DECATUR INCOME FUND
DECATUR TOTAL RETURN FUND
[GRAPHIC OMITTED: ILLUSTRATION OF A MAN AND WOMAN HOLDING A PAINTING
WHICH IS BROKEN IN HALF]
FOR TOTAL RETURN
service and guidance
professional management
goals
1998
Semi-Annual Report
[GRAPHIC OMITTED: LOGO OF DELAWARE INVESTMENTS
----------------------------
Philadelphia * London]
for total June 8, 1998
return
2
DEAR SHAREHOLDER:
AMERICA'S ECONOMY ACHIEVED A NOTABLE milestone during the first half of
fiscal 1998 as the nation's unemployment rate dropped to a 28-year low
of 4.3% as of May without triggering higher inflation.
U.S. corporate profits remained at near record levels. This helped
lift the Dow Jones Industrial Average above 9000 points for the first
time in early 1998. However, earnings growth for some businesses,
particularly those with overseas operations, began to falter this past
spring, leading to higher stock market volatility.
Market conditions appeared to reinforce the potential value of the
Decatur Funds' stock selection strategy. The Funds' dividend yield and
value disciplines served shareholders well by reducing investment risk
and providing income.
Both Decatur Funds outperformed the average of their peers for the
six months ended May 31, 1998, as shown below. Decatur Total Return
Fund's results nearly matched the return of the unmanaged S&P BARRA
Value Index. This index measures the performance of S&P 500 Index stocks
that meet BARRA International's definition of value stocks.
CALENDAR 1998 HAS BEEN CHALLENGING FOR THE DECATUR FUNDS BECAUSE GROWTH
STYLE INVESTING - THE STRATEGY OF A HARE - CAME BACK IN VOGUE. WE REMAIN
LOYAL TO A MORE TEMPERED, TORTOISE-LIKE APPROACH THAT HELPS US AVOID
PAYING TOO MUCH FOR A STOCK.
Calendar 1998 has been challenging for the Decatur Funds because
growth style investing - the strategy of a hare - came back in vogue.
Some investors sought growth at any price, pushing the average
price/earnings ratio of S&P 500 stocks to a historically high 24.5 times
estimated 1998 profits. We remain loyal to a more tempered, tortoise-like
approach that helps us avoid paying too much for stocks.
<TABLE>
<CAPTION>
CUMULATIVE/AVERAGE ANNUAL TOTAL RETURN
SIX MONTHS ENDED THREE YEARS ENDED
MAY 31, 1998 MAY 31, 1998
<S> <C> <C>
Decatur Income Fund A Class +12.61% +25.00%
Decatur Total Return Fund A Class +13.19% +26.30%
Lipper Equity Income Fund Average +11.02% (221 funds) +24.65% (131 funds)
S&P BARRA Value Index +13.62% +26.77%
Standard & Poor's 500 Index +15.07% +29.52%
The Decatur Funds' performance as well as that of the Lipper Equity Income Fund
Average is based on net asset value without the effect of sales charges and assumes
reinvestment of dividends and capital gains. Performance information for all Classes
of both Funds can be found on page 12. The unmanaged S&P BARRA Value Index measures
the performance of S&P 500 stocks that meet BARRA International's definition of
value stocks. Past performance does not guarantee future results.
</TABLE>
for total
return
3
Since November, corporate earnings disappointments have become more
frequent, and large daily price swings for growth stocks, particularly in
technology, have become more common. By buying stocks whose dividend
yields are relatively high and whose earnings growth expectations are
underappreciated, your Decatur management team chooses a steadier path
with the potential to "win the race" over the long term.
No one can say for certain how the stock market will perform between
now and 2007, when Decatur Income Fund will mark its 50-year Golden
Anniversary. We believe dividends continue to point the way to capital
appreciation. We encourage you to read portfolio manager John Fields'
discussion of how the 14-person Decatur management team attempts to tap
this potential.
We are pleased to say the Decatur approach to investing is more
popular than ever. The combined assets of Decatur Income Fund and Decatur
Total Return Fund reached nearly $4 billion as of May 31. Decatur Total
Return also attracts more investments than any other fund in the Delaware
Investments family.
In an ever more complex world, the Decatur Funds offer a clear
strategy for investors seeking attractive long-term total return from
equities. We urge you to examine your positioning in either Fund as you
review your asset allocation plan with your financial adviser.
Sincerely,
/s/ Wayne A. Stork
WAYNE A. STORK
Chairman
/s/Jeffrey J. Nick
JEFFREY J. NICK
President and Chief Executive Officer
<TABLE>
<CAPTION>
TOP 10 HOLDINGS
DECATUR INCOME AND DECATUR TOTAL RETURN FUNDS
MAY 31, 1998
INDUSTRY DIVIDEND YIELD PRICE/EARNINGS
RATIO
<S> <C> <C> <C>
McGraw-Hill Cos. publishing 1.96% 23.8x
Pitney Bowes Corp. office products 1.94% 23.2x
American Home Products pharmaceuticals 1.67% 26.4x
Hoechst AG chemicals 1.71% 36.3x
Imperial Chemical Industries chemicals 3.61% 23.5x
BestFoods processed food 1.57% 25.4x
Baxter InternationaL health care 2.11% 20.0x
American General Corp. insurance 2.18% 16.8x
May Department Stores retailer 1.95% 18.7x
Frontier Corp.** long distance
telecom 2.97% 28.4x
Aon Corp.* insurance 1.76% 19.9x
S&P 500 Index 1.46% 24.5x
Holdings are listed in order of size as a percentage of net assets within
Decatur Total Return Fund.
*Top 10 in Decatur Income Fund only.
**Top 10 in Decatur Total Return Fund only.
See page 10 for each Fund's SEC yields.
</TABLE>
for total
return
4
PORTFOLIO MANAGER'S REVIEW
INCREASED VOLATILITY IN SOME SECTORS of the U.S. stock market since
November has given your Fund's management team an exciting opportunity
to add high quality, relatively high-yielding stocks to the Decatur
Funds' portfolios.
During the period, the U.S. economy grew at an average annual rate
of 4.2%, a level indicative of a robust boom. However, corporate earnings
growth slowed as demand from the Pacific Rim weakened, business labor
costs rose and competitive pressures intensified.
Earnings disappointments, particularly from technology companies,
and a fall in commodity prices, notably oil and grains, prompted
investorsto favor growth stocks rather than value stocks. This helped
drive up the average price/earnings of stocks in the S&P 500 Index to a
historically high 24.5 times this year's anticipated profits.
Despite this challenging environment for value-style managers,
Decatur's dividend yield discipline helped us provide competitive
results for the first half of fiscal 1998. We focused on firms that
appear to offer solid potential from new products, cost-cutting
programs, consolidation opportunities and stock buybacks.
STRATEGIC POSITIONING
As part of our screening process, we seek companies with above-average
dividend yields likely to benefit from catalysts that can unlock a
stock's capital appreciation potential. Since autumn, our research and
dividend-oriented sell discipline has led us to:
[bullet] INCREASE OUR WEIGHTING IN TELECOMMUNICATIONS. Historically,
telephone companies have provided high yields but little growth.
This is changing as a result of new technology, deregulation
and global consolidation that, in our view, has not been fully
recognized by the market. During the first half, we purchased
shares of AT&T and BELL ATLANTIC in both Funds.
[GRAPHIC OMITTED: bar chart DECATUR TOTAL RETURN FUND SECTOR ALLOCATION
VS. S&P 500 INDEX]
DECATUR TOTAL RETURN FUND
SECTOR ALLOCATION VS. S&P 500 INDEX
DECATUR TOTAL RETURN FUND
Banks & Insurance 23.7%
Consumer Growth 11.7%
Consumer Staples & Cyclicals 18.6%
Capital Goods 10.1%
Technology 2.7%
Chemicals & Raw Materials 12.3%
Energy 11.2%
Electric Utilities 1.3%
Telecommunications 8.1%
S&P 500 INDEX
Banks & Insurance 16.9%
Consumer Growth 23.0%
Consumer Staples & Cyclicals 12.5%
Capital Goods 7.0%
Technology 13.9%
Chemicals & Raw Materials 4.6%
Energy 8.0%
Electric Utilities 2.6%
Telecommunications 8.2%
Decatur Income Fund's equity sector weightings are similar to that of
Decatur Total Return Fund after factoring out Decatur Income's 12.8%
positioning in high-yield bonds.
for total
return
5
[bullet] UPGRADE QUALITY. We used market weakness to replace and/or add
to our position in some high-yielding capital goods, service
business and food stocks. For instance, we sold our position in
BROWNING-FERRIS, a waste hauler, and added to our holdings of
EMERSON ELECTRIC (see page 8).
[bullet] REDUCE OUR WEIGHTING IN PHARMACEUTICALS. Many of our drug
stock selections have performed exceptionally well for the
past several years. During the first half of fiscal 1998, some
holdings such as BRISTOL-MYERS SQUIBB rose to the point where
dividend yield fell below that of the S&P 500 and we began to
sell them.
Even in a market that has provided high double-digit returns for
more than three consecutive years, there are companies whose stocks
get derailed. We sold our position in UNION PACIFIC this past winter as
it became clear that the company would not be able to quickly address
problems that have led to traffic bottlenecks on the nation's largest
freight railroad.
WE SEEK COMPANIES WITH ABOVE-AVERAGE DIVIDEND YIELDS LIKELY TO BENEFIT
FROM CATALYSTS THAT CAN UNLOCK A STOCK'S CAPITAL APPRECIATION POTENTIAL.
The energy area has also been disappointing in fiscal 1998. Oil
prices skidded to $15 a barrel during the period, reducing profits at a
broad array of energy companies. Some of our holdings in this area which
we believe still offer superior total return potential include CHEVRON
and BRITISH PETROLEUM.
HIGH-YIELD BONDS
Decatur Income Fund seeks to maintain a higher yield than the S&P 500
through a combination of stock selection and a small complement of
high-yield bonds. Between November and May, the Fund's weighting in
high-yield bonds declined one percentage point to 13.03%.
High-yield bonds provide a valuable element of diversification for
Decatur Income Fund. Currently, we are a bit cautious about the market's
short-term prospects. We are focusing on the highest quality tiers of
high-yield market - bonds rated B and BB and generally avoiding bonds of
companies with substantial ties to Asia, including technology businesses.
High-yield bonds add to the Fund's income potential; however, they
are issued by companies whose ability to pay interest and repay principal
is not as strong as companies with investment-grade ratings. Overall, we
believe the strength of the U.S. economy will enable most high-yield bond
issuers to meet their obligations for the balance of 1998.
<TABLE>
<CAPTION>
PORTFOLIO HIGHLIGHTS
MAY 31, 1998
DECATUR INCOME FUND DECATUR TOTAL RETURN FUND
<S> <C> <C>
Median Market Capitalization $15.8 billion $15.8 billion
Number of Stocks 75 71
Average Price-To-Earnings Ratio 18.9x 18.9x
High-Yield Bonds 12.8% of net assets none
Beta 0.75 0.85
P/Es based on analysts' earnings estimates for 1998 as reported by First Call;
P/E ratio for S&P 500 Index stocks was 24.5x as of 5/31/98. Beta is a measure of
volatility relative to the S&P 500 Index for the past three years ended May 31.
A number less than 1.0 means a security has fluctuated less in price than the
index. A number more than 1.0 means the security has fluctuated in price more
than the index.
</TABLE>
for total
return
6
OUTLOOK
Since early 1995, U.S. investors have been traveling a highway of strong
stock performance supported by flat consumer prices and an engine of
growing corporate earnings. However, the road ahead may not be as smooth
or as fast.
We think more financial analysts will lower their profit estimates
in the coming months as the U.S. economy begins to feel the effects of
Asia's recession. We believe that projections of substantial earnings
growth in the third and fourth quarter are unrealistic, given where we
are in the U.S. economic cycle.
