For Current Income
DELAWARE GROUP
Delchester Fund
(VARIOUS PHOTOS DEMONSTRATING SERVICE AND GUIDANCE, PROFESSIONAL MANAGEMENT AND
GOALS)
service and guidance
professional management
1997
Annual
Report
goals
DELAWARE
GROUP
==========
<PAGE>
A Commitment
To Our
Investors
(PHOTOS OF GLASSES, PEN AND KEYBOARD)
Delaware Group's investment tradition dates back to 1929. We have a long and
distinguished history of helping individuals and institutions - including
some of America's largest pension funds - reach their financial goals.
Headquartered in Philadelphia, a block from the nation's oldest stock
exchange, Delaware Group's first mutual fund was established in 1938.
Delaware International Advisers Ltd., our international affiliate, was
established in 1990 and is headquartered in London.
Delaware Group offers a full range of mutual funds. We also manage
variable annuity investments, unit investment trusts and closed-end funds,
and offer retirement plan services for individuals and businesses.
Delaware manages more than $39 billion in mutual fund assets and
institutional advisory accounts for more than half-a-million investors. We're
part of a global financial services and investment management business owned
by Lincoln National Corporation, whose subsidiaries manage more than $115
billion in assets.
current income
A TRADITION OF SOUND INVESTING
Delchester Fund Objective
To seek as high a current income as is consistent with providing reasonable
safety.
commitment
(PHOTO OF ILLUSTRATION FROM CURRENT INCOME BROCHURES)
<PAGE>
professional
management
professional management
MORE THAN 68 YEARS OF INVESTMENT EXPERIENCE
has taught us that disciplined strategies and prudent risk management are a
sound approach to any market environment.
(VARIOUS PHOTOS DEMONSTRATING SERVICE AND GUIDANCE, PROFESSIONAL MANAGEMENT AND
GOALS)
goals
goals
WHATEVER YOUR GOALS,
the years ahead will be shaped by choices you make today. Delaware offers
many options that can be an appropriate part of a sound investment plan.
service and
guidance
service and guidance
DELAWARE BELIEVES THAT THE GUIDANCE of a professional financial adviser is
vital to your long-term success. We are committed to providing you and your
adviser with the highest quality information and service.
<PAGE>
- --------------------------------------------------------------------------------
August 20, 1997
(PHOTO OF WAYNE A. STORK, CHAIRMAN)
Dear Shareholder:
I AM PLEASED TO REPORT THAT FISCAL 1997 WAS AN exceptionally rewarding year for
both the high-yield bond market and Delchester Fund.
Your Fund provided a robust total return of +17.53% for A Class
shares (capital change plus reinvested dividends at net asset value for the
12 months ended July 31, 1997). It was Delchester's best performance since
1992, when the U.S. economy emerged from recession and overall credit quality
in the high-yield market improved dramatically.
A focus on bonds of established domestic companies and careful credit
analysis helped Delchester outperform its unmanaged benchmark - the Salomon
Brothers High-Yield Bond Index - in fiscal 1997. The Fund also outpaced the
average of its 163 peers, as shown below.
This past year, everything that could go right did. The default rate
of higher risk, high-yield bonds dropped to 0.83%, the lowest level since
1981. Demand for high-yield, higher risk bonds among investors was strong.
Consumer and producer price increases were benign. U.S. economic growth
surged ahead at a 5.9% rate, helping highly leveraged companies meet their
obligations to bondholders.
Since July 1996, bond prices have been volatile, especially prices of
U.S. Treasuries. For much of the fiscal year, it
A FOCUS ON BONDS OF ESTABLISHED DOMESTIC COMPANIES AND CAREFUL CREDIT
ANALYSIS HELPED DELCHESTER FUND OUTPERFORM BOTH ITS UNMANAGED BENCHMARK AND
THE AVERAGE OF ITS PEERS IN FISCAL 1997.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------------------------------------------
12 Months Current 30-Day
Ended July 31, 1997 SEC Yield*
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Delchester Fund A Class +17.53% 8.51%
Salomon Brothers High-Yield Bond Index +15.80% 8.66%
Lipper High Current Yield Fund Average +16.71% 7.94%
- ----------------------------------------------------------------------------------------
</TABLE>
Performance quoted above assumes reinvestment of distributions. Results of
Delchester and the Lipper Fund Average do not show the effect of sales
charges. Performance and SEC yield for all Fund classes can be found on page
9. The Lipper Average consisted of 164 funds for the 12 months ended July 31,
1997.
*As of July 31, 1997.
1997 annual report
1
<PAGE>
remained unclear whether the Federal Reserve Board would substantially raise
interest rates to combat inflation. As it turned out, all the Fed needed to do
to prevent economic growth from reaching a feverish pace was to raise short-term
interest rates by a modest 25 basis points (0.25%) in March. So far, it has
proven to be a prudent inflation inoculation.
WE HAVE LEARNED THAT SUCCESS IN THE HIGH-YIELD BOND MARKET REQUIRES
PREVENTIVE MEDICINE.
high-yield
As of July 31, 1997, the domestic corporate high-yield bond market
offered an additional 250 basis points (2.50%) in income potential over
comparable maturity Treasuries.* This yield premium can compensate investors
for the added risks of investing in bonds of corporations whose credit
ratings are lower than investment grade and which have no U.S. government
guarantee of bond principal.
For 27 years, Delaware has managed Delchester Fund through a variety
of interest rate environments, and we have learned that success in the
high-yield bond market requires preventive medicine - a proactive approach to
analyzing credit risk and regular monitoring of external factors that might
affect the Fund's ability to provide income and preserve capital.
Inside, Paul A. Matlack and Gerald T. Nichols, the Fund's portfolio
managers, review the Fund's performance in fiscal 1997 and explain why we
believe the high-yield market may offer attractive potential for income and
total return oriented investors in the months ahead.
In our opinion, Delchester Fund has the potential to help investors
achieve both their income and diversification goals. Delaware Group values
your continued confidence in the Fund and we look forward to serving your
needs for many years to come.
Sincerely,
/s/ Wayne A. Stork
- ------------------------
Wayne A. Stork
Chairman, President and Chief Executive Officer
* As measured by the Salomon Brothers High-Yield Bond Index relative to
comparable duration U.S. Treasuries.
1997 annual report
2
<PAGE>
Portfolio Managers' Review
(PHOTO OF GERALD T. NICHOLS AND PAUL A. MATLACK)
Mr. Matlack holds an MBA in finance from George Washington University and has
16 years of investment and credit analysis experience. Mr. Nichols has a
master of science degree in finance from the University of Kansas and has
managed high-yield bond portfolios for 14 years.
Gerald T. Nichols and Paul A. Matlack
have managed Delchester Fund since 1990.
FISCAL 1997 WAS A WATERSHED period for the high-yield bond market. Investors
allocated more than $12 billion dollars to high-yield mutual funds during the
past 12 months, providing high-yield funds with more new cash flow than all
other bond funds combined, according to Strategic Insight, a research firm. We
believe this demand was primarily fueled by investors' desire to increase income
and diversify their portfolios.
WE DID ESPECIALLY WELL WITH NEW BOND ISSUES, WHICH OFFERED BOTH ATTRACTIVE
INCOME AND RELATIVE SAFETY OF PRINCIPAL.
