<PAGE>
For Current Income
DELAWARE GROUP
Strategic Income Fund
service and guidance
professional management
1997 Annual Report
goals
DELAWARE
GROUP
==========
<PAGE>
A Commitment To Our Investors
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 service and investment management business owned
by Lincoln National Corporation, whose subsidiaries manage more than $115
billion in assets.
(PHOTO OF GLASSES, PEN AND KEYBOARD)
current income
A TRADITION OF SOUND INVESTING
Strategic Income Fund Objective
To seek high current income and total return by using a multi-sector
investment approach, investing principally in three sectors of the
fixed-income securities markets: high-yield, higher risk securities;
investment grade fixed-income securities; and foreign government and other
foreign fixed-income securities.
commitment
(PHOTO OF WATERFALL)
<PAGE>
- --------------------------------------------------------------------------------
August 8, 1997
(PHOTO OF WAYNE A. STORK, CHAIRMAN)
Dear Shareholder:
I AM PLEASED TO PRESENT THE INAUGURAL ANNUAL REPORT of Strategic Income Fund, a
multi-sector bond fund that provides investors with an opportunity to tap the
potential of fixed-income markets in the U.S. and abroad.
Strategic Income Fund provided a total return of +10.11% (with
dividends reinvested for A Class shares at net asset value)* between October
1, 1996, the Fund's inception date, and July 31, 1997, the end of the Fund's
initial fiscal year.
Your Fund's results were affected by its focus on higher risk,
high-yield U.S. bonds. These bonds, the dominant component of your Fund's net
assets for the period, provided more income and were less volatile than
domestic investment grade securities.
In March and April, 1997, when bond prices declined, your Fund's
positioning enabled us to preserve capital to a greater degree than its
unmanaged benchmark, the Lehman Brothers Aggregate Bond Index. However,
Strategic Income Fund did not benefit as much as the index when interest
rates declined sharply in the late spring. Of course, 10 months is too short
IN A YEAR MARKED BY U.S. BOND MARKET VOLATILITY, STRATEGIC INCOME FUND'S
RESULTS DEMONSTRATED THE POTENTIAL BENEFITS OF DIVERSIFICATION FOR
FIXED-INCOME INVESTORS.
The fund's asset allocation as of July 31, 1997, was an attractive
mix of 39.7% domestic higher risk,high-yield bonds, 27.9% investment
grade foreign bonds and 25.0% U.S.government and investment grade
corporate securities, with most of the balance in cash. We believe
this blend has the potential to provide a higher level of income than
a portfolio exclusively composed of U.S. government securities.
In our opinion, an investment strategy that capitalizes on different
sectors of the bond market can lead to reduced portfolio price fluctuation in
the short term. The Fund's initial results seem to be an encouraging sign of
the potential benefits of diversification for fixed-income investors.
*For performance information for all classes, see page 10.
1997 annual report
1
<PAGE>
TOTAL CUMULATIVE RETURN
- --------------------------------------------------------------------------------
October 1,1996
to July 31,1997
- --------------------------------------------------------------------------------
Strategic Income Fund A Class +10.11%
- --------------------------------------------------------------------------------
Lipper Multi-Sector Fund Average (75 funds) +10.72%
Lehman Brothers Aggregate Bond Index +10.76%
- --------------------------------------------------------------------------------
Strategic Income Fund 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 10.
This report comes to you at a fortuitous time for fixed income
markets around the world. Our political leaders in Washington appear to have
embraced a greater sense of fiscal responsibility. Credit quality in the
domestic high-yield market is strong. Overseas, governments are taking steps
to reduce inflation as well as the risk associated with foreign investing.
On the pages that follow, your Fund's management team - Paul Matlack
and Paul Grillo in Philadelphia and Ian Sims in London - explain the Fund's
positioning and offer their views on bond markets in the U.S. and abroad.
I wish to thank you for becoming Strategic Income Fund's charter
shareholders. We appreciate your continuing confidence in Delaware Group.
Sincerely,
/s/ Wayne A. Stork
- ---------------------------
Wayne A. Stork
Chairman, President and Chief Executive Officer
research & discipline
1997 annual report
2
<PAGE>
(PHOTO OF PAUL A. MATLACK)
Your Fund's Portfolio Managers
Paul A. Matlack manages your Fund's high-yield bond component. He holds an
MBA in finance from George Washington University and has 16 years of
investment and credit analysis experience that includes eight years at
Delaware.
(PHOTO OF PAUL GRILLO)
Paul Grillo manages your Fund's U.S. investment grade component. He has
managed investment grade fixed-income portfolios for institutional accounts
at Delaware since 1993. Prior to joining Delaware, he served as a mortgage
strategist and trader at Dreyfus Corp.
(PHOTO OF IAN G. SIMS)
Ian G. Sims manages your Fund's foreign bonds from Delaware International's
London office. Prior to joining Delaware in 1990, he was a senior fixed
income and currency portfolio manager at Hill Samuel Investment Advisers Ltd.
Performance Review
INVESTMENT STRATEGY
FOR THE PAST YEAR, STRATEGIC Income Fund's management team has been building a
fixed-income portfolio that includes several types of bonds:
* government and investment grade corporate bonds,
* higher risk, high-yield U.S. corporate bonds; and,
* foreign government and investment-grade corporate bonds.
The Fund's overall duration, or sensitivity to interest rates, was
lower than our benchmark - the Lehman Brothers Aggregate Bond Index - during
Strategic Income's initial fiscal year. This conservative positioning
reflected our view that world economic growth was likely to be strong,
particularly in the U.S., suggesting that the Federal Reserve Board might
tighten the money supply in an effort to forestall inflation.
1997 annual report
3
<PAGE>
Rather than increase the Fund's income potential by extending
duration and taking on more interest rate risk, your Fund's management
preferred to focus on domestic high-yield bonds that offered acceptable
credit risks as well as investment grade bonds in the U.S. and abroad which
we believed were undervalued.
The Fund's investment parameters allow us to invest between 20% and
60% in any one bond market segment. We strive to carefully weigh the risks
and potential rewards of each segment 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
companies to repay debt; and,
* How inflation, politics, economic conditions and currency changes
within a country may affect the income and total return
potential of foreign bonds.
