<PAGE>
1995
Annual
Report
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DELAWARE
GROUP
DELCHESTER
FUND
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[PHOTO OF VARIOUS PHILADELPHIA HISTORICAL SITES TO APPEARS HERE]
A Tradition of Sound Investing Since 1929
[DELAWARE GROUP LOGO APPEARS HERE]
<PAGE>
Delchester Fund
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Investment
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Objective
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To seek as high a current income as is consistent with providing reasonable
safety.
[PHOTO OF VARIOUS PHILADELPHIA HISTORICAL SITES APPEARS HERE]
About Our Cover
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Headquartered in Philadelphia, Pennsylvania, Delaware Group shares in the
tradition of a city built on the vision of opportunity. Amidst the city's
historic sites, symbolic of our nation's freedom and prosperity, Delaware Group
provides both individual and institutional investors with a conservative,
disciplined approach to money management.
Delaware Group
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A Tradition of
================================================================================
Sound Investing
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Delaware's investment experience dates back to 1929. Our first mutual fund was
established in 1938. Headquartered in Philadelphia with an affiliate in London,
Delaware provides a full range of mutual fund investments, annuities and
retirement plan services. Delaware International Advisers Ltd., our London-based
international affiliate, was established in 1990.
Delaware Group manages mutual funds with the same time-tested, disciplined
strategies demanded by the large public and private pension plans, foundations
and endowments that are among our clients. With over 60 years of investment
management standing behind us, we have experience you can count on and a
commitment to excellent service.
Today, Delaware manages some $27 billion in mutual funds and institutional
investment advisory accounts. We measure our success by the financial success
and satisfaction of our nearly 500,000 shareholders.
<PAGE>
August 15, 1995
Dear
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Shareholder:
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The portfolio managers of any high-yield bond fund have to carefully evaluate
both credit and interest rate risks. Delchester Fund's 25th fiscal year, which
ended July 31, 1995, was one that required an unusual degree of foresight to
anticipate how each type of risk would affect a particular bond issue.
Between the summer of 1994 and February 1995, the Federal Reserve Board
raised the Federal Funds rate 1.75 percentage points to 6.0% to combat
inflation, negatively affecting the value of all types of fixed-income
securities. As the fiscal year wore on, however, signs of a slowing economy made
credit risk a growing concern for high-yield issues even as interest rates fell
sharply.
The Delchester Fund's strategy through-out the majority of its 25-year
history has been to focus on better quality bonds within the high-yield sector.
We credit the Fund's strong long-term performance to this defensive approach,
which we continued to implement during the past year. We consider it the most
prudent long-term way to reach the Fund's objective of seeking high current
income consistent with reasonable safety.
The Fund recovered from a modest 0.78% loss in the first fiscal half and
participated in the 1995 rebound with a total return of +9.31%. For the year
ended July 31, 1995, Delchester Fund A Class shares provided a total return of
+8.46% at net asset value (capital change plus reinvested dividends). As of that
date, the Fund's 12-month distribution rate (based on net asset value) ranked a
strong 11th out of 106 comparable high-yield bond funds tracked by Lipper
Analytical Services, an evaluator of mutual funds. Distribution rate includes
dividends and capital gains but does not include unrealized gains or losses in
the portfolio.
Due to our desire to protect principal in a volatile market, the Fund's
total return in fiscal 1995 was less than the average +10.34% total return of
high-yield bond funds tracked by Lipper Analytical Services.
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<TABLE>
<CAPTION>
Total Return
Six 12
Months Months
Ended Ended
-------------------- --------
1/31/95 7/31/95 7/31/95
<S> <C> <C> <C>
Delchester Fund A Class -0.78% +9.31% +8.46%
Lipper High-Current Yield
Fund Average -0.48% +10.82% +10.34%
</TABLE>
Performance for Delchester and the Lipper average (which includes 106 funds) is
based on net asset value without impact of sales charge. Past performance is not
a guarantee of future results. Performance for all classes of the Fund can be
found on page 7.
- --------------------------------------------------------------------------------
Between January and July 1995, Delchester's net asset value per share did
not grow as much as the share values of mutual funds with longer average
maturities. In the opinion of our portfolio managers, holding longer term debt
would have exposed shareholders to an unacceptable level of interest rate risk.
The Fund's performance since January was also affected by the fact that issuers
of a number of bonds in our portfolio refinanced their debt to capitalize on
falling interest rates. The funds that benefitted most from the recent bond
rally were the most interest rate sensitive.
1
<PAGE>
Delaware has managed Delchester Fund since 1970 and included high-yield
bonds among the funds it manages before such bonds were even recognized as a
separate and potentially profitable asset category by most other money managers.
On the occasion of the Fund's silver anniversary, our report reviews the dynamic
growth of the nearly $300 billion high-yield bond sector, as well as Delaware's
participation in this market. We also review Delchester Fund's performance in
1995 and detail how the Fund is positioned for the coming months.
Since Delchester became one of the nation's first mutual funds to focus on
high-yield securities in August 1982, Fund assets have grown from less than $30
million to nearly $1.2 billion. We thank you for your continued confidence in
Delchester Fund.
/s/ Wayne A. Stork
Wayne A. Stork
Chairman, Board of Directors
[CHART APPEARS HERE]
Federal Reserve Interest Rate Moves, 1994-1995
<TABLE>
<S> <C>
Aug. '94 4.75
Nov. '94 5.5
Feb. '95 6
July '95 5.75
Source: Bloomberg Business News
</TABLE>
This chart shows previous steep increases and the recent decline in the Federal
Funds rate as targeted by the Federal Reserve Board.
Portfolio
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Managers'
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Report
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Both the high-yield market and the Delchester Fund faced a challenging period
during the 12 months ended July 31, 1995. Rising interest rates led to negative
returns for most fixed-income investments during the last five months of 1994.
During the first seven months of 1995, both the U.S. Treasury and the corporate
bond markets had extraordinary recoveries.
In part because the sharp drop in interest rates since January had a
positive effect on funds whose portfolios had a larger percentage of longer term
bonds, the average high-yield bond fund rallied more than Delchester.
Another factor affecting the Fund's performance during fiscal 1995 was that
13% of the portfolio's bonds - including
2
<PAGE>
some higher quality, older bonds in the paper and packaging material industries
yielding as much as 14.25% - were called by issuers before their maturity dates.
We believed that the most prudent way to invest this money was to purchase
newer issues yielding 10% to 11% in the more defensive media, food and consumer
goods sectors. This resulted in a decline in the Fund's distribution rate to
shareholders. Lower quality bonds yielding as high as 14% were available in the
high-yield market; however, we felt these issues lacked sufficient credit
quality to justify purchases by the Fund.
[PHOTO OF DELCHESTOR DELAWARE GROUP SENIOR PORTFOLIO MANAGERS APPEARS HERE]
Paul A. Matlack, Gerald T. Nichols, James R. Raith, Jr.
We became concerned that rising interest rates and slowing economic activity
would become features of the investment landscape for the year ended July 31.
Accordingly, we decided to upgrade the credit quality of the Delchester
portfolio by increasing the percentage of the portfolio devoted to BB
securities.
While the Fund's short-term performance relative to other funds is
disappointing, it resulted from what we believe is a fundamentally sound, long-
term strategy to position the Fund against both a slowing economy and interest
rate risk. Since the soundness of the Fund's approach may not have been as
apparent in recent months as it was during more difficult periods for the high-
yield market, we would like to spend some time discussing the rationale behind
the Fund's strategy.
The Fund's Conservative
Investment Strategy
Perhaps the most important factor in Delchester's long and successful track
record since the Fund began investing in high-yield securities in 1982 has been
its consistent adherence to a single investment mission. The focus of the Fund's
portfolio managers has remained constant - to attempt to provide an above-
average income stream consistent with a defensive, conservative approach to
credit risk management.