Increased demand couldn't have come at a better time. Corporations
have been issuing high-yield bonds at a record pace, according to CS First
Boston. As of mid-1997, the total size of the market stood at more than $430
billion, nearly double the value of bonds outstanding at the start of the
decade. In 1997, high-yield securities issued by some 2,000 companies
represented one-fourth of the overall corporate bond market.
Despite such enormous growth, overall credit quality has remained
consistent. This provided us with ample opportunity to select both new and
seasoned high-yield bonds for your Fund's portfolio. We did especially well
with new bond issues, which offered both attractive income potential and
relative safety of principal.
New bond issues generally have a longer duration, or sensitivity to
interest rates, than older bonds. The Fund's buying activities during fiscal
1997 resulted in an increase in its average effective duration from 4.0
1997 annual report
3
<PAGE>
YOUR FUND'S CREDIT QUALITY AND INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------
July 31, 1997
July 31, 1996 July 31, 1997
- -----------------------------------------------------------------
A Class 30-Day SEC Yield* 9.47% 8.51%
Average Effective Duration 4.0 years 4.6 years
Average Effective Maturity 5.7 years 6.9 years
Number of Bond Issues 109 132
*Measured according to Securities and Exchange Commission guidelines;
thirty-day SEC yield as of July 31, 1997, for B and C Class shares was
8.16%. Institutional Class SEC yield was 9.16%.
AAA 12.8%
B 74.5%
BB 8.2%
CCC 1.3%
Unrated 0.9%
The quality chart does not add up to 100% because a small portion of the
Fund's holdings such as preferred stock, stock warrants and other assets are
not debt securities.
THE FUND EMPHASIZES INCOME AS THE DOMINANT COMPONENT OF RETURN, AND STRESSES
CAPITAL PRESERVATION OVER APPRECIATION.
years in July 1996 to 4.6 years as of July 31, 1997. Still, Delchester's
duration remains shorter than the average duration of our peers, as we do not
believe it prudent to take on undue interest rate risk. We believe our
positioning should help the Fund benefit if interest rates remain stable or rise
in the months ahead.
During the past year, as high-yield bond prices rose, yields
declined. In fact, as of July 31, the difference in yield between higher risk
corporate bonds and U.S. Treasuries was near the lowest on record. We expect
this trend to continue because of the overall soundness of the U.S. economy
and the lack of any apparent factors that would increase defaults by
high-yield bond issuers.
INVESTMENT STRATEGY
For 27 years, Delchester Fund's goal has remained constant - to provide
above-average income while maintaining a conservative approach to credit risk
management.
The Fund emphasizes income as the dominant component of return, and
stresses capital preservation over appreciation. We strive to achieve this by
investing primarily in bonds rated B and BB, the two highest quality tiers in
the high-yield, non-investment grade market. During times of economic
expansion such as the U.S. has enjoyed in the past year, the Fund will
emphasize bonds rated B. We focus on lower yielding, better quality bonds
rated BB during slower economic growth.
1997 annual report
4
<PAGE>
In selecting bonds for your Fund's portfolio, your Fund's management:
* Buys bonds of companies that issue at least $100 million worth of bonds at
a given time because this often indicates a bond issue has a reasonably
high level of liquidity;
* Examines a company's financial statements and meets with senior management
at its plants and headquarters; and,
* Focuses exclusively on bonds issued by U.S.-based corporations.
Our current portfolio positioning hinges on our belief that the
nation's output of goods and services (gross domestic product) will grow at a
non-inflationary pace for the balance of calendar 1997. As of July 31,
approximately 74.5% of the bonds in the Fund's portfolio were rated B. This wa
s much higher than the average of 168 high-yield bond funds tracked by
Morningstar.
Delchester's concentration on bonds rated B and a relatively high
average coupon (interest rate at the time a bond is issued) helped the Fund
provide a superior level of income in fiscal 1997. As of July 31, the average
coupon of bonds in the portfolio was 9.43%, a full percentage point higher
than its peers.
HISTORICALLY, BONDS RATED B HAVE TENDED TO OUTPERFORM BONDS RATED BB DURING
PERIODS OF ECONOMIC GROWTH.
strategy
The Fund's holdings were diversified across 24 industries as of
year's end, with no one sector accounting for more than 12% of net assets. To
provide a further element of diversification as your Fund grew to nearly $1.4
billion in net assets, we increased the number of bonds in the portfolio from
109 to 132 as of July 31, 1997. As we have in the past, we generally avoided
bonds of companies in sectors such as emerging technologies and airlines
where business prospects were unclear. This as well as our income focus
helped your Fund outpace the average of peers in fiscal 1997.
This past year we increased your Fund's income potential by investing
in Rule 144A bonds. These bonds represented 24.1% of the Fund's net assets as
of July 31, 1997, and are named for a Securities and Exchange
YOUR FUND'S DIVERSE PORTFOLIO
- --------------------------------------------------------------------------------
July 31, 1997
Consumer Products 3.6%
Telecom & Electronics 10.5%
Cable & Media 8.9%
Leisure & Lodging 9.0%
Food & Retail 9.9%
Cash 11.6%
Miscellaneous 8.4%
Paper & Containers 6.4%
Energy & Chemicals 10.1%
Healthcare 2.8%
Credit Sensitive 2.2%
Autos & Transport 9.4%
Metals 4.0%
Machinery 3.2%
1997 annual report
5
<PAGE>
Commission rule that allows a security to be traded among sophisticated
investors prior to registration.
Rule 144A bonds offered an average of 100 basis points more yield and
credit risk and liquidity attributes similar to bonds that were not issued
under the rule. As with all securities selected for the Fund, we carefully
examine the operating performance of companies issuing 144A bonds before
making a purchase.
During the year, many companies were willing to temporarily pay
higher interest rates rather than risk losing a financing opportunity because
of the time and expense involved in registering securities. Prices of Rule
144A bonds generally rise - and yields decline - once companies complete
required regulatory filings. Rule 144A bonds accounted for more than half of
all new high-yield bonds issued during fiscal 1997, according to The Bond
Buyer.
HIGH-YIELD BONDS CAN CUSHION VOLATILITY
An important catalyst for high-yield bond demand in fiscal 1997 was the
increasing volatility of both the stock and investment grade bond markets. In
our view, investors are increasingly embracing the notion that high-yield
bonds can be a defensive investment under certain market conditions.
During short-term market setbacks in July 1996 and March 1997,
high-yield bonds retained more of their value than the Standard & Poor's 500
Index. Of course, the past doesn't guarantee the future, but we believe it is
worth noting that since 1980 the high-yield bond market has generally
provided a positive return when the S&P 500 Index has posted a negative
return, as shown below.
Thus, we believe high-yield bonds have the potential to both
diversify and balance an investment portfolio that's focused heavily on
equities. We believe
diversity
HIGH-YIELD BOND PERFORMANCE
AMID MONTHLY STOCK MARKET CORRECTIONS SINCE 1980
- --------------------------------------------------------------------------------
S&P 500 Return Return From High-Yield Bonds*
- --------------------------------------------------------------------------------
October 1987 -21.5% -3.8%
March 1980 -9.9% -2.1%
August 1990 -9.0% -4.8%
September 1986 -8.2% +0.8%
November 1987 -8.2% +3.8%
January 1990 -6.7% -3.5%
July 1996 -5.7% -1.9%
March 1997 -4.1% -0.8%
Sources: Chase Securities and Bloomberg Business News. This illustration is
not intended to represent the performance of Delchester Fund or suggest that
high-yield bonds have outperformed stocks over long periods of time. Past
performance does not guarantee future results.
