders for being part of the Delaware
Investments(R) Family of Funds, including the privilege to exchange investments
between the same class of funds without a sales charge, the ability to reinvest
Fund dividends into other funds and the privilege to combine holdings in other
funds to obtain a reduced sales charge. The Board was satisfied with the nature,
extent and quality of the overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Fund. The Board was pleased by DMC's investment performance, noting
Barron's ranking of the Delaware Investments(R) Family of Funds in the top
quartile of mutual fund families for 2002 - 2004. The Board placed significant
emphasis on the investment performance of the Fund in view of its importance to
shareholders. While consideration was given to performance reports and
discussions with portfolio managers at Board meetings throughout the year,
particular attention in assessing performance was given to the Lipper reports
furnished for the Annual Meeting. The Lipper reports prepared for the Fund
showed the investment performance of its Class A shares in comparison to a group
of similar funds as selected by Lipper (the "Performance Universe"). A fund with
the highest performance is ranked first, and a fund with the lowest is ranked
last. The highest/best performing 25% of funds in the Performance Universe make
up the first quartile; the next 25% - the second quartile; the next 25% - the
third quartile; and the lowest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Fund was shown for the past one, three, five and 10 year periods ended February
28, 2005. The Board noted its objective that the Fund's performance be at or
above the median of its Performance Universe. The following paragraph summarizes
the performance results for the Fund and the Board's view of such performance.
The Performance Universe for this Fund consisted of the Fund and all retail and
institutional general U.S. government funds as selected by Lipper. The Lipper
report comparison showed that the Fund's total return for the one, three and
five year periods was in the first quartile of such Performance Universe. The
report further showed that the Fund's total return for the 10 year period was in
the second quartile. The Board was satisfied with such performance.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments(R) Family of Funds, Delaware Investments' institutional
separate account business and other lines of business at Delaware Investments.
The Board stated its belief that, given the differing level of service provided
to Delaware Investments' various clients and other factors that related to the
establishment of fee levels, variations in the levels of fees and expenses were
justified. The Board placed significant emphasis on the comparative analysis of
the management fees and total expense ratios of the Fund compared with those of
a group of similar funds as selected by Lipper (the "Expense Group") and among
the other Delaware Investments(R) funds. In reviewing comparative costs, the
Fund's contractual management fee and the actual management fee incurred by the
Fund were compared with the contractual management fees (assuming all funds in
the Expense Group were similar in size to the Fund) and actual management fees
(as reported by each fund) of other funds within the Expense Group, taking into
effect any applicable breakpoints and fee waivers. The Fund's total expenses
were also compared with those of its Expense Group. The Lipper total expenses,
for comparative consistency, were shown by Lipper for Class A shares and
compared total expenses including 12b-1 and non-12b-1 service fees. The Board
noted its objective to limit the Fund's total expense ratio to an acceptable
range as compared to the median of the Expense Group. The following paragraph
summarizes the expense results for the Fund and the Board's view of such
expenses.
The expense comparisons for the Fund showed that its management fee was in the
quartile with the lowest expenses of its Expense Group and its total expenses
were in the quartile with the second lowest expenses of its Expense Group. The
Board was satisfied with the management fees and total expenses of the Fund in
comparison to its Expense Group as shown in the Lipper report.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Fund.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments(R) Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC initiatives. The Board also
considered the extent to which Delaware Investments might derive ancillary
benefits from fund operations, including the potential for procuring additional
business as a result of the prestige and visibility associated with its role as
service provider to the Delaware Investments(R) Family of Funds, the benefits
from allocation of fund brokerage to improve trading efficiencies and the use of
"soft" commission dollars to pay for proprietary and non-proprietary research.
At the Board's request, management also provided information relating to
Delaware Investments' profitability by client type. The information provided set
forth the revenue, expenses and pre-tax income/loss attributable to the Delaware
Investments(R) Family of Funds, Delaware Investments' separate account business
and other lines of business at Delaware Investments. Emphasis was given to the
level and type of service provided to the various clients. The Board was
satisfied with the level of profits realized by Delaware Investments from its
relationships with the Fund and the Delaware Investments(R) Family of Funds.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Fund's assets increase and the extent to
which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Fund's management contract fell within the standard
structure. Although the Fund has not reached a size at which it can take
advantage of breakpoints, the Board recognized that the fee was structured so
that when the Fund grows, economies of scale may be shared.
21
DELAWARE INVESTMENTS(R) FAMILY OF FUNDS
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors ("Trustees"), which
has oversight responsibility for the management of a fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor and others 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 and Officers with
certain background and related information.
NUMBER OF OTHER
PORTFOLIOS IN FUND DIRECTORSHIPS
POSITION(S) COMPLEX OVERSEEN HELD BY
NAME, ADDRESS AND HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) BY TRUSTEE TRUSTEE
BIRTHDATE FUND(S) SERVED DURING PAST 5 YEARS OR OFFICER OR OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
JUDE T. DRISCOLL(2) Chairman, 5 Years - Executive Since August 2000, Mr. 92 None
2005 Market Street President, Chief Officer Driscoll has served in
Philadelphia, PA Executive Officer various executive
19103 and Trustee 1 Year - Trustee capacities at different
times at Delaware
March 10, 1963 Investments(1)
Senior Vice President and
Director of Fixed-Income
Process - Conseco Capital
Management
(June 1998 - August 2000)
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
THOMAS L. BENNETT Trustee Since Private Investor - 92 None
2005 Market Street March 23, 2005 (March 2004 - Present)
Philadelphia, PA
19103 Investment Manager -
Morgan Stanley & Co.
October 4, 1947 (January 1984 - March 2004)
JOHN A. FRY Trustee 4 Years President - Franklin & 92 Director - Community
2005 Market Street Marshall College Health Systems
Philadelphia, PA (June 2002 - Present)
19103
Executive Vice President
May 28, 1960 - University of
Pennsylvania
(April 1995 - June 2002)
ANTHONY D. KNERR Trustee 12 Years Founder/Managing Director 92 None
2005 Market Street - Anthony Knerr &
Philadelphia, PA Associates (Strategic
19103 Consulting)
(1990 - Present)
December 7, 1938
LUCINDA S. LANDRETH Trustee Since Chief Investment Officer - 92 None
2005 Market Street March 23, 2005 Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002 - 2004)
June 24, 1947
ANN R. LEVEN Trustee 16 Years Treasurer/Chief Fiscal 92 Director and Audit
2005 Market Street Officer - National Committee
Philadelphia, PA Gallery of Art Chairperson -
19103 (1994 - 1999) Andy Warhol
Foundation
November 1, 1940
Director and Audit
Committee Member -
Systemax Inc.
22
NUMBER OF OTHER
PORTFOLIOS IN FUND DIRECTORSHIPS
POSITION(S) COMPLEX OVERSEEN HELD BY
NAME, ADDRESS AND HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) BY TRUSTEE TRUSTEE
BIRTHDATE FUND(S) SERVED DURING PAST 5 YEARS OR OFFICER OR OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
THOMAS F. MADISON Trustee 11 Years President/Chief Executive 92 Director -
2005 Market Street Officer - MLM Partners, Banner Health
Philadelphia, PA Inc. (Small Business
19103 Investing and Consulting) Director and Audit
(January 1993 - Present) Committee Member-
CenterPoint Energy
February 25, 1936
Director and Audit
Committee Member-
Digital River Inc.
Director and Audit
Committee Member-
Rimage Corporation
Director - Valmont
Industries Inc.