PORTFOLIO HIGHLIGHTS AND ASSET ALLOCATION
- --------------------------------------------------------------------------------
July 31, 1997
U.S. Investment Grade Corporate Bonds 4.2%
U.S. High-Yield Corporate Bonds 39.7%
Cash Equivalents 5.8%
Common and Preferred Stocks 1.6%
Domestic Government Securities 4.9%
U.S. Mortgage-Backed Securities 13.3%
Foreign Government and Corporate Bonds 27.9%
U.S.Investment
High-Yield Foreign Grade Total Portfolio
- --------------------------------------------------------------------------------
Average Quality B AA AA BBB
Average Effective
Duration 4.8 years 3.9 years 4.5 years 4.6 years
Average Effective
Maturity 7.4 years 5.8 years 6.3 years 6.6 years
Yield Before Expenses 11.26% 9.95% 6.8% 9.60%
Current 30-Day Yield
A Class 7.11%*
*Yield measured according to Securities and Exchange Commission guidelines.
Current 30-Day SEC yield for B and C Classes was 6.68% as of July 31, 1997.
Institutional Class yield was 7.72%.
1997 annual report
4
<PAGE>
HIGH-YIELD U.S. BONDS
A focus on bonds of established domestic companies and careful credit
analysis helped the high-yield component of your Fund's portfolio perform
well in fiscal 1997. The economic climate for higher risk, high-yield bonds
was excellent during the period.
The default rate dropped to 0.83%, the lowest level since 1981.
Demand for high-yield bonds among investors was strong. Consumer and producer
price increases were benign. U.S. economic growth surged ahead at a 5.9%
annualized rate, helping highly leveraged companies meet their debt
obligations.
1997 WAS A WATERSHED PERIOD FOR THE HIGH-YIELD BOND MARKET.
As of July 31, 1997, the domestic corporate high-yield bond market
offered 250 basis points (2.50%) more income potential than comparable
maturity U.S. Treasuries. This yield premium can compensate investors for the
added risks of investing in bonds of corporations whose credit ratings are
less than BBB and which have no U.S. government guarantees of principal or
interest.
Fiscal 1997 was a watershed period for the high-yield bond market.
Investors have been allocating, on average, about $1 billion dollars a month
to mutual funds investing in high-yield securities, according to Strategic
Insight, a research firm.
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.
Despite such enormous growth, overall credit quality has remained
consistent. This provided us with ample opportunity to select high-yield
bonds for your Fund's portfolio. We did especially well with new bond issues,
which offered both attractive income and relative safety of principal.
(PHOTO OF GLOBES)
Declining Default Rates Signal Improved Credit Quality
High-Yield Bond Market Since 1992
Default Rates Since 1992
Y 1992 3.40%
E 1993 1.10%
A 1994 1.45%
R 1995 1.90%
S 1996 1.23%
1997 0.83%
Source: Merrill Lynch
1997 annual report
5
<PAGE>
FOREIGN BONDS
In selecting foreign bonds for the Fund's portfolio, we rely on income
potential as a key measure of value. Our research focuses on long-term
factors such as inflation and trends that can be analyzed with
reasonable certainty.
We place great importance on quality and select only those foreign
bonds rated "A" or better by Standard & Poor's. Generally, the Fund's
holdings will have an average maturity in the five to 10-year range, the
range we believe offers attractive income potential relative to the risk
to principal from fluctuating interest rates. Of course, international
investing has special risks that include less stable economics and
governments, currency fluctuations and different accounting standards.
Your Fund's largest country weightings outside the U.S. were Sweden,
New Zealand and the United Kingdom. In our opinion, intermediate-term Swedish
government bonds offer high income potential after adjusting for currency
fluctuations and inflation, which appears to be relatively modest in Sweden.
Historically, Swedish bonds have typically offered higher yields than German
bunds with only a modestly higher level of risk. The New Zealand market also
remains attractive because the government has been operating at a budget
surplus. New Zealand is also reducing its total government debt burden.
The Fund did not have any currency hedges in place during the period,
and this had a mildly negative affect on performance during the fall of
calendar 1996 because the dollar increased in value relative to other
currencies. In the coming year, we will strive to protect the dollar value of
our investments if we can do so without adversely affecting the Fund's income
potential.
INVESTMENT GRADE U.S. BONDS
During fiscal 1997, we emphasized intermediate-term, government-backed
mortgage securities within the U.S. investment grade portion of your Fund's
portfolio. In our opinion, bonds maturing in five to seven years were the
most attractive subset of this bond market sector.
Our asset allocation as of July 31, 1997 was weighted toward commercial
and residential mortgages, complemented by investment grade
(PHOTO OF KEYBOARD)
1997 annual report
6
<PAGE>
corporate bonds, collateralized mortgage obligations and U.S. Treasuries. To
reduce mortgage prepayment risks, which can occur when interest rates drop
sharply, we attempted to select pools of mortgages with certain favorable
homeowner characteristics such as low loan balances, typically less than
$60,000. Such mortgages have historically been prepaid to a lesser degree than
larger loans because the potential interest savings for a homeowner is too small
to justify refinancing costs.
In calendar 1996, we emphasized corporate bonds of financial firms
and this served your Fund well. However, because of an uncertain outlook for
interest rates, we reduced our position in this area in calendar 1997 and
instead are focusing on companies whose prospects did not appear tied to
overall U.S. economic growth.
Chart:
WE SEARCH THE WORLD FOR HIGH INCOME POTENTIAL
(Yields measured in U.S. dollars)
Treasury Swedish British New Zealand
Bonds Government Corporate U.S.Treasury Government
Bonds Bonds Bonds Bonds
3 mo. 3.94% 5.24% 8.12%
M 6 mo. 4.14% 7.12% 5.32% 7.85%
A 1 yr. 4.37% 7.50% 5.43% 7.33%
T 2 yr. 4.81% 7.32% 5.732%
U 3 yr. 5.25% 7.06% 5.79% 6.97%
R 4 yr. 5.52% 7.28% 6.87%
I 5 yr. 5.69% 7.16% 5.90% 6.81%
T 6 yr. 5.87%
Y 7 yr. 7.25% 6.75%
8 yr. 6.17%
9 yr.