However, the Decatur strategy has historically done well in such a
challenging environment. As growth-oriented "hares" stop to catch their
breath, we believe your Funds' methodical value discipline can provide
attractive results.
Our dividend yield-oriented approach continues to lead us to many
financial stocks, especially in the banking and insurance industries. As
we complete our 41st year, we anticipate more merger activity in finance,
telecommunications and capital goods, and believe each Fund is
well-positioned to benefit from both consolidation and growth among large
domestic and multinational businesses.
JOHN B. FIELDS
Vice President and
Senior Portfolio Manager
June 8, 1998
[PHOTO OF KEYBOARD]
<TABLE>
<CAPTION>
RESULTS BY SECTOR
DECATUR TOTAL RETURN FUND VS. S&P 500 INDEX
DECEMBER 1, 1997 TO MAY 31, 1998
INDUSTRY GROUP DECATUR TOTAL RETURN FUND S&P 500 INDEX
<S> <C> <C>
Consumer Cyclicals +35.5% +32.3%
Consumer Growth +28.4% +21.8%
Chemicals +24.4% +18.0%
Insurance +22.5% +19.7%
Telecommunications +18.3% +21.1%
Utilities +15.1% +10.2%
Capital Goods +12.0% +10.8%
Banks +11.5% +15.7%
Energy +2.1% +5.3%
Raw Materials -9.3% -0.7%
Performance is based on prices of stock holdings and index components and does not
include expenses.
</TABLE>
for total
return
7
DECATUR'S APPROACH: A TOOL FOR ALL TIMES
Some tools have enduring quality. Sundials created by the Egyptians
thousands of years ago still keep accurate time. A sextant from
Columbus' day can still guide today's mariners.
As we near the dawn of the 21st Century, we believe cash dividends
are as valuable an investment tool as ever. Dividends can point the way
to capital appreciation, and allow us to judge whether a company can be
an effective building block for either Fund's portfolio. Decatur's
management team believes a stock's yield relative to the dividend yield
of the unmanaged Standard & Poor's 500 Index can help us navigate market
volatility and economic change.
Decatur Income Fund and Decatur Total Return Fund follow a very
clear buy/sell strategy that targets fundamentally strong, growing
companies whose stocks have above-average dividend yields. To be eligible
for purchase or holding by the Funds, stocks must have a current dividend
yield greater than that of the S&P 500.
We are most attracted to stocks whose yield is high relative to the
S&P 500 but not necessarily the highest yield available. As shown in the
chart to the left, the "high" category of stocks has historically
generated the greatest level of total return.
WE SELECT STOCKS THAT FALL WITHIN THE HIGH YIELD CATEGORY. AS YOU CAN SEE,
THESE STOCKS HAVE PROVIDED THE HIGHEST ANNUAL AVERAGE TOTAL RETURN SINCE
1929.
[GRAPHIC OMITTED: bar chart of LONG-TERM RETURNS OF DIVIDEND PAYING
STOCKS 1929 TO 1997]
LONG-TERM RETURNS OF DIVIDEND PAYING STOCKS 1929 TO 1997
INCOME CAPITAL APPRECIATION TOTAL YIELDS
3.1% 6.3% 9.4% LOWEST
4.4% 4.8% 9.2% LOW
5.0% 4.2% 9.2% MID
6.4% 5.4% 11.8% HIGH
7.8% 3.6% 11.4% HIGHEST
Source: Case Studies.
THE IMPORTANCE OF A SELL DISCIPLINE
How we buy a stock is only half the story, however. Just as some
sundials can tell a farmer when to harvest crops, we think dividend
yield tells us when to sell a stock and harvest capital appreciation. In
an equity market that has been as robust as that of the past several
years, it is tempting, even for financial professionals, to become
complacent. Value stocks can turn into growth stocks, increasing a
portfolio's risk profile.
When a stock's yield falls below the average of the S&P 500, we
view that as a time to sell because future appreciation potential no
longer appears attractive relative to possible risks.
Sometimes we sell a stock whose yield is still above that of the
S&P 500 average if we find what seems to be a more attractive candidate
for either Fund or when a company's earnings or business operations have
not met our expectations.
for total
return
8
FINANCIAL SHOCK ABSORBER: EMERSON ELECTRIC
WHEN TO BUY, AND WHEN NOT TO SELL
Home electronics users know that computers and stereos can be damaged by a
power surge during a storm or a summer brownout. Surge protectors made by
Emerson Electric help consumers protect the value of technology
investments from bad weather and utility company mishaps.
Based in St. Louis, Emerson Electric is the world market leader in
power supply and voltage regulation equipment. It has a 40-year record
of steady earnings and dividend growth. For most of the 1990s, Wall
Street recognized the company's achievements and Emerson Electric's
dividend yield was lower than that of the S&P 500 Index.
DECATUR FUNDS' POSITIONING IN EMERSON ELECTRIC
NOVEMBER 30, 1997 MAY 31, 1998
Market Value Holding $15 million $58.4 million
Emerson Dividend Yield 1.96% 1.94%
S&P 500 Dividend Yield 1.65% 1.46%
Market Price Per Share 55 60 3/4
Emerson P/E Ratio 21.8x 22.8x
Source: Bloomberg Business News.
In the summer of 1997, however, Pacific Rim economies stumbled amid
currency devaluations and political turmoil. Some investors grew
concerned that Emerson Electric's profit and growth potential would be
short-circuited by Asia's financial storm.
Emerson Electric derives much of its revenue and earnings from
overseas. Weakening Asian economies and the strength of the dollar have
cut into demand for its heating, ventilating and air-conditioning
equipment. The company has said this has been offset by strong demand
for computer-related equipment in Latin America and Europe.
Still, negative perceptions about Emerson Electric caused its stock
price to fall during the autumn of 1997. The company's dividend yield,
meanwhile, rose to a level that was more than 20% higher than the average
dividend yield of stocks in the S&P 500.
After examining Emerson Electric's business mix, Decatur's
management team decided to purchase a modest amount of the company's
stock for both Decatur Funds as of November 30, 1997. We saw a
consistent global business we believe has the potential to expand profits
at an average annual rate of 11% over the next few years, a
significantly higher pace than many companies in the S&P 500.
This past spring, our team got another opportunity to buy shares of
Emerson Electric as investor fears about Asia mounted and the company's
dividend yield continued to grow more attractive than usual. We
increased your Funds' position by four-fold during the first half of
fiscal 1998. As of May 31, Emerson Electric represented 1.4% and 1.7%
of the net assets of Decatur Income Fund and Decatur Total Return Fund,
respectively.
One factor that could lead to future earnings growth is that in
late May, Emerson agreed to buy the Westinghouse process-control
operations of CBS Corp. This business makes factory-monitoring
instruments.
As with all your Funds' holdings, we will monitor the company's
fundamental growth potential and adhere to the Decatur sell discipline
if Emerson Electric's dividend yield should fall below that of
the S&P 500.
for total
return
9
[GRAPHIC OMITTED: bar chart DECATUR INCOME FUND]
DECATUR INCOME FUND
ANNUAL INCOME FROM A $100,000 INVESTMENT
20 YEARS THROUGH MAY 31, 1998
TOTAL INCOME $487,340
ACCOUNT VALUE WITH CAPITAL GAINS AND
DIVIDENDS REINVESTED $1,883,299
Decatur Income
Fund A Class
Period end Income
5/31/1979 $ 6,229
5/31/1980 $ 6,940
5/31/1981 $ 9,300
5/31/1982 $13,291
5/31/1983 $15,742
5/31/1984 $12,125
5/31/1985 $15,550
5/31/1986 $18,018
5/31/1987 $18,555
5/31/1988 $19,421
5/31/1989 $24,362
5/31/1990 $34,115
5/31/1991 $35,726
5/31/1992 $31,650
5/31/1993 $30,672
5/31/1994 $34,511
5/31/1995 $39,582
5/31/1996 $40,097
5/31/1997 $42,459
5/31/1998 $42,475
FOR MONTHLY INCOME AND INFLATION PROTECTION POTENTIAL
[bullet] Dividends paid each month
[bullet] Strives for a yield higher than the S&P 500 Index
[bullet] Uses a complement of high-yield bonds for income and
diversification
[GRAPHIC OMITTED: worm chart of DECATUR TOTAL RETURN FUND]
DECATUR TOTAL RETURN FUND
GROWTH OF A $100,000 INVESTMENT SINCE 1986
TOTAL RETURN THROUGH MAY 31, 1998
Decatur Total Return
Fund A Class
Market
Period End Value
8/27/1986 $ 96,263
5/31/1987 $117,565
5/31/1988 $110,046
5/31/1989 $143,254
5/31/1990 $152,836
5/31/1991 $164,596
5/31/1992 $178,814
5/31/1993 $203,359
5/31/1994 $215,237
5/31/1995 $250,254
5/31/1996 $313,846
5/31/1997 $399,979
5/31/1998 $504,050
DESIGNED FOR INVESTORS WHOSE PRIMARY GOAL IS TOTAL RETURN
[bullet] Dividends paid quarterly
[bullet] Fully invested in large-cap stocks
[bullet] Attractive risk/reward profile
Both charts above are for investments in A Class shares and include the
effect of a 3.75% front-end sales charge and reinvestment of
distributions. Performance of other classes vary due to differing
charges and expenses as shown on page 12. Past performance is not a
guarantee of future results. The maximum sales charge is 4.75% and is
reduced on investments of $100,000 or more. Decatur Total Return Fund
began operating on August 27, 1986.
for total
return
10
[GRAPHIC OMITTED: worm chart of A FUND FOR ALL SEASONS DECATUR
INCOME FUND'S LIFETIME PERFORMANCE]
A FUND FOR ALL SEASONS
DECATUR INCOME FUND'S LIFETIME PERFORMANCE
GROWTH OF A $100,000 INVESTMENT SINCE MARCH 18, 1957
DECATUR INCOME CONSUMER PRICE
STANDARD & POOR'S FUND INDEX
PERIOD END 500 INDEX A CLASS (INFLATION)
3/18/1957 $ 96,288 $ 100,000 $100,000 Decatur Income Fund
first offered on
March 18, 1957
5/31/1958 $ 95,875 $ 104,914 $103,999
5/31/1959 $ 131,150 $ 144,440 $104,322
5/31/1960 $ 127,941 $ 142,046 $106,257 Dow Jones Industrial
Average at 597
5/31/1961 $ 156,723 $ 174,833 $107,224 Berlin Wall Built
5/31/1962 $ 150,265 $ 161,394 $108,663
5/31/1963 $ 179,931 $ 198,251 $109,623 Kennedy Assassinated
5/31/1964 $ 200,040 $ 232,021 $111,306
5/31/1965 $ 235,494 $ 262,922 $113,107
5/31/1966 $ 251,887 $ 264,107 $116,229
5/31/1967 $ 282,733 $ 282,785 $119,350 Vietnam War Escalates
5/31/1968 $ 362,467 $ 323,321 $124,154
5/31/1969 $ 399,857 $ 349,358 $130,878 First Man On The Moon
5/31/1970 $ 321,722 $ 267,786 $138,923
5/31/1971 $ 431,334 $ 361,051 $145,047 Wages And Price
Controls
5/31/1972 $ 476,163 $ 409,196 $149,729
5/31/1973 $ 420,390 $ 403,333 $157,895
5/31/1974 $ 393,009 $ 347,051 $174,825 Steepest Market
Decline In Four
Decades
5/31/1975 $ 456,294 $ 380,165 $191,273
5/31/1976 $ 579,496 $ 434,640 $203,161
5/31/1977 $ 682,088 $ 433,704 $216,851
5/31/1978 $ 706,492 $ 461,207 $232,098
5/31/1979 $ 761,062 $ 495,320 $257,075
5/31/1980 $ 944,176 $ 587,212 $294,056 Dow at 993
Interest Rates at
All-Time Highs
5/31/1981 $ 1,150,285 $ 735,076 $322,993
5/31/1982 $ 1,148,659 $ 656,026 $344,727 Start of Great
Bull market of the
80's
5/31/1983 $ 1,663,355 $ 1,002,496 $356,733
5/31/1984 $ 1,681,929 $ 971,989 $371,862
5/31/1985 $ 2,239,018 $ 1,280,544 $385,792
5/31/1986 $ 2,847,075 $ 1,737,101 $391,794 Dow Nears 2000
5/31/1987 $ 3,536,326 $ 2,104,643 $406,685 Sharpest One-Day
Decline in Market
History
5/31/1988 $ 3,420,052 $ 1,968,101 $422,525
5/31/1989 $ 4,306,348 $ 2,495,560 $445,180
5/31/1990 $ 4,476,059 $ 2,910,169 $464,598 Persian Gulf Crisis
Worldwide Recession
5/31/1991 $ 4,588,197 $ 3,253,322 $487,612 Break up of Soviet
Union
5/31/1992 $ 4,990,121 $ 3,573,849 $502,355
5/31/1993 $ 5,703,336 $ 3,988,782 $518,537
5/31/1994 $ 6,047,376 $ 4,158,683 $530,404 Fed Begins Raising
Short-Term Interest
Rates
5/31/1995 $ 6,979,452 $ 4,998,285 $547,305
5/31/1996 $ 8,621,871 $ 6,419,671 $562,717 Dow Reaches 6500
5/31/1997 $10,858,670 $ 8,307,984 $575,713 Dow Surpasses 9000
5/31/1998 $13,705,517 $11,047,126 $584,347
AVERAGE ANNUAL RETURNS SINCE MARCH 18, 1957
DECATUR INCOME FUND A CLASS +12.64%
S&P 500 INDEX +12.12%
CONSUMER PRICE INDEX (INFLATION) +4.39%
Includes reinvestment of dividends and capital gains. See page 12 for
complete Fund performance.
