<PAGE>
For Current Income
DELAWARE GROUP
Strategic Income Fund
1997
Semi-Annual
Report
professional management
service and guidance
goals
[Photo of house by a stream with waterfall]
DELAWARE
GROUP
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FEBRUARY 14, 1997
Dear Shareholder:
When I began working at Delaware Group 35 years ago, bonds offered far less
income potential than today. Thirty-year Treasury bonds yielded just 3.6% and
only a few companies issued high-yield debt. Investing in overseas bonds was
considered highly speculative, given the dynamics of the Cold War.
Today, U.S. investors not only have an opportunity to earn significantly
more at home, but may diversify a fixed-income portfolio and participate in the
income and growth potential of a much more stable world.
I am pleased to present the inaugural report of Delaware Group Strategic
Income Fund, which began operating on October 1, 1996. Strategic Income Fund
utilizes the expertise of portfolio managers in both our London and Philadelphia
offices, and draws on Delaware's four decades of experience managing high-yield
bonds.
WE BELIEVE STRATEGIC INCOME FUND'S INITIAL RESULTS ARE AN ENCOURAGING SIGN OF
THE POTENTIAL BENEFITS OF GLOBAL DIVERSIFICATION FOR FIXED-INCOME INVESTORS.
Your Fund had a total return of +3.83% (with dividends reinvested for A
Class shares at net asset value) between October 1, 1996, and January 31, 1997,
the end of the Fund's initial semi-annual period.
Obviously, four months is much too short a time to judge performance,
especially for a long-term oriented mutual fund such as Strategic Income Fund.
However, we believe the Fund's initial results are an encouraging sign of the
potential benefits of global diversification for fixed-income investors.
The Fund's asset allocation is a mix of domestic high-yield bonds,
investment grade foreign and U.S. government and high quality corporate
securities. We believe this blend has the potential to provide a higher level of
income and lower level of volatility than a portfolio exclusively composed of
U.S. government securities.
opportunity
2
1997 semi-annual report
Foreign bonds and domestic high-yield bonds don't offer the same
guarantees of principal and interest that U.S. Treasuries offer. However, we
believe that an investment strategy utilizing different sectors of the bond
market may lead to reduced short-term price fluctuation in a bond portfolio.
Inside, your Fund's management team -- Paul A. Matlack and Paul Grillo
in Philadelphia and Ian G. Sims in London -- explain the Fund's positioning and
offer their views on bond markets in the U.S.and abroad.
I welcome those of you who have made Strategic Income Fund your first
Delaware Group investment. I also wish to express my gratitude to shareholders
who have added Strategic Income Fund shares to an existing portfolio of Delaware
Group Funds. With the help of your financial advisers, we will do our best to
help you meet your investment goals in the years ahead.
Sincerely,
/s/ Wayne A. Stork
- -----------------------
Wayne A. Stork
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
TOTAL RETURN
- --------------------------------------------------------------------------------
OCTOBER 1, 1996
TO JANUARY 31, 1997
- --------------------------------------------------------------------------------
Strategic Income Fund A Class +3.83%
- --------------------------------------------------------------------------------
Lipper Multi-Sector Income Fund Average (62 Funds) +4.58%
Lehman Brothers Aggregate Bond Index +3.31%
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ALL ABOVE PERFORMANCE IS CALCULATED AT NET ASSET VALUE. ALL PERFORMANCE
QUOTED ABOVE ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. PERFORMANCE FOR THIS
SHORT TIME MAY NOT BE INDICATIVE OF LONG-TERM RESULTS. COMPLETE FUND
PERFORMANCE FOR ALL CLASSES CAN BE FOUND ON PAGE 8.
performance
1997 semi-annual report
3
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PORTFOLIO MANAGERS' REVIEW
INVESTMENT STRATEGY
Since October, Strategic Income Fund's portfolio management team has
been building a diversified fixed-income portfolio that primarily includes three
types of bonds -- U.S. government and investment grade corporate bonds,
high-yield U.S. corporate bonds, and foreign bonds.
Overall, your Fund favors an income-oriented approach to selecting
individual bonds, and we strive to carefully weigh the risks and potential
rewards of each category of bonds we invest in. Among the factors we examine
are:
* How interest rate trends may affect prices and the income potential of U.S.
government securities such as mortgages;
* How changes in U.S. economic conditions may affect the ability of corporations
to repay debt, especially issuers of high-yield securities; and
* How inflation, politics, economic conditions and currency changes within a
country may affect the income and total return potential of foreign bonds.
The Fund's investment parameters allow us to invest between 20% and 60%
in any one segment of the bond market. As of January 31, 1997, we believed the
U.S. high-yield market offered the most attractive risk/reward ratio, and
consequently we allocated the largest share of your Fund's net assets to this
sector, as shown on page 5.