JANET L. YEOMANS Trustee 6 Years Vice President/Mergers & 92 None
2005 Market Street Acquisitions -
Philadelphia, PA 3M Corporation
19103 (January 2003 - Present)
July 31, 1948 Ms. Yeomans has held
various management
positions at 3M Corporation
since 1983.
J. RICHARD ZECHER Trustee Since Founder - 92 Director and Audit
2005 Market Street March 23, 2005 Investor Analytics Committee Member -
Philadelphia, PA (Risk Management) Investor Analytics
19103 (May 1999 - Present)
Director and Audit
July 3, 1940 Committee Member -
Oxigene, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS
MICHAEL P. BISHOF Senior Vice Chief Financial Mr. Bishof has served in 92 None(3)
2005 Market Street President and Officer since various executive capacities
Philadelphia, PA Chief Financial February 17, 2005 at different times at
19103 Officer Delaware Investments.
August 18, 1962
RICHELLE S. MAESTRO Executive Vice 2 Years Ms. Maestro has served in 92 None(3)
2005 Market Street President, Chief various executive capacities
Philadelphia, PA Legal Officer and at different times at
19103 Secretary Delaware Investments.
November 26, 1957
JOHN J. O'CONNOR Senior Vice Treasurer since Mr. O'Connor has served in 92 None(3)
2005 Market Street President and February 17, 2005 various executive capacities
Philadelphia, PA Treasurer at different times at
19103 Delaware Investments.
June 16, 1957
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the Fund's(s') investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's(s') manager and distributor.
(3) Mr. Bishof, Ms. Maestro and Mr. O'Connor 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.
23
Delaware
Investments(R)
- -----------------------------------
A member of Lincoln Financial Group
This annual report is for the information of Delaware American Government Bond
Fund shareholders, but it may be used with prospective investors when preceded
or accompanied by a current prospectus for American Government Bond Fund and the
Delaware Investments Performance Update for the most recently completed calendar
quarter. The prospectus sets forth details about charges, expenses, investment
objectives, and operating policies of the Fund. You should read the prospectus
carefully before you invest. The figures in this report represent past results
that are not a guarantee of future results. The return and principal value of an
investment in the Fund will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
BOARD OF TRUSTEES AFFILIATED OFFICERS CONTACT INFORMATION
JUDE T. DRISCOLL MICHAEL P. BISHOF INVESTMENT MANAGER
Chairman Senior Vice President and Delaware Management Company,
Delaware Investments Family of Funds Chief Financial Officer a Series of Delaware Management Business Trust
Philadelphia, PA Delaware Investments Family of Funds Philadelphia, PA
Philadelphia, PA
THOMAS L. BENNETT NATIONAL DISTRIBUTOR
Private Investor RICHELLE S. MAESTRO Delaware Distributors, L.P.
Rosemont, PA Executive Vice President, Philadelphia, PA
Chief Legal Officer and Secretary
JOHN A. FRY Delaware Investments Family of Funds SHAREHOLDER SERVICING, DIVIDEND
President Philadelphia, PA DISBURSING AND TRANSFER AGENT
Franklin & Marshall College Delaware Service Company, Inc.
Lancaster, PA JOHN J. O'CONNOR 2005 Market Street
Senior Vice President and Treasurer Philadelphia, PA 19103-7094
ANTHONY D. KNERR Delaware Investments Family of Funds
Managing Director Philadelphia, PA FOR SHAREHOLDERS
Anthony Knerr & Associates 800 523-1918
New York, NY
FOR SECURITIES DEALERS AND FINANCIAL
LUCINDA S. LANDRETH INSTITUTIONS REPRESENTATIVES ONLY
Former Chief Investment Officer 800 362-7500
Assurant, Inc.
Philadelphia, PA Web site
www.delawareinvestments.com
ANN R. LEVEN
Former Treasurer/Chief Fiscal Officer Delaware Investments is the marketing name for
National Gallery of Art Delaware Management Holdings, Inc. and
Washington, DC its subsidiaries.
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
J. RICHARD ZECHER
Founder
Investor Analytics
Scottsdale, AZ
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(9658) Printed in the USA
AR-023 [7/05] IVES 9/05 MF-05-08-228 PO10381
Delaware
Investments(R)
- -----------------------------------
A member of Lincoln Financial Group
FIXED INCOME
ANNUAL REPORT JULY 31, 2005
- --------------------------------------------------------------------------------
DELAWARE INFLATION PROTECTED BOND FUND
[LOGO] POWERED BY RESEARCH(R)
TABLE
OF CONTENTS
- ------------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- ------------------------------------------------------------------
PERFORMANCE SUMMARY 4
- ------------------------------------------------------------------
DISCLOSURE OF FUND EXPENSES 6
- ------------------------------------------------------------------
SECTOR/COUNTRY ALLOCATION 7
- ------------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 8
Statement of Operations 10
Statement of Changes in Net Assets 11
Financial Highlights 12
Notes to Financial Statements 13
- ------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 16
- ------------------------------------------------------------------
OTHER FUND INFORMATION 17
- ------------------------------------------------------------------
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS 18
- ------------------------------------------------------------------
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 INFLATION PROTECTED BOND FUND
MANAGEMENT REVIEW August 8, 2005
FUND MANAGER
Stephen R. Cianci
Senior Portfolio Manager
Q: PLEASE DESCRIBE THE NATURE OF THE FIXED INCOME MARKETS DURING THE FISCAL
PERIOD, WHICH FOR THIS RELATIVELY NEW INVESTMENT SPANS FROM DECEMBER 1, 2004 TO
JULY 31, 2005.
A: Through July 31, 2005, 10-year Treasury yields first moved down to a
seven-month low of 3.9%, before beginning an ascent that would take them to 4.2%
by fiscal year-end. During this period, a "bull flattening" trend was largely in
place, with the yield spread between two- and 30-year Treasuries narrowing,
given market uncertainty over U.S. economic growth prospects (source: Bloomberg
L.P.).
The tendency toward relatively low long-term yields was caused by foreign
demand, a European economic slowdown, and likely investor perceptions of an
"inflation-fighting" Federal Reserve Board. Perhaps Federal Reserve Chairman
Alan Greenspan put it best, when in attempting to describe the sense of
disconnect between rising short-term rates and muted longer-term bond yield, he
used the term "conundrum."
Additionally, the Federal Reserve Board remained committed to raising rates at
"a measured pace." The Fed funds rate stood at 2.00% when the Fund was incepted,
yet with five 25 basis point (0.25%) increases, the measure stood at 3.25% at
our first fiscal period-end seven months later on July 31, 2005 (source: St.
Louis Federal Reserve Bank).
Q: WHAT WAS THE INFLATION ENVIRONMENT DURING THE 12-MONTH PERIOD?
A: Breakeven spreads -- the difference between the real (or inflation-adjusted)
10-year Treasury Inflation Protected Securities (TIPS) yield and that for the
nominal 10-year Treasury bond -- widened in March to the 2.8% level, denoting
rising inflation expectations in the market. The breakeven rate thereafter fell
to the 2.2% level in the 10-year maturity sector. Several factors contributed to
this market backdrop. First and foremost, the Federal Reserve Board continued
the policy of raising short-term rates at its "measured" pace. Commodity prices
fell, though oil rose, as did the relative value of the U.S dollar. We believe
the confluence of these events caused the Fund to lose relative return in a
market in which the nominal 10-year Treasury yield rallied from 4.5% to 3.8%.
While petroleum prices are currently advancing toward $70 per barrel, we
nonetheless do not believe the market may reach the high breakeven spreads we
experienced during the period, as pipeline inflationary pressures appear to be
flattening out. Still, we are cautious in the short-term with regard to
expectations for rising prices, and we expect to continue to hold a more neutral
IPB weighting.