A DOLLAR INVESTED IN DECATUR INCOME FUND AT INCEPTION 41 YEARS AGO WOULD
HAVE GROWN TO MORE THAN $137 AS OF MAY 31, 1998, WITH DIVIDENDS AND
CAPITAL GAINS REINVESTED.
DECATUR INCOME FUND'S RETURN AND SHARE VALUE FLUCTUATE SO THAT SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COSTS.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Performance of other classes of Decatur Income Fund differ from the
above due to differing charges and expenses. See page 12 for complete
performance information.
<TABLE>
<CAPTION>
for total
return
12
DECATUR INCOME FUND
AVERAGE ANNUAL RETURNS THROUGH MAY 31, 1998
Lifetime Ten Years Five Years Three Years One Year
<S> <C> <C> <C> <C> <C>
Class A (Est. 3/18/57)
Excluding Sales Charge +12.78% +14.83% +19.03% +25.00% +25.52%
Including Sales Charge +12.64% +14.27% +17.89% +22.98% +19.58%
Class B (Est. 9/6/94)
Excluding Sales Charge +22.08% +23.93% +24.51%
Including Sales Charge +21.61% +23.27% +20.51%
Class C (Est. 11/29/95)
Excluding Sales Charge +23.93% +24.51%
Including Sales Charge +23.93% +23.51%
</TABLE>
<TABLE>
<CAPTION>
DECATUR TOTAL RETURN FUND
AVERAGE ANNUAL RETURNS THROUGH MAY 31, 1998
Lifetime Ten Years Five Years Three Years One Year
<S> <C> <C> <C> <C> <C>
Class A (Est. 8/27/86)
Excluding Sales Charge +15.12% +16.44% +19.91% +26.30% +26.04%
Including Sales Charge +14.64% +15.87% +18.75% +24.27% +20.04%
Class B (Est. 9/6/94)
Excluding Sales Charge +23.57% +25.43% +25.16%
Including Sales Charge +23.12% +24.80% +21.16%
Class C (Est. 11/29/95)
Excluding Sales Charge +24.79% +25.22%
Including Sales Charge +24.79% +24.22%
RETURN AND SHARE VALUE OF DECATUR TOTAL RETURN FUND AND DECATUR INCOME FUND
FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. PERFORMANCE
ABOVE INCLUDES REINVESTMENT OF DIVIDENDS AND THE EFFECT OF SALES CHARGES. LIFETIME
PERFORMANCE FOR B AND C SHARES EXCLUDING SALES CHARGE ASSUMES EITHER CONTINGENT
SALES CHARGES DID NOT APPLY OR THE INVESTMENT WAS NOT REDEEMED.
CLASS A shares have a front-end 4.75% maximum sales charge, and a 12b-1 fee (for
Decatur Total Return since inception; for Decatur Income Fund since May 1, 1994).
CLASS B shares do not have a front-end sales charge, but are subject to a 1% annual
distribution and service fee. They are subject to a maximum deferred sales charge of
up to 4% if redeemed before the end of the sixth year.
CLASS C shares have a 1% annual distribution and service fee and a 1% contingent
deferred sales charge if redeemed within 12 months of purchase.
SEC yields for A, B, C and Institutional Class shares were 2.19%, 1.51%, 1.51% and
2.51%, respectively, for Decatur Income Fund and 1.22%, 0.59%, 0.59% and 1.58%,
respectively for Decatur Total Return Fund as of May 31, 1998.
<CAPTION>
Average Annual Institutional Class Returns Through May 31, 1998
Lifetime 10 Years Five Years One Year Six Months
<S> <C> <C> <C> <C> <C>
Decatur Income Fund +12.80% +14.90% +19.19% +25.79% +12.70%
Decatur Total Return Fund +15.26% +16.61% +20.25% +26.46% +13.40%
The Institutional Class shares are available without sales or asset-based
distribution charges only to certain eligible institutional accounts. Returns have
not been adjusted to eliminate the effect of 12b-1 fees in effect since 1994 that
apply to A Class shares.
</TABLE>
<TABLE>
<CAPTION>
for total return 13
FINANCIAL STATEMENTS
DELAWARE GROUP EQUITY FUNDS II, INC. -
DECATUR INCOME FUND
STATEMENT OF NET ASSETS
MAY 31, 1998 (UNAUDITED)
NUMBER MARKET
OF SHARES VALUE
<S> <C> <C>
COMMON STOCK - 86.41%
AUTOMOBILES & AUTOMOTIVE PARTS - 4.27%
Ford Motor 612,900 $ 31,794,188
General Motors 440,400 31,681,275
Tenneco 1,075,400 44,763,525
--------------
108,238,988
--------------
BANKING, FINANCE & INSURANCE - 20.93%
AMERICAN GENERAL 690,900 46,376,663
AON 731,550 46,864,922
Bank of Boston 376,200 39,642,075
Bankers Trust New York 205,100 25,329,850
Crestar Financial 603,900 34,686,506
First Chicago NBD 401,200 35,079,925
First Union 608,468 33,655,886
Fleet Financial Group 326,000 26,732,000
Mellon Bank 576,500 38,877,719
Mercantile Bancorporation 499,950 25,559,944
National City 383,100 25,955,025
PNC Financial Group 545,600 31,508,400
SAFECO 506,300 23,637,881
St. Paul 860,400 38,180,250
Summit Bancorp 625,100 31,333,138
U.S. Bancorp 684,900 26,796,713
--------------
530,216,897
--------------
CABLE, MEDIA & PUBLISHING - 2.84%
MCGRAW-HILL 919,700 71,909,044
--------------
71,909,044
--------------
CHEMICALS - 5.51%
duPont(E.I.)deNemours 288,700 22,229,900
Hercules 314,500 13,857,656
HOECHST ADR 1,008,500 50,235,906
IMPERIAL CHEMICAL ADR 712,300 53,155,388
--------------
139,478,850
--------------
CONSUMER PRODUCTS - 3.01%
Kimberly-Clark 684,700 33,935,444
Minnesota Mining & Manufacturing 456,800 42,311,100
--------------
76,246,544
--------------
ELECTRONICS & ELECTRICAL EQUIPMENT - 4.37%
AMP 184,600 7,014,800
Eaton 232,400 20,872,425
Emerson Electric 567,000 34,445,250
Thomas & Betts 646,300 34,536,656
Whirlpool 200,600 13,703,488
--------------
110,572,619
--------------
- ------------------------
Top 10 holdings, representing 21.96% of net assets, are printed in bold face.
ENERGY - 9.67%
Atlantic Richfield 509,100 40,155,263
British Petroleum ADR 355,833 31,535,699
Chevron 396,700 31,686,413
Consolidated Natural Gas 694,900 39,305,281
Enron 444,100 22,260,513
Texaco 200 11,550
USX-Marathon Group 1,127,700 39,469,500
Williams 1,252,300 40,621,481
--------------
245,045,700
--------------
ENVIRONMENTAL SERVICES - 0.43%
Browning Ferris 304,000 10,811,000
--------------
10,811,000
--------------
FOOD, BEVERAGE & TOBACCO - 7.80%
BESTFOODS 1,032,000 58,243,500
ConAgra 1,454,100 42,532,425
Fortune Brands 1,162,100 44,668,219
Heinz (H.J.) 456,750 24,236,297
Philip Morris 749,000 27,993,875
--------------
197,674,316
--------------
HEALTHCARE & PHARMACEUTICALS - 7.63%
AMERICAN HOME PRODUCTS 1,294,800 62,555,025
Bausch & Lomb 370,700 18,465,494
BAXTER INTERNATIONAL 913,100 52,217,906
Glaxo Wellcome ADR 372,500 20,091,719
Pharmacia & Upjohn 906,100 40,038,294
--------------
193,368,438
--------------
METALS & MINING - 2.07%
Allegheny Teledyne 1,097,500 25,516,875
Aluminum Company of America 389,300 27,007,688
--------------
52,524,563
--------------
PAPER & FOREST PRODUCTS - 3.05%
Temple-Inland 250,600 14,722,750
Union Camp 645,600 35,306,250
Weyerhaeuser 534,100 27,138,956
--------------
77,167,956
--------------
RETAIL - 3.35%
MAY DEPARTMENT STORES 702,700 45,192,394
Penney (J.C.) 553,400 39,741,038
--------------
84,933,432
--------------
TELECOMMUNICATIONS - 6.39%
AT&T 393,900 23,978,663
Bell Atlantic 373,800 34,249,425
Cable & Wireless ADR 642,900 22,300,594
Frontier 1,357,600 41,321,950
GTE 683,400 39,850,763
--------------
161,701,395
--------------
14 for total return
TRANSPORTATION & SHIPPING - 1.13%
British Airways ADR 165,400 17,387,675
Norfolk Southern 360,400 11,285,025
--------------
28,672,700
--------------
UTILITIES - 1.22%
Southern 1,163,900 30,916,094
--------------
30,916,094
--------------
MISCELLANEOUS - 2.74%
PITNEY BOWES 1,476,800 69,409,600
--------------
69,409,600
--------------
TOTAL COMMON STOCK (COST $1,804,086,291) 2,188,888,136
--------------
PREFERRED STOCK - 0.24%
CABLE, MEDIA & PUBLISHING -
American Radio Systems 11.375% 1/15/09
Series B 681 81,039
Granite Broadcasting 12.75% 4/1/09 5,202 5,955,989
--------------
TOTAL PREFERRED STOCK (COST $4,593,156) 6,037,028
--------------
PRINCIPAL
AMOUNT
CORPORATE BONDS - 13.03%
AEROSPACE & DEFENSE - 0.24%
DERLAN Manufacturing sr nts 10.00% 1/15/07 $2,800,000 2,954,000
K & F Industries sr sub nts 9.25% 10/15/07 1,000,000 1,032,500
Sequa sr sub nts 9.375% 12/15/03 2,000,000 2,090,000
--------------
6,076,500
--------------
AUTOMOBILES & AUTOMOTIVE PARTS - 0.39%
JPS Automotive Products sr nts 11.125%
6/15/01 2,000,000 2,230,000
Motors and Gears sr nts 10.75% 11/15/06 2,000,000 2,160,000
Ryder Transportation sr sub nts 10.00%
12/1/06 2,550,000 2,773,125
Venture Holdings Trust sr sub nts 9.75%
4/1/04 2,800,000 2,842,000
--------------
10,005,125
--------------
BANKING, FINANCE & INSURANCE - 0.25%
DVI sr nts 9.875% 2/1/04 2,785,000 2,966,025
First Nationwide Holdings sr sec nts
9.125% 1/15/03 2,500,000 2,643,750
Olympic Financial units 11.50% 3/15/07 650,000 646,750
--------------
6,256,525
--------------
BUILDINGS & MATERIALS - 0.96%
American Builders and Contractors sr
unsec sub nts 10.625% 5/15/07 2,225,000 2,308,438
American Standard sr nts 7.375% 2/1/08 1,000,000 987,500
American Standard sr nts 10.875% 5/15/99 2,750,000 2,880,625
Atrium sr sub nts 10.50% 11/15/06 2,150,000 2,289,750
Collins & Aikman Floorcovers sr sub nts
10.00% 1/15/07 3,000,000 3,150,000
Maxim Group sr nts 9.25% 10/15/07 2,500,000 2,543,750
Standard Pacific sr nts 8.50% 6/15/07 5,000,000 5,075,000
Wesco Distribution sr sub nts 9.125%
6/1/08 3,000,000 2,990,250