The Fund emphasizes income as the dominant component of return, with
capital preservation taking precedence over capital appreciation. We strive to
achieve this by investing primarily in securities rated BB or B, the two highest
quality tiers in the high-yield market. As of July 31, the portfolio did not
have any bonds rated lower than B by Standard & Poor's. A small percentage of
the Fund's holdings were rated Caa or lower by Moody's Investor Services. In
general, the Fund emphasizes B-rated bonds during periods of economic growth,
and higher quality, lower yielding BB issues during an economic slowdown.
3
<PAGE>
Among high-yield funds, our strategy has been more conservative than most.
About 35% percent of the portfolio's bonds were BB-rated bonds as of July 31,
1995, compared to less than 20% for the 120 high-yield funds tracked by
Morningstar, Inc.
Delaware believes this strategy has enabled the Fund to perform well over
longer periods of time. For example, Delchester's average annual total return of
+10.71% for the 10 years ended July 31 exceeds the +9.95% 10-year average annual
total return of high-yield funds tracked by Lipper Analytical Services, based on
performance at net asset value. The Fund's more conservative strategy has, in
the past, helped the Fund preserve principal in down markets.
However, our approach has several short-term implications. First, the Fund
may lag in a strong bull market such as the one we've experienced in 1995. This
underperformance may persist as long as economic growth and the overall credit
quality in the market remain firm.
The key to long-term performance, in our opinion, is the preservation of
principal during intervening periods of slow economic growth and declining
credit quality. Because we have to reposition the portfolio before rather than
after an economic decline begins, there can be a lag before the Fund's strategy
bears fruit. Of course, there can be no guarantee of the success of this
strategy.
As the chart to the right shows, the rate of return investors have received
from BB-rated bonds has far outpaced the rate of return from B- and CCC-rated
bonds between 1985 and the first half of 1995.
As the Fund's fiscal year began in August 1994, we looked at what was
happening with America's economy. The U.S. recovery had been underway for nearly
four years, beyond the long-term average for an economic expansion. Two
indicators of economic growth - auto production and housing starts - appeared to
be at or past a cyclical peak, according to Bloomberg Business News. And, the
Fed was raising interest rates.
Meanwhile, signs of inflation abounded. Production capacity in several
industries was reaching its limit. The price of commodities such as steel,
paper, chemicals and packaging was rising rapidly. Employment growth remained
strong.
We became concerned that rising interest rates and slowing economic
activity would become features of the investment landscape for the year ended
July 31. Accordingly, we decided to upgrade the credit quality of the Delchester
portfolio by gradually increasing the percentage of the portfolio devoted to BB
securities from 5% as of July 31, 1994, to 18% as of December 31, 1994, and to
35% as of July 31, 1995.
In addition, by avoiding bonds with longer maturities, we lowered the
average
- --------------------------------------------------------------------------------
Historical Rate of Return by Credit Rating
<TABLE>
<CAPTION>
Annual Total Returns
-----------------------------------
BB B CCC
-----------------------------------
<S> <C> <C> <C>
1985 +37.3% +26.3% +5.0%
1986 +19.4 +17.3 -14.0
1987 +6.4 +3.2 +19.1
1988 +14.4 +16.5 +10.0
1989 +12.1 +1.3 -25.6
1990 +5.9 -9.2 -36.5
1991 +23.2 +46.1 +72.4
1992 +14.8 +20.0 +16.2
1993 +15.9 +18.2 +29.9
1994 -1.3 +0.3 -11.8
Jan.-June 1995 +13.9 +10.7 +12.0
Cumulative +336.7% +277.5% +44.4%
Annualized Returns 15.07% 13.49% 3.56%
</TABLE>
- --------------------------------------------------------------------------------
BB-rated bonds have outperformed B-rated and CCC-rated bonds since 1985. This
performance is not intended to represent performance of the Fund.
Source: Salomon Brothers Inc.
4
<PAGE>
duration of the bonds in the Fund's portfolio to 3.9 years, a level that was
approximately 20% lower than that of the overall high-yield bond market at the
time. Duration is the most common measure of a bond's sensitivity to interest
rate fluctuations. It indicates the approximate percentage of change in a bond's
price given a 1% change in interest rates.
Though upgrading credit quality without extending maturity resulted in a
slight decline in the portfolio's overall yield, the Fund succeeded in
maintaining a 12-month distribution rate (based on net asset value) that, as of
July 31, ranked in the top 12% of the 106 high-yield funds tracked by Lipper
Analytical Services.
Beginning in February 1995, evidence of slowing economic growth emerged.
However, U.S. Department of Commerce and Bureau of Labor Statistics data also
unexpectedly revealed a striking absence of inflationary pressure. This sparked
a six-month decline in interest rates and a major rally in equities.
The six months ended June 30, 1995, marked the best six-month performance
for the high-yield bond market since the first half of 1991, as measured by the
Merrill Lynch High-Yield Master Index. The earlier rally occurred at the bottom
of the business cycle and was sparked by investor consensus that an economic
recovery was at hand. In contrast, the more recent rally occurred against a
backdrop of slowing corporate earnings growth and considerable economic
uncertainty.
Because Delchester Fund was invested in higher quality securities with
below-average sensitivity to interest rates, the Fund did not fully benefit from
the capital appreciation that resulted from the bond rally. However, the Fund
still provided a very attractive level of income for investors with a portfolio
that avoided the riskiest corporate bonds, strategy consistent with our long-
term effort to provide high income with reasonable safety.
Outlook
We remain committed to Delchester Fund's current strategy because we believe a
focus on higher quality issues remains prudent given the evidence that economic
activity has slowed substantially since 1994.
During July, the bond rally stalled, and as of the second week of August
1995, interest rates as reflected by the yield on the 10-year U.S. Treasury bond
had risen nearly 0.50% over a six-week period. We expect that if interest rates
rise Delchester Fund is favorably positioned relative to the overall high-yield
market.
In the near-term, we do not see any significant problems for the high-yield
market, and in fact think the sector may continue to attract investors seeking
high income and equity-like returns. Nevertheless, we continue to favor a high
income, quality-oriented strategy centered on issues with below-average interest
rate risk. Under a scenario of flat to rising interest rates and stable to
slowing economic activity, we believe Delchester's relatively conservative
strategy will be vital to generating competitive long-term returns.
/s/ Paul A. Matlack
Paul A. Matlack
Senior Portfolio Manager
/s/ Gerald T. Nichols
Gerald T. Nichols
Senior Portfolio Manager
/s/ James R. Raith, Jr.
James R. Raith, Jr.
Senior Portfolio Manager
5
<PAGE>
A Look at
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Long-Term
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Performance
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As you can see from the chart on the opposite page, an investor who bought
$10,000 worth of Delchester Fund A shares in July 1985 and reinvested all
dividends would have had holdings worth $26,118 as of July 31, 1995. Much of
this gain would have been achieved through the compounding effect of purchasing
additional shares with dividends.
Think of all that happened during the past decade -- the October 1987 stock
market drop, the collapse of a major underwriter of high-yield debt, several
bond defaults by airlines and retailers, and the Persian Gulf War. Yet the
average annual total return on Delchester Fund A shares during that time was
+10.17% including all sales charges, significantly better than the 3.9% average
annual rise in consumer prices.
Though Delchester Fund's performance has not matched that of the unmanaged
Salomon Brothers Long-Term High-Yield Index, remember that the Index represents
a hypothetical portfolio of high-yield securities which does not include the
costs associated with running a mutual fund, including the costs of buying and
selling bonds. Bonds included in the Index also have a longer average maturity
than Delchester's bond portfolio. And, 75% of the Salomon Brothers Index is
composed of bonds rated BB, compared to 35% of Delchester's portfolio.