Q: HOW WELL DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK AND PEER GROUP?
A: Delaware Inflation Protected Bond Fund returned 2.55% (Class A shares at net
asset value with distributions reinvested) during the period December 1, 2004 to
July 31, 2005. By comparison, the Fund's performance benchmark, the Lehman
Brothers U.S. Treasury Inflation Protected Securities Index, returned 2.30% and
its peer group, as measured by the Lipper Treasury Inflation Protected
Securities Funds Average, returned 1.92% (source: Lipper Inc.).
Q: WHAT BROAD MEASURES DID YOU TAKE DURING THE EIGHT-MONTH PERIOD THAT
INFLUENCED FUND PERFORMANCE?
A: The Fund benefited from our being nimble with regard to the allocation to
inflation-protected bonds (IPB). In early 2005, when oil was making new highs,
Fund return was positively impacted by our positioning in intermediate-maturity
IPB. Performance was also enhanced in early 2005 in a declining dollar
environment, as we held a small position in non-dollar European bonds with an
unhedged currency position that amounted to roughly 1% of net assets.
Generally speaking, we believe the market for IPB is one that is still
misunderstood by investors. We also believe it is inefficient, and the
opportunities presented by an inefficient market may create long-term value for
shareholders. Furthermore, IPB may serve a meaningful role as a portfolio
diversifier, when utilized within an asset allocation that might also include
stocks, bonds, and real estate, among other investments.
1
19
PORTFOLIO DELAWARE INFLATION PROTECTED BOND FUND
MANAGEMENT REVIEW (CONTINUED)
Q: CAN YOU IDENTIFY FURTHER ACTIONS YOU TOOK DURING THE PERIOD THAT INFLUENCED
THE FUND'S RETURN?
A: We lowered our allocation to IPB, and specifically TIPS. In the first quarter
of 2005, we held an allocation to IPB in excess of 95% of Fund net assets, but
by late May/early June, that figure had fallen to 82% -- near the Fund's minimum
exposure allowed. We have since increased that weighting to approximately the
90% level.
More specifically, at roughly a 2.5% breakeven spread, we began reducing the
Fund's allocation to TIPS while increasing its weighting in nominal Treasury
securities. When breakeven spreads fell to the 2.2% level, we started
liquidating the nominal Treasuries and buying back the TIPS in an auction where
significant supply of 5-, 10-, and 20- year TIPS came to market, representing
yet another notable factor that influenced events during the period.
Q: AS THE FUND MAY HOLD A SMALL NON-IPB ALLOCATION, WERE YOU ABLE TO LEVERAGE
THIS FEATURE OF THE FUND?
A: Yes, we generated excess return with small allocations in short-dated
mortgage-backed securities and investment grade floating rate bonds. We expect
to continue to seek opportunities beyond IPB as a means of enhancing
performance, and will aim to do so without elevating risk in the Fund.
2
This page intentionally left blank.
3
PERFORMANCE SUMMARY
DELAWARE INFLATION PROTECTED BOND 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 Inflation
Protected Bond Fund prospectus contains this and other important information
about the investment company. Please request a prospectus by calling 800
523-1918. Read it carefully before you invest or send money. Performance
includes reinvestment of all distributions and is subject to change.
FUND PERFORMANCE
Total Returns
Through July 31, 2005 Lifetime
- --------------------------------------------------------------------------------
Class A (Est. 12/1/04)
Excluding Sales Charge +2.55%
Including Sales Charge -2.05%
- --------------------------------------------------------------------------------
Class B (Est. 12/1/04)
Excluding Sales Charge +2.37%
Including Sales Charge -1.60%
- --------------------------------------------------------------------------------
Class C (Est. 12/1/04)
Excluding Sales Charge +2.37%
Including Sales Charge +1.38%
- --------------------------------------------------------------------------------
Returns reflect the reinvestment of 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, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.25%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
The cumulative total return for the lifetime period ended July 31, 2005 for
Delaware Inflation Protected Bond Fund's Institutional Class was +2.61%. The
Institutional Class shares were first made available on December 1, 2004 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 Inflation
Protected Bond 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: DIPIX
4
FUND BASICS
July 31, 2005
- --------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks to provide inflation protection and current income.
- --------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$5.8 million
- --------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
40
- --------------------------------------------------------------------------------
FUND START DATE:
December 1, 2004
- --------------------------------------------------------------------------------
YOUR FUND MANAGER:
Stephen R. Cianci joined Delaware Investments in 1992. He holds both a BS and a
MBA from Widener University. Mr. Cianci is an Adjunct Professor of Finance at
Widener University and is a CFA charterholder.
- --------------------------------------------------------------------------------
NASDAQ SYMBOLS:
Class A DIPAX
Class B DIPBX
Class C DIPCX
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
December 1, 2004 (Fund's inception) through July 31, 2005
Delaware Inflation
Protected Bond Lehman Brothers U.S.
Fund -- Class A Treasury Inflation Protected
Shares Securities Inex
1-DEC-04 $9,550 $10,000
DEC-04 $9,661 $10,174
JAN-05 $9,756 $10,175
FEB-05 $9,708 $10,131
MAR-05 $9,711 $10,140
APR-05 $9,885 $10,334
MAY-05 $9,950 $10,405
JUN-05 $9,972 $10,450
JUL-05 $9,794 $10,231
Chart assumes $10,000 invested on December 1, 2004 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. The chart also assumes $10,000 invested in the Lehman Brothers U.S.
Treasury Inflation Protected Securities Index. Returns plotted on the chart were
as of the last day of each month shown. The Lehman Brothers U.S. Treasury
Inflation Protected Securities Index is an unmanaged index that generally tracks
the performance of the market for U.S. Treasury inflation protected securities.
An index is unmanaged and does not reflect the costs of operating a mutual fund,
such as the costs of buying, selling, and holding securities. You cannot invest
directly in an index. The performance graph does not reflect the deduction of
taxes the shareholder would pay on Fund distributions or redemption of Fund
shares. An expense limitation was in effect for all classes of the Delaware
Inflation Protected Bond Fund during the period shown. Performance would have
been lower had the expense limitation not been in effect. Past performance is
not a guarantee of future results.
5
DISCLOSURE For the Period February 1, 2005 to July 31, 2005
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 February 1, 2005 to July 31, 2005.
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.
DELAWARE INFLATION PROTECTED BOND FUND
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 2/1/05 to
2/1/05 7/31/05 Ratio 7/31/05*
- -------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,003.80 0.75% $3.73
Class B 1,000.00 1,002.00 1.50% 7.45
Class C 1,000.00 1,002.00 1.50% 7.45
Institutional Class 1,000.00 1,004.40 0.50% 2.48
- -------------------------------------------------------------------------------------------------------------
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,021.08 0.75% $3.76
Class B 1,000.00 1,017.36 1.50% 7.50
Class C 1,000.00 1,017.36 1.50% 7.50
Institutional Class 1,000.00 1,022.32 0.50% 2.51
- -------------------------------------------------------------------------------------------------------------
* "Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).
Prior to May 1, 2005, Delaware Distributors, L.P. elected voluntarily to waive
the distribution and service fees of Class A, Class B, and Class C shares. These
expense ratios do reflect this voluntary waiver.
6
SECTOR/COUNTRY ALLOCATION As of July 31, 2005
DELAWARE INFLATION PROTECTED BOND FUND
Sector designations may be different than the sector designations presented in
other Fund materials.