Williams Scotsman sr nts 9.875% 6/1/07 2,000,000 2,080,000
--------------
24,305,313
--------------
CABLE, MEDIA & PUBLISHING - 0.62%
American Banknote units 11.25% 12/1/07 500,000 510,000
American Lawyer Media sr nts 9.75%
12/15/07 575,000 599,438
Dialog sr sub nts 11.00% 11/15/07 4,000,000 4,420,000
Hollinger International Publishing
sr sub nts 9.25% 3/15/07 2,000,000 2,100,000
Muzak LP/Muzak Capital unsec sr nts
10.00% 10/1/03 180,000 187,650
Outdoor Communications sr sub nts 9.25%
8/15/07 1,525,000 1,608,875
Rogers Cablesystems sr sub nts 11.00%
12/1/15 840,000 987,000
Telewest Communications sr debs 9.625%
10/1/06 3,000,000 3,142,500
Von Hoffman Press sr sub nts 10.375%
5/15/07 2,100,000 2,260,125
--------------
15,815,588
--------------
CHEMICALS - 0.63%
BPC Holding sr nts 12.50% 6/15/06 2,000,000 2,210,000
Envirodyne sr nts 10.25% 12/1/01 5,000,000 5,037,500
Huntsman sr sub nts 9.50% 7/1/07 2,000,000 2,055,000
Octel Developments sr nts 10.00% 5/1/06 2,000,000 2,040,000
RBX sr sub nts 11.25% 10/15/05 2,000,000 1,580,000
Sterling Chemicals
sr sub nts 11.25% 4/1/07 2,000,000 1,995,000
sr sub nts 11.75% 8/15/06 1,000,000 1,007,500
--------------
15,925,000
--------------
COMPUTERS & TECHNOLOGY - 0.13%
Axiohm Transaction Solutions unsec sr
sub nts 9.75% 10/1/07 3,225,000 3,297,563
--------------
3,297,563
--------------
CONSUMER PRODUCTS - 0.30%
Calmar sr sub nts 11.50% 8/15/05 1,000,000 1,075,000
Fedders North America sr sub nts 9.375%
8/15/07 1,000,000 1,017,500
Revlon sr nts 9.50% 6/1/99 1,500,000 1,545,000
Revlon Consumer Products sr sub nts
8.625% 2/1/08 4,000,000 4,010,000
--------------
7,647,500
--------------
ELECTRONICS & ELECTRICAL EQUIPMENT - 0.63%
Fairchild Semiconductor sr sub nts
10.125% 3/15/07 1,730,000 1,794,875
HCC Industries sr sub nts 10.75% 5/15/07 2,925,000 3,100,500
Insilco sr sub nts 10.25% 8/15/07 1,200,000 1,261,500
International Logistics Limited sr nts
9.75% 10/15/07 9,000,000 8,842,500
Phase Metrics sr nts 10.75% 2/1/05 1,000,000 992,500
--------------
15,991,875
--------------
ENERGY - 1.39%
Canadian Forest Oil Limited unsec sr
sub nts 8.75% 9/15/07 1,500,000 1,507,500
Chiles Offshore sr nts 10.00% 5/1/08 4,000,000 3,930,000
Costilla Energy
sr nts 10.25% 10/1/06 1,440,000 1,454,400
sr nts 10.25% 10/1/06 3,000,000 3,030,000
First Wave Marine sr nts 11.00% 2/1/08 500,000 535,000
Gothic Production sr nts 11.125% 5/1/05 5,000,000 4,912,500
Grant Geophysical sr nts 9.75% 2/15/08 2,000,000 1,995,000
KCS Energy sr sub nts 8.875% 1/15/08 2,350,000 2,285,375
for total return 15
P & L Coal Holdings sr sub nts 9.625%
5/15/08 4,000,000 4,095,000
Panaco unsec sr sub nts 10.625% 10/1/04 3,000,000 3,030,000
Southwest Royalties sr nts 10.50% 10/15/04 2,850,000 2,586,375
Transamerican Energy sr nts 11.50% 6/15/02 2,000,000 1,915,000
United Refining sr unsec nts 10.75% 6/15/07 2,000,000 1,990,000
Wiser Oil sr sub nts 9.50% 5/15/07 2,000,000 1,925,000
--------------
35,191,150
--------------
FOOD, BEVERAGE & TOBACCO - 0.73%
Ameriserv Food Distributors sr nts 8.875%
10/15/06 4,000,000 4,125,000
Aurora Foods sr sub nts 9.875% 2/15/07 1,200,000 1,287,000
Core-Mark International sr sub nts 11.375%
9/15/03 400,000 427,000
Cott sr nts 8.50% 5/1/07 3,000,000 2,910,000
Delta Beverage Group sr nts 9.75% 12/15/03 4,500,000 4,702,500
DiGiorgio sr nts 10.00% 6/15/07 2,000,000 2,020,000
International Home Foods sr sub nts
10.375% 11/1/06 2,755,000 3,061,494
--------------
18,532,994
--------------
HEALTHCARE & PHARMACEUTICALS - 0.20%
Kinetic Concepts sr sub nts 9.625%
11/1/07 3,500,000 3,561,250
Paracelsus Healthcare sr sub nts 10.00%
8/15/06 1,455,000 1,495,013
--------------
5,056,263
--------------
INDUSTRIAL MACHINERY - 0.25%
Interlake sr nts 12.125% 3/1/02 1,200,000 1,239,000
Outboard Marine sr nts 10.75% 6/1/08 3,000,000 3,033,750
Spinnaker Industries sr nts 10.75%
10/15/06 2,000,000 2,080,000
--------------
6,352,750
--------------
LEISURE, LODGING & ENTERTAINMENT - 1.43%
AFC Enterprises sr sub nts 10.25% 5/15/07 1,450,000 1,540,625
Alliance Gaming sr sub nts 10.00% 8/1/07 6,500,000 6,711,250
AMC Entertainment sr sub nts 9.50% 3/15/09 1,900,000 1,966,500
Bally Total Fitness Holdings sr sub nts
9.875% 10/15/07 2,000,000 2,080,000
Cinemark USA
Series C sr sub nts 9.625% 8/1/08 5,000,000 5,175,000
sr sub nts 9.625% 8/1/08 2,000,000 2,070,000
Eldorado Resorts LLC sr sub nts 10.50%
8/15/06 2,000,000 2,200,000
Grand Casinos unsec sr nts 9.00% 10/15/04 3,500,000 3,657,500
Hollywood Theaters unsec sr sub nts
10.625% 8/1/07 825,000 892,031
Regal Cinemas sr sub nts 9.50% 6/1/08 5,000,000 5,037,500
Town Sports International unsec sr nts
9.75% 10/15/04 3,000,000 3,015,000
Trump-Atlantic City 1st mtg nts 11.25%
5/1/06 1,900,000 1,866,750
--------------
36,212,156
--------------
METALS & MINING - 0.30%
Anker Coal Group sr nts 9.75% 10/1/07 2,000,000 1,945,000
Centaur Mining & Exploration nts 11.00%
12/1/07 2,000,000 2,087,500
Commonwealth Aluminum sr sub nts 10.75%
10/1/06 1,000,000 1,077,500
Weirton Steel sr nts 11.375% 7/1/04 1,500,000 1,631,250
WHX sr nts 10.50% 4/15/05 750,000 776,250
--------------
7,517,500
--------------
PACKAGING & CONTAINERS - 0.63%
Gaylord Container sr nts 9.75% 6/15/07 4,500,000 4,635,000
Huntsman Packaging sr sub nts 9.125%
10/1/07 3,325,000 3,395,656
Riverwood International
unsec sr nts 10.25% 4/1/06 1,000,000 1,035,000
unsec sr sub nts 10.875% 4/1/08 650,000 663,000
Stone Container
sr nts 10.75% 10/1/02 3,785,000 4,049,950
sr sub units 12.25% 4/1/02 1,000,000 1,028,750
sr nts 12.625% 7/15/98 1,000,000 1,030,000
--------------
15,837,356
--------------
PAPER & FOREST PRODUCTS - 0.27%
CEX Holdings sr sub nts 9.625% 6/1/08 2,000,000 2,045,000
Doman Industries Limited sr nts 8.75%
3/15/04 3,120,000 3,088,800
Four M sr nts 12.00% 6/1/06 450,000 481,500
Pacific Lumber sr nts 10.50% 3/1/03 1,075,000 1,116,656
--------------
6,731,956
--------------
REAL ESTATE - 0.03%
Engle Homes sr nts 9.25% 2/1/08 700,000 710,500
--------------
710,500
--------------
RETAIL - 0.75%
Advance Stores sr sub nts 10.25% 4/15/08 500,000 517,500
Amscan Holdings sr sub nts 9.875% 12/15/07 650,000 677,625
Chief Auto Parts sr nts 10.50% 5/15/05 3,038,000 3,425,345
Cole National Group sr sub nts 9.875%
12/31/06 2,500,000 2,693,750
Fleming
sr sub nts 10.50% 12/1/04 1,000,000 1,040,000
sr nts 10.625% 12/15/01 5,000,000 5,350,000
Frank's Nursery and Crafts sr sub nts
10.25% 3/1/08 500,000 497,500
Petro Stopping Centers sr nts 10.50% 2/1/07 1,000,000 1,080,000
Shoppers Food Warehouse sr nts 9.75%
6/15/04 2,000,000 2,240,000
Wilsons The Leather Expert sr nts 11.25%
8/15/04 1,500,000 1,567,500
--------------
19,089,220
--------------
TELECOMMUNICATIONS - 0.68%
BTI Telecom sr nts 10.50% 9/15/07 650,000 682,500
Global Crossing Holdings Limited sr nts
9.625% 5/15/08 3,000,000 3,097,500
Intermedia Communication sr nts 8.60%
6/1/08 5,000,000 5,062,500
Iridium LLC/Capital sr nts 11.25% 7/15/05 5,000,000 5,068,750
JACOR Communications unsec sr sub nts
9.75% 12/15/06 775,000 842,813
Paging Network sr sub nts 10.125% 8/1/07 1,235,000 1,289,031
Rogers Communications sr nts 8.875%
7/15/07 1,165,000 1,176,650
--------------
17,219,744
--------------
TEXTILES, APPAREL & FURNITURE - 0.22%
Anvil Knitwear sr nts 10.875% 3/15/07 450,000 466,875
GFSI sr sub nts 9.625% 3/1/07 1,100,000 1,164,625
Ntex sr nts 11.50% 6/1/06 2,000,000 2,000,000
Synthetic Industries sr sub nts 9.25%
2/15/07 1,750,000 1,820,000
--------------
5,451,500
--------------
16 for total return
TRANSPORTATION & SHIPPING - 0.62%
Alpha Shipping sr nts 9.50% 2/15/08 1,000,000 967,500
Atlantic Express sr sec nts 10.75% 2/1/04 900,000 958,500
Blue Bird Body sr nts 10.75% 11/15/06 2,700,000 2,983,500
Chemical Leaman sr nts 10.375% 6/15/05 1,915,000 2,029,900
MC Shipping sr nts 11.25% 3/1/08 500,000 504,375
Navigator Gas Transport units 12.00%
6/30/07 1,250,000 1,431,250
Stena Line AB sr nts 10.625% 6/1/08 4,050,000 4,110,750
Viking Star Shipping 1st pfd mtg nts
9.625% 7/15/03 2,579,000 2,704,726
--------------
15,690,501
--------------
UTILITIES - 0.47%
AES sr sub nts 10.25% 7/15/06 3,000,000 3,300,000
Calpine
sr nts 8.75% 7/15/07 4,000,000 4,130,000
sr nts 10.50% 5/15/06 2,000,000 2,195,000
Midland Funding II sr sub debs 11.75%
7/23/05 2,000,000 2,380,000
--------------
12,005,000
--------------
MISCELLANEOUS - 0.91%
ATC Group Services sr sub nts 12.00%
1/15/08 500,000 505,000
Dyncorp sr sub nts 9.50% 3/1/07 1,000,000 1,031,250
EV International sr sub nts 11.00% 3/15/07 2,000,000 1,890,000
Graphic Controls sr sub nts 12.00% 9/15/05 2,500,000 2,806,250
Iron Mountain unsec sr sub nts 10.125%
10/1/06 330,000 359,700
Knoll sr sub nts 10.875% 3/15/06 1,298,000 1,481,343
Loomis Fargo sr sub nts 10.00% 1/15/04 4,695,000 4,741,950
MSX International sr sub nts 11.375%
1/15/08 500,000 515,000