While a strong rally can tempt investors to take a more aggressive position
to capture returns, it is important to keep in mind what a high-yield bond is --
the debt of corporations whose ability to pay interest and repay principal is
not as strong as corporations whose bonds have investment grade ratings.
High-yield bonds offer substantially higher potential returns than most
other fixed-income securities, but also involve greater risks. Traditionally
investors who have been willing to accept a prudent level of price volatility
have been rewarded with higher income and higher overall return. While past
performance doesn't guarantee future results, we believe Delchester's 10-year
record shows the potential of this market as well as the potential benefits to
investors who "stay the course."
6
<PAGE>
This chart shows what a $10,000 investment in Delchester Fund A Class would have
grown to since August 1985, assuming the reinvestment of dividends. The Fund's
performance is compared to that of the Salomon Brothers Long-Term High-Yield
Index.
[CHART APPEARS HERE]
Performance Chart
A Look at Long-Term Performance Growth of a $10,000 Investment, August 1985
through July 1995
<TABLE>
<CAPTION>
Solomon Brothers Delchester Fund
High-Yield Index A Class
<S> <C> <C>
Aug. '85 $ 10,000 $ 9,524
Jan. '86 10,941 10,451
July '86 11,935 11,456
Jan. '87 13,103 12,523
July '87 13,398 12,670
Jan. '88 13,685 13,105
July '88 14,762 13,942
Jan. '89 15,620 14,641
July '89 16,293 15,166
Jan. '90 14,552 14,032
July '90 15,401 14,589
Jan. '91 14,502 13,006
July '91 18,218 16,707
Jan. '92 20,180 18,803
July '92 22,719 20,709
Jan. '93 24,280 21,849
July '93 26,900 23,703
Jan. '94 29,086 25,419
July '94 27,187 24,082
Jan. '95 27,850 23,893
July '95 32,233 26,118
</TABLE>
Chart assumes $10,000 invested on August 1, 1985, and includes the impact of
Delchester's 4.75% sales charge and the reinvestment of all dividends. The
illustration does not show the impact of taxes. The Salomon Brothers Long-Term
High-Yield Index is an unmanaged index. Performance for other Classes of
Delchester Fund will vary due to differing charges and expenses.
Delchester Fund's Performance
Total Return through July 31, 1995
Class A (Est. 1970)
Average Annual Total Returns
10 Year +10.17%
5 Years +11.28%
1 Year +3.33%
Including Sales Charge
Class B (Est. 1994)
Average Annual Total Returns
Lifetime
+4.69% Excluding Sales Charge
+1.73% Including Sales Charge
1 Year
+7.64% Excluding Sales Charge
+3.75% Including Sales Charge
Delchester Fund invests primarily in lower rated, high-yield securities which
involve greater risks than investing in higher quality fixed-income securities.
Return and share value fluctuate with rising and falling interest rates and
other factors so that shares, when redeemed, may be worth more or less than
their original cost. Past performance is not a guarantee of future results.
Class A returns reflect the impact of the 4.75% maximum sales charge and the
12b-1 fee, and take into account the reinvestment of all distributions.
Class B performance reflects the reinvestment of all distributions. Class B
shares do not carry a front-end sales charge, but are subject to a 1% annual
distribution and service fee. They are subject to a deferred sales charge of up
to 4% if redeemed before the end of the sixth year. Performance "excluding sales
charge" assumes the investment was not redeemed. Class B was initially offered
on 5/2/94.
Average annual total returns for Delchester Fund's Institutional Class, which is
available without sales or asset-based distribution charges only to certain
eligible institutional accounts, were +10.91%, +12.62% and +8.72%, respectively,
for the 10-, five- and one-year periods ending July 31, 1995. The Institutional
Class was initially made available on June 1, 1992. Performance for the
Institutional Class for periods prior to this date are based on Class A
performance, adjusted to eliminate the sales charge.
7
<PAGE>
Delchester Fund:
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Yesterday and Today
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1970 - 1995
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From an initial portfolio of $104,000 in 1970, the Delchester Fund has grown to
nearly $1.2 billion in assets, making it Delaware Group's largest fixed-income
mutual fund. Delchester is also one of the larger high-yield funds in the mutual
fund industry. Assets have nearly doubled since the 1991 recession, and tripled
since the mid-1980s. The Fund had 49,368 shareholders of record as of August 4,
1995.
One share of Delchester Fund A purchased at $9.15 in August 1970 would have
provided $89.09 in dividends as of July 31, 1995, if dividends were reinvested.
When Delchester's assets are combined with an additional $1.5 billion in
assets from institutional accounts such as employee pension funds, Delaware
manages about 1% of the entire U.S. high-yield bond market.
In 10 of the last 11 years, the Fund's annual distribution rate has
exceeded the average yield of all high-yield mutual funds tracked by
Morningstar, Inc. (Distribution rate includes dividends and capital gains but
not unrealized gains and losses in the portfolio.) Since August 20, 1970,
shareholders of Delchester Fund A Class have earned an average annual total
return of +9.70% including sales charge.
As you can see by the chart to the right, a person who invested $10,000 in
Delchester at inception would today have a portfolio worth $93,803 if dividends
were reinvested. A share purchased at the initial net asset value of $9.15 in
August 1970 would have provided $89.09 in dividends as of July 31, 1995.
The Birth of a High-Yield Strategy
Founded as the Delchester Mutual Fund in 1970, the Fund's initial objective was
"to earn and pay shareholders as liberal a current income as is consistent with
providing reasonable safety." It sought to achieve that objective by investing
at least 80% of its assets in investment grade bonds -- those rated BBB or
higher -- or stocks.
Thirteen years ago, in August 1982, the Dow Jones Industrial Average stood
at 776.92. That was lower, after adjusting for inflation, than the Dow had been
at any point since 1952, according to Media General Financial Services, Inc. The
American economy was in recession, consumer inflation at the time was running at
an annual pace of more than 7% and the interest rate on the latest issue 30-year
U.S. Treasury Bond was 12.31%.
In that bearish environment for both bonds and equities, the Delchester
Fund's Board of Directors saw what they believed to be a prudent opportunity to
benefit income-minded shareholders by allowing the Fund to make high-yield
corporate bonds a primary focus of its investment strategy.
8
<PAGE>
[CHART APPEARS HERE]
History chart
Delchester Fund A Class:
Lifetime Total Return
Growth of a $10,000 Investment
August 1970 through July 1995
<TABLE>
<CAPTION>
Cost of Living Index Delchester Fund Class
<S> <C> <C> <C>
Aug. '70 $10,000 $10,000
Dec. '70 10,205 10,528
Dec. '71 10,538 11,790
Dec. '72 10,897 12,553
Dec. '73 11,846 12,604
Dec. '74 13,308 11,536 December 1974 Recession,
Prolonged Bear Market in Equities
Dec. '75 14,231 13,361
Dec. '76 14,923 16,338
Dec. '77 15,923 17,278
Dec. '78 17,359 17,607
Dec. '79 19,667 17,858 November 1979 Hostages Taken
in Iran, Double Digit Inflation
Dec. '80 22,128 17,932
Dec. '81 24,103 18,049 Spring 1981 Ronald Regan becomes
President, Interest Rates Near
All-Time Highs
Dec. '82 25,026 24,735 August 1982 Delchester Focuses
on High Yield Bond
Dec. '83 25,974 27,847
Dec. '84 27,000 30,171
Dec. '85 28,026 37,167
Dec. '86 28,333 43,192
Dec. '87 29,590 45,312 October 1987 Dow Jones Industrials
Drop More Than 500 Points in One Day
Dec. '88 30,897 51,506
Dec. '89 32,333 51,890 Spring 1989 S&L Bailout Crisis grows
Dec. '90 34,308 45,562 1990-1991 High-Yield Bond Defaults
Rise Above 10%
Dec. '91 35,359 65,359 January 1991 Persian Gulf War, Bank
Credit Crunch
Dec. '92 36,385 76,606
Dec. '93 37,385 89,249 Spring 1993 High Yield Market Recovers,
Defaults Drop to 1%
Dec. '94 38,385 85,168 February 1994 Worst Bond Market Since
1920's begins as Fed Raises Interest Rates
July '95 39,103 93,803
</TABLE>
Delchester Fund invests primarily in lower rated, high-yield securities which
involve greater risks as to payment of principal and interest than investing in
higher quality fixed-income securities. Return and share value 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. Chart above includes impact of
4.75% sales charge and 12b-1 fees, as well as the reinvestment of all dividends.