PORTFOLIO HIGHLIGHTS
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January 31, 1997
- --------------------------------------------------------------------------------
Average Quality BBB
Average Effective Duration 4.7 years
Average Effective Maturity 7.6 years
Current 30-Day Yield 7.23%+
+ FOR A CLASS SHARES, CALCULATED ACCORDING TO SECURITIES AND EXCHANGE
COMMISSION GUIDELINES; 30-DAY SEC YIELD FOR B AND C CLASS WAS 6.86% AS OF
JANUARY 31, 1997. INSTITUTIONAL CLASS 30-DAY SEC YIELD WAS 7.86%.
4
1997 semi-annual report
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HOW WE'RE BUILDING A PORTFOLIO
Your Fund began operations just before the November elections in the U.S., a
relatively strong period for U.S. government securities as well as the domestic
high-yield bond market. Actions by government officials this past fall suggested
future restraint in new government spending, modest economic growth and a
possible bipartisan consensus on reducing annual budget deficits. Recent U.S.
government economic reports appeared to confirm that the Federal Reserve Board
had contained domestic inflation to 3% to 3.5% per year.
LOW INFLATION AROUND THE WORLD PROMPTED US TO ALLOCATE MORE THAN A QUARTER OF
YOUR FUND'S NET ASSETS TO FOREIGN BONDS AS OF JANUARY 31, 1997.
FOREIGN BONDS
Elsewhere in the developed world, consumer price increases also appeared
benign. Low inflation around the world prompted us to allocate more than a
quarter of your Fund's net assets to foreign bonds as of January 31, 1997.
Countries where we invested in government bonds included Italy, the United
Kingdom, Spain, Sweden, Australia, and New Zealand.
Our largest foreign holdings were corporate bonds issued in the United
Kingdom. We avoided bonds issued in Japan because we believe yields were
unattractively low. Japan may also face higher inflation in the months ahead as
it grapples with structural economic and taxation problems.
Portfolio Asset Allocation
- --------------------------------------------------------------------------------
January 31, 1997
Plot Points:
U.S. High-Yield Corporate Bonds 38.1%
U.S. Government Securities 17.4%
Investment-Grade U.S. Corporate Bonds 8.3%
Foreign Bonds 25.9%
Cash Equivalents 4.4%
Common and Preferred Stocks 5.9%
5
1997 semi-annual report
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INVESTMENT GRADE U.S. BONDS
In the U.S. investment grade market, we have been emphasizing
intermediate-term, government-backed mortgage securities which we believe have
attractive income potential. We have also added high-quality corporate bonds
that we believe may have the ability to perform well during periods of slower
economic growth.
In our opinion, bonds maturing in five to seven years were the most
attractive segment of the U.S. investment grade market during the Fund's initial
months in operation. We believe high-quality but longer term U.S. bonds present
a much higher degree of risk relative to the income they currently provide.
As of January 31, 1997, five-year U.S. government and corporate
securities provided between 90% and 95% of the income available from longer term
U.S. Treasuries with substantially less interest rate risk.
HIGH-YIELD U.S. BONDS
Your Fund sees income as the dominant component of return from American
high-yield bonds, and stresses capital preservation over appreciation. We strive
to achieve this by investing in bonds rated B and BB, the two highest quality
tiers in the high-yield market. In general, the Fund emphasizes bonds rated B
during periods of economic expansion and lower yielding, better quality bonds
rated BB during slower economic growth.
We have a "quality first" approach to determining which high-yield bonds
to select. Your Fund generally invests in older, seasoned and larger bond
issues. Also, we examine a company's financial statements and meet with a bond
issuer's senior management.
(Photos of globes, pen and keyboard)
COMMON AND PREFERRED STOCKS
As of January 31, 1997, nearly 6% of your Fund's net assets were
invested in preferred stocks of broadcasting companies and shares of a real
estate investment trust. We held these equities to further diversify the Fund
and capitalize on what we believe were superior income and total return
opportunities.
OUTLOOK
Assuming U.S. economic growth remains moderate for the balance of 1997
and the Federal Reserve Board's current monetary policy effectively keeps
inflation caged, we believe the U.S. high-yield market can continue to reward
income-oriented investors. We expect to continue to allocate a substantial
portion of your Fund's net assets to high-yield bonds. Generally, we
GUIDANCE
6
1997 semi-annual report
<PAGE>
believe income will be the dominant component of total return from all types of
domestic bonds this year.
The past doesn't always repeat itself, but it is worth noting that
between 1980 and 1996, the high-yield bond market, on average, provided a
positive return during the 68 months the Standard & Poor's 500 Index posted a
negative return, according to Chase Securities Inc. Thus, we believe high-yield
bonds have the potential to both diversify and balance an investment portfolio.
MANY EUROPEAN COUNTRIES ARE REFORMING FISCAL POLICY TO REDUCE INFLATION AND
QUALIFY FOR MONETARY UNION.
In fiscal 1997, we anticipate that there will be attractive income and
capital appreciation opportunities in many foreign countries, particularly in
Europe. Many European countries are reforming fiscal policy to reduce inflation
and qualify for monetary union. We are investing accordingly.