10 yr. 6.39% 7.20% 6.01% 6.69%
15 yr. 6.50% 7.62% 6.63%
20 yr. 7.16%
30 yr. 6.30%
YIELD
The above illustration is not intended to represent the yield of Strategic
Income Fund. Past performance does not guarantee future results. Unlike U.S.
Treasuries, foreign bonds have currency, political and economic risks and are
not guaranteed by the U.S. government.
COMMON AND PREFERRED STOCKS
As of July 31, 1997, approximately 1.6% 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 to capitalize on what we believe are superior income and total return
opportunities.
1997 annual report
7
<PAGE>
While your Fund has the ability to raise its equity component to 10%
of net assets, given the current price levels of many stocks we do not
anticipate a substantial increase in your Fund's allocation to this sector in
the coming months.
(PHOTO OF FAMILY ON BEACH)
OUTLOOK
We believe we are in the midst of an exceptionally attractive period for
fixed-income investments around the world. In the U.S., inflation appears
firmly at bay. Across the globe, fundamental economic and political reforms
are taking place which, in our opinion, could lead to greater regional
financial stability and less risk over time. Consider that:
* For the first time since Dwight Eisenhower's presidency, America's
political leaders have passed what could be a balanced federal budget. If
this occurs, many economists believe it may have a positive effect on
domestic bond prices.
* The popularity and relative credit quality of the U.S. high-yield bond
market has never been greater. Most high-yields currently being issued have
BB or B ratings, the upper credit quality tiers of the market.
* Europe's leaders are gradually accepting the need for greater fiscal
discipline to achieve monetary union. Privatization efforts are relieving
taxpayers of the need to support inefficient state enterprises
FIXED-INCOME DIVERSIFICATION HAS HISTORICALLY
GENERATED ATTRACTIVE RETURNS AND REDUCED RISK
- -------------------------------------------------------------------------------
Average Annual Total Returns July 1987 - July 1997
Average Annual Total Return Volatility+
--------------------------- ----------
Lehman Brothers
High Yield Bond Index 11.2% 7.2%
Lehman Brothers
Global Bond Index 9.4% 10.0%
Lehman Brothers
Aggregate Bond Index 9.1% 4.4%
Equal Mix of Each Index 10.1% 4.8%
+ 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. Source: Lipper
Analytical Services.
1997 annual report
8
<PAGE>
and central banks are being given greater autonomy.
In the months ahead, we expect to maintain a strong weighting in the
U.S. high-yield corporate bond market because of the underlying strength of
the U.S. economy and the superior income potential offered by non-investment
grade bonds. Although the additional yield provided by high-yield bonds
relative to U.S. investment grade bonds is near a historical low, we believe
investors are still being adequately compensated for the sector's additional
risks.
ACROSS THE GLOBE, FUNDAMENTAL ECONOMIC AND POLITICAL REFORMS ARE TAKING PLACE
THAT, IN OUR OPINION, COULD LEAD TO GREATER REGIONAL FINANCIAL STABILITY AND
LESS RISK OVER TIME.
Overseas, we anticipate gradually reducing our weighting in some
European countries - namely Spain and Greece - whose bonds have provided
strong total return in anticipation of European monetary union. In the United
Kingdom, where the new Labour Party government appears to be acting
prudently, we expect to continue to focus on high quality corporate bonds.
These securities, which include bonds issued by utilities and pharmaceutical
companies, served the Fund well during our initial year.
As of July 31, the nation's unemployment rate was at its lowest level
since the early 1970s. This signals a need for continuing caution about
short-term consumer price trends. In our opinion, uncertainty about inflation
is likely to keep the yield on long-term U.S. Treasuries within a range of 6%
to 7% for the balance of calendar 1997.
By keeping a balanced mix of domestic and overseas fixed-income
investments, we believe we have positioned Strategic Income Fund to both
benefit from a rally that might occur in a given market as well as help
cushion the impact of a short-term setback in any one sector or country.
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
Foreign Bonds
August 15, 1997
1997 annual report
9
<PAGE>
Fund Performance
Strategic Income Fund's Lifetime Performance
Growth of a $10,000 Investment
October 1, 1996 to July 31, 1997
Strategic Income Fund A Lehman Brothers Aggregate Bond Index
Oct. 1 '96 $ 9,532 $10,000
Oct 31 '96 $ 9,635 $10,222
Nov. 29 '96 $ 9,821 $10,397
Dec. 31 '96 $ 9,850 $10,300
Jan. 31 '97 $ 9,897 $10,332
Feb. 28 '97 $10,033 $10,358
Mar. 31 '97 $ 9,902 $10,243
Apr. 30 '97 $ 9,950 $10,397
May 30 '97 $10,161 $10,495
Jun. 30 '97 $10,354 $10,620
Jul. 31 '97 $10,476 $10,907
Chart assumes $10,000 invested on October 1, 1996, a 4.75% maximum front-end
sales charge and reinvestment of all distributions. Performance for other
Fund classes will vary due to differing charges and expenses. Performance for
the short time frame shown above may not be representative of longer term
results.
STRATEGIC INCOME FUND PERFORMANCE
Cumulative Total Return, October 1, 1996 to July 31, 1997
- --------------------------------------------------------------------------------
Lifetime
- --------------------------------------------------------------------------------
Class A
Excluding sales charge +10.11%
Including sales charge +4.95%
- --------------------------------------------------------------------------------
Class B
Excluding sales charge +9.53%
Including sales charge +5.53%
- --------------------------------------------------------------------------------
Class C
Excluding sales charge +9.53%
Including sales charge +8.53%
- --------------------------------------------------------------------------------
Strategic Income Fund invests a portion of its portfolio 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.
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%, excluding 12b-1 fees, was in effect
for A, B and C classes. Returns would been lower had the limitation not been
in effect.
The cumulative total return for the lifetime period ended July 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 +10.36%.