*As measured by the Salomon Brothers High-Yield Bond Index.
1997 annual report
6
<PAGE>
that a possible increase in stock market volatility in the months ahead bodes
well for high-yield bonds. It may inspire continuing investor demand and
reinforce the relative attractiveness of the high-yield market.
outlook
OUTLOOK
In an environment of moderate economic growth with inflation seemingly in
check, the overall credit quality of the high-yield market has reached new
heights despite a plethora of new issues. Based on corporate plans for the
balance of the year, calendar 1997 is likely to be another record year for
new bond supply, surpassing the $73.6 billion level set in 1996.
Two factors suggest the market's supply-demand dynamics are likely to
remain healthy in the coming months:
* Investors' purchasing behavior has remained rational, perhaps more so than
in some parts of the equity market. During the second calendar quarter of
1997, some companies were forced to scrub plans to issue some very
low-quality bonds after their plans met with unfavorable investor response;
* Many of the new bonds coming to market are simply refinancings of existing
high-yield debt. Investors who had these companies' old bonds often provide
much of the demand for new issues.
Amid one of the longest economic growth cycles of the 20th Century,
we have structured the Fund's portfolio with an emphasis on high-quality
bonds rated B, complemented by a modest component of bonds rated BB and
unrated securities. As always, we will continue to select only those domestic
companies with proven track records, management depth and capital structures
that we believe can weather adverse economic conditions.
PAUL A. MATLACK GERALD T. NICHOLS
Vice President Vice President
Senior Portfolio Manager Senior Portfolio Manager
August 20, 1997
(PHOTO OF KEYBOARD)
GLOSSARY
- ---------------------
Basis Points
A measure of the yield difference between bonds. A basis point is one
hundredth of a percent (1/100 of 1%).
Investment Grade Bonds
Bonds with credit ratings of BBB and higher. Prices of these bonds tend to be
more sensitive to monetary policy changes as quality increases.
High-Yield Bonds
Higher risk bonds with credit ratings lower than BBB. The risk of default
increases substantially for bonds rated CCC and lower. Also known as junk
bonds.
Duration
The most common measure of a bond's sensitivity to interest rates. It
indicates the approximate changes in a bond's price given a 1% movement in
interest rates.
1997 annual report
7
<PAGE>
Two Features of Delchester Fund
HIGH INCOME AND LESS POTENTIAL VOLATILITY
PROVIDING HIGH INCOME SINCE THE HIGH-YIELD MARKET'S INFANCY
Dividends from a $100,000 Investment 1982- 1997
- --------------------------------------------------------------------------------
Total Dividends: $500,642
July '83 $14,013
July '84 $15,645
July '85 $23,140
July '86 $23,829
July '87 $25,503
July '88 $28,036
July '89 $30,391
July '90 $33,228
July '91 $35,027
July '92 $38,639
July '93 $42,638
July '94 $46,091
July '95 $46,186
July '96 $47,903
July '97 $50,376
Delchester Fund pioneered high-yield mutual fund investing in the early
1980s. With continual reinvestment, a $100,000 investment 15 years ago in A
Class shares would have provided more than $50,000 in dividends during the 12
months ended July 31, 1997.
Chart assumes $100,000 invested on July 31, 1982, a 3.75% front-end sales
charge and reinvestment of all distributions. Performance for other
Delchester classes will vary due to differing charges and expenses. Past
performance is not a guarantee of future results.
SUPERIOR RESULTS WITH LESS SHORT-TERM
VOLATILITY THAN TREASURIES
- --------------------------------------------------------------------------------
Salomon Brothers 10-Year
Delchester Fund A High-Yield Bond US Treasury
July '96 0% 0% 0%
Aug. '96 0.33% 0.84% -0.47%
Sept. '96 3.3 % 3.01% 1.77%
Oct. '96 3.49% 4.15% 4.69%
Nov. '96 3.98% 6.08% 7.6%
Dec. '96 6.66% 6.88% 5.36%
Jan '97 8.03% 7.7% 5.31%
Feb. '97 9.98% 9.41% 5.13%
Mar. '97 8.43% 8.53% 3.07%
Apr. '97 9.09% 9.44% 5.09%
May '97 11.84% 11.53% 6.15%
June '97 13.74% 13.31% 7.94%
July '97 +17.53% +15.80% +12.43%
Past performance does not guarantee future results. Performance is at net
asset value without effect of front-end sales charges and assumes
reinvestment of all distributions. Performance for other Delchester classes
will vary due to differing charges and expenses. Interest and principal
repayment at maturity for U.S. Treasury securities are guaranteed by the U.S.
government, unlike mutual fund dividends and share value. The unmanaged
Salomon Brothers Index shown above is an amalgam of high-yield bonds that pay
cash interest and are of varying levels of quality.
1997 annual report
8
<PAGE>
Fund Performance
DELCHESTER FUND'S
LONG-TERM PERFORMANCE
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment
August 1, 1987 to July 31, 1997
Salomon Brothers U.S. Consumer
Delchester Fund A High-Yield Bond Index Price Index (Inflation)
July '87 $ 9,520 $10,000 $10,000
July '88 $10,508 $10,979 $10,413
July '89 $11,431 $12,141 $10,932
July '90 $10,998 $11,996 $11,459
July '91 $12,591 $14,020 $11,969
July '92 $15,605 $17,303 $12,347
July '93 $17,862 $20,045 $12,689
July '94 $18,147 $20,717 $13,041
July '95 $19,682 $23,648 $13,401
July '96 $21,276 $25,774 $13,793
July '97 $25,006 $30,064 $14,104
Chart assumes $10,000 invested on August 1, 1987, a 4.75% maximum front-end
sales charge and reinvestment of all distributions. Performance for other
Delchester classes will vary due to differing charges and expenses.
DELCHESTER FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURN THROUGH JULY 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Lifetime Ten Years Five Years One Year
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (Est. 8/20/70)
Excluding Sales Charge +9.88% +10.14% +9.89% +17.53%
Including Sales Charge +9.68% +9.60% +8.84% +11.88%
- --------------------------------------------------------------------------------------------------------------
Class B (Est. 5/2/94)
Excluding Sales Charge +9.06% +16.66%
Including Sales Charge +8.32% +12.66%
- --------------------------------------------------------------------------------------------------------------
Class C (Est. 11/29/95)
Excluding Sales Charge +13.03% +16.66%
Including Sales Charge +13.03% +15.66%
</TABLE>
Delchester Fund invests primarily in high-yield securities, which involves
greater risks than investing in higher quality, fixed-income securities.
Return and share value will fluctuate with rising and falling interest
rates so that shares, when redeemed may be worth more or less than the
original cost. All results include reinvestment of distributions and sales
charges as shown below. Lifetime performance for B and C shares "excluding
sales charge" assumes the investment was not redeemed. Past performance is
not a guarantee of future results.