PERCENTAGE
SECTOR/COUNTRY OF NET ASSETS
- -------------------------------------------------------------------------
ASSET-BACKED SECURITIES 0.71%
- -------------------------------------------------------------------------
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 0.52%
- -------------------------------------------------------------------------
AGENCY MORTGAGE-BACKED SECURITIES 0.19%
- -------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES 0.01%
- -------------------------------------------------------------------------
CORPORATE BONDS 4.75%
- -------------------------------------------------------------------------
Basic Industry 0.90%
Brokerage 0.86%
Communications 0.65%
Consumer Cyclical 1.91%
Insurance 0.43%
- -------------------------------------------------------------------------
MUNICIPAL BONDS 0.95%
- -------------------------------------------------------------------------
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 2.07%
- -------------------------------------------------------------------------
SOVEREIGN DEBT 2.12%
- -------------------------------------------------------------------------
Italy 2.12%
- -------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 89.11%
- -------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 100.43%
- -------------------------------------------------------------------------
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (0.43)%
- -------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
- -------------------------------------------------------------------------
7
STATEMENT DELAWARE INFLATION PROTECTED BOND FUND
OF NET ASSETS JULY 31, 2005
Principal
Amount Market
(degree) Value
ASSET-BACKED SECURITIES - 0.71%
MBNA Master Credit Card Trust USA
Series 1999-D B 6.50% 11/17/08 USD 2,000 $ 2,037
oMorgan Stanley ABS Capital I
Series 2004-HE4 A3 3.66% 5/25/34 12,557 12,557
Series 2005-WMC1 A2A 3.56% 1/25/35 21,112 21,114
Residential Asset Securities
Series 2003-KS10 AI2 2.71% 5/25/26 5,654 5,635
---------
TOTAL ASSET-BACKED SECURITIES (COST $41,149) 41,343
---------
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 0.52%
Freddie Mac Series 2351 PX 6.50% 7/15/30 4,827 4,852
GNMA Series 2002-20 VD 6.00% 4/20/19 25,000 25,473
---------
TOTAL AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (cost $30,408) 30,325
---------
AGENCY MORTGAGE-BACKED SECURITIES - 0.19%
Freddie Mac S.F. 30 yr 8.00% 5/1/31 9,974 10,737
---------
TOTAL AGENCY MORTGAGE-BACKED SECURITIES
(cost $10,772) 10,737
---------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 0.01%
Asset Securitization
Series 1995-MD4 A1 7.10% 8/13/29 677 695
---------
TOTAL COMMERCIAL MORTGAGE-BACKED
SECURITIES (cost $694) 695
---------
CORPORATE BONDS - 4.75%
Basic Industry - 0.90%
Norske Skog Canada 8.625% 6/15/11 25,000 26,000
Stone Container 9.75% 2/1/11 25,000 26,406
---------
52,406
---------
Brokerage - 0.86%
oMerrill Lynch 4.31% 3/12/07 50,000 49,750
---------
49,750
---------
Communications - 0.65%
CSC Holdings 10.50% 5/15/16 20,000 21,850
Insight Midwest 10.50% 11/1/10 15,000 15,975
---------
37,825
---------
Consumer Cyclical - 1.91%
Autonation 9.00% 8/1/08 15,000 16,613
Corrections Corporation of America
7.50% 5/1/11 25,000 26,062
General Motors Acceptance Corporation
o4.559% 7/16/07 5,000 4,892
6.75% 1/15/06 25,000 25,199
Hilton Hotels 7.625% 5/15/08 15,000 16,033
MGM MIRAGE 9.75% 6/1/07 20,000 21,675
---------
110,474
---------
Insurance - 0.43%
Marsh & McLennan 5.375% 3/15/07 25,000 25,180
---------
25,180
---------
TOTAL CORPORATE BONDS (cost $278,135) 275,635
---------
Principal
Amount Market
(degree) Value
MUNICIPAL BONDS - 0.95%
oMassachusetts State Special Obligation
Revenue Loan 5.27% 6/1/22 (FSA) USD 50,000 $ 54,754
----------
TOTAL MUNICIPAL BONDS (COST $55,335) 54,754
----------
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 2.07%
oWashington Mutual
Series 2003-AR7 A5 3.066% 8/25/33 25,000 24,495
Series 2004-AR4 A1 1.873% 6/25/34 96,976 95,731
----------
TOTAL NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (cost $119,953) 120,226
----------
SOVEREIGN DEBT - 2.12%
Italy - 2.12%
Italy Buoni Poliennali Del Tesoro
0.95% 9/15/10 EUR 100,471 122,754
----------
TOTAL SOVEREIGN DEBT (COST $129,567) 122,754
----------
U.S. TREASURY OBLIGATIONS - 89.11%
U.S. Treasury Inflation Index Bonds
2.375% 1/15/25 USD 603,340 637,136
3.375% 4/15/32 109,525 142,460
3.625% 4/15/28 234,384 302,685
3.875% 4/15/29 295,643 399,152
U.S. Treasury Inflation Index Notes
0.875% 4/15/10 364,297 350,067
1.625% 1/15/15 453,068 443,122
1.875% 7/15/13 148,189 148,675
1.875% 7/15/15 174,907 174,614
2.00% 1/15/14 247,251 250,022
&2.00% 7/15/14 520,832 526,610
3.00% 7/15/12 686,587 740,174
3.375% 1/15/07 190,191 195,355
3.625% 1/15/08 288,804 302,793
3.875% 1/15/09 367,477 394,694
4.25% 1/15/10 115,550 128,053
U.S. Treasury Note 4.125% 5/15/15 35,000 34,568
----------
TOTAL U.S. TREASURY OBLIGATIONS
(cost $5,224,040) 5,170,180
----------
TOTAL MARKET VALUE OF SECURITIES - 100.43%
(cost $5,890,053) 5,826,649
LIABILITIES NET OF RECEIVABLES AND
OTHER ASSETS - (0.43%) (24,785)
----------
NET ASSETS APPLICABLE TO 584,951
SHARES OUTSTANDING - 100.00% $5,801,864
==========
Net Asset Value - Delaware Inflation Protected Bond Fund
Class A ($2,675,697 / 269,764 Shares) $9.92
-----
Net Asset Value - Delaware Inflation Protected Bond Fund
Class B ($544,126 / 54,864 Shares) $9.92
-----
Net Asset Value - Delaware Inflation Protected Bond Fund
Class C ($530,035 / 53,443 Shares) $9.92
-----
Net Asset Value - Delaware Inflation Protected Bond Fund
Institutional Class ($2,052,006 / 206,880 Shares) $9.92
-----
8
STATEMENT DELAWARE INFLATION PROTECTED BOND FUND
OF NET ASSETS (CONTINUED)
COMPONENTS OF NET ASSETS AT JULY 31, 2005:
Shares of beneficial interest
(unlimited authorization - no par) $5,861,171
Undistributed net investment income 449
Accumulated net realized gain on investments 3,962
Net unrealized depreciation of investments
and foreign currencies (63,718)
----------
Total net assets $5,801,864
==========
o Principal amount shown is stated in the currency in which each bond is
denominated.
EUR - European Monetary Unit
USD - U.S. Dollar
o Variable rate securities. The interest rate shown is the rate as of July 31,
2005.
& Fully or partially pledged as collateral for financial futures contracts.