1997 annual report
10
<PAGE>
Financial Statements
DELAWARE GROUP INCOME FUNDS, INC. -
STRATEGIC INCOME FUND
STATEMENT OF NET ASSETS
JULY 31,1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Principal Value
Amount* (U.S. Dollars)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS - 44.03%
Aerospace & Defense - 0.48%
Lockheed notes 6.75% 03/15/03 ................... $100,000 $101,625
--------
101,625
--------
AUTOMOBILE & AUTO EQUIPMENT - 1.76%
Aetna Industries sr notes 11.88% 10/01/06 ....... 100,000 110,750
CSK Auto sr sub notes 11.00% 11/01/06 ........... 150,000 160,125
Motors & Gears sr notes 10.75% 11/15/06 ......... 100,000 105,250
--------
376,125
--------
BANKING, FINANCE & INSURANCE - 3.24%
Credit Foncier de France sr sub notes 8.00%
01/14/02 ....................................... 200,000 212,000
Hutchison Whampoa Finance 6.95% 08/01/07 ........ 100,000 101,250
Petrozuata Finance 8.22% 04/01/17 ............... 100,000 107,875
Summit Bancorp sub notes 8.63% 12/10/02 ......... 100,000 109,750
U.S. Bancorp sub notes 8.125% 05/15/02 .......... 150,000 160,875
--------
691,750
--------
BUILDING & MATERIALS - 2.94%
Atrium sr sub notes 10.50% 11/15/06 ............. 150,000 155,250
Clark Materials Handling 10.75% 11/15/06 ........ 100,000 106,625
Reliant Building sr sub notes 10.875% 05/01/04 .. 350,000 365,750
--------
627,625
--------
CABLE, MEDIA & PUBLISHING - 3.04%
Adelphia Communications sr notes 11.875%
09/15/04 ....................................... 300,000 324,750
STC Broadcasting sr sub notes 11.00%
03/15/07 ....................................... 300,000 324,000
--------
648,750
--------
CHEMICALS - 4.38%
Harris Chemical North America sr sub notes 10.75%
10/15/03 ....................................... 350,000 361,813
Huntsman sr sub notes 9.50% 07/01/07 ............ 175,000 181,125
Hydrochem Industrial sr sub notes 10.375%
08/01/07 ....................................... 225,000 228,938
Sterling Chemicals sr sub notes 11.75%
08/15/06 ....................................... 150,000 165,000
--------
936,876
--------
COMPUTER & TECHNOLOGY - 3.36%
Decisionone Corporate Notes 9.75% 08/01/07 ...... 225,000 230,625
Decisionone Holdings Units 11.50% 08/01/08 ...... 225,000 128,880
Precise Technology sr sub notes 11.125%
06/15/07 ...................................... 350,000 359,625
--------
719,130
--------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Principal Value
Amount* (U.S. Dollars)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER PRODUCTS - 0.60%
Pen-Tab Industries sr sub notes 10.875%
02/01/07 ...................................... $125,000 $127,500
--------
127,500
--------
ELECTRONICS/ELECTRICAL EQUIPMENT - 2.01%
HCC Industries sr sub notes 10.75% 05/15/07 ..... 300,000 319,125
IMO Industries sr sub notes 11.75% 05/01/06 ..... 100,000 111,500
--------
430,625
--------
ENERGY - 3.19%
Transamerican Energy sr notes 11.50% 06/15/02 ... 325,000 325,813
United Refining 10.75% 06/15/07 ................. 350,000 355,250
--------
681,063
--------
FOOD, BEVERAGE & TOBACCO - 1.34%
AFC Enterprises sr sub notes 10.25% 05/15/07 .... 100,000 104,500
CFP Holdings sr notes 11.625% 01/15/04 .......... 175,000 181,563
--------
286,063
--------
HEALTHCARE & PHARMACEUTICALS - 0.59%
Cardinal Health notes 6.00% 01/15/06 ............ 130,000 125,938
--------
125,938
--------
INDUSTRIAL MACHINERY - 3.09%
American Builders & Contractors sr sub notes
10.625% 05/15/07 .............................. 300,000 313,875
DiGiorgio sr notes 10.00% 06/15/07 .............. 350,000 347,375
--------
661,250
--------
LEISURE, LODGING & ENTERTAINMENT - 1.76%
Hollywood Theaters sr sub notes 10.625% 08/01/07 225,000 225,000
Trump Atlantic City 1st mtg notes 11.25% 05/01/06 150,000 151,500
--------
376,500
--------
METALS & MINING - 2.53%
Barrick Gold deb 7.50% 05/01/07 ................. 100,000 105,875
Weirton Steel sr notes 11.375% 07/01/04 ......... 400,000 435,000
--------
540,875
--------
PACKAGING & CONTAINERS - 1.24%
Four M Corp sr notes series B 12.00%
06/01/06 ...................................... 100,000 107,500
Portola Packaging sr notes 10.75% 10/01/05 ...... 150,000 156,750
--------
264,250
--------
PAPER & FOREST PRODUCTS - 1.65%
Drypers sr notes 10.25% 06/15/07 ................ 350,000 351,750
--------
351,750
--------
</TABLE>
1997 annual report
11
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Principal Value
Amount* (U.S. Dollars)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
RETAIL - 1.71%
Central Tractor sr notes 10.625% 04/01/07 ... $ 75,000 $ 78,750
Leslie's Poolmart sr notes 10.375% 07/15/04 . 275,000 287,375
------------
366,125
------------
TEXTILES & FURNITURE - 3.03%
Anvil Knitwear sr notes 10.875% 03/15/07 .... 300,000 307,500
Riddell Sports sr notes 10.50% 07/15/07 ..... 325,000 339,219
------------
646,719
------------
TRANSPORTATION & SHIPPING - 2.09%
Ameriking sr notes 10.75% 12/01/06 .......... 250,000 265,625
Continental Airlines pass thru cert 7.206%
12/30/05 .................................. 75,000 76,406
Federal Express pass thru cert 7.65%
01/15/14 .................................. 100,000 105,125
Federal Express pass thru cert 7.85% 01/30/15 401 427
------------
447,583
------------
Total Corporate Bonds (cost $9,162,238) ..... 9,408,122
------------
FOREIGN BONDS - 27.89%
AUSTRALIA - 3.38%
Australian Government 13.00% 07/15/00 .......AS 200,000 179,136
Bank of Austria 10.875% 11/17/04 ............ 150,000 137,300
Commerzbank 10.50% 01/19/00 ................. 200,000 164,872
Queensland Treasury Global 8.00% 08/14/01 ... 300,000 240,815
------------
722,123
------------
CANADA - 2.25%
Electric Power Development 10.375% 09/27/01 .CS 200,000 170,741
General Electric Capital of Canada 7.125%
02/12/04 .................................. 80,000 62,203
InterAmerica Development Bank Notes 7.25%
11/03/03 .................................. 100,000 78,207
Kansai International Airport 8.00% 07/02/03 . 80,000 64,524
Kingdom of Norway 8.375% 01/27/03 ........... 130,000 106,090
------------
481,765
------------
GREECE - 2.09%
European Investment Bank 17.50% 03/08/99 ....Grd 30,000,000 118,923
Hellenic Republic 11.00% 11/26/99 ........... 60,000,000 213,332
International Finance 15.25% 05/11/99 ....... 30,000,000 115,272
------------
447,527
------------
ITALY - 2.77%
European Investment Bank 12.75% 02/15/00 ....Itl 300,000,000 193,453