Does not reflect the impact of taxes. For performance of all Classes of
Delchester Fund, see page 7.
How Delaware Capitalized On a Growing Market
In 1982, the market for bonds that were rated lower than investment grade was a
small, but rapidly growing part of the overall corporate bond market. In the
prior five years the amount of high-yield issues had grown from $4 billion to
$25 billion as many mid-size companies pursued this new way to raise capital
(First Boston High-Yield Research). Rapidly growing companies in technology,
health care and consumer services in need of resources for expansion found a
financing vehicle that allowed them to tap the corporate bond market.
By the early 1980s, Delaware Group had more than two decades of experience
investing in high-yield securities. The firm initially found opportunities in
this sector in the late 1950s during searches for undervalued, high-yielding
stocks. Portfolio managers found that many of these companies had bond issues
with yields well above the market. High-yield bonds were initially purchased for
Delaware's Decatur Income Fund.
In August, 1982, the Delchester Fund's Board of Directors reviewed an
independent study which showed that the high-yield component of the Fund had
been outperforming the Fund's investment grade bonds since the late 1970s, a
period referred to at the time as "the worst bond market since the 1930s." The
board, after reviewing the potential risks and rewards, decided to eliminate
rating restrictions on the corporate bonds the Fund could hold.
9
<PAGE>
Use of High-Yield Debt Becomes Widespread
The end of the 1982 recession and the growing public acceptance and use of more
debt in both the private and public sectors allowed the high-yield market to
grow. By 1989, high-yield represented a 30% share of all corporate debt,
amounting to $226.2 billion in securities, according to First Boston High-Yield
Research. Issuers included beverage makers, casinos, airlines, consumer
packaging businesses, textile processors, cosmetic companies and
telecommunications firms.
[CHART APPEARS HERE]
High Yield Market Size, 1977 through April 1995
<TABLE>
<S> <C>
$ Billions
'77 4
'78 8
'79 12
'80 18
'81 20
'82 25
'83 39
'84 55
'85 78
'86 123.3
'87 157.9
'88 188.3
'89 226.2
'90 227
'91 220.2
'92 231.5
'93 272
'94 294.3
June '95 296.2
</TABLE>
Source: First Boston High-Yield Research.
The high-yield market grew six-fold between 1977 and 1982, nine-fold from 1982
to 1989. The market recovered from a period of weakness in 1990 and 1991 to set
new record levels of activity in 1993-1995.
Although the growing use of high-yield debt for hostile takeovers generated
sensational headlines, high-yield debt had become a broadly accepted way for
companies to access capital. Between 1977 and 1988, some 976 companies issued
non-investment grade bonds, making high-yield the fastest growing part of the
fixed-income market. Many businesses such as McCaw Cellular Communications,
Manor Care Inc., Turner Broadcasting and MCI Communications grew through use of
high-yield debt. (Pensions and Investment Age, October 31, 1988)
Some industrial businesses and financial institutions, however, used high-
yield securities to a far greater degree than was prudent. From 1989 to 1991,
the high-yield market suffered in the wake of rising defaults and recession.
These economic and structural problems reduced liquidity and temporarily
shook investor confidence in this market, highlighting the genuine risks of
investing in high-yield securities. Investors who withdrew from the market at
this time suffered substantial losses of principal. Gradually, however,
conditions improved from 1991 to 1993 as interest rates fell to the lowest level
in a generation. Investors in high-yield bonds also demanded higher credit
standards, increased collateral to
10
<PAGE>
back up high-yield bonds and more realistic evaluations of future corporate
earnings.
A Market That's Still Growing
Confidence in the high-yield market has been restored and remains today. The
number of mutual funds focusing on high-yield bonds has grown from 32 in 1984 to
124. Net assets in these funds have risen from $6.9 billion in 1984 to $48.8
billion as of June 30. (Lipper Analytical Services)
- --------------------------------------------------------------------------------
Who Owns High-Yield Bonds...
<TABLE>
<CAPTION>
Investors 1990 1994
<S> <C> <C>
Mutual funds/Money Managers 28% 44%
Insurers 31% 23%
Pension funds 14% 15%
All others, including S&Ls 27% 18%
</TABLE>
Source: Salomon Brothers Inc.
- --------------------------------------------------------------------------------
Despite the 1990-1991 recession and the loss of a major underwriter, the
high-yield market has enjoyed renewed acceptance, growing 35% over the past four
years.
Delchester: A Philosophy
Built on Experience
At Delaware, we put our extensive knowledge of high-yield bonds to work for the
benefit of Delchester Fund shareholders. The team of portfolio managers
overseeing the Fund has over 30 years of combined high-yield bond management
experience, and they continue to use a "quality first" philosophy when
determining which bonds to select for the portfolio.
. The Fund's managers generally invest in bonds from large companies that issue
at least $100 million worth of bonds at a given time, which indicates a
relatively high level of liquidity.
. The Fund's managers examine a company's financial statements, meet with a bond
issuer's senior management, and may frequently travel to the site to determine
the company's ability to meet interest payments before selecting a bond. The
managers believe this bottom-up approach has been rewarding over the long run.
Since the mid-1980s, the quality of companies issuing high-yield bonds has
improved substantially, presenting high-yield mutual funds with increased
investment choices. More than three-quarters of all high-yield bonds are rated B
or better. Only a little more than a third of newly issued high-yield bonds were
rated B or better six years ago, according to Merrill Lynch.
Delchester Fund's portfolio managers seek out what they believe are the
best opportunities available in today's high-yield bond market, a market they
believe is both healthy and growing. They aim to continue a tradition of sound
investing that, for the past 25 years, has allowed Fund shareholders to benefit
from the fact that some of America's most exciting companies are willing to pay
high interest rates to finance expansion or operations.
11
<PAGE>
Financial
- --------------------------------------------------------------------------------
Statements
- --------------------------------------------------------------------------------
Delaware Group
Delchester High-Yield Bond Fund, Inc.