SUMMARY OF ABBREVIATIONS:
FSA - Insured by Financial Security Assurance
GNMA - Government National Mortgage Association
yr - Year
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE INFLATION PROTECTED BOND FUND
Net asset value Class A (A) $9.92
Sales charge (4.50% of offering price) (B) 0.47
------
Offering price $10.39
======
(A) Net asset value per share, as illustrated, is the amount which would be paid
upon the redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
The following foreign currency exchange contracts and futures contracts were
outstanding at July 31, 2005:
FOREIGN CURRENCY EXCHANGE CONTRACTS(1)
In Value of
Contracts to Exchange Contract Settlement Unrealized
Deliver For at 7/31/05 Date Depreciation
- ------------ --------- ---------- ---------- ------------
(52,000)
European
Monetary Units US$63,104 $(63,118) 8/26/05 $(14)
----
$(14)
====
FUTURES CONTRACTS(2)
Contracts Notional Notional Expiration Unrealized
to Buy Cost Value Date Depreciation
- --------- -------- -------- ---------- ------------
3 U.S. Treasury
5 year notes $321,863 $321,611 9/5/05 $(252)
-----
$(252)
=====
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional
amounts presented above represent the Fund's total exposure in such contracts,
whereas only the net unrealized appreciation (depreciation) is reflected in the
Fund's net assets.
(1) See Note 7 in "Notes to Financial Statements."
(2) See Note 8 in "Notes to Financial Statements."
See accompanying notes.
9
STATEMENT DELAWARE INFLATION PROTECTED BOND FUND
OF OPERATIONS December 1, 2004* to July 31, 2005
INVESTMENT INCOME:
Interest $195,076
--------
EXPENSES:
Management fees $15,764
Distribution expenses -- Class A 3,633
Distribution expenses -- Class B 3,433
Distribution expenses -- Class C 3,392
Registration fees 62,826
Reports and statements to shareholders 13,366
Legal and professional fees 12,261
Custodian fees 5,187
Accounting and administration expenses 1,188
Pricing fees 641
Insurance fees 347
Dividend disbursing and transfer agent fees and expenses 345
Trustees' fees 179
Other 2,583 125,145
-------
Less expenses absorbed or waived (96,646)
Less expense paid indirectly (553)
Less waived distribution expenses -- Class A (2,094)
Less waived distribution expenses -- Class B (2,094)
Less waived distribution expenses -- Class C (2,094)
--------
Total operating expenses 21,664
--------
NET INVESTMENT INCOME 173,412
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investments 11,662
Futures contracts (3,953)
Foreign currencies (48)
--------
Net realized gain 7,661
Net change in unrealized appreciation/depreciation of investments
and foreign currencies (63,718)
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN CURRENCIES (56,057)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $117,355
========
*Commencement of operations.
See accompanying notes
10
STATEMENT DELAWARE INFLATION PROTECTED BOND FUND
OF CHANGES IN NET ASSETS
December 1, 2004*
to
July 31, 2005
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 173,412
Net realized gain on investments and foreign currencies 7,661
Net change in unrealized appreciation/depreciation of investments and
foreign currencies (63,718)
----------
Net increase in net assets resulting from operations 117,355
----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (74,498)
Class B (16,450)
Class C (16,159)
Institutional Class (69,555)
----------
(176,662)
----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 2,724,251
Class B 532,676
Class C 518,348
Institutional Class 2,000,010
Net asset value of shares issued upon reinvestment of dividends
and distributions:
Class A 73,624
Class B 16,450
Class C 16,159
Institutional Class 69,555
----------
5,951,073
----------
Cost of shares repurchased:
Class A (89,902)
----------
(89,902)
----------
Increase in net assets derived from capital share transactions 5,861,171
----------
NET INCREASE IN NET ASSETS 5,801,864
NET ASSETS:
Beginning of period --
----------
End of period (including undistributed net investment income of $449) $5,801,864
==========
*Commencement of operations.
See accompanying notes
11
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------
Delaware Inflation Protected Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
Institutional
Class A Class B Class C Class
12/1/04(1) 12/1/04(1) 12/1/04(1) 12/1/04(1)
to to to to
7/31/05 7/31/05 7/31/05 7/31/05
NET ASSET VALUE, BEGINNING OF PERIOD $10.000 $10.000 $10.000 $10.000
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.332 0.313 0.314 0.339
Net realized and unrealized loss on investments
and foreign currencies (0.075) (0.074) (0.075) (0.076)
-------- -------- -------- --------
Total from investment operations 0.257 0.239 0.239 0.263
-------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.337) (0.319) (0.319) (0.343)
-------- -------- -------- --------
Total dividends and distributions (0.337) (0.319) (0.319) (0.343)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.920 $ 9.920 $ 9.920 $ 9.920
======== ======== ======== ========
Total return(3) 2.55% 2.37% 2.37% 2.61%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $2,676 $544 $530 $2,052
Ratio of expenses to average net assets 0.61% 0.88% 0.87% 0.50%
Ratio of expenses to average net assets
prior to expense limitations and expenses paid indirectly(4) 3.51% 4.25% 4.25% 3.26%
Ratio of net investment income to average net assets 4.95% 4.68% 4.69% 5.07%
Ratio of net investment income to average net assets
prior to expense limitations and expenses paid indirectly(4) 2.05% 1.31% 1.31% 2.31%
Portfolio turnover 360% 360% 360% 360%
(1) Date of commencement of operations; ratios and portfolio turnover 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 and
distributor, as applicable. Performance would have been lower had the
expense limitations not been in effect.
(4) Includes 0.02% of expenses paid indirectly.
See accompanying notes
12
NOTES DELAWARE INFLATION PROTECTED BOND FUND
TO FINANCIAL STATEMENTS July 31, 2005
Delaware Group Government Fund (the "Trust") is organized as a Delaware
statutory trust and offers two series: Delaware American Government Bond Fund
and Delaware Inflation Protected Bond Fund. These financial statements and the
related notes pertain to Delaware Inflation Protected Bond Fund (the "Fund").
The Trust is an open-end investment company. The Fund is considered
non-diversified under the Investment Company Act of 1940, as amended, and offers
Class A, Class B, Class C and Institutional Class shares. Class A shares are
sold with a front-end sales charge of up to 4.50%. Class B shares are sold with
a contingent deferred sales charge that declines from 4% to zero depending upon
the period of time the shares are held. Class B shares will automatically
convert to Class A shares on a quarterly basis approximately eight years after
purchase. Class C shares are sold with a contingent deferred sales charge of 1%,
if redeemed during the first 12 months. Institutional 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 to provide inflation protection
and current income.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation -- Securities listed on a foreign exchange are valued at the
last quoted sales price before the Fund is valued. U.S. government and agency
securities are valued at the mean between the bid and asked prices. Other
long-term debt securities are valued by an independent pricing service and such
prices are believed to reflect the fair value of such securities. Short-term
debt securities having less than 60 days to maturity are valued at amortized
cost, which approximates market value. Forward foreign currency exchange
contracts (and forward foreign cross currency exchange contracts) are valued at
the mean between the bid and ask prices of the contracts and are
market-to-market daily. Interpolated values are derived when the settlement date
of the contract is an interim date for which quotations are not available.
Futures contracts and options on futures contracts are valued at the daily
quoted settlement prices. Other securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Fund's Board of Trustees. In determining
whether market quotations are readily available or fair valuation will be used,
various factors will be taken into consideration, such as market closures, or
with respect to foreign securities, aftermarket trading or significant events
after local market trading (e.g., government actions or pronouncements, trading
volume or volatility on markets, exchange among dealers, or news events).
Federal Income Taxes -- The Fund intends 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.