We believe the return potential of investment grade U.S. bonds will be
more modest than in the high-yield or overseas market in the coming months. Over
the past two years, even small whiffs of inflation from one or two monthly U.S.
government statistics that do not meet analysts' expectations have caused yields
on investment grade U.S. bonds to rise substantially in a single day. We believe
that these overreactions should eventually subside and that bond market
volatility will return to the historically lower norms seen before the 1990s.
For that to happen, however, we believe the domestic bond market will
need to be convinced, among other things, that Washington has taken effective
steps toward long-term fiscal policy reform. Until that occurs, we expect that
our positioning in U.S. government securities will be modest.
PAUL A. MATLACK
DELAWARE MANAGEMENT COMPANY
U.S. HIGH-YIELD BONDS
PAUL GRILLO
DELAWARE MANAGEMENT COMPANY
U.S. INVESTMENT GRADE BONDS
IAN G. SIMS
DELAWARE INTERNATIONAL
ADVISERS LTD.
FOREIGN BONDS
February 14, 1997
(Photo of globes)
7
1997 semi-annual report
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FIXED-INCOME DIVERSIFICATION HAS HISTORICALLY
GENERATED ATTRACTIVE RETURNS AND REDUCED RISK
Average Annual Total Returns 1986-1996
- ---------------------------------------------
(INSERT CHART HERE)
Plot Points:
Average Annual
Total Return Volatility+
LB High-Yield Bond Index 10.86% 7.3%
LB Global Bond Index 8.47% 4.5%
LB Aggregate Bond Index 11.2% 10.1%
Equal Mix of Each Index 10.36% 4.9%
+ AS MEASURED BY STANDARD DEVIATION. THIS ILLUSTRATION IS NOT INTENDED TO
REPRESENT THE PERFORMANCE OR ASSET ALLOCATION OF STRATEGIC INCOME FUND. PAST
PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Between 1986 and 1996, a portfolio equally balanced between U.S. investment
grade bonds, high-yield bonds and foreign bonds would have provided 93% of the
return of a strictly domestic bond portfolio with less than half the volatility.
STRATEGIC INCOME FUND PERFORMANCE
Aggregate Total Return Through January 31, 1997
- --------------------------------------------------------------------------------
All classes initially offered October 1, 1996
LIFETIME
- --------------------------------------------------------------------------------
Class A (Est.1996) -1.03%
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Class B (Est.1996)
Excluding sales charge +3.65%
Including sales charge -0.35%
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Class C (Est.1996)
Excluding sales charge +3.65%
Including sales charge +2.66%
ALL RESULTS INCLUDE REINVESTMENT OF DISTRIBUTIONS AND THE IMPACT OF ANY
SALES CHARGES AS DESCRIBED BELOW. 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. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE
RESULTS. PERFORMANCE FOR THIS SHORT TIME PERIOD MAY NOT BE INDICATIVE OF FUTURE
RESULTS. B AND C CLASS RESULTS "EXCLUDING SALES CHARGE" ASSUME INVESTMENT WAS
NOT REDEEMED.
CLASS A SHARES REFLECT THE EFFECT OF THE 4.75% MAXIMUM SALES CHARGE AND THE
12B-1 FEE.
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.
A VOLUNTARY EXPENSE LIMITATION OF 0.75% WAS IN EFFECT FOR A, B AND C CLASSES.
RETURNS WOULD HAVE BEEN LOWER HAD THE LIMITATION NOT BEEN IN EFFECT.
THE AGGREGATE TOTAL RETURN FOR THE LIFETIME PERIOD ENDED JANUARY 31, 1997, FOR
STRATEGIC INCOME FUND'S INSTITUTIONAL CLASS, WHICH IS AVAILABLE WITHOUT SALES OR
ASSET-BASED DISTRIBUTION CHARGES ONLY TO CERTAIN ELIGIBLE INSTITUTIONAL
ACCOUNTS, WAS +3.91%.