Statement of Net Assets
July 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
CORPORATE BONDS - 88.54%
Aerospace & Defense - 3.09%
Alliant Techsystems
11 3/4% sr sub nts 2003........................... $ 9,500,000 $10,331,250
American General 12 7/8% sr nts 2002................. 7,200,000 7,200,000
K & F Industries
13 3/4% sr sub deb 2001........................... 10,000,000 10,425,000
Interlake 12% sr nts 2001............................ 8,600,000 8,944,000
-----------
36,900,250
-----------
Automotives & Automotive Parts - 4.73%
** Aftermarket Tech 12% sr sub nts 2004................. 10,000,000 10,712,500
Burlington Motor
11 1/2% sr sub nts 2003........................... 9,850,000 8,323,250
Exide 0/12 1/4% sr sub def deb 2004.................. 9,800,000 7,889,000
** Exide 10% sr nts 2005................................ 9,600,000 9,984,000
Hyster-Yale Materials
12 3/8% sr sub nts 1999........................... 9,506,000 9,743,650
SPX 11 3/4% sr sub nts 2002.......................... 9,400,000 9,846,500
-----------
56,498,900
-----------
Banking, Finance & Insurance - 2.60%
** Acadia Partners 13% sub nts 1997..................... 13,500,000 14,141,250
Bankers Life Holding
13% sr sub deb 2002............................... 14,800,000 16,946,000
-----------
31,087,250
-----------
Buildings & Materials - 6.42%
American Standard
0/10 1/2% sr sub deb 2005......................... 31,200,000 24,804,000
American Standard
10 7/8% sr nts 1999............................... 6,885,000 7,478,831
Eagle Industries
0/10 1/2% sr sub nts 2003......................... 10,800,000 8,424,000
Grossmans 14% sub strips 1996........................ 2,950,000 3,112,250
Schuller International Group
10 7/8% sr nts 2004............................... 14,850,000 16,260,750
Southdown 14% sr sub nts 2001........................ 14,700,000 16,555,875
-----------
76,635,706
-----------
Chemicals - 8.34%
Berry Plastics 12 1/4% units 2004.................... 11,600,000 12,122,000
Foamex L.P. 11 7/8% sr sub nts 2004.................. 13,200,000 12,771,000
G-I Holdings 0% sr nts 1998.......................... 43,700,000 31,245,500
NL Industries 11 3/4% sr nts 2003.................... 7,285,000 7,831,375
NL Industries 0/ 13% sr nts 2005..................... 15,400,000 11,396,000
** Polymer Group 12 3/4% sr nts 2002.................... 12,900,000 13,061,250
UCC Investors Holding
0/ 12% sub nts 2005............................... $15,000,000 $11,175,000
-----------
99,602,125
-----------
Computers & Technology - 2.81%
ADT Operations
9 1/4% sr sub nts 2003............................ 7,185,000 7,436,475
Unisys 13 1/2% nts 1997.............................. 23,390,000 26,167,563
-----------
33,604,038
-----------
Consumer Products - 2.36%
** American Safety Razor
9 7/8% sr nts 2005................................ 6,900,000 6,969,000
Calmar Spraying Systems
14% sr sub nts 1999............................... 12,550,000 12,801,000
** Remington Arms 10% sr sub nts 2003................... 9,100,000 8,428,875
-----------
28,198,875
-----------
Containers - 7.16%
Anchor Glass Container
10 1/4% sr nts 2002............................... 11,450,000 11,607,438
Owens-Illinois 11% sr amort deb 2003................. 23,800,000 26,180,000
Silgan Holdings
0/ 13 1/4% sr disc deb 2002....................... 23,777,000 21,874,840
Stone Container
11 1/2% sr sub nts 2004........................... 9,750,000 10,530,000
Stone Container 11 7/8% sr nts 1998.................. 4,750,000 5,165,625
U.S. Can 13 1/2% sr sub nts 2002..................... 9,200,000 10,131,500
-----------
85,489,403
-----------
Electronics - 1.56%
IMO Industries 12% sr sub nts 2001................... 10,650,000 10,796,438
Magnetek 10 3/4% sr sub deb 1998..................... 7,450,000 7,878,375
-----------
18,674,813
-----------
Energy - 3.38%
Clark Oil 10 1/2% sr nts 2001........................ 9,000,000 9,495,000
Ferrellgas 10% sr sub nts 2001....................... 12,975,000 13,526,438
Global Marine
12 3/4% sr sec nts 1999........................... 9,245,000 10,261,950
Wilrig AS 11 1/4% sr sec nts 2004.................... 6,800,000 7,089,000
-----------
40,372,388
-----------
Food, Beverage & Tobacco - 2.35%
Chiquita Brands 9 5/8% sr nts 2004................... 6,350,000 6,381,750
Cott 9 3/8% sr nts 2005.............................. 1,000,000 1,005,000
PMI Acquisition
10 1/4% sr sub nts 2003........................... 5,400,000 5,562,000
** Specialty Foods 11 1/8% sr nts 2002.................. 7,760,000 7,818,200
Specialty Foods 11 1/4% sr nts 2003.................. 7,250,000 7,322,500
-----------
28,089,450
-----------
Healthcare & Pharmaceuticals - 5.05%
American Medical International
0/ 15% jr sub disc nts 2005....................... 13,100,000 25,348,500
HEALTHSOUTH Rehabilitation
9 1/2% sr sub nts 2001............................ 15,600,000 16,302,000
</TABLE>
12
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Healthcare & Pharmaceuticals (Continued)
Tenet Healthcare
10 1/8% sr sub nts 2005........................... $17,500,000 $ 18,637,500
------------
60,288,000
------------
Media, Leisure & Entertainment - 17.19%
AMC Entertainment
12 5/8% sr sub deb 2002........................... 14,100,000 15,739,125
Aztar 13 3/4% sr sub nts 2004........................ 13,510,000 15,266,300
Century Communications
9 3/4% sr nts 2002................................ 14,350,000 14,708,750
Cinemark USA 12% sr nts 2002......................... 10,000,000 10,837,500
Coleman Holdings
0% sr sec disc nts 1998........................... 29,600,000 22,940,000
Continental Cablevision 9% sr deb 2008............... 14,250,000 14,713,125
Infinity Broadcasting
10 3/8% sr sub nts 2002........................... 13,045,000 14,007,069
Jones Intercable 9 5/8% sr nts 2002.................. 5,200,000 5,460,000
**Marcus Cable
0/ 14 1/4% sr disc nts 2005....................... 19,200,000 11,040,000
MGM Grand Hotel Finance
12% 1st mtg nts 2002.............................. 18,400,000 20,516,000
New World Holding 0% sr disc nts 1999................ 31,525,000 20,491,250
Rogers Cablesystems
10% sr sec nts 2005............................... 17,100,000 17,826,750
Sullivan Graphics 15% sr sub nts 2000................ 11,950,000 12,667,000
Viacom 8% sub deb 2006............................... 2,500,000 2,462,500
Viacom International
10 1/4% sr sub nts 2001........................... 5,810,000 6,594,350
------------
205,269,719
------------
Metals & Mining - 4.06%
Acme Metals 12 1/2% sr nts 2002...................... 9,500,000 9,690,000
G.S. Technologies 12% sr nts 2004.................... 11,500,000 11,456,875
Inland Steel 12 3/4% unsec nts 2002.................. 3,100,000 3,472,000
Kaiser Aluminum & Chemical
12 3/4% sr sub nts 2003........................... 9,600,000 10,668,000
Maxxam Group
11 1/4% sr sec nts 2003........................... 12,250,000 11,606,875
Maxxam Group 14% sr sub nts 2000..................... 1,576,000 1,642,980
------------
48,536,730
------------
Paper & Forest Products - 8.21%
Doman Industries Limited
8 3/4% sr nts 2004................................ 9,000,000 8,820,000
Domtar 11 3/4% sr nts 1999........................... 12,000,000 13,200,000
Ivex Packaging
12 1/2% sr sub nts 2002........................... 15,750,000 16,635,938
Pacific Lumber 10 1/2% sr nts 2003................... 11,800,000 11,151,000
Repap Wisconsin
9 1/4% sr sec nts 2002............................ 6,300,000 6,268,500
**S.D. Warren 12% sr sub nts 2004...................... 19,600,000 21,805,000
Stone Consolidated
10 1/4% sr nts 2000............................... 11,750,000 12,396,250
Sweetheart Cup
9 5/8% sr sec nts 2000............................ 7,825,000 7,746,750
------------
98,023,438
------------
Retail - 3.81%
DiGiorgio 12% sr nts 2003............................ $ 9,000,000 $ 7,098,750
Fleming Companies
10 5/8% sr nts 2001............................... 6,380,000 6,762,800
Grand Union 12% sr nts 2004.......................... 5,100,000 4,972,500
Pathmark Stores
0/ 10 3/4% jr sub nts 2003........................ 11,600,000 7,308,000
Penn Traffic 10.65% sr nts 2004...................... 14,775,000 15,070,500
Ralph's Grocery
13 3/4% sr sub nts 2005........................... 3,982,000 4,305,538
--------------
45,518,088
--------------
Transportation & Related - 2.82%
Eletson Holdings
9 1/4% 1st pfd mtg nts 2003....................... 12,340,000 11,954,375
Trans Ocean Container
12 1/4% sr sub nts 2004........................... 6,900,000 6,969,000
Viking Star Shipping
9 5/8% 1st pfd ship mtg nts 2003.................. 14,650,000 14,778,188
--------------
33,701,563
--------------
Utilities - 2.60%
Amerigas Partners L.P.