Class A shares have a 4.75% maximum front-end sales charge and a 12b-1 fee of
0.30%.
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.
Class C shares have a 1% annual distribution and service fee. If redeemed
within 12 months, a 1% contingent deferred sales charge applies.
The average annual total returns for the 10-year, five-year and one-year
periods ended July 31, 1997, for Delchester Fund's Institutional Class, which
is available without sales or asset-based distribution charges only to
certain eligible institutional accounts, were +10.39%, +10.14% and +17.82%.
The Institutional Class was initially made available June 1, 1992;
performance prior to that date was adjusted to eliminate the effect of the
sales charge.
1997 annual report
9
<PAGE>
Financial Statements
DELAWARE GROUP INCOME FUNDS, INC. - DELCHESTER FUND
STATEMENT OF NET ASSETS/JULY 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS - 85.91%
AEROSPACE AND DEFENSE - 0.79%
Federal Data sr sub nts 10.13% 08/01/05 ...... $ 6,600,000 $ 6,682,500
Roller Bearing sr sub nts 9.63% 06/15/07 ..... 4,000,000 4,120,000
------------
10,802,500
------------
AUTOMOBILE & AUTO EQUIPMENT - 5.64%
CSK Auto sr sub nts 11.00% 11/01/06 .......... 14,400,000 15,372,000
Cambridge Industries sr sub nts
10.25% 07/15/07 ............................ 6,000,000 6,270,000
Collins & Aikman sr sub nts 10.00% 01/15/97 .. 16,420,000 16,666,300
Delco Remy International sr sub nts
10.63% 08/01/06 ............................ 10,750,000 11,610,000
Motors and Gears sr sub nts 10.75% 11/15/06 .. 14,500,000 15,261,250
*Penda sr nts 10.75% 03/01/04 ................. 11,400,000 11,856,000
------------
77,035,550
------------
BANKING, FINANCE & INSURANCE - 2.15%
Acadia Partners sr sub nts 13.00% 10/01/97 ... 13,500,000 13,685,625
*Cityscape Financial sr nts 12.75% 06/01/04 ... 8,475,000 8,136,000
*Delta Financial sr nts 9.50% 08/01/04 ........ 7,500,000 7,546,875
------------
29,368,500
------------
BUILDING & MATERIALS - 2.28%
American Builders & Contractors sr sub nts
10.63% 05/15/07 ............................ 4,750,000 4,969,681
Atrium sr sub nts 10.50% 11/15/06 ............ 9,125,000 9,444,375
Nortek sr nts 9.25% 03/15/07.................. 1,185,000 1,198,331
Reliant Building sr sub nts 10.88% 05/01/04 .. 4,500,000 4,702,500
Williams Scotsman sr nts 9.88% 06/01/07 ...... 10,750,000 10,911,250
------------
31,226,137
------------
CABLE, MEDIA & PUBLISHING - 8.90%
Adelphia Communications sr debs
11.88% 09/15/04 ............................. 9,380,000 10,153,850
Adelphia Communications sr nts
9.50% 02/15/04 ............................. 8,917,262 8,939,555
*Cablevision Systems sr sub nts
9.88% 05/15/06 ............................. 2,225,000 2,403,000
Hollinger International Publishing sr sub nts
9.25% 03/15/07 ............................. 1,685,000 1,756,613
Hollinger International Publishing sr nts
8.63% 03/15/05 ............................. 8,825,000 9,155,938
Intermed Capital Partners sr nts
11.25% 08/01/06 ............................ 14,500,000 15,841,250
*Jones Intercable sr nts 8.88% 04/01/07 ....... 9,400,000 9,834,750
Katz Media sr sub nts 10.50% 01/15/07 ........ 7,025,000 7,604,563
Lamar Advertising sr sub nts 9.63% 12/01/06... 9,500,000 10,188,750
*Marcus Cable sr disc nts 11.12% 12/15/05 ..... 19,200,000 15,840,000
STC Broadcasting sr sub nts 11.00% 03/15/07... 10,900,000 11,772,000
Sullivan Graphics sr sub nts 12.75% 08/01/05.. 10,800,000 11,259,000
Universal Outdoor sr sub nts 9.75% 10/15/06... 6,400,000 6,880,000
------------
121,629,269
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CHEMICALS - 6.34%
Astor sr sub nts 10.50% 10/15/06 .............. $ 6,350,000 $ 6,770,688
BPC Holding sr nts 12.50% 06/15/06 ............ 3,750,000 4,115,625
Harris Chemical sr sub nts 10.75% 10/15/03 .... 11,500,000 11,888,125
*Huntsman sr sub nts 9.50% 07/01/07 ............ 11,000,000 11,385,000
Pioneer Americas Acquisition sr nts
9.25% 06/15/07 .............................. 3,900,000 3,929,250
Precise Technology sr sub nts
11.13% 06/15/07 ............................. 3,975,000 4,084,313
Statia Sovereign Specialty Chemical sr sub nts
9.50% 08/01/07 .............................. 3,150,000 3,150,000
*Sterling Chemical Holdings sr disc nts
11.72%/13.50% 08/15/08 ...................... 24,175,000 16,529,656
*Texas Petrochemical sr sub nts
11.13% 07/01/06 ............................. 9,750,000 10,505,625
UCC Investors Holding sub nts
11.33%/12.00% 05/01/05 ...................... 15,000,000 14,250,000
-----------
86,608,282
-----------
COMPUTER & TECHNOLOGY - 0.27%
Decisionone sr sub nts 9.75% 08/01/07 ......... 3,000,000 3,000,000
Decisionone Holdings units 11.50% 08/01/08 .... 1,150,000 658,720
-----------
3,658,720
-----------
CONSUMER PRODUCTS - 3.56%
Calmar sr sub nts 11.50% 08/15/05 ............ 14,500,000 15,116,250
Drypers sr nts 10.25% 06/15/07 ............... 7,750,000 7,788,750
French Fragrance sr nts 10.38% 05/15/07 ...... 9,000,000 9,393,750
Shop Vac sr sub nts 10.63% 09/01/03 .......... 9,500,000 10,248,125
Standard Commercial sr nts 8.88% 08/01/05 .... 6,000,000 6,090,000
-----------
48,636,875
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT - 2.49%
Amphenol unsec sr sub nts
9.88% 05/15/07 ............................. 6,300,000 6,693,750
Electronic Retailing Systems sr disc nts
15.60%/13.25% 02/01/04 ..................... 13,200,000 8,448,000
IMO Industries sr sub nts 11.75% 05/01/06 .... 16,965,000 18,915,975
-----------
34,057,725
-----------
ENERGY - 3.78%
Clark USA Notes sr nts 10.88% 12/01/05 ........ 10,470,000 11,359,950
Statia Terminals mtg nts 11.75% 11/15/03 ...... 6,250,000 6,765,625
*TransAmerican Energy sr nts 11.50% 06/15/02 ... 9,900,000 9,924,750
*TransAmerican Energy sr disc nts
13.15%/13.00% 06/15/02 ...................... 11,750,000 9,223,750
*United Refining sr unsec nts 10.75% 06/15/07 .. 14,250,000 14,463,750
-----------
51,737,825
-----------
</TABLE>
1997 annual report
10
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
ENVIRONMENTAL SERVICES - 0.15%