8
1997 semi-annual report
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Financial Statements
Delaware Group Income Funds, Inc.-
STRATEGIC INCOME FUND
Statement of Net Assets/January 31, 1997
(Unaudited)
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MARKET
PRINCIPAL VALUE
AMOUNT (U.S. $)
CORPORATE BONDS - 46.34%
AEROSPACE & DEFENSE - 0.75%
Lockheed notes 6.75% 03/15/03 ................... 100,000 $ 100,000
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100,000
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AUTOMOBILE & AUTO EQUIPMENT - 3.16%
*CSK Auto sr sub notes 11.00% 11/01/06 ........... 150,000 157,688
*Delco Remy International sr sub notes
10.625% 08/01/06 .............................. 100,000 106,500
*Motors & Gears sr notes 10.75% 1/15/06 .......... 100,000 102,750
Speedy Muffler King notes
10.875% 10/01/06 .............................. 50,000 52,625
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419,563
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BANKING, FINANCE & INSURANCE - 7.98%
Aetna Industries sr notes 11.875% 10/01/06 ...... 100,000 107,750
CNA Financial notes 6.25% 11/15/03 .............. 160,000 154,600
Credit Foncier de France sr unsub seasoned
8.00% 01/14/02 ................................ 200,000 209,500
*Imperial Credit Industries sr notes
9.875% 01/15/07 ............................... 200,000 205,500
Key Bank of Washington sub notes series BKN1
7.125% 08/15/06 ............................... 125,000 124,688
Lehman Brothers Holdings notes
7.25% 10/15/03 ................................ 100,000 100,250
U.S. Bancorp sub notes 8.125% 05/15/02 .......... 150,000 159,000
----------
1,061,288
BUILDING & MATERIALS - 1.16%
*Clarks Material sr notes 10.75% 11/15/06 ........ 100,000 105,125
Ford Motor Credit debs 7.50% 08/01/26 ........... 50,000 49,375
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154,500
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CABLE, MEDIA & PUBLISHING - 3.70%
Adelphia Communications sr notes
12.50% 05/15/02 ............................... 200,000 205,500
Cablevision Industries sr sub notes
10.75% 04/01/04 ............................... 35,000 36,400
*Katz Media sr sub notes 10.50% 01/15/07 ......... 50,000 51,063
News America Holdings debs
8.875% 04/26/23 ............................... 90,000 95,625
Time Warner notes 8.180% 08/15/07 ............... 100,000 103,250
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491,838
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CHEMICALS - 2.79%
*Astor sr sub notes 10.50% 10/15/06 .............. 50,000 52,250
NL Industries sr notes 11.75% 10/15/03 .......... 150,000 158,438
Sterling Chemicals sr sub notes
11.75% 08/15/06 ............................... 150,000 159,938
----------
370,626
----------
COMPUTER & TECHNOLOGY - 0.41%
Unisys sr notes 11.75% 10/15/04 ................. 50,000 53,875
----------
53,875
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<PAGE>
DELAWARE GROUP STRATEGIC INCOME FUND (continued)
STATEMENT OF NET ASSETS (continued)
MARKET
PRINCIPAL VALUE
AMOUNT (U.S. $)
CORPORATE BONDS (CONTINUED)
CONSUMER PRODUCTS - 1.75%
*Pen-Tab Industries sr sub notes
10.875% 02/01/07 ................................ 125,000 $127,031
*Shop Vac sr notes 10.625% 09/01/03 ................ 100,000 106,125
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233,156
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ENERGY - 1.54%
Clark USA sr notes series B
10.875% 12/01/05 ................................ 200,000 204,750
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204,750
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ENVIRONMENTAL SERVICES - 3.08%
*Loomis Fargo & Co sr sub notes
10.00% 01/15/04 ................................. 200,000 205,000
*Petro Stopping Centers sr notes
10.50% 02/01/07 ................................. 200,000 204,500
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409,500
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FOOD, BEVERAGE & TOBACCO - 3.30%
*CFP Holdings sr notes 11.625% 01/15/04 ............ 175,000 180,250
*Core-Mark International sr sub notes
11.375% 09/15/03 ................................ 250,000 257,813
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438,063
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INDUSTRIAL MACHINERY - 1.11%
Goss Graphics System sr sub notes
12.00% 10/15/06 ................................. 50,000 52,438
IMO Industries sr sub notes
11.75% 05/01/06 ................................. 100,000 95,250
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147,688
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LEISURE, LODGING & ENTERTAINMENT - 1.09%
Trump Atlantic City 1st mtg notes
11.25% 05/01/06 ................................. 150,000 145,313
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145,313
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METALS & MINING - 1.75%
Commonwealth Aluminum sr sub notes
10.75% 10/01/06 ................................. 75,000 77,813
Weirton Steel sr notes 11.375% 07/01/04 ........... 150,000 155,438
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233,251
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PACKAGING & CONTAINERS - 1.97%
Four M Corp sr notes series B
12.00% 06/01/04 ................................. 100,000 105,500
Portola Packaging sr notes
10.75% 10/01/05 ................................. 150,000 156,188
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261,688
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RETAIL - 3.50%
Finlay Fine Jewelry sr notes
10.625% 05/01/03 ................................ 50,000 53,125
Fleming Companies sr notes
10.625% 12/15/01 ................................ 300,000 311,250
Grand Union sr notes 12.00% 09/01/04 .............. 100,000 101,500
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465,875
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9
1997 semi-annual report
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DELAWARE GROUP STRATEGIC INCOME FUND (continued)
STATEMENT OF NET ASSETS (continued)
MARKET
PRINCIPAL VALUE
AMOUNT (U.S. $)
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS - 0.28%