Neff sr sub nts 10.25% 6/1/08 4,000,000 4,020,000
Pierce Leahy sr sub nts 9.125% 7/15/07 2,000,000 2,060,000
Rayovac sr sub nts 10.25% 11/1/06 3,252,000 3,605,655
--------------
23,016,148
--------------
TOTAL CORPORATE BONDS (COST $320,724,649) 329,935,727
--------------
REPURCHASE AGREEMENTS - 0.23%
With Chase Manhattan 5.53% 6/1/98
(dated 5/29/98, collateralized by
$2,999,000 U.S. Treasury Notes 6.00%
due 7/31/02, market value
$3,101,052) 3,036,000 3,036,000
With J.P. Morgan Securities 5.55% 6/1/98
(dated 5/29/98, collateralized by
$2,904,000 U.S. Treasury Notes 6.00%
due 6/30/99, market value
$2,988,895) 2,928,000 2,928,000
--------------
TOTAL REPURCHASE AGREEMENTS
(cost $5,964,000) 5,964,000
--------------
TOTAL MARKET VALUE OF SECURITIES - 99.91%
(cost $2,135,368,096) $2,530,824,891
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES - 0.09% 2,313,777
--------------
NET ASSETS APPLICABLE TO 116,455,815 SHARES
($1 PAR VALUE) OUTSTANDING - 100.00% $2,533,138,668
==============
NET ASSET VALUE - DECATUR INCOME FUND A CLASS
($2,061,756,067 / 94,759,011 SHARES) $21.76
======
NET ASSET VALUE - DECATUR INCOME FUND B CLASS
($163,134,388 / 7,527,390 SHARES) $21.67
======
NET ASSET VALUE - DECATUR INCOME FUND C CLASS
($21,477,456 / 986,419 SHARES) $21.77
======
NET ASSET VALUE - DECATUR INCOME FUND INSTITUTIONAL CLASS
($286,770,757 / 13,182,995 SHARES) $21.75
======
- ------------------------
SUMMARY OF ABBREVIATIONS:
ADR - American Depository Receipt nts - notes sr - senior
debs - debentures pfd - preferred sub - subordinated
mtg - mortgage sec - secured unsec - unsecured
COMPONENTS OF NET ASSETS AT MAY 31, 1998:
Common Stock, $1 par value, 250,000,000 shares authorized to
the Fund with 100,000,000 shares allocated to Decatur Income
Fund A Class, 50,000,000 shares allocated to Decatur Income
Fund B Class, 50,000,000 shares allocated to Decatur Income
Fund C Class, and 50,000,000 shares allocated to Decatur
Income Fund Institutional Class $1,914,209,959
Undistributed net investment income 4,318,862
Accumulated net realized gain on investments 219,153,052
Net unrealized appreciation of investments 395,456,795
--------------
Total net assets $2,533,138,668
==============
NET ASSET VALUE AND OFFERING PRICE PER SHARE - A CLASS:
Net Asset Value A Class (A) $21.76
Sales Charge (4.75% of offering price or 5.01% of the amount
invested per share) (B) 1.09
------
Offering price $22.85
======
- ------------------------
(A) Net asset value per share, as illustrated, is the estimated amount which would
be paid upon redemption or repurchase of shares.
(B) See How to Buy Shares in the current Prospectus for purchases of $100,000 or
more.
See accompanying notes
<CAPTION>
for total return 17
FINANCIAL STATEMENTS
DELAWARE GROUP EQUITY FUNDS II, INC. -
DECATUR TOTAL RETURN FUND
STATEMENT OF NET ASSETS
MAY 31, 1998 (UNAUDITED)
NUMBER MARKET
OF SHARES VALUE
<S> <C> <C>
COMMON STOCK - 99.39%
AUTOMOBILES & AUTOMOTIVE PARTS - 5.06%
Ford Motor 425,100 $ 22,052,063
General Motors 283,200 20,372,700
Tenneco 641,100 26,685,788
--------------
69,110,551
--------------
BANKING, FINANCE & INSURANCE - 23.65%
AMERICAN GENERAL 439,000 29,467,875
Aon 375,750 24,071,484
Bank of Boston 249,500 26,291,063
Bankers Trust New York 137,000 16,919,500
Crestar Financial 385,000 22,113,438
First Chicago NBD 226,700 19,822,081
First Union 405,128 22,408,642
Fleet Financial Group 196,100 16,080,200
Mellon Bank 346,700 23,380,581
Mercantile Bancorporation 335,200 17,137,100
National City 228,400 15,474,100
PNC Financial Group 325,100 18,774,525
SAFECO 313,300 14,627,194
St. Paul 510,600 22,657,875
Summit Bancorp 354,120 17,750,265
U.S. Bancorp 410,700 16,068,638
--------------
323,044,561
--------------
CABLE, MEDIA & PUBLISHING - 3.14%
MCGRAW-HILL 547,800 42,831,141
--------------
42,831,141
--------------
CHEMICALS - 7.15%
duPont(E.I.)deNemours 222,100 17,101,700
Hercules 288,700 12,720,844
HOECHST ADR 683,600 34,051,825
IMPERIAL CHEMICAL ADR 453,500 33,842,438
--------------
97,716,807
--------------
CONSUMER PRODUCTS - 3.35%
Kimberly-Clark 413,300 20,484,181
Minnesota Mining & Manufacturing 273,200 25,305,150
--------------
45,789,331
--------------
ELECTRONICS & ELECTRICAL EQUIPMENT - 5.39%
AMP 114,100 4,335,800
Eaton 178,400 16,022,550
Emerson Electric 394,700 23,978,025
Thomas & Betts 374,500 20,012,344
Whirlpool 136,100 9,297,331
--------------
73,646,050
--------------
- ------------------------
Top 10 holdings, representing 24.37% of net assets, are printed in bold face.
ENERGY - 11.20%
Atlantic Richfield 313,400 24,719,425
British Petroleum ADR 216,372 19,175,968
Chevron 302,200 24,138,225
Consolidated Natural Gas 417,900 23,637,469
Enron 338,200 16,952,275
Texaco 200 11,550
USX-Marathon Group 659,000 23,065,000
Williams 654,200 21,220,613
--------------
152,920,525
--------------
ENVIRONMENTAL SERVICES - 0.84%
Browning Ferris 321,500 11,433,344
--------------
11,433,344
--------------
FOOD, BEVERAGE & TOBACCO - 8.67%
BESTFOODS 596,100 33,642,394
ConAgra 839,700 24,561,225
Fortune Brands 692,200 26,606,438
Heinz (H.J.) 263,750 13,995,234
Philip Morris 526,100 19,662,988
--------------
118,468,279
--------------
HEALTHCARE & PHARMACEUTICALS - 8.49%
AMERICAN HOME PRODUCTS 738,600 35,683,613
Bausch & Lomb 180,300 8,981,194
BAXTER INTERNATIONAL 547,700 31,321,594
Glaxo Wellcome ADR 280,900 15,151,044
Pharmacia & Upjohn 561,000 24,789,188
--------------
115,926,633
--------------
METALS & MINING - 2.21%
Allegheny Teledyne 599,800 13,945,350
Aluminum Company of America 233,600 16,206,000
--------------
30,151,350
--------------
PAPER & FOREST PRODUCTS - 2.93%
Temple-Inland 161,500 9,488,125
Union Camp 262,900 14,377,344
Weyerhaeuser 317,000 16,107,563
--------------
39,973,032
--------------
RETAIL - 3.81%
MAY DEPARTMENT STORES 435,000 27,975,938
Penney (J.C.) 334,600 24,028,463
--------------
52,004,401
--------------
18 for total return
TELECOMMUNICATIONS - 8.13%
AT&T 241,600 14,707,400
Bell Atlantic 187,600 17,188,850
Cable & Wireless ADR 444,000 15,401,250
FRONTIER 879,200 26,760,650
GTE 380,800 22,205,400
SBC Communications 379,600 14,756,950
--------------
111,020,500
--------------
TRANSPORTATION & SHIPPING - 1.30%
British Airways ADR 98,300 10,333,788
Norfolk Southern 234,800 7,352,175
--------------
17,685,963
--------------
UTILITIES - 1.34%
Southern 690,400 18,338,750
--------------
18,338,750
--------------
MISCELLANEOUS - 2.73%
PITNEY BOWES 793,200 37,280,400
--------------
37,280,400
--------------
TOTAL COMMON STOCK (COST $1,114,628,225) 1,357,341,618
--------------
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENTS - 0.68%
With Chase Manhattan 5.53% 6/1/98
(dated 5/29/98, collateralized by
$4,670,000 U.S. Treasury Notes
6.00% due 7/31/02, market
value $4,828,365) $4,726,000 4,726,000
With J.P. Morgan Securities 5.55% 6/1/98
(dated 5/29/98, collateralized by
$4,521,000 U.S. Treasury Notes
6.00% due 6/30/99, market value
$4,653,735) 4,560,000 4,560,000
--------------
TOTAL REPURCHASE AGREEMENTS
(COST $9,286,000) 9,286,000
--------------
TOTAL MARKET VALUE OF SECURITIES - 100.07%
(COST $1,123,914,225) $1,366,627,618
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS - (0.07%) (935,393)
--------------
NET ASSETS APPLICABLE TO 70,668,654 SHARES
($1 PAR VALUE) OUTSTANDING - 100.00% $1,365,692,225
==============
NET ASSET VALUE - DECATUR TOTAL RETURN FUND A CLASS
($1,007,869,251 / 52,133,097 SHARES) $19.33
======
NET ASSET VALUE - DECATUR TOTAL RETURN FUND B CLASS
($197,319,405 / 10,229,239 SHARES) $19.29
======
NET ASSET VALUE - DECATUR TOTAL RETURN FUND C CLASS
($42,675,600 / 2,216,686 SHARES) $19.25
======
NET ASSET VALUE - DECATUR TOTAL RETURN FUND INSTITUTIONAL
CLASS ($117,827,969 / 6,089,632 SHARES) $19.35
======
- ------------------------
ADR - American Depository Receipt
COMPONENTS OF NET ASSETS AT MAY 31, 1998:
Common Stock, $1 par value, 250,000,000 shares authorized
to the Fund with 100,000,000 shares allocated to Decatur
Total Return Fund A Class, 50,000,000 shares allocated to
Decatur Total Return Fund B Class, 50,000,000 shares
allocated to Decatur Total Return Fund C Class, and
50,000,000 shares allocated to Decatur Total Return Fund
Institutional Class
$1,022,603,285
Undistributed net investment income 3,884,613
Accumulated net realized gain on investments 96,490,934
Net unrealized appreciation of investments 242,713,393
--------------
Total net assets $1,365,692,225
==============
NET ASSET VALUE AND OFFERING PRICE PER SHARE - A CLASS:
Net Asset Value A Class (A) $19.33
Sales Charge (4.75% of offering price or 4.97% of the amount
invested per share) (B) 0.96
------
Offering price $20.29
======
- ------------------------
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See How to Buy Shares in the current Prospectus for purchases of $100,000 or
more.