Hydrochem Industrial sr sub nts
10.38% 08/01/07 ........................ $ 2,000,000 $ 2,035,000
------------
2,035,000
------------
Food, Beverage and Tobacco - 7.79%
Ameriking sr nts 10.75% 12/01/06 ......... 9,300,000 9,881,250
*Ameriserv Food sr sub nts 10.13% 07/15/07 14,250,000 14,820,000
CFP Holdings sr nts 11.63% 01/15/04 ...... 10,600,000 10,997,500
Core-Mark sr sub nts 11.38% 09/15/03 ..... 7,975,000 8,413,625
*DiGiorgio sr nts 10.00% 06/15/07 ......... 10,275,000 10,197,938
Delta Beverage Group sr nts 9.75% 12/15/03 7,700,000 8,113,875
*Fleming sr sub nts 10.50% 12/01/04 ....... 13,700,000 14,145,250
*International Home Foods sr sub nts
10.38% 11/01/06 ........................ 15,350,000 16,271,000
MBW Foods sr sub nts 9.88% 02/15/07 ...... 4,350,000 4,491,375
Windy Hill Pet Food sr sub nts
9.75% 05/15/07 ......................... 8,900,000 9,222,625
------------
106,554,438
------------
HEALTHCARE & PHARMACEUTICALS - 2.78%
Dynacare sr nts 10.75% 01/15/06 .......... 9,750,000 10,335,000
Fresensius Medical Care co gtd nts
9.00% 12/01/06 ......................... 7,500,000 7,762,500
Imed sr sub nts 9.75% 12/01/06 ........... 6,500,000 6,760,000
Integrated Health Services sr sub nts
9.50% 09/15/07 ......................... 9,200,000 9,752,000
Owens & Minor sr sub nts
10.88% 06/01/06 ........................ 3,060,000 3,411,900
------------
38,021,400
------------
INDUSTRIAL MACHINERY - 3.23%
Hawk sr nts 10.25% 12/01/03 .............. 10,500,000 10,998,750
Interlake sr nts 12.13% 03/01/02 ......... 3,400,000 3,557,250
International Wire Group sr sub nts
11.75% 06/01/05 ........................ 7,125,000 7,819,688
*KSL Recreation sr sub nts
10.25% 05/01/07 ........................ 3,400,000 3,612,500
Safety Component International sr sub nts
10.13% 07/15/07 ........................ 8,400,000 8,505,000
Spinnaker Industries sr nts
10.75% 10/15/06 ........................ 9,500,000 9,654,375
------------
44,147,563
------------
LEISURE, LODGING & ENTERTAINMENT - 9.02%
American Skiing sr sub nts 12.00% 07/15/06 4,700,000 5,040,750
Booth Creek Ski Holdings sr nts
12.50% 03/15/07 ........................ 11,400,000 11,713,500
Casino America sr nts 12.50% 08/01/03 .... 9,900,000 10,518,750
Cinemark USA sr sub nts 9.63% 08/01/08 ... 11,000,000 11,357,500
*Coleman Escrow 1st priority disc nts
11.91% 05/15/01 ........................ 34,000,000 21,930,000
Coleman Escrow 2nd priority disc nts
14.51% 05/15/01 ........................ 5,925,000 3,480,938
</TABLE>
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
LEISURE, LODGING & ENTERTAINMENT (CONTINUED)
Eldorado Resorts LLC sr sub nts
10.50% 08/15/06 .......................... $ 9,050,000 $ 9,875,813
*Hollywood Casino sr nts 12.75% 11/01/03 .... 12,450,000 13,414,875
Host Mar Travel Plaza sr nts 9.50% 05/15/05 4,200,000 4,431,000
Riddell Sports sr nts 10.50% 07/15/07 ...... 875,000 913,281
*Station Casinos sr sub nts 9.75% 04/15/07 .. 14,425,000 14,280,750
Sun International Hotels sr sub nts
9.00% 03/15/07 ........................... 6,500,000 6,760,000
Trump-Atlantic City 1st mtg nts
11.25% 05/01/06 .......................... 9,450,000 9,544,500
------------
123,261,657
------------
METALS & MINING - 4.01%
Bayou Steel 1st mtg nts 10.25% 03/01/01 .... 5,000,000 5,125,000
Commonwealth Aluminum sr sub nts
10.75% 10/01/06 .......................... 11,725,000 12,516,438
G.S.Technologies sr nts 12.00% 09/01/04 .... 2,975,000 3,242,750
G.S.Technologies sr nts 12.25% 10/01/05 .... 1,475,000 1,633,563
Renco Metals sr nts 11.50% 07/01/03 ........ 14,900,000 16,092,000
Weirton Steel sr nts 11.38% 07/01/04 ....... 5,600,000 6,090,000
Westmin Resources sr nts 11.00% 03/15/07 ... 9,650,000 10,180,750
------------
54,880,501
------------
PACKAGING & CONTAINERS - 2.50%
*Gaylord Container sr nts 9.75% 06/15/07 .... 9,500,000 9,820,625
Plastic Containers sr nts 10.00% 12/15/06 .. 3,400,000 3,604,000
*Stone Container sr nts 11.88% 08/01/16 ..... 11,800,000 12,847,250
Stone Container sr sub units 12.25% 04/01/02 7,500,000 7,856,250
------------
34,128,125
------------
PAPER & FOREST PRODUCTS - 3.88%
*Four M sr nts 12.00% 06/01/06 .............. 14,225,000 15,291,875
MAXXAM Group sr sec nts 11.25% 08/01/03 .... 12,250,000 12,985,000
MAXXAM Group sr sec nts 12.00% 08/01/03 .... 9,400,000 9,987,500
*Pacific Lumber sr nts 10.50% 03/01/03 ...... 3,750,000 3,914,063
Repap,Wisconsin sr nts 9.88% 05/01/06 ...... 10,000,000 10,862,500
------------
53,040,938
------------
RETAIL - 2.10%
*Central Tractor sr nts 10.63% 04/01/07 ..... 7,350,000 7,717,500
Leslie's Poolmart sr nts 10.38% 07/15/04 ... 3,000,000 3,135,000
Petro Stopping Centers sr nts
10.50% 02/01/07 .......................... 10,400,000 10,764,000
*Shoppers Food Warehouse sr nts
9.75% 06/15/04 ........................... 6,900,000 7,158,750
------------
28,775,250
------------
TELECOMMUNICATIONS - 8.02%
Arch Communications Group sr disc nts
12.22%/10.88% 03/15/08 ................... 19,000,000 11,590,000
*Century Communications sr nts
9.75% 02/15.02 ........................... 4,750,000 5,035,000
*Comcast Cellular sr nts 9.50% 05/01/07 ..... 19,000,000 19,950,000
EchoStar Communications sr sec nts
12.50% 07/01/02 .......................... 9,500,000 9,690,000
</TABLE>
1997 annual report
11
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Galaxy Telecommunication L.P. sr sub nts
12.38% 10/01/05 ............................ $ 7,500,000 $ 8,100,000
McCaw International units 12.95% 04/15/07 .... 11,200,000 6,216,000
*Metrocall unsec sr sub nts 10.38% 10/01/07 ... 12,900,000 12,384,000
*Paging Network sr sub nts 10.13% 08/01/07 .... 9,400,000 9,682,000
TELEX Communications sr sub nts
10.50% 05/01/07 ............................ 10,500,000 11,143,125
Teleport Communications sr nts
9.88% 07/01/06 ............................. 4,750,000 5,236,875
Teleport Communications sr disc nts
12.00%/11.13% 07/01/07 ..................... 13,900,000 10,633,500
--------------
109,660,500
--------------
TEXTILES & FURNITURE - 0.75%