Lenfest Communication sr sub notes
10.50% 06/15/06 ............................... 35,000 $ 37,100
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37,100
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TEXTILES & FURNITURE - 0.40%
Clark-Schwebel sr notes series B
10.50% 04/15/06 ............................... 50,000 53,063
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53,063
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TRANSPORTATION & SHIPPING - 2.16%
*Atlantic Express 10.75% 02/01/04 ................ 125,000 128,750
Ameriking sr notes 10.75% 12/01/06 .............. 50,000 52,188
Blue Bird Body sr sub notes
10.75% 11/15/06 ............................... 100,000 105,750
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286,688
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MISCELLANEOUS - 4.46%
*Atrium sr sub notes 10.50% 11/15/06 ............. 150,000 155,063
*Hawk sr notes 10.25% 12/01/03 ................... 225,000 229,781
*LDM Technologies sr sub notes
10.75% 01/15/07 ............................... 200,000 207,500
592,344
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Total Corporate Bonds (cost $6,071,461) ......... 6,160,169
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FOREIGN BONDS - 25.94%
AUSTRALIA - 3.64%
Australian Government 13.00% 07/15/00 ........... 200,000 182,297
Bank of Austria 10.875% 11/17/04 ................ 150,000 134,149
Commerzbank 10.50% 01/19/00 ..................... 200,000 167,424
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483,870
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CANADA - 3.63%
Electric Power Development
10.375% 09/27/01 .............................. 200,000 174,179
General Electric Capital of Canada
7.125% 02/12/04 ............................... 80,000 61,213
InterAmerica Development Bank Notes
7.250% 11/03/03 ............................... 100,000 77,305
Kansai International Airport 8.00% 07/02/03 ..... 80,000 64,070
Kingdom of Norway 8.375% 01/27/03 ............... 130,000 105,982
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482,749
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GREECE - 1.96%
European Investment Bank
17.50% 03/08/99 ............................... 30,000,000 132,303
International Finance 15.25% 05/11/99 ........... 30,000,000 127,942
---------
260,245
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ITALY - 0.75%
Italian Government 10.50% 01/01/03 .............. 130,000,000 99,992
---------
99,992
---------
NEW ZEALAND - 1.07%
New Zealand Government 8.00% 02/15/01 ........... 100,000 70,769
New Zealand Government 8.00% 11/15/06 ........... 100,000 71,802
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142,571
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<PAGE>
MARKET
PRINCIPAL VALUE
AMOUNT (U.S. $)
FOREIGN BONDS (CONTINUED)
SOUTH AFRICA - 4.75%
Electric Supply Communication
11.00% 06/01/08 ................................ 1,800,000 $ 302,789
Republic of South Africa 12.50% 01/15/02 ......... 1,650,000 329,078
---------
631,867
---------
SPAIN - 2.71%
European Investment Bank
8.90% 02/01/01 ................................. 23,000,000 183,138
Spanish Government 11.30% 01/15/02 ............... 20,000,000 176,891
---------
360,029
---------
SWEDEN - 1.88%
Swedish Government 10.25% 05/05/03 ............... 1,500,000 249,775
---------
249,775
---------
UNITED KINGDOM - 5.55%
Abbey National Treasury 8.00% 04/02/03 ........... 80,000 130,026
Anglian Water 12.00% 01/07/14 .................... 60,000 126,403
Blue Circle 10.75% 11/29/13 ...................... 40,000 76,022
Glaxo Wellcome 8.75% 12/01/05 .................... 60,000 100,582
J. Sainsbury 8.25% 12/22/00 ...................... 30,000 49,300
John Lewis 10.50% 01/23/14 ....................... 40,000 75,221
Nippon Telegraph & Telephone
10.88% 05/10/01 ................................ 30,000 53,744
Pearson 10.50% 06/13/08 ......................... 40,000 72,979
Thames Water Utilities 10.50% 11/21/01 ........... 30,000 53,533
---------
737,810
---------
Total Foreign Bonds (cost $3,497,049) ............ 3,448,908
---------
AGENCY MORTGAGE-BACKED
SECURITIES - 4.06%
Federal Home Loan Mortgage Corporation-Gold
7.00% 06/01/11 ................................. 97,146 97,328
FNCL 7.00% 07/01/26 ............................. 49,883 48,917
Federal National Mortgage Association
6.50% 06/01/11 ................................. 100,626 98,991
Federal National Mortgage Association
6.50% 10/01/11 ................................. 75,271 74,048
Federal National Mortgage Association
7.00% 02/01/26 ................................. 52,761 51,771
Federal National Mortgage Association
6.50% 03/01/26 ................................. 98,599 94,347
Federal National Mortgage Association
7.00% 12/01/26 ................................. 75,634 74,121
---------
Total Agency Mortgage-Backed Securities
(cost $540,879) ................................ 539,523
---------
ASSET-BACKED SECURITIES - 1.50%
Green Tree Home Improvement Loan Trust
96-F HEA3
6.90% 01/15/28 .................................. 100,000 99,688
UCFC Home Equity Loan 96-D1 A3
6.541% 11/15/13 ................................ 100,000 99,688
---------
Total Asset-Backed Securites
(cost $199,984) ................................ 199,376
---------
10
1997 semi-annual report
<PAGE>
DELAWARE GROUP STRATEGIC INCOME FUND (continued)
STATEMENT OF NET ASSETS (continued)
MARKET
PRINCIPAL VALUE
AMOUNT (U.S. $)
COLLATERALIZED MORTGAGE
OBLIGATIONS (CMO) - 3.76%
Asset Securization 96-D3 A1B
7.21% 10/13/26 ................................... 100,000 $101,438
Federal Home Loan Mortgage Corporation
6.15% 01/15/17 ................................... 100,000 99,711
Mortgage Capital Funding 96-MC2 A1
6.758% 12/21/26 .................................. 199,434 198,655
Norwest Asset Securities 97-1 A8
7.25% 02/25/12 ................................... 100,000 100,563
Total Collateralized Mortgage Obligations
---------
(cost $503,381) .................................. 500,367
---------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS (GNMA) - 1.76%
GNMA 1 10.00% 07/15/17 ............................ 73,621 81,443