Foreign Currency Transactions -- Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies is translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Fund isolates
that portion of realized gains and losses on investments in debt securities,
which are due to changes in foreign exchange rates from that which are due to
changes in market prices of debt securities. The Fund reports certain foreign
currency related transactions as components of realized gains (losses) for
financial reporting purposes, where such components are treated as ordinary
income (loss) for federal income tax purposes.
Use of Estimates -- The preparation of financial statements in conformity with
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(R) 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. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. Realized gains (losses) on
paydowns of mortgage- and asset-backed securities are classified as interest
income. The Fund declares and pays dividends from net investment income monthly
and distributions from net realized gain on investments, if any, annually.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The earnings
credits for the period ended July 31, 2005 were approximately $553. The expense
paid under the above arrangement is included in custodian fees on the Statement
of Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER
TRANSACTIONS WITH AFFILIATES
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.45% on the first $500 million of average daily net assets of the Fund,
0.40% on the next $500 million, 0.35% on the next $1.5 billion, and 0.30% 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 0.50% of average daily net assets of the Fund through November 28, 2005.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. Effective June
1, 2005, the Fund pays DSC a monthly fee computed at the annual rate of 0.04% of
the Fund's average daily net assets for accounting and administration services.
Prior to June 1, 2005, the Fund paid 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 0.25% 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. Prior to May 1, 2005, DDLP elected voluntarily to waive
the distribution and service fees of Class A, Class B and Class C shares.
Institutional Class shares pay no distribution and service expenses.
13
NOTES DELAWARE INFLATION PROTECTED BOND FUND
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
At July 31, 2005, the Fund had receivables due from or liabilities payable to
affiliates as follows:
Reimbursement receivable from DMC $23,099
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses payable to DSC (330)
Other expenses payable to DMC and affiliates* (4,575)
*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,
custodian 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 period ended July 31, 2005, the Fund was
charged $187 for internal legal services provided by DMC.
For the period ended July 31, 2005, DDLP earned $1,641 for commissions on sales
of the Fund's Class A shares. For the period ended July 31, 2005, DDLP did not
receive any contingent deferred sales charge commissions on redemption of the
Fund's Class A, Class B and Class C 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 period ended July 31, 2005, the Fund made purchases of $788,905 and
sales of $122,677 of investment securities other than U.S. government securities
and short-term investments. For the period ended July 31, 2005, the Fund made
purchases of $18,114,156 and sales of $12,897,812 of long-term U.S. government
securities.
At July 31, 2005, the cost of investments for federal income tax purposes was
$5,910,945. At July 31, 2005, net unrealized depreciation was $84,296, of which
$23,169 related to unrealized appreciation of investments and $107,465 related
to unrealized depreciation of investments.
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. The tax character of
dividends and distributions paid during the period ended July 31, 2005 was as
follows:
Ordinary income $176,662
As of July 31, 2005, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $5,861,171
Undistributed ordinary income 27,622
Post-October losses (2,523)
Post-October currency losses (62)
Unrealized depreciation of investments
and foreign currencies (84,344)
----------
Net assets $5,801,864
==========
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales, mark-to-market
on futures contracts, mark-to-market of forward foreign currency contracts and
tax treatment of market discount and premium on debt instruments.
Post-October losses represent losses realized on investment and foreign currency
transactions from November 1, 2004 through July 31, 2005 that, in accordance
with federal income tax regulations, the Fund has elected to defer and treat as
having arisen in the following fiscal year.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of gain (loss) on foreign currency transactions, market
discount and premium on certain debt instruments and paydowns of mortgage- and
asset-backed securities. Results of operations and net assets were not affected
by these reclassifications. For the period ended July 31, 2005, the Fund
recorded the following reclassifications:
Undistributed net investment income $3,699
Accumulated net realized gain (loss) (3,699)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Period
Ended
7/31/05
Shares sold:
Class A 271,410
Class B 53,238
Class C 51,846
Institutional Class 200,001
Shares issued upon reinvestment of dividends and
distributions:
Class A 7,282
Class B 1,626
Class C 1,597
Institutional Class 6,879
-------
593,879
-------
Shares repurchased:
Class A (8,928)
-------
(8,928)
-------
Net increase 584,951
========
6. LINE OF CREDIT
The Fund, along with certain other funds in the Delaware Investments(R) 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 July 31, 2005, or at any time during the
period.
7. FOREIGN EXCHANGE CONTRACTS
The Fund may enter into forward foreign
currency exchange contracts (and forward foreign cross currency exchange
contracts) as a way of managing foreign exchange rate risk. The Fund may enter
into these contracts to fix the U.S. dollar value of a security that it has
agreed to buy or sell for the period between the date the trade was entered into
and the date the security is
14
NOTES DELAWARE INFLATION PROTECTED BOND FUND
TO FINANCIAL STATEMENTS (CONTINUED)
7. FOREIGN EXCHANGE CONTRACTS (CONTINUED)
delivered and paid for. The Fund may also use these contracts to hedge the U.S.
dollar value of securities it already owns that are denominated in foreign
currencies. The change in market value is recorded as an unrealized gain or
loss. When the contract is closed, a realized gain or loss is recorded equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. The use of forward foreign currency
exchange contracts (and forward foreign cross currency exchange contracts) does
not eliminate fluctuations in the underlying prices of the securities, but does
establish a rate of exchange that can be achieved in the future. Although
forward foreign currency exchange contracts limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Fund could be exposed to risks if the counterparties to the contracts are unable
to meet the terms of their contracts.
8. FUTURES CONTRACTS
The Fund may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, the
Fund deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. In some cases, due to the form of the futures agreement, initial
margin is held in a segregated account with the Fund's custodian, rather than
directly with the broker. Subsequent payments are received from the broker or
paid to the broker (or added to the segregated account) each day, based on the
daily fluctuation in the market value of the contract. These receipts or
payments are known as "variation margin" and are recorded daily by the Fund as
unrealized gains or losses until the contracts are closed. When the contracts
are closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risks of entering into futures contracts include potential
imperfect correlation between the futures contracts and the underlying
securities and the possibility of an illiquid secondary market for these
instruments.
9. CREDIT AND MARKET RISK
The Fund primarily invests in inflation protected debt securities whose
principal and/or interest payments are adjusted for inflation, unlike
traditional debt securities that make fixed principal and interest payments.
Under normal circumstances, the Fund will invest at least 80% of its net assets
in inflation protected debt securities issued by the U.S. government, its
agencies or instrumentalities, foreign governments and corporations.
Some countries in which the Fund may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad. The securities
exchanges of certain foreign markets are substantially smaller, less liquid and
more volatile than the major securities markets in the United States.
Consequently, acquisition and disposition of securities by the Fund may be
inhibited. In addition, a significant portion of the aggregate market value of
equity securities listed on the major securities exchanges in emerging markets
are held by a smaller number of investors. This may limit the number of shares
available for acquisition or disposition by the Fund.
The Fund also invests in fixed-income securities whose value is derived from an
underlying pool of mortgages or consumer loans. Investors receive principal and
interest payments as the underlying mortgages and consumer loans are paid back.
Some of these securities are collateralized mortgage obligations (CMOs). CMOs
are debt securities issued by U.S. government agencies or by financial
institutions and other mortgage lenders, which are collateralized by a pool of
mortgages held under an indenture.
Prepayment of mortgages may shorten the stated maturity of the obligations and
can result in a loss of premium, if any has been paid. Certain of these
securities may be stripped (securities, which provide only the principal or
interest feature of the underlying security). The yield to maturity on an
interest-only CMO is extremely sensitive not only to changes in prevailing
interest rates, but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. A rapid rate of
principal payments may have a material adverse affect on the Fund's' yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
The Fund may invest up to 15% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Board of Trustees has delegated to DMC the
day-to-day functions of determining whether individual Rule 144A securities are
liquid for purposes of the Fund's limitation on investments in illiquid assets.