See accompanying notes
</TABLE>
for total return 19
<TABLE>
<CAPTION>
DELAWARE GROUP EQUITY FUNDS II, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998
(UNAUDITED)
DECATUR DECATUR TOTAL
INCOME FUND RETURN FUND
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 27,415,954 $ 15,860,458
Interest 15,898,650 681,645
-------------- --------------
43,314,604 16,542,103
-------------- --------------
EXPENSES:
Management fees 5,992,112 3,617,897
Distribution expense 2,817,084 2,297,881
Dividend disbursing and transfer agent fees
and expenses 1,613,576 1,223,611
Accounting and administration 550,081 306,855
Reports and statements to shareholders 159,500 111,813
Taxes (other than taxes on income) 107,595 45,882
Registration fees 70,210 46,930
Custodian fees 43,384 6,036
Professional fees 28,150 10,650
Directors' fees 21,120 11,212
Other 52,605 41,286
-------------- --------------
11,455,417 7,720,053
-------------- --------------
NET INVESTMENT INCOME 31,859,187 8,822,050
-------------- --------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions 225,129,742 98,977,944
Net change in unrealized appreciation on
investment transactions 31,776,591 42,100,770
-------------- --------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 256,906,333 141,078,714
-------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $288,765,520 $149,900,764
============== ==============
See accompanying notes
</TABLE>
20 for total return
<TABLE>
<CAPTION>
DELAWARE GROUP EQUITY FUNDS II, INC.
STATEMENTS OF CHANGES IN NET ASSETS
MAY 31, 1998
DECATUR INCOME FUND DECATUR TOTAL RETURN FUND
-----------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
5/31/98 11/30/97 5/31/98 11/30/97
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 31,859,187 $ 60,681,557 $ 8,822,050 $ 14,374,069
Net realized gain on
investment transactions 225,129,742 313,528,087 98,977,944 118,411,596
Net change in
unrealized
appreciation 31,776,591 92,817,837 42,100,770 73,054,945
------------- ------------- ------------- -------------
Net increase in net
assets resulting
from operations 288,765,520 467,027,481 149,900,764 205,840,610
------------- ------------- ------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment
income:
A Class (23,287,564) (50,434,466) (5,804,986) (13,730,775)
B Class (964,620) (1,982,699) (424,756) (845,781)
C Class (122,746) (215,950) (85,273) (141,173)
Institutional Class (3,557,213) (8,136,700) (771,615) (1,274,443)
Net realized gain on
investment transactions:
A Class (258,801,828) (202,786,937) (93,764,367) (70,806,628)
B Class (17,106,645) (7,925,263) (15,007,510) (5,885,390)
C Class (2,124,083) (667,229) (2,946,080) (833,086)
Institutional
Class (39,093,334) (30,836,157) (8,735,336) (4,917,869)
------------- ------------- ------------- -------------
(345,058,033) (302,985,401) (127,539,923) (98,435,145)
------------- ------------- ------------- -------------
CAPITAL SHARE
TRANSACTIONS:
Proceeds from shares
sold:
A Class 100,815,026 127,046,258 114,384,129 159,597,090
B Class 34,629,360 53,496,669 51,714,031 73,054,276
C Class 5,529,870 9,608,934 14,793,777 17,429,244
Institutional
Class 31,701,999 29,459,747 35,900,808 29,259,960
Net asset value of
shares issued upon
reinvestment of
dividends from net
investment income
and distributions
of net realized
gain on
investment
transactions:
A Class 253,628,835 225,289,553 95,090,163 80,559,736
B Class 16,257,784 8,786,781 14,644,734 6,377,205
C Class 2,025,661 755,724 2,949,105 957,519
Institutional
Class 42,362,816 38,511,526 9,507,063 6,192,312
------------- ------------- ------------- -------------
486,951,351 492,955,192 338,983,810 373,427,342
------------- ------------- ------------- -------------
Cost of shares
repurchased:
A Class (153,719,127) (194,261,594) (81,581,106) (133,127,920)
B Class (8,654,354) (8,907,680) (8,022,734) (9,380,873)
C Class (1,155,062) (1,033,773) (1,998,026) (1,953,803)
Institutional
Class (57,625,813) (55,044,707) (8,686,919) (9,662,151)
------------- ------------- ------------- -------------
(221,154,356) (259,247,754) (100,288,785) (154,124,747)
------------- ------------- ------------- -------------
Increase in net
assets derived from
capital share
transactions 265,796,995 233,707,438 238,695,025 219,302,595
------------- ------------- ------------- -------------
NET INCREASE IN NET
ASSETS 209,504,482 397,749,518 261,055,866 326,708,060
NET ASSETS:
Beginning of year 2,323,634,186 1,925,884,668 1,104,636,359 777,928,299
-------------- -------------- -------------- --------------
End of year $2,533,138,668 $2,323,634,186 $1,365,692,225 $1,104,636,359
============== ============== ============== ==============
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
for total return 21
DELAWARE GROUP EQUITY FUNDS II, INC.
FINANCIAL HIGHLIGHTS
Selected data for
each share of the
Fund outstanding
throughout each
period were as
follows:
DECATUR INCOME FUND A CLASS
----------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
5/31/982 1997 1996
(UNAUDITED)
<S> <C> <C> <C>
Net asset value,
beginning of
period $22.580 $21.320 $19.070
Income from
investment
operations:
Net
investment
income 0.280 0.600 0.650
Net realized
and unrealized
gain (loss)
on investments 2.220 3.940 3.630
--------- --------- ---------
Total from
investment
operations 2.500 4.540 4.280
--------- --------- ---------
Less dividends
and distributions:
Dividends
from net
investment
income (0.250) (0.600) (0.690)
Distributions
from net
realized gain
on investment
transactions (3.070) (2.680) (1.340)
--------- --------- ---------
Total
dividends
and
distributions (3.320) (3.280) (2.030)
--------- --------- ---------
Net asset value,
end of period $21.760 $22.580 $21.320
========= ========= =========
Total return1 12.61% 24.78% 24.47%
Ratios and
supplemental data:
Net assets,
end of period
(000
omitted) $2,061,756 $1,906,726 $1,616,315
Ratio of
expenses
to average
net assets 0.90% 0.88% 0.85%
Ratio of net
investment
income to
average net
assets 2.61% 2.87% 3.40%
Portfolio
turnover 88% 90% 101%
YEAR ENDED NOVEMBER 30,
1995 1994 1993
Net asset value,
beginning of
period $15.570 $18.240 $17.200
Income from
investment
operations:
Net
investment
income 0.700 0.670 0.780
Net realized
and unrealize
gain (loss)
on investments 3.910 (0.730) 1.790
--------- --------- ---------
Total from
investment
operations 4.610 (0.060) 2.570
--------- --------- ---------
Less dividends
and distributions:
Dividends
from net
investment
income (0.690) (0.860) (0.680)
Distributions
from net
realized gain
on investment
transactions (0.420) (1.750) (0.850)
--------- --------- ---------
Total
dividends
and
distributions (1.110) (2.610) (1.530)
--------- --------- ---------
Net asset value,
end of period $19.070 $15.570 $18.240
========= ========= =========
Total return1 31.02% (0.57%) 15.85%
Ratios and
supplemental data:
Net assets,
end of period
(000
omitted) $1,382,693 $1,153,884 $1,512,194
Ratio of
expenses
to average
net assets 0.87% 0.81% 0.71%
Ratio of net
investment
income to
average net
assets 4.03% 3.92% 4.34%
Portfolio
turnover 74% 92% 80%
</TABLE>
<TABLE>
<CAPTION>
DECATUR INCOME FUND B CLASS
----------------------------------------------------------------------------------
SIX MONTHS YEAR YEAR YEAR 9/6/943
ENDED ENDED ENDED ENDED TO
5/31/982 11/30/97 11/30/96 11/30/95 11/30/94
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $22.480 $21.260 $19.030 $15.550 $16.590
Income from
investment
operations:
Net investment
income 0.200 0.450 0.500 0.560 0.150
Net realized
and unrealized
gain (loss) on
investments 2.200 3.900 3.610 3.890 (1.020)
------------ ------------ ------------ ------------ ------------
Total from
investment
operations 2.400 4.350 4.110 4.450 (0.870)
------------ ------------ ------------ ------------ ------------
Less dividends
and
distributions:
Dividends
from net
investment
income (0.140) (0.450) (0.540) (0.550) (0.170)
Distributions
from net
realized
gain on
investment
transactions (3.070) (2.680) (1.340) (0.420) none
------------ ------------ ------------ ------------ ------------
Total
dividends
and
distributions (3.210) (3.130) (1.880) (0.970) (0.170)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of period $21.670 $22.480 $21.260 $19.030 $15.550
============ ============ ============ ============ ============
Total return1 12.14% 23.73% 23.43% 29.85% (5.27%)
Ratios and
supplemental
data:
Net assets,
end of period
(000 omitted) $163,134 $123,180 $60,689 $19,665 $2,765
Ratio of
expenses to
average net
assets 1.70% 1.68% 1.69% 1.74% 1.70%
Ratio of net
investment
income to
average net
assets 1.81% 2.07% 2.56% 3.16% 3.30%
Portfolio
turnover 88% 90% 101% 74% 92%
- ------------------------
1 Does not include maximum sales charge of 4.75% nor the 1% limited contingent deferred
sales charge that would apply in the event of certain redemptions within 12 months of
purchase of A Class shares. Does not include contingent deferred sales charge which
varies from 1-4% depending upon the holding period for Class B and Class C shares.
2 Ratios have been annualized and total return has not been annualized.
3 Date of initial public offering; ratios have been annualized and total return has not
been annualized.