GNMA 9.50% 09/15/17 ............................... 91,375 99,485
GNMA 1 9.00% 12/15/19 ............................. 49,294 52,790
---------
Total Government National Mortgage Association
Obligations (cost $232,379) ....................... 233,718
---------
U.S. TREASURY OBLIGATIONS - 6.34%
U.S. Treasury Note 6.75% 04/30/00 .................. 380,000 386,783
U.S. Treasury Note 6.375% 08/15/02 ................. 140,000 140,609
U.S. Treasury Note 7.50% 02/15/05 .................. 165,000 175,511
U.S. Treasury Note 7.00% 07/15/06 .................. 135,000 139,414
---------
Total U.S. Treasury Obligations
(cost $846,604) .................................. 842,317
---------
COMMON STOCK - 0.96%
REAL ESTATE - 0.96%
**Kilroy Realty ...................................... 5,000 128,125
---------
Total Common Stock (cost $115,000) ................. 128,125
---------
PREFERRED STOCKS - 4.92%
CABLE, MEDIA & PUBLISHING - 4.92%
*American Radio Systems
11.375% 01/15/09 ................................. 2,500 251,875
*Chancellor Radio Broadcast
12.00% 01/15/09 .................................. 2,000 201,500
Pegasus Communications Unit pik
12.75% 01/01/07 .................................. 2,000 200,000
---------
Total Preferred Stocks (cost $650,469) ............. 653,375
---------
<PAGE>
MARKET
VALUE
(U.S. $)
TOTAL MARKET VALUE OF SECURITIES - 95.58%
(cost $12,657,206) ............................................ $12,705,878
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES - 4.42% ......... 587,334
-----------
NET ASSETS APPLICABLE TO 2,373,649 SHARES ($.01 PAR
VALUE) OUTSTANDING - 100.00% .................................. $13,293,212
===========
NET ASSET VALUE - STRATEGIC INCOME FUND A CLASS
($6,044,321 / 1,079,184 Shares) ............................... $ 5.60
===========
NET ASSET VALUE - STRATEGIC INCOME FUND B CLASS
($3,504,149 / 625,485 Shares) ................................. $ 5.60
===========
NET ASSET VALUE - STRATEGIC INCOME FUND C CLASS
($628,094 / 112,329 Shares) ................................... $ 5.59
===========
NET ASSET VALUE - STRATEGIC INCOME FUND INSTITUTIONAL CLASS
($3,116,648 / 556,651 Shares) ................................. $ 5.60
===========
COMPONENTS OF NET ASSETS AT January 31, 1997:
Common stock, $.01 par value, 200,000,000 shares
authorized to the Fund with 100,000,000 shares
allocated to Strategic Income Fund A Class,
25,000,000 shares allocated to Strategic Income
Fund B Class, 25,000,000 shares allocated
to Strategic Income Fund C Class, and
50,000,000 shares allocated to Strategic Income Fund
Institutional Class ............................................ $13,208,945
Accumulated undistributed:
Net investment income .......................................... 9,485
Net realized gain on investments ............................... 30,580
Net unrealized appreciation of investments and
foreign currencies ............................................ 44,202
-----------
Total net assets ............................................... $13,266,212
===========
- ----------
* These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers.
**Non-income producing security for the period ended January 31, 1997.
Summary of Abbreviations:
debs - debentures
mtg - mortgage
pik - pay-in-kind
sec - secured
sr - senior
sub - subordinated
See accompanying notes
11
1997 semi-annual report
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC.
STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
FOR THE PERIOD ENDED
JANUARY 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS:
Investments at market ........................................... $12,705,878
Subscriptions receivable ........................................ 457,785
Interest receivable ............................................. 287,867
Cash and foreign currencies ..................................... 268,331
-----------
Total assets .................................................... 13,719,861
-----------
LIABILITIES:
Payable for securities purchased ................................ 354,938
Liquidations payable ............................................ 16,256
Other accounts payable and
accrued expenses ................................................ 55,455
-----------
Total liabilities ............................................... 426,649
-----------
TOTAL NET ASSETS ................................................ $13,293,212
===========
See accompanying notes
<PAGE>
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED
JANUARY 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest .......................................... $ 242,356
EXPENSES:
Management fees ................................... 17,368
Registration fees ................................. 17,025
Distribution expense .............................. 10,139
Custodian fees .................................... 7,360
Dividend disbursing and transfer agent fees
and expenses ...................................... 7,002
Professional fees ................................. 5,994
Reports and statements to shareholders ............ 3,198
Directors' fees ................................... 989
Accounting fees ................................... 836
Taxes (other than taxes on income) ................ 724
Other ............................................. 3,448
-------
74,083
Less expenses absorbed by
Delaware Management Company .................... 44,298 29,785
------- ---------
NET INVESTMENT INCOME ............................. 212,571
---------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain (loss) on:
Investment transactions ........................... 30,580
Foreign currency .................................. (1,031)
---------
Net realized gain ................................. 29,549
Net unrealized appreciation of investment
and foreign currencies ............................ 44,202
---------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES ................ 73,751
---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ......................... $ 286,322
=========
See accompanying notes
12
1997 semi-annual report
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC.