At July 31, 2005, there were no Rule 144A securities.
10. CONTRACTUAL OBLIGATIONS
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
11. TAX INFORMATION (UNAUDITED)
The information set forth below is for the Fund's fiscal period as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2005, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total
Distributions Distributions Distributions
(Tax Basis) (Tax Basis) (Tax Basis)
-------------- -------------- --------------
-- 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
15
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Delaware Group Government Funds - Delaware Inflation
Protected Bond Fund
We have audited the accompanying statement of net assets of Delaware Inflation
Protected Bond Fund (one of the series constituting Delaware Group Government
Funds) (the "Fund") as of July 31, 2005, and the related statement of
operations, statement of changes in net assets, and financial highlights for the
period December 1, 2004 (commencement of operations) through July 31, 2005.
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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. ur audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of July 31, 2005, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audit provides 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 Inflation Protected Bond Fund of Delaware Group Government Funds at
July 31, 2005, the results of its operations, the changes in its net assets, and
its financial highlights for the period December 1, 2004 (commencement of
operations) through July 31, 2005, in conformity with U.S. generally accepted
accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
September 16, 2005
16
OTHER DELAWARE INFLATION PROTECTED BOND FUND
FUND INFORMATION
PROXY RESULTS
The shareholders of Delaware Group Government Fund (the "Trust") voted on the
following proposals at the special meeting of shareholders on March 23, 2005 or
as adjourned. The description of each proposal and number of shares voted are as
follows:
1. To elect a Board of Trustees for the Trust (shareholders of all series of the
Trust voting together).
Shares Voted
Shares Voted For Withheld Authority
---------------- ------------------
Thomas L. Bennett 16,016,270 312,153
Jude T. Driscoll 16,012,027 316,396
John A. Fry 16,014,284 314,139
Anthony D. Knerr 16,010,874 317,550
Lucinda S. Landreth 16,026,233 302,190
Ann R. Leven 16,017,443 310,980
Thomas F. Madison 16,008,181 320,242
Janet L. Yeomans 16,027,387 301,037
J. Richard Zecher 16,016,340 312,084
2. To approve the use of a "manager of managers" structure whereby the
investment manager of each Fund will be able to hire and replace subadvisers
without shareholder approval.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
Delaware Inflation Protected Bond Fund 400,002 0 0 0
17
DELAWARE INVESTMENTS(R) FAMILY OF FUNDS
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors ("Trustees"), which
has oversight responsibility for the management of a fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor and others 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 and Officers with
certain background and related information.
NUMBER OF OTHER
PORTFOLIOS IN FUND DIRECTORSHIPS
POSITION(S) COMPLEX OVERSEEN HELD BY
NAME, ADDRESS AND HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) BY TRUSTEE TRUSTEE
BIRTHDATE FUND(S) SERVED DURING PAST 5 YEARS OR OFFICER OR OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
JUDE T. DRISCOLL(2) Chairman, 5 Years - Executive Since August 2000, Mr. 92 None
2005 Market Street President, Chief Officer Driscoll has served in
Philadelphia, PA Executive Officer various executive
19103 and Trustee 1 Year - Trustee capacities at different
times at Delaware
March 10, 1963 Investments(1)
Senior Vice President and
Director of Fixed-Income
Process - Conseco Capital
Management
(June 1998 - August 2000)
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
THOMAS L. BENNETT Trustee Since Private Investor - 92 None
2005 Market Street March 23, 2005 (March 2004 - Present)
Philadelphia, PA
19103 Investment Manager -
Morgan Stanley & Co.
October 4, 1947 (January 1984 - March 2004)
JOHN A. FRY Trustee 4 Years President - Franklin & 92 Director - Community
2005 Market Street Marshall College Health Systems
Philadelphia, PA (June 2002 - Present)
19103
Executive Vice President
May 28, 1960 - University of
Pennsylvania
(April 1995 - June 2002)
ANTHONY D. KNERR Trustee 12 Years Founder/Managing Director 92 None
2005 Market Street - Anthony Knerr &
Philadelphia, PA Associates (Strategic
19103 Consulting)
(1990 - Present)
December 7, 1938
LUCINDA S. LANDRETH Trustee Since Chief Investment Officer - 92 None
2005 Market Street March 23, 2005 Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002 - 2004)
June 24, 1947
ANN R. LEVEN Trustee 16 Years Treasurer/Chief Fiscal 92 Director and Audit
2005 Market Street Officer - National Committee
Philadelphia, PA Gallery of Art Chairperson -
19103 (1994 - 1999) Andy Warhol
Foundation
November 1, 1940
Director and Audit
Committee Member -
Systemax Inc.
18
NUMBER OF OTHER
PORTFOLIOS IN FUND DIRECTORSHIPS
POSITION(S) COMPLEX OVERSEEN HELD BY
NAME, ADDRESS AND HELD WITH LENGTH OF TIME PRINCIPAL OCCUPATION(S) BY TRUSTEE TRUSTEE
BIRTHDATE FUND(S) SERVED DURING PAST 5 YEARS OR OFFICER OR OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
THOMAS F. MADISON Trustee 11 Years President/Chief Executive 92 Director -
2005 Market Street Officer - MLM Partners, Banner Health
Philadelphia, PA Inc. (Small Business
19103 Investing and Consulting) Director and Audit
(January 1993 - Present) Committee Member-
CenterPoint Energy
February 25, 1936
Director and Audit
Committee Member-
Digital River Inc.
Director and Audit
Committee Member-
Rimage Corporation
Director - Valmont
Industries Inc.
JANET L. YEOMANS Trustee 6 Years Vice President/Mergers & 92 None
2005 Market Street Acquisitions -
Philadelphia, PA 3M Corporation
19103 (January 2003 - Present)
July 31, 1948 Ms. Yeomans has held
various management
positions at 3M Corporation
since 1983.
J. RICHARD ZECHER Trustee Since Founder - 92 Director and Audit
2005 Market Street March 23, 2005 Investor Analytics Committee Member -
Philadelphia, PA (Risk Management) Investor Analytics
19103 (May 1999 - Present)
Director and Audit
July 3, 1940 Committee Member -
Oxigene, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS
MICHAEL P. BISHOF Senior Vice Chief Financial Mr. Bishof has served in 92 None(3)
2005 Market Street President and Officer since various executive capacities
Philadelphia, PA Chief Financial February 17, 2005 at different times at
19103 Officer Delaware Investments.
August 18, 1962
RICHELLE S. MAESTRO Executive Vice 2 Years Ms. Maestro has served in 92 None(3)
2005 Market Street President, Chief various executive capacities
Philadelphia, PA Legal Officer and at different times at
19103 Secretary Delaware Investments.
November 26, 1957
JOHN J. O'CONNOR Senior Vice Treasurer since Mr. O'Connor has served in 92 None(3)
2005 Market Street President and February 17, 2005 various executive capacities
Philadelphia, PA Treasurer at different times at
19103 Delaware Investments.
June 16, 1957
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the Fund's(s') investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's(s') manager and distributor.
(3) Mr. Bishof, Ms. Maestro and Mr. O'Connor 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.