10 1/8% sr nts 2007............................... 1,750,000 1,870,313
Midland II Funding 13 1/4% deb 2006.................. 12,250,000 12,985,000
**Pronet 11 7/8% sr sub nts 2005....................... 9,500,000 9,880,000
Rogers Cantel Mobile Communications
10 3/4% sr sec nts 2001........................... 6,000,000 6,292,500
--------------
31,027,813
--------------
Total Corporate Bonds
(cost $1,018,554,498)............................. 1,057,518,549
--------------
U.S. TREASURY OBLIGATIONS - 4.26%
U.S. Treasury Bonds 11 1/2% 1995..................... 29,250,000 29,761,287
U.S. Treasury Notes 10 1/2% 1995..................... 21,117,000 21,156,698
--------------
Total U.S. Treasury Obligations
(cost $50,963,614)................................ 50,917,985
--------------
SHORT-TERM INVESTMENTS - 4.36%
Federal Home Loan Mortgage Corporation
12 3/4% 1996...................................... 50,000,000 52,081,995
--------------
Total Short-Term Investments
(cost $52,926,500)................................ 52,081,995
--------------
<CAPTION>
Number of
Shares
<S> <C> <C>
PREFERRED STOCK - 0.45%
*Supermarket General $3.50 pfd........................ 200,000 5,325,000
--------------
Total Preferred Stock
(cost $5,107,800)................................. 5,325,000
--------------
CONVERTIBLE PREFERRED STOCK - 0.85%
Pantry Pride cv $14.875 pfd.......................... 97,500 10,140,000
--------------
Total Convertible Preferred Stock
(cost $10,237,500)................................ 10,140,000
--------------
</TABLE>
13
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Number of Market
Shares Value
<S> <C> <C>
STOCK WARRANTS - 0.09%
*Berry Plastics....................................... 11,600 $ 145,000
*Protection One....................................... 140,000 892,500
--------------
Total Stock Warrants
(cost $553,800)................................... 1,037,500
--------------
TOTAL MARKET VALUE OF SECURITIES --
98.55% (cost $1,138,343,712)...................... 1,177,021,029
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES -- 1.45%....................... 17,344,233
--------------
NET ASSETS APPLICABLE TO 162,495,049
DELCHESTER FUND A CLASS, 9,828,671
DELCHESTER FUND INSTITUTIONAL CLASS
AND 17,807,043 DELCHESTER FUND B CLASS
SHARES ($1.00 PAR VALUE) OUTSTANDING;
EQUIVALENT TO $6.28 PER SHARE -- 100.00%.......... $1,194,365,262
==============
COMPONENTS OF NET ASSETS AT JULY 31, 1995
Capital stock, $1 par value, 500,000,000 shares
authorized to the Fund............................ $1,398,620,770
Accumulated undistributed:
Net realized loss on investments.................. (242,932,825)
Net unrealized appreciation of investments........ 38,677,317
--------------
Total net assets..................................... $1,194,365,262
==============
</TABLE>
- -------------------------
* Non-income producing for the year ended July 31, 1995.
** This security is exempt from registration under Rule 144A of the Securities
Act of 1933. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1995,
these securities amounted to $113,840,075 or 9.53% of net assets.
Summary of Abbreviations:
cv -- convertible
deb -- debentures
def -- deferred
disc -- discount
frn -- floating rate notes
jr -- junior
mtg -- mortgage
pfd -- preferred
sec -- secured
sr nts -- senior notes
sub -- subordinated
unsec -- unsecured
See accompanying notes
Delaware Group
Delchester High-Yield Bond Fund, Inc.
Statement of Operations
Year Ended July 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................... $131,491,120
Dividends................................................... 1,450,313 $132,941,433
------------
EXPENSES:
Management fees ($6,469,140) and
directors' fees ($23,302)................................ 6,492,442
Distribution expenses....................................... 3,079,162
Dividend disbursing and transfer agent
fees and expenses........................................ 1,649,538
Reports and statements to shareholders...................... 355,883
Salaries.................................................... 291,792
Taxes (other than taxes on income).......................... 165,775
Registration fees........................................... 113,700
Custodian fees.............................................. 100,651
Professional fees........................................... 40,425
Other....................................................... 286,270 12,575,638
------------ ------------
NET INVESTMENT INCOME....................................... 120,365,795
------------
NET REALIZED LOSS AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized loss from investment
transactions............................................. (87,627,487)
Net unrealized appreciation of
investments during the period............................ 62,149,528
------------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS...................................... (25,477,959)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................................ $ 94,887,836
============
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
FOR DELCHESTER FUND A CLASS -- July 31, 1995:
Net asset value per share (A)............................... $6.28
Sales charges (4.75% of offering price, or 4.94% of amount
invested per share)(B)................................... .31
-----
Offering price.............................................. $6.59
=====
</TABLE>
- -------------------------
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon the redemption or repurchase of shares.
(B) See Purchasing Shares in the current Prospectuses for purchases of $100,000
or more Delchester Fund A Class.
See accompanying notes
14
<PAGE>
Delaware Group
Delchester High-Yield Bond Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
7/31/95 7/31/94
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 120,365,795 $ 113,174,026
Net realized loss from investment
transactions......................................... (87,627,487) (3,574,612)
Net unrealized appreciation
(depreciation)during the period...................... 62,149,528 (94,141,312)
-------------- --------------
Net increase in net assets
resulting from operations............................ 94,887,836 15,458,102
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME:
Delchester Fund A Class................................. (106,358,471) (106,877,965)
Delchester Fund B Class................................. (6,897,786) (200,558)
Delchester Fund Institutional Class..................... (7,492,250) (6,347,391)
-------------- --------------
(120,748,507) (113,425,914)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Delchester Fund A Class.............................. 244,651,020 360,014,314
Delchester Fund B Class.............................. 97,174,674 22,645,448
Delchester Fund Institutional Class.................. 93,277,438 84,508,032
Net asset value of shares issued
upon reinvestment of dividends
from net investment income:
Delchester Fund A Class.............................. 51,650,920 52,710,351
Delchester Fund B Class.............................. 2,782,355 79,980
Delchester Fund Institutional Class.................. 5,760,633 4,839,929
-------------- --------------
495,297,040 524,798,054
-------------- --------------
Cost of shares repurchased:
Delchester Fund A Class.............................. (234,810,778) (293,134,865)
Delchester Fund B Class.............................. (10,542,001) (429,503)
Delchester Fund Institutional Class.................. (106,185,449) (47,820,351)
-------------- --------------
(351,538,228) (341,384,719)
-------------- --------------
Increase in net assets derived from
capital share transactions........................... 143,758,812 183,413,335
-------------- --------------
NET INCREASE IN NET ASSETS.............................. 117,898,141 85,445,523
NET ASSETS:
Beginning of period..................................... 1,076,467,121 991,021,598
-------------- --------------
End of period (including undistributed
net investment income of $-0- and
$382,712, respectively).............................. $1,194,365,262 $1,076,467,121
-------------- --------------
</TABLE>
See accompanying notes
Delaware Group
Delchester High-Yield Bond Fund, Inc.