Anvil Knitwear sr nts 10.88% 03/15/07 ........ 10,000,000 10,250,000
--------------
10,250,000
--------------
TRANSPORTATION & SHIPPING - 3.78%
Blue Bird Body sr nts 10.75% 11/15/06 ........ 3,000,000 3,195,000
Chemical Leaman sr nts 10.38% 06/15/05 ....... 6,000,000 6,225,000
Equimar Shipholdings 1st priority ship mtg nts
9.88% 07/01/07 ............................. 9,800,000 9,653,000
Navigator Gas Transport nts 10.50% 06/30/07 .. 9,400,000 9,400,000
Navigator Gas Transport units
12.00% 06/30/07 ............................ 7,600,000 7,600,000
Ryder Transportation sr sub nts
10.00% 12/01/06 ............................ 15,000,000 15,562,500
--------------
51,635,500
--------------
UTILITIES - 0.75%
*Calpine sr nts 8.75% 07/15/07 ................ 10,000,000 10,225,000
--------------
10,225,000
--------------
MISCELLANEOUS - 0.95%
Coinmach sr nts 11.75% 11/15/05 .............. 4,350,000 4,839,375
Dyncorp sr sub nts 9.50% 03/01/07 ............ 4,000,000 4,085,000
Therma-Wave Notes sr nts 10.63% 05/15/04 ..... 3,800,000 4,075,500
--------------
12,999,875
--------------
Total Corporate Bonds
(cost $1,126,108,555) ...................... 1,174,377,130
--------------
U.S. TREASURY OBLIGATIONS - 10.09%
U.S. Treasury Notes 9.00% 05/15/98 ........... 134,450,000 137,983,333
--------------
Total U.S. Treasury Obligations
(cost $138,004,531) ........................ 137,983,333
--------------
Number of
Shares
PREFERRED STOCK - 1.60%
Cablevision Systems PIK-Preferred ............ 3,207 336,735
Pegasus Communications Unit .................. 91,500 9,470,250
Silgan Holdings PIK-Preferred ................ 6,054 6,856,285
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Number of Market
Shares Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCK (CONTINUED)
**Supermarket General ...................... 200,000 $4,050,000
Terex-Appreciation Rights ................ 55,200 1,104,000
----------
Total Preferred Stock (cost $20,610,421) . 21,817,270
----------
CONVERTIBLE PREFERRED STOCK - 0.71%
Pantry Pride $14.875 cv pfd .............. 97,500 9,750,000
----------
Total Convertible Preferred Stock
(cost $10,237,500) ..................... 9,750,000
----------
STOCK WARRANTS - 0.19%
**Electronic Retailing Systems warrants ... 13,200 528,000
**NS Group warrants ....................... 12,575 2,074,875
----------
Total Stock Warrants (cost $1,168,579) .. 2,602,875
----------
TOTAL MARKET VALUE OF SECURITIES - 98.50%
(cost $1,296,129,586) ................................. 1,346,530,608
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 1.50% ............................ 20,454,962
---------------
NET ASSETS APPLICABLE TO 156,754,713 DELCHESTER
FUND A CLASS, 41,610,262 DELCHESTER FUND B CLASS,
2,904,954 DELCHESTER FUND C CLASS, AND 6,704,112
DELCHESTER FUND INSTITUTIONAL CLASS SHARES
($1 PAR VALUE) OUTSTANDING; EQUIVALENT TO $6.57
PER SHARE - 100% ...................................... $ 1,366,985,570
===============
COMPONENTS OF NET ASSETS AT JULY 31, 1997:
Capital Stock, $1 par value, 500,000,000 shares authorized
to the Fund with 350,000,000 shares allocated to Delchester
Fund A Class, 50,000,000 shares allocated to Delchester
Fund B Class, 50,000,000 shares allocated to Delchester
Fund C Class and 50,000,000 shares allocated to Delchester
Fund Institutional Class ............................... $ 1,507,600,440
Undistributed net investment income ..................... 441,112
Accumulated net realized loss on investments ............ (191,457,004)
Net unrealized appreciation of investments .............. 50,401,022
---------------
Total net assets ........................................ $ 1,366,985,570
===============
</TABLE>
* Security out on loan
** Non-income producing security for the year ended July 31, 1997.
- ----------
Summary of Abbreviations:
cv - convertible nts - notes
debs - debentures pfd - preferred
def - deferred pik - pay-in-kind
disc - discount sec - secured
fm - floating rate notes sr - senior
jr - junior sub - subordinated
mtg - mortgage unsec - unsecured
See accompanying notes
1997 annual report
12
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C> <C>
Interest .................................. $132,542,204
Dividends ................................. 2,282,372 $134,824,576
------------
EXPENSES:
Management fees ($7,362,089)
and directors' fees ($26,830) ............ 7,388,919
Distribution expenses ..................... 4,910,726
Dividend disbursing and transfer agent fees
and expenses ............................. 1,716,779
Accounting fees and salaries .............. 537,063
Reports and statements to shareholders .... 175,103
Registration fees ......................... 84,890
Taxes (other than taxes on income) ........ 48,188
Professional fees ......................... 35,896
Custodian fees ............................ 900
Other ..................................... 142,667 15,041,131
------------ ------------
NET INVESTMENT INCOME ..................... 119,783,445
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain from security transactions .................... 47,638,271
Net change in unrealized appreciation of
investments during the period .................................. 39,751,252
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS ................................................. 87,389,523
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ................................................ $207,172,968
============
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELCHESTER FUND A CLASS - July 31, 1997:
Net asset value A Class (A) .................................... $ 6.57
Sales Charge (4.75% of offering price or 5.02%, of the amount
invested per share) (B) ....................................... .33
------------
Offering price .................................................. $ 6.90
============
</TABLE>
- ----------
(A) Net asset value per share, as illustrated, is the estimated amount
which would be paid upon redemption or repurchase of shares.
(B) See Buying Shares in the current Prospectus for purchases of
$100,000 or more.