</TABLE>
<TABLE>
<CAPTION>
22 for total return
Selected data for each share of the Fund outstanding throughout each period were as
follows:
DECATUR INCOME FUND C CLASS
-----------------------------------------------------------------------------------
SIX MONTHS YEAR YEAR 11/29/953
ENDED ENDED ENDED TO
5/31/982 11/30/97 11/30/96 11/30/95
(UNAUDITED)
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $22.570 $21.330 $19.080 $19.150
Income from
investment
operations:
Net investment
income 0.200 0.460 0.510 0.040
Net realized
and unrealized
gain (loss) on
investments 2.210 3.910 3.630 (0.060)
----------- ----------- ----------- -----------
Total from
investment
operations 2.410 4.370 4.140 (0.020)
----------- ----------- ----------- -----------
Less dividends
and distributions:
Dividends
from net
investment
income (0.140) (0.450) (0.550) (0.050)
Distributions
from net
realized
gain on
investment
transactions (3.070) (2.680) (1.340) --
----------- ----------- ----------- -----------
Total
dividends and
distributions (3.210) (3.130) (1.890) (0.050)
----------- ----------- ----------- -----------
Net asset value,
end of period $21.770 $22.570 $21.330 $19.080
=========== =========== =========== ===========
Total return1 12.14% 23.75% 23.47% 4
Ratios and
supplemental data:
Net assets,
end of period
(000 omitted) $21,477 $15,343 $4,833 $5
Ratio of
expenses to
average net
assets 1.70% 1.68% 1.69% 4
Ratio of net
investment
income to
average net
assets 1.81% 2.07% 2.56% 4
Portfolio
turnover 88% 90% 101% 4
</TABLE>
<TABLE>
<CAPTION>
DECATUR INCOME FUND INSTITUTIONAL CLASS
-----------------------------------------------------------------------------------
SIX MONTHS YEAR YEAR YEAR 1/13/945
ENDED ENDED ENDED ENDED TO
5/31/982 11/30/97 11/30/96 11/30/95 11/30/94
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $22.570 $21.310 $19.060 $15.590 $16.720
Income from
investment
operations:
Net
investment
income 0.310 0.650 0.690 0.710 0.590
Net realized
and unrealized
gain (loss) on
investments 2.205 3.930 3.620 3.920 (1.100)
----------- ----------- ----------- ----------- -----------
Total from
investment
operations 2.515 4.580 4.310 4.630 (0.510)
----------- ----------- ----------- ----------- -----------
Less dividends
and distributions:
Dividends
from net
investment
income (0.265) (0.640) (0.720) (0.740) (0.620)
Distributions
from net
realized gain
on investment
transactions (3.070) (2.680) (1.340) (0.420) none
----------- ----------- ----------- ----------- -----------
Total
dividends
and
distributions (3.335) (3.320) (2.060) (1.160) (0.620)
----------- ----------- ----------- ----------- -----------
Net asset value,
end of period $21.750 $22.570 $21.310 $19.060 $15.590
=========== =========== =========== =========== ===========
Total return1 12.70% 25.02% 24.65% 31.14% (0.45%)
Ratios and
supplemental data:
Net assets,
end of period
(000 omitted) $286,771 $278,384 $244,048 $211,049 $182,105
Ratio of
expenses to
average net
assets 0.70% 0.68% 0.69% 0.74% 0.70%
Ratio of net
investment
income to
average net
assets 2.81% 3.07% 3.56% 4.16% 4.03%
Portfolio
turnover 88% 90% 101% 74% 92%
- ------------------------
1 Does not include maximum sales charge which varies from 1% -4% depending upon the
holding period for Class B and Class C shares.
2 Ratios have been annualized and total return has not been annualized.
3 Date of initial public offering; ratios and total return have been annualized.
4 The ratios of expenses and net investment income to average net assets, portfolio
turnover and total return have been omitted as management believes that such ratios
and return for this relatively short period are not meaningful.
5 Date of initial public offering; ratios have been annualized and total return has not
been annualized.
</TABLE>
for total return 23
<TABLE>
<CAPTION>
Selected data for each share of the Fund outstanding throughout each period were as follows:
DECATUR TOTAL RETURN FUND A CLASS
-----------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
5/31/982 1997 1996 1995 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $19.230 $17.520 $15.610 $12.320 $14.380 $13.980
Income from
investment
operations:
Net
investment
income 0.138 0.280 0.340 0.370 0.370 0.450
Net realized
and
unrealized
gain (loss)
on investments 2.162 3.610 3.210 3.700 (0.340) 1.450
---------- ---------- ---------- ---------- ---------- ----------
Total from
investment
operations 2.300 3.890 3.550 4.070 0.030 1.900
---------- ---------- ---------- ---------- ---------- ----------
Less dividends
and distributions:
Dividends
from net
investment
income (0.120) (0.330) (0.350) (0.360) (0.430) (0.450)
Distributions
from net
realized gain
on investment
transactions (2.080) (1.850) (1.290) (0.420) (1.660) (1.050)
---------- ---------- ---------- ---------- ---------- ----------
Total
dividends
and
distributions (2.200) (2.180) (1.640) (0.780) (2.090) (1.500)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period $19.330 $19.230 $17.520 $15.610 $12.320 $14.380
========== ========== ========== ========== ========== ==========
Total return1 13.19% 25.26% 24.89% 34.68% (0.04%) 14.74%
Ratios and
supplemental data:
Net assets,
end of
period
(000
omitted) $1,007,869 $863,855 $670,912 $534,342 $402,849 $431,638
Ratio of
expenses
to average
net assets 1.14% 1.13% 1.11% 1.19% 1.26% 1.22%
Ratio of
net
investment
income to
average net
assets 1.49% 1.60% 2.21% 2.72% 2.88% 3.15%
Portfolio
turnover 85% 69% 87% 81% 74% 119%
</TABLE>
<TABLE>
<CAPTION>
DECATUR TOTAL RETURN FUND B CLASS
-----------------------------------------------------------------------------------
SIX MONTHS YEAR YEAR YEAR 9/6/943
ENDED ENDED ENDED ENDED TO
5/31/982 11/30/97 11/30/96 11/30/95 11/30/94
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $19.200 $17.460 $15.560 $12.310 $13.110
Income from
investment
operations:
Net
investment
income 0.076 0.170 0.230 0.300 0.120
Net realized
and unrealized
gain (loss) on
investments 2.147 3.600 3.200 3.670 (0.820)
---------- ---------- ---------- ---------- ----------
Total from
investment
operations 2.223 3.770 3.430 3.970 (0.700)
---------- ---------- ---------- ---------- ----------
Less dividends
and distributions:
Dividends
from net
investment
income (0.053) (0.180) (0.240) (0.300) (0.100)
Distributions
from net
realized gain
on investment
transactions (2.080) (1.850) (1.290) (0.420) none
---------- ---------- ---------- ---------- ----------
Total
dividends and
distributions (2.133) (2.030) (1.530) (0.720) (0.100)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period $19.290 $19.200 $17.460 $15.560 $12.310
========== ========== ========== ========== ==========
Total return1 12.81% 24.45% 24.01% 33.79% (5.37%)
Ratios and
supplemental data:
Net assets,
end of period
(000 omitted) $197,319 $135,737 $53,467 $14,745 $1,738
Ratio of
expenses to
average net
assets 1.84% 1.83% 1.81% 1.89% 1.96%
Ratio of net
investment
income to
average net
assets 0.79% 0.90% 1.53% 2.02% 2.18%
Portfolio
turnover 85% 69% 87% 81% 74%
- ------------------------
1 Does not include maximum sales charge of 4.75% nor the 1% limited contingent deferred
sales charge that would apply in the event of certain redemptions within 12 months of
purchase of A Class shares. Does not include contingent deferred sales charge which
varies from 1-4% depending upon the holding period for Class B and Class C shares.
2 Ratios have been annualized and total return has not been annualized.
3 Date of initial public offering; ratios have been annualized and total return has not
been annualized.
</TABLE>
24 for total return
<TABLE>
<CAPTION>
Selected data for each share of the Fund outstanding throughout each period were as
follows:
DECATUR TOTAL RETURN FUND C CLASS
-----------------------------------------------------------------------------------
SIX MONTHS YEAR YEAR 11/29/953
ENDED ENDED ENDED TO
5/31/982 11/30/97 11/30/96 11/30/95
(UNAUDITED)
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period $19.160 $17.430 $15.610 $15.610
Income from
investment
operations:
Net investment
income 0.077 0.170 0.330 none
Net realized
and unrealized
gain (loss) on
investments 2.146 3.590 3.100 none
---------- ---------- ---------- ----------
Total from
investment
operations 2.223 3.760 3.430 none
---------- ---------- ---------- ----------
Less dividends
and distributions:
Dividends
from net
investment
income (0.053) (0.180) (0.320) none
Distributions
from net
realized gain
on investment
transactions (2.080) (1.850) (1.290) none
---------- ---------- ---------- ----------
Total
dividends
and
distributions (2.133) (2.030) (1.610) none
---------- ---------- ---------- ----------
Net asset value,
end of period $19.250 $19.160 $17.430 $15.610
========== ========== ========== ==========
Total return1 12.84% 24.44% 24.04% 4
Ratios and
supplemental
data:
Net assets,
end of period
(000 omitted) $42,676 $26,231 $7,591 $5
Ratio of
expenses to
average net
assets 1.84% 1.83% 1.81% 4
Ratio of net
investment
income to
average net
assets 0.79% 0.90% 1.53% 4
Portfolio
turnover 85% 69% 87% 4
</TABLE>
<TABLE>
<CAPTION>
DECATUR TOTAL RETURN FUND INSTITUTIONAL CLASS
-----------------------------------------------------------------------------------
SIX MONTHS YEAR YEAR YEAR YEAR 7/26/935
ENDED ENDED ENDED ENDED ENDED TO
5/31/982 11/30/97 11/30/96 11/30/95 11/30/94 11/30/93
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $19.260 $17.570 $15.650 $12.350 $14.400 $14.100
Income from
investment
operations:
Net
investment
income 0.174 0.350 0.370 0.470 0.430 0.150
Net realized
and
unrealized
gain (loss)
on investments 2.154 3.600 3.230 3.650 (0.370) 0.250
---------- ---------- ---------- ---------- ---------- ----------
Total from
investment
operations 2.328 3.950 3.600 4.120 0.060 0.400
---------- ---------- ---------- ---------- ---------- ----------
Less dividends
and distributions:
Dividends
from net
investment
income (0.158) (0.410) (0.390) (0.400) (0.450) (0.100)
Distributions
from net
realized
gain on
investment
transactions (2.080) (1.850) (1.290) (0.420) (1.660) none
---------- ---------- ---------- ---------- ---------- ----------
Total
dividends
and
distributions (2.238) (2.260) (1.680) (0.820) (2.110) (0.100)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period $19.350 $19.260 $17.570 $15.650 $12.350 $14.400
========== ========== ========== ========== ========== ==========
Total return1 13.40% 25.65% 25.24% 35.13% 0.19% 14.89%
Ratios and
supplemental data:
Net assets,
end of
period (000
omitted) $117,828 $78,813 $45,958 $11,520 $1,376 $1,181
Ratio of
expenses to
average net
assets 0.84% 0.83% 0.81% 0.89% 0.96% 0.92%
Ratio of net
investment
income to
average net
assets 1.79% 2.73% 2.53% 3.02% 3.18% 3.45%
Portfolio
turnover 85% 69% 87% 81% 74% 119%
- ------------------------
1 Does not include maximum sales charge which varies from 1% -4% depending upon the
holding period for Class B and Class C shares.
2 Ratios have been annualized and total return has not been annualized.
3 Date of initial public offering; ratios and total return have been annualized.
4 The ratios of expenses and net investment income to average net assets, portfolio
turnover and total return have been omitted as management believes that such ratios
and return for this relatively short period are not meaningful.
5 Date of initial public offering; ratios have been annualized and total return has not
been annualized.
</TABLE>
for total return 25
DELAWARE GROUP EQUITY FUNDS II, INC. -
DECATUR INCOME FUND AND DECATUR TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998 (UNAUDITED)
Delaware Group Equity Funds II, Inc. (The "Company") is registered as a
diversified open-end investment company under the Investment Company Act
of 1940, as amended. The Fund is organized as a Maryland Corporation and
offers four series: the Decatur Income Fund, the Decatur Total Return
Fund, the Blue Chip Fund and the Social Awareness Fund. These financial
statements and related notes pertain to the Decatur Income Fund and
Decatur Total Return Fund (The "Funds"). The Funds offer four classes of
shares. The A Class carries a front-end sales charge of 4.75%. The B
Class carries a back-end deferred sales charge. The C Class carries a
level load deferred sales charge and the Institutional Class has no
sales charge.
The investment objective of the Decatur Income Fund is to achieve the
highest possible current income by investing primarily in common stocks
that provide the potential for income and capital appreciation without
undue risk to principal.