19
Delaware
Investments(R)
- -----------------------------------
A member of Lincoln Financial Group
This annual report is for the information of Delaware Inflation Protected Bond
Fund shareholders, but it may be used with prospective investors when preceded
or accompanied by a current prospectus for Delaware Inflation Protected Bond
Fund and the Delaware Investments Performance Update for the most recently
completed calendar quarter. The prospectus sets forth details about charges,
expenses, investment objectives, and operating policies of the Fund. You should
read the prospectus carefully before you invest. The figures in this report
represent past results that are not a guarantee of future results. The return
and principal value of an investment in the Fund will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost.
BOARD OF TRUSTEES AFFILIATED OFFICERS CONTACT INFORMATION
JUDE T. DRISCOLL MICHAEL P. BISHOF INVESTMENT MANAGER
Chairman Senior Vice President and Delaware Management Company,
Delaware Investments Family of Funds Chief Financial Officer a Series of Delaware Management Business Trust
Philadelphia, PA Delaware Investments Family of Funds Philadelphia, PA
Philadelphia, PA
THOMAS L. BENNETT NATIONAL DISTRIBUTOR
Private Investor RICHELLE S. MAESTRO Delaware Distributors, L.P.
Rosemont, PA Executive Vice President, Philadelphia, PA
Chief Legal Officer and Secretary
JOHN A. FRY Delaware Investments Family of Funds SHAREHOLDER SERVICING, DIVIDEND
President Philadelphia, PA DISBURSING AND TRANSFER AGENT
Franklin & Marshall College Delaware Service Company, Inc.
Lancaster, PA JOHN J. O'CONNOR 2005 Market Street
Senior Vice President and Treasurer Philadelphia, PA 19103-7094
ANTHONY D. KNERR Delaware Investments Family of Funds
Managing Director Philadelphia, PA FOR SHAREHOLDERS
Anthony Knerr & Associates 800 523-1918
New York, NY
FOR SECURITIES DEALERS AND FINANCIAL
LUCINDA S. LANDRETH INSTITUTIONS REPRESENTATIVES ONLY
Former Chief Investment Officer 800 362-7500
Assurant, Inc.
Philadelphia, PA Web site
www.delawareinvestments.com
ANN R. LEVEN
Former Treasurer/Chief Fiscal Officer Delaware Investments is the marketing name for
National Gallery of Art Delaware Management Holdings, Inc. and
Washington, DC its subsidiaries.
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
J. RICHARD ZECHER
Founder
Investor Analytics
Scottsdale, AZ
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(9663) Printed in the USA
AR-556 [7/05] IVES 9/05 MF-05-08-022 PO10385
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a
third party. A copy of the registrant's Code of Business Ethics has been posted
on Delaware Investments' internet website at www.delawareinvestments.com. Any
amendments to the Code of Business Ethics, and information on any waiver from
its provisions granted by the registrant, will also be posted on this website
within five business days of such amendment or waiver and will remain on the
website for at least 12 months.
Item 3. Audit Committee Financial Expert
The registrant's Board of Trustees/Directors has determined that each
member of the registrant's Audit Committee is an audit committee financial
expert, as defined below. For purposes of this item, an "audit committee
financial expert" is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant's financial statements, or
experience actively supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
An "audit committee financial expert" shall have acquired such attributes
through:
a. Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant, or auditor or experience in
one or more positions that involve the performance of similar functions;
b. Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor, or person
performing similar functions;
c. Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing, or evaluation of
financial statements; or
d. Other relevant experience.
The registrant's Board of Trustees/Directors has also determined that
each member of the registrant's Audit Committee is independent. In order to be
"independent" for purposes of this item, the Audit Committee member may not: (i)
other than in his or her capacity as a member of the Board of Trustees/Directors
or any committee thereof, accept directly or indirectly any consulting, advisory
or other compensatory fee from the issuer; or (ii) be an "interested person" of
the registrant as defined in Section 2(a)(19) of the Investment Company Act of
1940.
The names of the audit committee financial experts on the registrant's
Audit Committee are set forth below:
Thomas L. Bennett (1)
Thomas F. Madison
Janet L. Yeomans (1)
J. Richard Zecher
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
----------
The aggregate fees billed for services provided to the registrant by
its independent auditors for the audit of the registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $23,300 for
the fiscal year ended July 31, 2005.
_______________________
(1) The instructions to Form N-CSR require disclosure on the relevant experience
of persons who qualify as audit committee financial experts based on "other
relevant experience." The Board of Trustees/Directors has determined that Mr.
Bennett qualifies as an audit committee financial expert by virtue of his
education, Chartered Financial Analyst designation, and his experience as a
credit analyst, portfolio manager and the manager of other credit analysts and
portfolio managers. The Board of Trustees/Directors has determined that Ms.
Yeomans qualifies as an audit committee financial expert by virtue of her
education and experience as the Treasurer of a large global corporation.
The aggregate fees billed for services provided to the registrant by
its independent auditors for the audit of the registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $26,000 for
the fiscal year ended July 31, 2004.
(b) Audit-related fees.
-------------------
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended July 31, 2005.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the registrant's investment adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $159,700 for the registrant's fiscal year ended
July 31, 2005. 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 July 31, 2004.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the registrant's investment adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $167,700 for the registrant's fiscal year ended
July 31, 2004. The percentage of these fees relating to services approved by the
registrant's Audit Committee pursuant to the de minimis exception from the
pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These audit-related services were as follows: issuance of reports concerning
transfer agent's system of internal accounting control pursuant to Rule 17Ad-13
of the Securities Exchange Act; issuance of agreed upon procedures reports to
the 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").
(c) Tax fees.
---------
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $4,200 for the fiscal year
ended July 31, 2005. The percentage of these fees relating to services approved
by the registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: Review of income tax returns and
review of annual excise distribution calculations.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's investment adviser and other
service providers under common control with the adviser and that relate directly
to the operations or financial reporting of the registrant were $0 for the
registrant's fiscal year ended July 31, 2005.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $1,750 for the fiscal year
ended July 31, 2004. The percentage of these fees relating to services approved
by the registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: review of income tax returns and
review of annual excise distribution calculations.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's investment adviser and other
service providers under common control with the adviser and that relate directly
to the operations or financial reporting of the registrant were $0 for the
registrant's fiscal year ended July 31, 2004.
(d) All other fees.
--------------
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended July 31, 2005.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the registrant's independent
auditors to the registrant's adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $0 for the registrant's fiscal year ended July
31, 2005.
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended July 31, 2004.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the registrant's independent
auditors to the registrant's adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $0 for the registrant's fiscal year ended July
31, 2004.
(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
and other service providers under common control with the adviser were $335,260
and $344,690 for the registrant's fiscal years ended July 31, 2005 and July 31,
2004, respectively.
(h) In connection with its selection of the independent auditors, the
registrant's Audit Committee has considered the independent auditors' provision
of non-audit services to the registrant's investment adviser and other service
providers under common control with the adviser that were not required to be
pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit
Committee has determined that the independent auditors' provision of these
services is compatible with maintaining the auditors' independence.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There were no significant changes in the registrant's internal control
over financial reporting that occurred during the second fiscal quarter of the
period covered by the report to stockholders included herein (i.e., the
registrant's fourth fiscal quarter) that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are
furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf, by the undersigned, thereunto duly authorized.
NAME OF REGISTRANT: Delaware Group Government Fund
JUDE T. DRISCOLL
- --------------------------------
By: Jude T. Driscoll
Title: Chief Executive Officer
Date: October 7, 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: Chief Executive Officer
Date: October 7, 2005
MICHAEL P. BISHOF
- ---------------------------------
By: Michael P. Bishof
Title: Chief Financial Officer
Date: October 7, 2005