See accompanying notes
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
7/31/97 7/31/96
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................ $ 119,783,445 $ 120,921,861
Net realized gain on investments ................. 47,638,271 1,187,422
Net change in unrealized appreciation
(depreciation) ................................. 39,751,252 (28,027,547)
--------------- ---------------
Net increase in net assets
resulting from operations ....................... 207,172,968 94,081,736
--------------- ---------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income:
Delchester Fund A Class ......................... (94,104,779) (100,800,197)
Delchester Fund B Class ......................... (19,288,798) (13,336,513)
Delchester Fund C Class ......................... (967,413) (145,007)
Delchester Fund Institutional Class ............. (5,288,670) (6,332,817)
--------------- ---------------
(119,649,660) (120,614,534)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Delchester Fund A Class ......................... 189,097,203 182,180,243
Delchester Fund B Class ......................... 114,988,203 88,879,473
Delchester Fund C Class ......................... 15,224,523 5,408,360
Delchester Fund Institutional Class ............. 26,230,680 33,198,797
Net asset value of shares issued upon reinvestment
of dividends from net investment income:
Delchester Fund A Class ......................... 45,057,620 49,169,956
Delchester Fund B Class ......................... 7,617,766 5,253,012
Delchester Fund C Class ......................... 613,365 106,355
Delchester Fund Institutional Class ............. 4,464,404 5,385,495
--------------- ---------------
403,293,764 369,581,691
--------------- ---------------
Cost of shares repurchased:
Delchester Fund A Class ......................... (245,410,292) (256,308,765)
Delchester Fund B Class ......................... (40,864,850) (26,555,455)
Delchester Fund C Class ......................... (2,539,287) (514,240)
Delchester Fund Institutional Class ............. (49,688,282) (39,364,486)
--------------- ---------------
(338,502,711) (322,742,946)
--------------- ---------------
Increase in net assets derived from capital
share transactions .............................. 64,791,053 46,838,745
--------------- ---------------
NET INCREASE IN NET ASSETS ....................... 152,314,361 20,305,947
NET ASSETS:
Beginning of year ................................ 1,214,671,209 1,194,365,262
--------------- ---------------
End of year ...................................... $ 1,366,985,570 $ 1,214,671,209
=============== ===============
</TABLE>
See accompanying notes
1997 annual report
13
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each period was
as follows:
<TABLE>
<CAPTION>
Delchester Fund A Class
----------------------------------------------------------------
Year Ended
7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...................... $ 6.140 $ 6.280 $ 6.450 $ 7.070 $ 6.900
Income from investment operations:
Net investment income ................................. 0.598 0.628 0.668 0.744 0.774
Net realized and unrealized gain (loss)
from investments ..................................... 0.430 (0.141) (0.167) (0.618) 0.165
----- ------ ------ ------ -----
Total from investment operations ...................... 1.028 0.487 0.501 0.126 0.939
----- ----- ----- ----- -----
Less dividends and distributions:
Dividends from net investment income .................. (0.598) (0.627) (0.671) (0.746) (0.769)
------ ------ ------ ------ ------
Total dividends and distributions ..................... (0.598) (0.627) (0.671) (0.746) (0.769)
------ ------ ------ ------ ------
Net asset value, end of period ............................ $ 6.570 $ 6.140 $ 6.280 $ 6.450 $ 7.070
========== ======== ========== ======== ========
Total Return(1) .......................................... 17.53% 8.10% 8.46% 1.60% 14.46%
Ratios and supplemental data:
Net assets, end of period (000 omitted) .............. $1,030,328 $973,939 $1,020,763 $983,569 $955,113
Ratio of expenses to average net assets ............... 1.04% 1.02% 1.09% 1.05% 1.04%
Ratio of net investment income to average net assets .. 9.48% 10.11% 10.77% 10.48% 11.17%
Portfolio turnover .................................... 154% 108% 92% 92% 72%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Delchester Fund B Class Delchester Fund C Class
----------------------------------------------- -----------------------
Year 5/2/94(2) Year 11/29/95(2)
Ended To Ended To
7/31/97 7/31/96 7/31/95 7/31/94 7/31/97 7/31/96
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .................... $ 6.140 $ 6.280 $ 6.450 $ 6.730 $ 6.140 $ 6.140
Income from investment operations:
Net investment income ............................... 0.550 0.581 0.624 0.120 0.550 0.385
Net realized and unrealized gain (loss)
from investments ................................... 0.430 (0.141) (0.170) (0.280) 0.430 (0.069)
----- ------ ------ ------ ----- ------
Total from investment operations .................... 0.980 0.440 0.454 (0.160) 0.980 0.316
----- ----- ----- ------ ----- -----
Less dividends and distributions:
Dividends from net investment income ................ (0.550) (0.580) (0.624) (0.120) (0.550) (0.386)
------ ------ ------ ------ ------ ------
Total dividends and distributions ................... (0.550) (0.580) (0.624) (0.120) (0.550) (0.386)
------ ------ ------ ------ ------ ------
Net asset value, end of period .......................... $ 6.570 $ 6.140 $ 6.280 $ 6.450 $ 6.570 $ 6.140
======== ======== ======== ======= ======= =========
Total Return(1) ........................................ 16.66% 7.30% 7.64% 3 16.66% 5.20%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ............ $273,499 $176,266 $111,860 $21,776 $19,094 $ 4,953
Ratio of expenses to average net assets ............. 1.79% 1.77% 1.82% 1.83% 1.79% 1.77%
Ratio of net investment income to average net assets 8.73% 9.36% 10.14% 9.70% 8.73% 9.36%
Portfolio turnover .................................. 154% 108% 92% 92% 154% 108%
</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 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 Date of commencement of trading; ratios have been annualized and total
return has not been annualized.
3 Total return has been omitted as management believes that such information
for this relatively short period is not meaningful.
See accompanying notes
1997 annual report
14
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each
period was as follows:
<TABLE>
<CAPTION>
Delchester Fund Institutional Class
--------------------------------------------------------------------
Year Ended
7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .................... $ 6.140 $ 6.280 $ 6.450 $ 7.070 $ 6.900
Income from investment operations:
Net investment income ............................... 0.614 0.644 0.685 0.758 0.787
Net realized and unrealized gain (loss)
from investments .................................. 0.429 (0.142) (0.169) (0.617) 0.165
----- ------ ------ ------ -----
Total from investment operations .................... 1.043 0.502 0.516 0.141 0.952
----- ----- ----- ----- -----
Less dividends and distributions:
Dividends from net investment income ................ (0.613) (0.642) (0.686) (0.761) (0.782)
------ ------ ------ ------ ------
Total dividends and distributions ................... (0.613) (0.642) (0.686) (0.761) (0.782)
------ ------ ------ ------ ------
Net asset value, end of period .......................... $ 6.570 $ 6.140 $ 6.280 $ 6.450 $ 7.070
======== ======== ======== ======== ========
Total Return ............................................ 17.82% 8.37% 8.72% 1.82% 14.67%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ............ $44,065 $59,513 $61,742 $71,122 $35,909
Ratio of expenses to average net assets ............. 0.79% 0.77% 0.82% 0.83% 0.86%
Ratio of net investment income to average
net assets ........................................ 9.73% 10.36% 11.14% 10.70% 11.35%
Portfolio turnover .................................. 154% 108% 92% 92% 72%
</TABLE>
See accompanying notes
1997 annual report
15
<PAGE>
Delaware Group Income Funds, Inc. -
Delchester Fund
Notes to Financial Statements
July 31, 1997
Delaware Group Income Funds, Inc. - Delchester Fund (the "Fund") 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 classes of shares. The Fund's
objective is to seek as high a current income as is consistent with
providing reasonable safety.
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
lasted 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. Other securities and
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the
Fund's Board of Directors.
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 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 - The Fund may invest in a pooled cash account
along with other members of the Delaware Group 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 Group 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 Fund declares and pays dividends from net investment income daily and
capital gains, if any, 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.