The investment objective of the Decatur Total Return Fund is to achieve
long-term growth by investing primarily in common stocks that provide
the potential for income and capital appreciation without undue risk to
principal.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with generally
accepted accounting principles and are consistently followed by the Fund.
SECURITY VALUATION - Securities listed on an exchange are valued at the
last quoted sales price as of the close of the NYSE on the valuation date.
Securities not traded or securities not listed on an exchange are valued
at the mean of the last quoted bid and asked prices. Long-term debt
securities are valued by an independent pricing service and such prices
are believed to reflect the fair value of such securities. Money market
instruments having less than 60 days to maturity are valued at amortized
cost which approximates market value.
FEDERAL INCOME TAXES - Each Fund intends to continue to qualify 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. Income and capital gain
distributions are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting
principles.
CLASS ACCOUNTING - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various
classes of the Fund on the basis of daily net assets of each class.
Distribution expenses relating to a specific class are charged directly
to that class.
REPURCHASE AGREEMENTS - Each Fund may invest in a pooled cash account
along with other members of the Delaware Investments Family of Funds.
The aggregate daily balance of the pooled cash account is invested in
repurchase agreements secured by obligations of the U.S. government.
The respective collateral is held by the Fund's custodian bank until
the maturity of the respective repurchase agreements. Each repurchase
agreement is at least 100% 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.
OTHER - Expenses common to all funds within the Delaware Investments
Family of Funds are allocated amongst the funds on the basis of average
net assets. Security transactions are recorded on the date the securities
are purchased or sold (trade date). Costs used in calculating realized
gains and losses on the sale of investment securities are those of the
specific securities sold. Dividend income is recorded on the ex-dividend
date and interest income is recorded on the accrual basis. Original issue
discounts are accreted to interest income over the lives of the respective
securities. The Decatur Income Fund declares and pays dividends from net
investment income on a monthly basis and capital gains annually. The
Decatur Total Return Fund declares and pays dividends from net investment
income on a quarterly basis and capital gains annually.
Certain Fund expenses are paid through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Fund's
average daily net assets.
USE OF ESTIMATES - The preparation of financial statements in conformity
with 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.
2. INVESTMENT MANAGEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
In accordance with the terms of the Investment Management Agreement, the
Funds pay Delaware Management Company (DMC), the Investment Manager, an
annual fee which is calculated daily at the following rates less fees
paid to unaffiliated directors: 0.60% on the first $100 million of
average daily net assets, 0.525% on the next $150 million, 0.50% on the
next $250 million and 0.475% on the average daily net assets over $500
million for the Decatur Income Fund, and 0.60% on the first $500 million
of average daily net assets, 0.575% on the next $250 million, and 0.55%
on the average daily net assets over $750 million of the Decatur Total
Return Fund.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate
of DMC, to serve as dividend disbursing and transfer agent for the Fund.
The Fund has also engaged DSC to provide accounting services. For the six
months ended May 31, 1998, the amounts expensed for each Fund were as
follows:
DECATUR DECATUR TOTAL
INCOME FUND RETURN FUND
----------------------------------------
Dividend disbursing, transfer
agent fees and other expenses $1,613,576 $1,223,611
Accounting fees 488,774 249,113
On May 31, 1998, the Fund had payables to affiliates as follows:
DECATUR DECATUR TOTAL
INCOME FUND RETURN FUND
-------------------------------------
Investment Management fee payable
to DMC $155,402 $177,459
Dividend disbursing, transfer
agent fees, accounting fees
and other expenses payable
to DSC 118,656 103,842
Other expenses payable to DMC
and affiliates 91,325 127,042
Pursuant to the Distribution Agreement, the Fund pays Delaware
Distributors, L.P. (DDLP), the Distributor and an affiliate of DMC, an
annual fee not to exceed 0.30% of the average daily net assets of the
A Class and 1.00% of the average daily net assets of the B and C Classes
for each Series.
26 for total return
For the six months ended May 31, 1998, DDLP earned commissions on sales
of the Fund A Class shares for each Fund as follows:
DECATUR DECATUR TOTAL
INCOME FUND RETURN FUND
-------------------------------------
$230,601 $291,332
Certain officers of DMC, DSC and DDLP are officers, directors and/or
employees of the Fund. These officers, directors and employees are
paid no compensation by the Fund.
3. INVESTMENTS
During the six months ended May 31, 1998, the Fund made purchases and
sales of investment securities other than U.S. government securities
and temporary cash investments as follows:
DECATUR DECATUR TOTAL
INCOME FUND RETURN FUND
-------------------------------------
Purchases $1,065,765,116 $562,347,896
Sales $1,105,224,739 $434,878,451
At May 31, 1998, the aggregate cost of securities and unrealized
appreciation (depreciation) for federal income tax purposes for each
Fund were as follows:
DECATUR DECATUR TOTAL
INCOME FUND RETURN FUND
-------------------------------------
Cost of investments $2,139,069,532 $1,125,441,053
Aggregate unrealized appreciation 423,793,753 260,604,333
Aggregate unrealized depreciation (32,038,394) (19,417,768)
Net unrealized appreciation 391,755,359 241,186,565
4. CAPITAL STOCK
Transactions in capital stock shares were as follows:
DECATUR INCOME FUND
------------------------------------
SIX MONTHS YEAR
ENDED ENDED
5/31/98 11/30/97
(UNAUDITED)
Shares sold:
Decatur Income Fund A Class 4,778,120 6,087,710
Decatur Income Fund B Class 1,629,132 2,584,300
Decatur Income Fund C Class 258,955 461,635
Decatur Income Fund
Institutional Class 1,459,044 1,422,421
Shares issued upon reinvestment
of dividends from net
investment income and net
realized
gains on investment
transactions:
Decatur Income Fund A Class 12,757,503 11,932,825
Decatur Income Fund B Class 822,162 466,138
Decatur Income Fund C Class 101,967 39,660
Decatur Income Fund
Institutional Class 2,131,917 2,039,464
----------- -----------
23,938,800 25,034,153
----------- -----------
Shares repurchased:
Decatur Income Fund A Class (7,228,261) (9,366,427)
Decatur Income Fund B Class (403,927) (425,637)
Decatur Income Fund C Class (54,352) (48,083)
Decatur Income Fund
Institutional Class (2,743,416) (2,577,081)
----------- -----------
(10,429,956) (12,417,228)
Net Increase 13,508,844 12,616,925
=========== ===========
DECATUR INCOME FUND
------------------------------------
SIX MONTHS YEAR
ENDED ENDED
5/31/98 11/30/97
(UNAUDITED)
Shares sold:
Decatur Total Return
Fund A Class 6,070,644 9,044,416
Decatur Total Return
Fund B Class 2,736,839 4,136,331
Decatur Total Return
Fund C Class 784,020 980,633
Decatur Total Return
Fund Institutional Class 1,912,856 1,630,998
Shares issued upon reinvestment
of dividends
from net investment income
and net realized
gains from investment
transactions:
Decatur Total Return
Fund A Class 5,453,705 5,157,354
Decatur Total Return
Fund B Class 842,709 408,787
Decatur Total Return
Fund C Class 169,984 61,310
Decatur Total Return
Fund Institutional Class 544,526 394,807
----------- -----------
18,515,283 21,814,636
----------- -----------
Shares repurchased:
Decatur Total Return
Fund A Class (4,301,890) (7,584,462)
Decatur Total Return
Fund B Class (421,587) (535,525)
Decatur Total Return
Fund C Class (106,295) (108,427)
Decatur Total Return
Fund Institutional Class (459,961) (549,647)
----------- -----------
(5,289,733) (8,778,061)
Net Increase 13,225,550 13,036,575
=========== ===========
5. LINES OF CREDIT
Committed lines of credit were $68 million for Decatur Income Fund and
$33 million for Decatur Total Return Fund. No amount was outstanding at
May 31, 1998, or at any time during the fiscal year.
6. MARKET AND CREDIT RISK
The Decatur Income Fund may invest in high-yield fixed income securities
which carry ratings of BB or lower by S&P and/or Ba or lower by Moody's.
Investments in these higher yielding securities may be accompanied by a
greater degree of credit risk than higher rated securities. Additionally,
lower rated securities may be more susceptible to adverse economic and
competitive industry conditions than investment grade securities.
The Decatur Income 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 some
of these securities may adversely affect the Fund's ability to dispose
of such securities in a timely manner and at a fair price when it is
necessary to liquidate such securities.
DELAWARE INVESTMENTS FAMILY OF FUNDS
FOR GROWTH OF CAPITAL
Aggressive Growth Fund
Trend Fund
DelCap Fund
Small Cap Value Fund
U.S. Growth Fund
Growth Stock Fund
Tax-Efficient Equity Fund
FOR TOTAL RETURN
Social Awareness Fund
Blue Chip Fund
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
REIT Fund
Delaware Fund
FOR INTERNATIONAL DIVERSIFICATION
Emerging Markets Fund
New Pacific Fund
Overseas Equity Fund
International Equity Fund
Global Equity Fund
Global Bond Fund
FOR CURRENT INCOME
Delchester Fund
High-Yield Opportunities Fund
Strategic Income Fund
U.S. Government Fund
Delaware-Voyageur
US Government Securities Fund
Limited-Term Government Fund
FOR TAX-EXEMPT INCOME
National High Yield Municipal Bond Fund
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
State Tax-Free Funds*
MONEY MARKET FUNDS
Delaware Cash Reserve
Tax-Free Money Fund
ASSET ALLOCATION FUNDS
Growth Portfolio
Balanced Portfolio
Income Portfolio
* Available for the following states: Arizona, California, Colorado,
Florida, Idaho, Iowa, Kansas, Minnesota, Missouri, North Dakota,
New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Utah,
Washington, Wisconsin. Insured and intermediate bond funds are
available in selected states.
[PHOTO OF KEYBOARD]
Complete information on any funds offered by Delaware Investments can be
found in each fund's current prospectus. Prospectuses for all funds
offered by Delaware Investments are available from your financial
adviser. Please read the prospectus carefully before you invest or send
money.
THIS SEMI-ANNUAL REPORT IS FOR THE INFORMATION OF DECATUR FUNDS
SHAREHOLDERS, BUT IT MAY BE USED WITH PROSPECTIVE investors when preceded
or accompanied by a current Prospectus for Decatur Funds, which sets
forth details about charges, expenses, investment objectives and
operating policies of the Funds. You should read the prospectus carefully
before you invest. Summary investment results are documented in the Funds'
current Statement of Additional Information. The figures in this report
represent past results which are not a guarantee of future results. The
return and principal value of an investment in the Funds will fluctuate
so that shares, when redeemed, may be worth more or less than their
original cost.
- ------------------------------------------------------------------------
INVESTMENT MANAGER
Delaware Management Company
Philadelphia, Pennsylvania
INTERNATIONAL AFFILIATE
Delaware International Advisers Ltd.
London, England
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
Philadelphia, Pennsylvania
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
Philadelphia, Pennsylvania
1818 Market Street
Philadelphia, PA 19103-3682
[PHOTO OF GLOBES]
FOR SHAREHOLDERS
1.800.523.1918
FOR SECURITIES DEALERS
1.800.362.7500
FOR FINANCIAL INSTITUTIONS
REPRESENTATIVES ONLY
1.800.659.2265
www.delawarefunds.com
Be sure to consult your financial adviser when making investments.
Mutual funds can be a valuable part of your financial plan; however,
shares of the Funds are not FDIC or NCUSIF insured, are not guaranteed
by any bank or any credit union, and involve investment risk, including
the possible loss of the principal amount invested. Shares of the Funds
are not bank or credit union deposits.
(copyright) Delaware Distributors, L.P.
[GRAPHIC OMITTED: LOGO OF DELAWARE INVESTMENTS
----------------------------
Philadelphia * London]
Printed in the USA
on recycled paper
SA-118 [5/98] PP7/98
(827)