Italian Government 9.50% 02/01/01 ........... 500,000,000 307,798
Italian Government 12.00% 01/01/03 .......... 130,000,000 91,108
------------
592,359
------------
NEW ZEALAND - 4.46%
New Zealand Government 6.50% 02/15/00 .......NZS 400,000 257,134
New Zealand Government 8.00% 02/15/01 ....... 350,000 235,321
New Zealand Government 8.00% 11/15/06 ....... 650,000 460,011
------------
952,466
------------
</TABLE>
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Principal Value
Amount* (U.S. Dollars)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN BONDS (CONTINUED)
SOUTH AFRICA - 4.06%
Electric Supply Communication 11.00% 06/01/08...Sa 1,800,000 $ 320,712
Republic of South Africa 12.50% 01/15/02 ....... 2,650,000 547,605
----------
868,317
----------
SWEDEN - 4.67%
Swedish Government 10.25% 05/05/00 .............Sk 1,800,000 253,191
Swedish Government 10.25% 05/05/03 ............. 4,000,000 604,741
Swedish Government 8.00% 08/15/07 .............. 1,000,000 139,854
----------
997,786
----------
UNITED KINGDOM - 4.21%
Abbey National Treasury 8.00% 04/02/03 .........Gbp 80,000 134,427
Anglian Water 12.00% 01/07/14 .................. 60,000 137,174
BOC Group plc 6.75% 02/18/04 ................... 75,000 118,413
Blue Circle 10.75% 11/29/13 .................... 40,000 83,043
Glaxo Wellcome 8.75% 12/01/05 .................. 60,000 106,049
J. Sainsbury 8.25% 12/22/00 .................... 30,000 50,195
John Lewis 10.50% 01/23/14 ..................... 40,000 82,879
Nippon Telegraph & Telephone 10.875%
05/10/01 ..................................... 30,000 54,501
Pearson 10.50% 06/13/08 ....................... 40,000 77,835
Thames Water Utilities 10.50% 11/21/01 ......... 30,000 54,255
----------
898,771
----------
Total Foreign Bonds (cost $6,187,823) .......... 5,961,114
----------
AGENCY MORTGAGE-BACKED
SECURITIES - 3.71%
Federal Home Loan Mortgage Corporation - Gold
7.00% 06/01/11 ............................... $ 92,707 94,098
Federal Home Loan Mortgage Corporation 7.00%
07/01/11 ..................................... 97,201 98,659
Federal Home Loan Mortgage Corporation 6.15%
01/15/17 ..................................... 100,000 100,159
Federal Home Loan Mortgage Corporation 6.00%
11/01/26 ..................................... 70,188 67,183
Federal National Mortgage Association 7.00%
02/01/26 ..................................... 51,192 51,256
Federal National Mortgage Association 7.00%
07/01/26 ..................................... 49,222 49,253
Federal National Mortgage Association 7.00%
12/01/26 ..................................... 74,566 74,566
Government National Mortgage Association
10.00% 07/15/17 .............................. 73,069 80,718
Government National Mortgage Association
9.50% 09/15/17 ............................... 72,961 79,595
Government National Mortgage Association
7.00% 11/15/23 ............................... 97,442 98,203
----------
Total Agency Mortgage-Backed Securities
(cost $781,170) .............................. 793,690
----------
</TABLE>
1997 annual report
12
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Principal Value
Amount* (U.S. Dollars)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES - 2.57%
CIT Group Securitization - Series 95-2 A2 6.00%
05/15/26 .......................................... $ 100,000 $ 99,778
Countrywide Home Equity Loan - Series 97-1 A4
6.95% 05/25/21 .................................... 100,000 100,656
First Union Residential Securitization Trust - Series
96-2 A2 6.46% 09/25/11 ............................ 140,000 140,131
MetLife Capital Equipment Loan Trust Series
97-AA 6 85% 05/20/08 .............................. 100,000 103,594
The Money Store Home Equity Trust Series
97-AA9 7 235% 04/15/27 ............................ 100,000 104,016
----------
Total Asset-Backed Securities
(cost $537,000) ................................... 548,175
----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 9.60%
Asset Securitization Corporation
Series 96-D3 A1B 7.21% 10/13/26 ..................... 100,000 104,000
Series 96-D2 A1 6.92% 02/14/29 ...................... 73,204 75,091
Series 97-D4 A1A 7.35% 04/14/29 ..................... 192,665 199,408
First Union-Lehman Brothers Commercial
Mortgage - Series 97-C1 A1 7.15%
02/18/04 .......................................... 98,964 102,591
Merrill Lynch Mortgage Investors-Series 97-C1 A1
6.95% 06/18/29 .................................... 99,702 102,584
Morgan Stanley Capital Trust-Series 97-C1 A1B
7.46% 02/15/20 .................................... 200,000 210,188
Mortgage Capital Funding - Series 96-MC2 A1
6.758% 12/21/26 ................................... 97,787 99,315
Nomura Asset Securities - Series 95-MD3 A1A
8.17% 03/04/20 .................................... 67,503 70,963
Norwest Asset Securities-Series 97-1 A8 7.25%
02/25/12 .......................................... 98,121 101,095
Residential Accredit Loans
Series 97-QS6 A 7.50% 06/25/12 ...................... 149,562 156,783
Series 96-QS2 A6 7.45% 04/25/23 ..................... 75,000 76,219
Series 96-QS3 AI3 7.29% 06/25/26 .................... 175,000 177,270
Series 97-QS1 A8 6.75% 02/25/27 ..................... 300,000 299,063
Series 96-A4 A5 7.50% 04/25/27 ...................... 100,000 102,313
Residential Funding Mortgage - Series 1994-S10
6.50% 03/25/09 .................................... 100,000 100,286
Travelers Mortgage Securities - Series 1 Z2
12.00% 03/01/14 ................................... 65,650 75,497
----------
Total Collateralized Mortgage Obligations
(cost $2,007,943) ................................. 2,052,666
----------
MUNICIPAL BONDS - 0.48%
Philadelphia,Pennsylvania Authority For
Industrial Development Tax Claim Revenue -
Class A 6.4880% 06/15/04 ........................... 100,000 102,212
----------
Total Municipal Bonds
(cost $100,000) ................................... 102,212
----------
</TABLE>
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Principal Value
Amount* (U.S. Dollars)
- ------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS - 4.38%
U.S. Treasury Bonds 6.25% 08/15/23 ........ $300,000 $295,815
U.S. Treasury Bonds 6.625% 02/15/27 ....... 50,000 52,234
U.S. Treasury Notes 6.625% 05/15/07 ....... 75,000 78,367
U.S. Treasury Notes 6.25% 06/30/02 ........ 100,000 101,425
U.S. Treasury Notes 6.25% 02/15/03 ........ 200,000 203,166