<PAGE>
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
Fund pays Delaware Management Company, Inc. (DMC), the Investment Manager
of the Fund, an annual fee which is calculated daily at the rate of 0.60%
of the first $500 million of average daily net assets of the Fund, 0.575%
on the next $250 million and 0.55% on the average daily net assets over
$750 million, less fees paid to the independent directors. At July 31,
1997, the Fund had a liability for Investment Management fees and other
expenses payable to DMC of $133,452.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate
of DMC, to serve as dividend disbursing and transfer agent for the Fund.
Effective August 19, 1996, the Fund also engaged DSC to provide accounting
services for the Fund. Previously, fund personnel provided this service and
the related costs were recorded in salaries and other expense categories in
the statement of operations. For the year ended July 31, 1997, the Fund
expensed $1,716,779 for dividend disbursing and transfer agent services and
$389,930 for accounting services. At July 31, 1997, the Fund had a
liability for such fees and other expenses payable to DSC for $88,554.
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 Class. For
the year ended July 31, 1997, DDLP earned $507,259 for commissions on sales
of the Fund A Class shares.
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 year ended July 31, 1997, the Fund made purchases of
$1,205,836,739 and sales of $1,598,175,969 of investment securities other
than U.S. government securities and temporary cash investments. During the
year ended July 31, 1997, the Fund made purchases of $656,507,409 and sales
of $261,244,998 of long-term U.S. government securities.
At July 31, 1997, the aggregate cost of securities for federal income tax
purposes was $1,296,241,688.
At July 31, 1997, unrealized appreciation for federal income tax purposes
aggregated $50,288,920 of which $54,112,496 related to unrealized
appreciation of securities and $3,823,576 related to unrealized
depreciation of securities.
For federal income tax purposes, the Fund had a capital loss carryforward
at July 31, 1997, of $191,344,902 which may be carried forward and applied
against future capital gains. The capital loss carryforward expires as
follows: 1998 - $10,861,752, 1999 - $89,261,440, 2002 - $3,628,131 and 2003
- - $87,593,579.
1997 annual report
16
<PAGE>
Notes to Financial Statements (Continued)
4. Capital Stock
Transactions in capital stock were as follows:
Year Ended Year Ended
7/31/97 7/31/96
Shares sold:
Delchester Fund A Class ............. 29,886,498 29,345,150
Delchester Fund B Class ............. 18,171,332 14,310,890
Delchester Fund C Class ............. 2,401,059 872,689
Delchester Fund Institutional Class . 4,110,657 5,337,336
Shares issued upon reinvestment of
dividends from net investment income:
Delchester Fund A Class ............. 7,101,822 7,914,017
Delchester Fund B Class ............. 1,198,602 846,254
Delchester Fund C Class ............. 96,296 17,233
Delchester Fund Institutional Class . 712,863 858,905
----------- -----------
63,679,129 59,502,474
----------- -----------
Shares repurchased:
Delchester Fund A Class ............. (38,750,393) (41,237,430)
Delchester Fund B Class ............. (6,448,410) (4,275,449)
Delchester Fund C Class ............. (398,589) (83,734)
Delchester Fund Institutional Class . (7,805,689) (6,338,631)
----------- -----------
(53,403,081) (51,935,244)
----------- -----------
Net Increase ........................ 10,276,048 7,567,230
----------- -----------
5 Lines of Credit
The Fund has a committed line of credit for $42,900,000. No amount was
outstanding at July 31, 1997, or at any time during the fiscal year.
6. Concentrations of Credit Risk
The 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 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.
7. Securities Lending
Security loans are required at all times to be secured by collateral at
least equal to 102% of the market value of the securities on loan. However,
in the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings. In the event that the borrower fails to return loaned
securities, and cash collateral being maintained by the borrower is
insufficient to cover the value of loaned securities and provided such
collateral insufficiency is not the result of investment losses, the
lending agent has agreed to pay the amount of the shortfall to the Fund or,
at the option of the lending agent, replace the loaned securities. The
market value of securities on loan to brokers and the related cash
collateral received at July 31, 1997, was $96,996,085 and $98,766,100,
respectively.
1997 annual report
17
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
Delaware Group Income Funds, Inc. - Delchester Fund
We have audited the accompanying statement of net assets of Delaware
Group Income Funds, Inc. - Delchester Fund (the "Fund") as of July 31,
1997, and the related statement of operations for the year then ended, the s
tatements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with 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 and financial highlights. Our procedures
included confirmation of securities owned as of July 31, 1997, by
correspondence with the Fund's 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 Income Funds, Inc. - Delchester Fund at July 31,
1997, 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 periods indicated therein, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
------------------------------
Philadelphia, Pennsylvania
September 5, 1997
1997 annual report
18
<PAGE>
DELAWARE GROUP 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
Quantum Fund
Blue Chip Fund
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
Delaware Fund
FOR INTERNATIONAL DIVERSIFICATION
Emerging Markets Fund
New Pacific Fund
Overseas Equity Fund
International Equity Fund
Global Assets Fund
Global Bond Fund
FOR CURRENT INCOME
Delchester Fund
Strategic Income Fund
U.S. Government Fund
Delaware-Voyageur
U.S. Government Securities Fund
Limited-Term Government Fund
FOR TAX-EXEMPT CURRENT 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
U.S. Government Money Fund
Tax-Free Money Fund
* Available for the following states: AZ, CA, CO, FL, ID, IA, KS, MN,
MO, ND, NJ, NM, NY, OH, OR, PA, UT, WA, WI. Insured and intermediate bond
funds are available in selected states.
funds
(PHOTO OF KEYBOARD)
Complete information on any Delaware Group fund can be found in each fund's
current prospectus. Prospectuses for all Delaware Group funds are available
from your financial adviser. Please read the prospectus carefully before you
invest or send money.
<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 for Delchester Fund, which sets forth details about
charges, expenses, investment objectives and operating policies of the Fund.
You should read the prospectus carefully before you invest. Summary
investment results are documented in the Fund's 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 Fund will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost.
Board of Directors
WAYNE A. STORK
Chairman, President and Chief Executive Officer
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
City Councilman
Philadelphia, PA
CHARLES E. PECK
Secretary/Treasurer, Enterprise Homes, Inc.
Fredericksburg, VA
Affiliated Officers
GEORGE M. CHAMBERLAIN, JR.
Senior Vice President and Secretary,
Delaware Group of Funds
Philadelphia, PA
DAVID K. DOWNES
Senior Vice President, Chief Financial Officer and
Chief Administrative Officer
Delaware Group of Funds
Philadelphia, PA
BRUCE D. BARTON
President and CEO,
Delaware Distributors, L.P.
Philadelphia, PA
directors &
officers
(PHOTO OF GLOBES)
INVESTMENT MANAGER
Delaware Management Company, Inc.
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
<PAGE>
This report must be preceded or accompanied by a current Delchester Fund
prospectus and the Delaware Group Fund Performance Update for the most
recently completed calendar quarter. For a prospectus of any other Delaware
Group fund, contact your financial adviser or Delaware Group.
(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
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, and involve investment risk, including the possible loss of the
principal amount invested. Shares of the Fund are not bank or credit union
deposits.
Copy Rights Delaware Distributors, L.P.
Printed in the USA on
recycled paper
(193)
AR-024[7/97]TKO9/97
DELAWARE
GROUP
==========
Philadelphia o London