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED
JANUARY 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
OPERATIONS:
Net investment income ........................................ $ 212,571
Net realized gain on investments and foreign currencies ...... 29,549
Net unrealized appreciation of investments and foreign
currencies .................................................. 44,202
------------
Net increase in net assets resulting from operations ......... 286,322
------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME:
Strategic Income Fund A Class ................................ (84,087)
Strategic Income Fund B Class ................................ (41,933)
Strategic Income Fund C Class ................................ (6,775)
Strategic Income Fund Institutional Class .................... (69,260)
------------
(202,055)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Strategic Income Fund A Class ................................ 6,326,780
Strategic Income Fund B Class ................................ 3,664,406
Strategic Income Fund C Class ................................ 660,125
Strategic Income Fund Institutional Class .................... 3,000,166
Net asset value of shares issued upon reinvestment of
dividends from net investment income:
Strategic Income Fund A Class ................................ 57,964
Strategic Income Fund B Class ................................ 24,767
Strategic Income Fund C Class ................................ 4,208
Strategic Income Fund Institutional Class .................... 62,769
------------
13,801,185
------------
Cost of shares repurchased:
Strategic Income Fund A Class ................................ (358,363)
Strategic Income Fund B Class ................................ (193,877)
Strategic Income Fund C Class ................................ (40,000)
Strategic Income Fund Institutional Class .................... --
------------
(592,240)
------------
Increase in net assets derived
from capital share transactions .............................. 13,208,945
------------
NET INCREASE IN NET ASSETS ................................... 13,293,212
------------
NET ASSETS:
Beginning of period .......................................... --
End of period (including undistributed
net investment income of $9,485) ............................. $ 13,293,212
============
See accompanying notes
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED
JANUARY 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
Delaware Group Income Funds, Inc. - Strategic Income 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. The Fund offers four classes of shares.
The objective of the Fund is to seek to provide investors with high current
income and total return.
1. Significant Accounting Policies
- ----------------------------------
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Fund:
Security Valuation - Securities listed on an exchange are valued at the last
- ------------------
quoted sales price as of 4:00 pm EST on the valuation date. Securities not
traded or 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 are believed to reflect the fair value of such securities.
Money market instruments having less than 60 days to maturity are valued at
amortized cost, which approximates market value.
Federal Income Taxes - 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 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 - Expenses directly attributable to a class are charged to that
- ----------------
class. Other common expenses are prorated between all classes of the Fund.
Foreign Currencies - The value of all assets and liabilities denominated in
- ------------------
foreign currencies are translated into the U.S. dollars at the exchange rate of
such currencies against the U.S. dollar as of 3:00 pm EST. Forward foreign
currency contracts are valued at the mean between the bid and asked prices of
the contracts. Interpolated values are derived when the settlement date of the
contract is an interim date for which quotations are not available.
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. 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
dividends daily from net investment income and pays such dividends monthly.
Certain fund expenses are paid directly by brokers. The amount of these expenses
was less than 0.01% of the Fund's average net assets.
13
1997 semi-annual report
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
2. Investment Management and Distribution Agreements
- ----------------------------------------------------
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 0.65% of average
daily net assets of the fund. DMC has entered into a sub-advisory agreement with
Delaware International Advisers Ltd. (DIAL) with respect to the management of
the investment in foreign securities. DIAL will receive a fee equal to one third
of the investment management fees and other expenses. At January 31, 1997, the
Fund had a liability for Investment Management fees and other expenses payable
to DMC of $3,096.
DMC has elected voluntarily to waive that portion, if any, of the annual
management fees payable for the Fund to the extent necessary to ensure that the
annual operating expenses exclusive of taxes, interest, brokerage commissions,
extraordinary expenses and 12b-1 expenses do not exceed 0.75% for each class
through May 31, 1997. Total expenses absorbed by DMC were $44,298.
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 and C Class. No distribution expenses are paid
by the Institutional Class. At January 31, 1997, the Fund had a liability for
distribution fees and other expenses payable to DDLP of $67,678. For the period
ended January 31, 1997, the Fund paid DDLP $1,992 for commissions earned on
sales of Strategic Income Fund A Class shares.
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 period
ended January 31, 1997, the amount expensed for these services was $7,002. The
Fund also engaged DSC to provide accounting services for the Fund. For the
period ended January 31, 1997, the Fund has expensed $680 for these services. At
January 31, 1997, the Fund had a liability for these and other expenses payable
to DSC for $7,933.