U.S. Treasury Notes 6.75% 04/30/00 ........ 50,000 51,197
U.S. Treasury Notes 6.50% 05/15/05 ........ 25,000 25,734
+U.S. Treasury Notes 6.25% 08/31/00 ........ 100,000 101,247
U.S. Treasury Notes 7.00% 07/15/06 ........ 25,000 26,605
--------
Total U.S. Treasury Obligations
(cost $909,526) ......................... 935,790
--------
COMMON STOCK - 0.59%
Real Estate - 0.59%
Kilroy Realty ............................. 5,000 125,625
--------
Total Common Stock (cost $115,000) ........ 125,625
--------
PREFERRED STOCK - 1.00%
Cable, Media & Publishing - 1.00%
** American Radio Systems 11.375% 01/15/09. 59 6,549
Pegasus Communications Unit pik
12.75% 01/01/07 ......................... 2,000 207,000
--------
Total Preferred Stocks (cost $205,763) .... 213,549
--------
REPURCHASE AGREEMENTS - 1.18%
With Chase Manhattan 5.72% 8/1/97 (dated
7/31/97, collateralized by $85,000 U.S. ..
Treasury Notes 5.625% due 11/30/98
market value $85,932) ................... 84,000 84,000
With JP Morgan Securities 5.72% 8/1/97
(dated 7/31/97, collateralized by $44,000
U.S. Treasury Notes 6.875% due 7/31/99
market value $45,331 and $38,000 U.S. ....
Treasury Notes 7.50% due 10/31/99
market value $39,977) ................... 84,000 84,000
With Paine Webber 5.72% 8/1/97 (dated
7/31/97, collateralized by $86,000 U.S....
Treasury Notes 6.25% due 6/30/98 market
value $87,090) .......................... 85,000 85,000
--------
Total Repurchase Agreements (cost $253,000) 253,000
--------
</TABLE>
1997 annual report
13
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
(U.S. Dollars)
- ------------------------------------------------------------------------------------------
<S> <C>
TOTAL MARKET VALUE OF SECURITIES - 95.43%
(cost $20,259,463) ...................................... $20,393,943
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES - 4.57% ... 977,125
-----------
NET ASSETS APPLICABLE TO SHARES 3,748,549 ($.01 PAR VALUE)
OUTSTANDING - 100.00% ................................... $21,371,068
===========
NET ASSET VALUE - STRATEGIC INCOME FUND A CLASS
($9,144,206 / 1,603,689 shares) ......................... $ 5.70
===========
NET ASSET VALUE - STRATEGIC INCOME FUND B CLASS
($6,878,213 / 1,206,422 shares) ......................... $ 5.70
===========
NET ASSET VALUE - STRATEGIC INCOME FUND C CLASS
($1,944,051 / 340,844 shares) ........................... $ 5.70
===========
NET ASSET VALUE - STRATEGIC INCOME FUND INSTITUTIONAL CLASS
($3,404,598 / 597,594 shares) ........................... $ 5.70
===========
COMPONENTS OF NET ASSETS AT JULY 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 .......................... $20,931,961
Accumulated net realized gain on investments .............. 307,281
Net unrealized appreciation of investments and
foreign currencies ....................................... 131,826
-----------
Total net assets .......................................... $21,371,068
===========
</TABLE>
- ----------
* Principal amount is stated in the currency in which each fund is
denominated.
A$ - Australian Dollar NZ$ - New Zealand Dollar
C$ - Canadian Dollar Sa - South Africa
Gbp - British Pounds Sk - Swedish Kroner
Grd - Greek Drakma $ - U.S. Dollar
Itl - Italian Lire
**Non-income producing security.
+ Principal amount of $50,000 pledged as initial margin for futures
transactions.
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
STRATEGIC INCOME FUND A CLASS
Net asset value A Class (A) ................................. $5.70
Sales Charge (4.75% of offering price or 4.91%, of the amount
invested per share) (B) .................................... 0.28
-----
Offering price .............................................. $5.98
=====
- ----------
(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. -
STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments at market (cost $20,259,463) ............ $20,393,943
Receivable for securities sold ...................... 1,209,790
Dividends and interest receivable ................... 432,301
Cash and foreign currencies ......................... 241,370
Subscriptions receivable ............................ 181,801
Other assets ........................................ 54,787
-----------
Total assets ....................................... 22,513,992
-----------
LIABILITIES:
Payable for securities purchased .................... 903,681
Other accounts payable and accrued expenses ......... 222,789
Liquidations payable ................................ 16,454
-----------
Total liabilities .................................. 1,142,924
-----------
TOTAL NET ASSETS .................................... $21,371,068
===========
See accompanying notes
1997 annual report
14
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 1, 1996*
TO JULY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest ................................ $ 985,934
Dividends ............................... 3,229
Foreign tax withheld .................... (1,011) $ 988,152
-----------
EXPENSES:
Management fees ......................... 73,164
Custodian fees .......................... 9,206
Dividend disbursing and transfer agent fees
and expenses ........................... 25,437
Distribution expense .................... 52,229
Registration fees ....................... 35,495
Reports and statements to shareholders .. 10,323
Accounting fees and salaries ............ 5,133
Professional fees ....................... 15,990
Directors' fees ......................... 2,122
Taxes (other than taxes on income) ...... 1,429
Amortization of organization expenses ... 27,549
Other .................................... 4,387
-----------
262,464
Less expenses absorbed by Delaware
Management Company, Inc. ............... (127,136) 135,328
----------- -----------
NET INVESTMENT INCOME ................... 852,824
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investment transactions ................ 327,835
Foreign currencies ..................... (18,681)
-----------
Net realized gain ....................... 309,154
Net unrealized appreciation during the period 131,826
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN
CURRENCIES ............................. 440,980
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ........................ $ 1,293,804
===========
</TABLE>
- ----------
* Date of commencement of operations.