Notes to Financial Statements
July 31, 1995
Delaware Group Delchester High-Yield Bond Fund, Inc. (the "Fund") is registered
as a diversified open-end investment company under the Investment Act of 1940.
The Fund is organized as a Maryland corporation. The Fund offers three classes
of shares.
1. Significant Accounting Policies
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Fund for financial
statement preparation.
Security Valuation - Securities listed on an exchange are valued at the last
quoted sales price as of 4:00 pm on the valuation date. 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 when 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.
Federal Income Taxes - The 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 is required in the financial
statements.
Repurchase Agreements - The Fund may invest in a pooled cash account along with
other members of the Delaware Group 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.
Class Accounting - Investment income, common expenses and gain (loss) are
allocated to the various classes of the Fund on the basis of daily net assets.
Distribution expenses relating to a specific class are charged directly to that
class.
Other - Expenses common to all funds within the Delaware Group 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. Interest income
is recorded on an accrual basis. Original issue discounts are accreted to
interest income over the lives of the respective securities. The Fund declares
dividends daily from net investment income and pays such dividends monthly.
15
<PAGE>
Notes to Financial Statements (Continued)
2. Investment Management Fee and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Fund
pays Delaware Management Company, Inc. (DMC), the Investment Manager of the
Fund, an annual fee which is calculated daily at the rate of .60% of the first
$500 million of average daily net assets of the Fund, .575% on the next $250
million and .55% on the average daily net assets over $750 million, less fees
paid to the unaffiliated independent directors by the Fund. At July 31, 1995,
the Fund had a liability for Investment Management fees and other expenses
payable to DMC for $102,372.
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 Class. No distribution expenses are paid by
the Institutional Class. For the year ended July 31, 1995, the Fund paid DDLP
$840,314 for commissions earned on sales of Delchester Fund A Class shares. At
July 31, 1995, the Fund had a liability for distribution fees and other expenses
payable to DDLP for $59,494.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of DMC,
to serve as dividend disbursing and transfer agent for the Fund. For the year
ended July 31, 1995, the Fund expensed $1,649,538 for these services. At July
31, 1995, the Fund had a liability for such fees and other expenses payable to
DSC for $34,948.
Certain officers of the Investment Manager are officers, directors and/or
employees of the Fund. These officers, directors and employees are paid no
compensation by the Fund.
On April 3, 1995, Delaware Management Holdings, Inc., the indirect parent of
DMC, DDLP and DSC, through a merger transaction (the "Merger") became a wholly-
owned subsidiary of Lincoln National Corporation. Other than the resulting
change in ownership, the Merger will not materially change the manner in which
DMC, DDLP or DSC have heretofore conducted their relationship with the Fund.
3. Investments
During the year ended July 31, 1995, the Fund made purchases of $982,105,057 and
sales of $879,014,019 of investment securities other than U.S. Government
securities and temporary cash investments.
At July 31, 1995, the aggregate cost of securities for federal income tax
purposes was $1,138,396,212.
At July 31, 1995, net unrealized appreciation for federal income tax purposes
aggregated $38,624,817 of which $46,906,455 related to unrealized appreciation
of securities and $8,281,638 related to unrealized depreciation of securities.
The realized loss for federal income tax purposes was $87,593,579 for the year
ended July 31, 1995. For federal income tax purposes, the Fund had accumulated
capital losses at July 31, 1995, of $240,229,579 which may be carried forward
and applied against future capital gains. The capital loss carryforward expires
as follows: 1998 -- $59,747,000, 1999 -- $89,261,000, 2002 -- $3,628,000 and
2003 -- $87,593,579.
4. Capital Stock
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
7/31/95 7/31/94
<S> <C> <C>
Shares sold:
Delchester Fund A Class.................... 39,583,037 52,162,247
Delchester Fund B Class.................... 15,685,814 3,428,388
Delchester Fund Institutional Class........ 15,030,853 12,409,280
Shares issued upon reinvestment of
dividends from net investment income:
Delchester Fund A Class.................... 8,345,378 7,638,956
Delchester Fund B Class.................... 449,795 12,283
Delchester Fund Institutional Class........ 931,569 706,147
---------- ----------
80,026,446 76,357,301
---------- ----------
Shares repurchased:
Delchester Fund A Class.................... (37,892,161) (42,358,212)
Delchester Fund B Class.................... (1,704,030) (65,207)
Delchester Fund Institutional Class........ (17,158,023) (7,167,289)
---------- ----------
(56,754,214) (49,590,708)
---------- ----------
Net increase............................... 23,272,232 26,766,593
========== ==========
</TABLE>
5. Line of Credit
The Fund has a committed line of credit for $20,000,000. No amount was
outstanding at July 31, 1995, or at any time during the last fiscal period.
6. Concentration of Credit Risk
The Fund invests in high-yield fixed income securities which carry ratings of
CCC or lower by Standard & Poors and/or Caa 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 Fund may invest up to 10% of its total assets in illiquid securities which
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. These securities have been denoted in the
Statement of Net Assets.
16
<PAGE>
Notes to Financial Statements (Continued)
7. Financial Highlights
Selected data for each share of the Fund outstanding throughout each period were
as follows:
<TABLE>
<CAPTION>
Delchester Fund A Class
--------------------------------------------------------
Year Ended July 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................................... $6.450 $7.070 $6.900 $6.260 $6.300
Income from investment operations:
Net investment income................................................ 0.668 0.744 0.774 0.781 0.805
Net realized and unrealized gain (loss) from security transactions... (0.167) (0.618) 0.165 0.640 (0.040)
------ ------ ------ ------ ------
Total from investment operations..................................... 0.501 0.126 0.939 1.421 0.765
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income................................. (0.671) (0.746) (0.769) (0.781) (0.805)
Distributions from net realized gain on security transactions........ none none none none none
------ ------ ------ ------ ------
Total distributions.................................................. (0.671) (0.746) (0.769) (0.781) (0.805)
------ ------ ------ ------ ------
Net asset value, end of period.......................................... $6.280 $6.450 $7.070 $6.900 $6.260
====== ====== ====== ====== ======
Total return/1/......................................................... 8.46% 1.60% 14.46% 23.94% 14.51%
Ratios/supplemental data:
Net assets, end of period (000 omitted).............................. $1,020,763 $983,569 $955,113 $760,290 $505,530
Ratio of expenses to average net assets.............................. 1.09% 1.05% 1.04% 1.08% 1.20%
Ratio of net investment income to average net assets................. 10.77% 10.48% 11.17% 11.58% 14.15%
Portfolio turnover................................................... 92% 92% 72% 101% 38%
</TABLE>
- -------------------------
/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.