3. Investments
- ---------------
During the period ended January 31, 1997, the Fund made purchases of $18,591,250
and sales of $4,209,169 of investment securities other than direct U.S.
government securities and temporary cash investments.
At January 31, 1997, the aggregate cost of securities for federal income tax
purposes was $12,657,206.
At January 31, 1997, net unrealized appreciation for federal income tax purposes
aggregated $48,673 of which $161,488 related to unrealized appreciation of
securities and $112,815 related to unrealized depreciation of securities.
<PAGE>
4. Capital Stock
- -----------------
Transactions in capital stock shares were as follows:
9/30/96*
to
1/31/97
-------
Shares sold:
Strategic Income Fund A Class ....................... 1,132,914
Strategic Income Fund B Class ....................... 655,731
Strategic Income Fund C Class ....................... 118,731
Strategic Income Fund Institutional Class ........... 545,455
Shares issued upon reinvestment of dividends
from net investment income:
Strategic Income Fund A Class ....................... 10,344
Strategic Income Fund B Class ....................... 4,419
Strategic Income Fund C Class ....................... 751
Strategic Income Fund Institutional Class ........... 11,196
---------
2,479,541
---------
Shares repurchased:
Strategic Income Fund A Class ....................... (64,074)
Strategic Income Fund B Class ....................... (34,665)
Strategic Income Fund C Class ....................... (7,153)
Strategic Income Fund Institutional Class ........... -
(105,892)
---------
Net increase ........................................ 2,373,649
=========
- ----------
*Date of Initial Public offering.
5. Concentration of Credit Risk
- -------------------------------
The Fund invests in high-yield fixed income securities which carry ratings of BB
or lower by Standard & Poors 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 15% 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 that are exempt from registration
under Rule 144A have been denoted in the Statement of Net Assets. Of these
securities, none have been determined to be illiquid.
14
1997 semi-annual report
<PAGE>
6. Financial Highlights
Selected data for each share of the fund outstanding throughout each period were
as follows:
<TABLE>
<CAPTION>
Strategic Income
Strategic Income Strategic Income Strategic Income Fund
Fund Fund Fund Institutional
A Class B Class C Class Class
---------------------------------------------------------------------
9/30/961 9/30/961 9/30/961 9/30/961
to to to to
1/31/97 1/31/97 1/31/97 1/31/97
<S> <C> <C> <C> <C>
Net asset value, beginning of period............................. $5.5000 $5.5000 $5.5000 $5.5000
Income form investment operations:
Net investment income............................................ 0.1129 0.1045 0.1045 0.1202
Net realized and unrealized gain from security transactions ..... 0.0971 0.0960 0.0860 0.0938
------- ------- ------- -------
Total from investment operations................................. 0.2100 0.2005 0.1905 0.2140
Less distributions:
Dividends from net investment income............................. 0.1100 0.1005 0.1005 0.1140
Distributions from net realized gain on security transactions.... none none none none
------- ------- ------- -------
Total distributions.............................................. 0.1100 0.1005 0.1005 0.1140
Net asset value, end of period................................... $5.6000 $5.6000 $5.5900 $5.6000
======= ======= ======= =======
Total return(2).................................................. 3.83% 3.65% 3.66% 3.91%
Ratios/supplemental data:
Net asset, end of period (000 omitted)........................... $6,044 $3,504 $628 $3,117
Ratio of expenses to average net assets.......................... 1.00% 1.75% 1.75% 0.75%
Ratio of expenses to average net assets prior to expense
limitation ..................................................... 2.59% 3.34% 3.34% 2.34%
Ratio of net investment income to average net assets ............ 6.75% 6.00% 6.00% 7.00%
Ratio of net investment income to average net assets prior to
expense limitation ............................................. 5.16% 4.41% 4.41% 5.41%
Portfolio turnover............................................... 140% 140% 140% 140%
</TABLE>
- ----------
(1) Date of initial public offering. Ratios have been annualized and total
return has not been annualized.
(2) Does not include maximum sales charge of 4.75% for A Class nor the limited
contingent deferred sales charge which varies from 1%-4% for B Class and 1%
for C Class depending upon the holding period.
15
1997 semi-annual report
<PAGE>
THIS SEMI-ANNUAL REPORT IS FOR THE INFORMATION OF STRATEGIC INCOME FUND
SHAREHOLDERS, BUT IT MAY BE USED WITH PROSPECTIVE INVESTORS WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS FOR STRATEGIC INCOME 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.
INVESTMENT MANAGER
Delaware Management Company, Inc.
Philadelphia
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
FOR SHAREHOLDERS
1.800.523.1918
FOR SECURITIES DEALERS
1.800.362.7500
FOR FINANCIAL INSTITUTIONS
REPRESENTATIVES
1.800.659.2265
(Photos of globes)
DELAWARE
GROUP
- --------------
Philadelphia * London
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
principal. Shares of the Fund are not bank or credit union deposits.
Copy Rights Delaware Distributors, L.P.
Printed in the USA on
recycled paper
SA-125 [--] PP3/97
ST-10