See accompanying notes.
<PAGE>
DELAWARE GROUP INCOME FUND, INC. -
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD OCTOBER 1, 1996*
TO JULY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................................. $ 852,824
Net realized gain on investments and foreign currencies 309,154
Net unrealized appreciation during the period ......... 131,826
------------
Net increase in net assets resulting from operations .. 1,293,804
------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Strategic Income Fund A Class ........................ (372,603)
Strategic Income Fund B Class ........................ (225,684)
Strategic Income Fund C Class ........................ (55,686)
Strategic Income Fund Institutional Class ............ (200,724)
------------
(854,697)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Strategic Income Fund A Class ........................ 9,997,064
Strategic Income Fund B Class ........................ 7,087,454
Strategic Income Fund C Class ........................ 2,029,588
Strategic Income Fund Institutional Class ............ 3,112,438
Net asset value of shares issued upon reinvestment
of dividends from net investment income:
Strategic Income Fund A Class ........................ 250,324
Strategic Income Fund B Class ........................ 129,461
Strategic Income Fund C Class ........................ 23,810
Strategic Income Fund Institutional Class ............ 194,119
------------
22,824,258
------------
Cost of shares repurchased:
Strategic Income Fund A Class ........................ (1,269,709)
Strategic Income Fund B Class ........................ (464,293)
Strategic Income Fund C Class ........................ (142,624)
Strategic Income Fund Institutional Class ............ (15,671)
------------
(1,892,297)
------------
Increase in net assets derived from capital
share transactions ................................... 20,931,961
------------
NET INCREASE IN NET ASSETS ............................ 21,371,068
NET ASSETS:
Beginning of period ................................... --
------------
End of period ......................................... $ 21,371,068
============
</TABLE>
See accompanying notes
1997 annual report
15
<PAGE>
DELAWARE GROUP INCOME FUND, INC. - STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout the
period was as follows:
<TABLE>
<CAPTION>
Strategic
Strategic Strategic Strategic Income
Income Income Income Fund
Fund Fund Fund Institutional
A Class B Class C Class Class
----------------------------------------------------------
10/01/96(1) 10/01/96(1) 10/01/96(1) 10/01/96(1)
to to to to
07/31/97 07/31/97 07/31/97 07/31/97
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................... $ 5.5000 $ 5.5000 $ 5.5000 $ 5.5000
Income from investment operations:
Net investment income .............................. 0.3373 0.3076 0.3131 0.3670
Net realized and unrealized gain from
investments & foreign currencies .................. 0.2037 0.2036 0.1981 0.1870
------ ------ ------ ------
Total from investment operations ................... 0.5410 0.5112 0.5112 0.5540
------ ------ ------ ------
Less dividends:
Dividends from net investment income ............... (0.3410) (0.3112) (0.3112) (0.3540)
------- ------- ------- -------
Total dividends .................................... (0.3410) (0.3112) (0.3112) (0.3540)
------- ------- ------- -------
Net asset value, end of period ......................... $ 5.7000 $ 5.7000 $ 5.7000 $ 5.7000
======== ======== ======== ========
Total return(2) ........................................ 10.11% 9.53% 9.53% 10.36%
Ratios and supplemental data
Net assets, end of period (000 omitted) ............ $ 9,144 $6,878 $1,944 $3,405
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 ................................ 2.12% 2.87% 2.87% 1.87%
Ratio of net investment income to average net assets 7.76% 7.01% 7.01% 7.90%
Ratio of net investment income to average net assets
prior to expense limitation ....................... 6.64% 5.89% 5.89% 6.78%
Portfolio turnover ................................. 183% 183% 183% 183%
</TABLE>
- ----------
1 Date of commencement of trading; ratios have been annualized and total
returns have not been annualized.
2 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. Does not include
contingent deferred sales charge which varies from 1-4% depending upon the
holding period for B Class and 1% for C Class.
See accompanying notes.
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
- --------------------------------------------------------------------------------
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 and offers four classes of shares. The Strategic
Income Fund A Class carries a front-end sales charge of 4.75%. The
Strategic Income Fund B Class carries a back-end deferred sales charge. The
Strategic Income Fund C Class carries a level load deferred sales charge
and Strategic Income Fund Institutional Class has no sales charge.
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 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. Securities listed on
a foreign exchange are valued at the last quoted sales price before the
Fund is valued. Long-term
1997 annual report
16
<PAGE>
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
debt securities are valued by an independent pricing service and such
prices are believed to reflect the fair value of such securities. Money
market instruments having less than 60 days to maturity are valued at
amortized cost which approximates market value. 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 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.
Foreign Currency Transactions - Transactions denominated in foreign
currencies are recorded in the Fund's records at the current prevailing
exchange rates. The value of all assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at the exchange rate of
such currencies against the U.S. dollar as of 3:00 PM EST. Transaction
gains or losses resulting from changes in exchange rates during the
reporting period or upon settlement of the foreign currency transaction are
reported in operations for the current period. It is not practical to
isolate that portion of both realized and unrealized gains and losses on
investments in equity securities in the statement of operations that result
from fluctuations in foreign currency exchange rates. The Fund does isolate
that portion of gains and losses on investments in debt securities which
are due to changes in the foreign exchange rate from that which are due to
changes in market prices of debt securities. The Fund reports certain
foreign currency related transactions as components of realized gains for
financial reporting purposes, whereas such components are treated as
ordinary income (loss) for federal income tax purposes.