17
<PAGE>
Notes to Financial Statements (Continued)
7. Financial Highlights
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
Delchester Fund B Class Delchester Fund Institutional Class
----------------------- -----------------------------------------------
Period from
5/2/94/2/
Year Ended to Year Ended July 31,
7/31/95 7/31/94 1995 1994 1993 1992/1/ 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..................... $6.450 $6.730 $6.450 $7.070 $6.900 $6.260 $6.300
Income from investment operations:
Net investment income................................. 0.624 0.120 0.685 0.758 0.787 0.798 0.822
Net realized and unrealized gain (loss) from security
transactions....................................... (0.170) (0.280) (0.169) (0.617) 0.165 0.640 (0.040)
------ ------ ------ ------ ------ ------ ------
Total from investment operations...................... 0.454 (0.160) 0.516 0.141 0.952 1.438 0.782
------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income.................. (0.624) (0.120) (0.686) (0.761) (0.782) (0.798) (0.822)
Distributions from net realized gain on security
transactions....................................... none none none none none none none
------ ------ ------ ------ ------ ------ ------
Total distributions................................... (0.624) (0.120) (0.686) (0.761) (0.782) (0.798) (0.822)
------ ------ ------ ------ ------ ------ ------
Net asset value, end of period........................... $6.280 $6.450 $6.280 $6.450 $7.070 $6.900 $6.260
====== ====== ====== ====== ====== ====== ======
Total return............................................. 7.64%/3/ /4/ 8.72% 1.82% 14.67% 24.28% 14.85%
Ratios/supplemental data:
Net assets, end of period (000 omitted)............... $111,860 $21,776 $61,742 $71,122 $35,909 $18,746 $113,414
Ratio of expenses to average net assets............... 1.82% 1.83% 0.82% 0.83% 0.86% 0.86% 0.90%
Ratio of net investment income to average net assets.. 10.14% 9.70% 11.14% 10.70% 11.35% 12.17% 14.45%
Portfolio turnover.................................... 92% 92% 92% 92% 72% 101% 38%
</TABLE>
- -------------------------
The per share data prior to 1992 was derived from the data of the Delchester I
class which, like the Delchester Fund Institutional Class, a new class of
shares, was not subject to Rule 12b-1 distribution expenses. Delchester I class
was converted into Delchester Fund Class on June 1, 1992, pursuant to a Plan of
Recapitalization approved by shareholders of Delchester I class.
/1/ The per share data for Delchester I class and Delchester Fund Institutional
Class has been combined for 1992. For the ten months ended May 31, 1992, the
Delchester I class operating expenses and net investment income per share
were $.047 and $.666, respectively. For the two months ended July 31, 1992,
the Delchester Fund Institutional Class operating expenses and net
investment income per share were $.009 and $.132, respectively. All net
investment income was distributed to shareholders.
/2/ Date of initial public offering. Ratios have been annualized.
/3/ Does not include the contingent deferred sales charge which varies from 1%-
4% depending upon the holding period.
/4/ Total return has been omitted as management believes that such information
for this relatively short period is not meaningful.
18
<PAGE>
Delaware Group Delchester High-Yield Bond Fund, Inc.
Report of Independent Auditors
To the Shareholders and Board of Directors
Delaware Group Delchester High-Yield Bond Fund, Inc.
We have audited the accompanying statement of net assets of Delaware Group
Delchester High-Yield Bond Fund, Inc. as of July 31, 1995, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Delchester High-Yield Bond Fund, Inc. at July 31, 1995, 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 the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
September 7, 1995
19
<PAGE>
A Report on Delchester High-Yield Bond Fund's Annual Meeting
At an annual meeting of shareholders held on March 29, 1995, the following
matters were submitted for shareholder vote: the election of directors, the
ratification of the selection of Ernst & Young LLP as independent auditors of
the Fund and the approval of a new investment management agreement. The new
investment management agreement was proposed in connection with the April 3,
1995, merger of Delaware Management Holdings, Inc. (the parent of Delaware
Management Company, Inc.) and a subsidiary of Lincoln National Corporation.
Whenever there is a change in control of an investment manager, the Investment
Company Act of 1940 requires shareholders to vote on a new investment management
agreement.
Below are the names of each director elected at the meeting as well as the
results of the other matters voted on by shareholders.
<TABLE>
<CAPTION>
Number of Votes*
---------------------------------------------------
For Against/Withheld Abstentions
<S> <C> <C> <C>
Election of Directors:
Wayne A. Stork.................... 111,811,239 2,967,654 --
Walter P. Babich.................. 111,842,220 2,936,672 --
Anthony D. Knerr.................. 111,831,833 2,947,059 --
Ann R. Leven...................... 111,833,497 2,945,396 --
W. Thacher Longstreth............. 111,802,859 2,976,033 --
Charles E. Peck................... 111,833,543 2,945,349 --
Approval of the New
Investment Management
Agreement......................... 106,598,921 2,676,904 5,503,067
Selection of Ernst & Young LLP as
Independent Auditors.............. 109,883,586 655,019 4,240,288
</TABLE>
* Please note that the results of this meeting were not audited by
Ernst & Young LLP.
20
<PAGE>
This annual report is for the information of Delchester Fund shareholders, but
it may be used with prospective investors when preceded or accompanied by a
current Prospectus, which gives details about charges, expenses, investment
objectives and operating policies of the Fund. Summary investment results are
documented in the current Statement of Additional Information. If used with
prospective investors after September 30, 1995, this report must be accompanied
by a Delchester Fund Performance Update for the most recently completed calendar
quarter. The figures in this report represent past 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
================================================================================
Members
================================================================================
Wayne A. Stork
Chairman, Delaware Group of Funds
Philadelphia, PA
Walter P. Babich
Board Chairman, Citadel Constructors, Inc.
King of Prussia, PA
Anthony D. Knerr
Consultant, Anthony Knerr & Associates
New York, NY
Ann R. Leven
Treasurer, National Gallery of Art
Washington, DC
W. Thacher Longstreth
Vice Chairman, Packquisition Corp.
Philadelphia, PA
Charles E. Peck
Secretary of Enterprise Homes, Inc.
Fredericksburg, VA
former Chairman and CEO
The Ryland Group, Inc.
Columbia, MD
Affiliated
================================================================================
Officers
================================================================================
George M. Chamberlain, Jr.
Senior Vice President and Secretary,
Delaware Group of Funds
Philadelphia, PA
Keith E. Mitchell
President and CEO,
Delaware Distributors, L.P.
Philadelphia, PA
David K. Downes
Senior Vice President, Chief Financial Officer and
Chief Administrative Officer
Delaware Group of Funds
Philadelphia, PA
<PAGE>
Delaware Group
================================================================================
of Funds
================================================================================
For Growth of Capital
Trend Fund
DelCap Fund
Value Fund
For Total Return
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
Delaware Fund
For Global Diversification
International Equity Fund
Global Assets Fund
Global Bond Fund
For Current Income
Delchester Fund
U.S. Government Fund
Limited-Term Government Fund
For Tax-Free Current Income
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Tax-Free Pennsylvania Fund
Money Market Funds
Delaware Cash Reserve
U.S. Government Money Fund
Tax-Free Money Fund
Closed-End Equity/Income*
Dividend and Income Fund
Global Dividend and Income Fund
This report must be preceded or accompanied by a current Delchester Fund
prospectus. For a prospectus of any other Delaware Group fund, contact your
financial adviser or Delaware Group.
* Delaware Group Dividend and Income Fund and Delaware Group Global Dividend and
Income Fund purchases can be made through any registered broker.
[LOGO OF DELAWARE GROUP TO APPEAR HERE]
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 Fund are
not FDIC or NCUSIF insured, are not guaranteed by any bank or any credit union,
are not obligations of or deposits of any bank or any credit union, and involve
investment risk, including the possible loss of principal. Shares of the Fund
are not bank or credit union deposits.
Investment Manager
Delaware Management Company, Inc.
Philadelphia
International Affiliate
Delaware International Advisers Ltd.
London
National Distributor
Delaware Distributors, L.P.
Philadelphia
Shareholder Servicing,
Dividend Disbursing
and Transfer Agent
Delaware Service Company, Inc.
Philadelphia
1818 Market Street
Philadelphia, PA 19103-3682
Nationwide (800) 523-4640;
In Philadelphia (215) 988-1333
Securities Dealers Only
Nationwide (800) 362-7500;
In Philadelphia (215) 988-1050
(C) Delaware Distributors, L.P.
[LOGO] Printed in the U.S.A. on recycled paper.
AR-024[795]TKO895