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. Foreign dividends are also
recorded on the ex-dividend date or as soon after the ex-dividend date that
the Fund is aware of such dividends, net of all non-rebatable tax
withholdings. Original issue discounts are accreted to interest income over
the lives of the respective securities. Withholding taxes on foreign
interest have been provided for in accordance with the Fund's understanding
of the applicable country's tax rules and rates. The Fund declares
dividends daily from net investment income and pays such dividends monthly
and declares and pays distributions from net realized gain on investment
transactions, if any, semi-annually.
<PAGE>
Certain Fund expenses are paid through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Fund's
average daily net assets.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the
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% on
the first $500 million of average daily net assets, 0.625% on the next $500
million and 0.60% on the average daily net assets in excess of $1 billion.
DMC has entered into a sub-advisory agreement with Delaware International
Advisors 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.
DMC has elected to waive that portion if any of the management fee and
reimburse the Fund to the extent that annual operating expenses exclusive
of taxes, interest, distribution fees, brokerage commissions and
extraordinary expenses, exceed 0.75% of average daily net assets of the
Fund through December 31, 1997. Total expenses absorbed by DMC for the
period ended July 31, 1997 were $127,136.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate
of DMC, to serve as dividend disbursing and transfer agent for the Fund.
The Fund also engaged DSC to provide accounting services for the Fund. For
the period ended July 31, 1997, the Fund expensed $25,437 for dividend
disbursing and transfer agent services and $3,648 for accounting services.
At July 31, 1997, the Fund had a liability for such fees and other expenses
payable to DSC of $15,661.
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 0.25% 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 period ended July 31, 1997, DDLP earned $14,310 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 period ended July 31, 1997, the Fund made purchases of
$42,006,615 and sales of $20,580,130 of investment securities other than
U.S. government securities and temporary cash investments.
At July 31, 1997, the aggregate cost of securities for federal income tax
purposes was $20,261,024.
At July 31, 1997, net unrealized appreciation for federal income tax
purposes aggregated $132,919 of which $371,766 related to unrealized
appreciation of securities and $238,847 related to unrealized depreciation
of securities.
1997 annual report
17
<PAGE>
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
4. Capital Stock
Transactions in capital stock shares were as follows:
10/01/96*
to
07/31/97
Shares sold:
Strategic Income Fund A Class ................... 1,786,116
Strategic Income Fund B Class ................... 1,266,123
Strategic Income Fund C Class ................... 361,988
Strategic Income Fund Institutional Class ....... 565,743
Shares issued upon reinvestment of dividends from
net investment income:
Strategic Income Fund A Class ................... 44,619
Strategic Income Fund B Class ................... 23,076
Strategic Income Fund C Class ................... 4,239
Strategic Income Fund Institutional Class ....... 34,615
----------
4,086,519
----------
Shares repurchased:
Strategic Income Fund A Class ................... (227,046)
Strategic Income Fund B Class ................... (82,777)
Strategic Income Fund C Class ................... (25,383)
Strategic Income Fund Institutional Class ....... (2,764)
----------
(337,970)
----------
Net Increase ..................................... 3,748,549
==========
- ----------
* Date of commencement of operations.
5. Lines of Credit
The Fund has a committed line of credit for $300,000. No amount was
outstanding at July 31, 1997, or at any time during the fiscal year.
6. Foreign Exchange Contracts
The Fund will generally enter into forward foreign currency contracts as
a way of managing foreign exchange rate risk. A fund may enter into these
contracts to fix the U.S. dollar value of a security that it has agreed to
buy or sell for the period between the date the trade was entered into and
the date the security is delivered and paid for. A fund may also use these
contracts to hedge the U.S. dollar value of securities it already owns
denominated in foreign currencies.
Forward foreign currency contracts are valued at the mean between the bid
and asked prices of the contracts and are marked-to-market daily.
Interpolated values are derived when the settlement date of the contract is
an interim date for which quotations are not available. The change in
market value is recorded by the Fund as an unrealized gain or loss. When
the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened a
nd the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's securities, but it does
establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline
in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition,
the Fund could be exposed to risks if the counterparties to the contracts
are unable to meet the terms of their contracts. At July 31, 1997, the Fund
had no open currency contracts.
<PAGE>
7. Futures Contracts
During the period ended July 31, 1997, the Fund entered into futures
contracts in accordance with its investment objectives. Upon entering into
a futures contract, the Fund deposits cash or pledges U.S. government
securities to a broker, equal to the minimum "initial margin" requirements
of the exchange on which the contract is traded. Subsequent payments are
received from or paid to the broker each day, based on the daily
fluctuation in the market value of the contract. These receipts or payments
are known as "variation margin" and are recorded daily by the Fund as
unrealized gains or losses until the contracts are closed. When the
contracts are closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed.
At July 31, 1997, the Fund had outstanding 4 long futures contracts on 10
year U.S. Treasury Notes, which expire on 09/15/97. The value of such
contracts on July 31, 1997 was $444,000 which resulted in an unrealized
gain of $3,750.
Risks may arise upon entering into futures contracts from potential
imperfect correlations between the futures contracts and the underlying
securities and from the possibility of an illiquid secondary market for
these instruments.
8. Concentrations of Credit Risk
Some countries in which the Fund may invest require governmental approval
for the repatriation of investment income, capital or the proceeds of sales
of securities by foreign investors. In addition, if there is a
deterioration in a country's balance of payments or for other reasons, a
country may impose temporary restrictions on foreign capital remittances
abroad.
The securities exchanges of certain foreign markets are substantially
smaller, less liquid and more volatile than the major securities markets in
the United States. Consequently, acquisition and disposition of securities
by the Fund may be inhibited. In addition, a significant proportion of the
aggregate market value of equity securities listed on the major securities
exchanges in emerging markets are held by a smaller number of investors.
This may limit the number of shares available for acquisition or
disposition of the Fund.
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 in securities whose value is derived from an
underlying pool of mortgages or consumer loans. Prepayment of these loans
may shorten the stated maturity of the respective obligation and may result
in a loss of premium, if any has been paid.
The Fund may invest up to 15% of its total assets in illiquid securities
which may include securities with contractual restrictions on resale,
securities exempt from registration under Rule 144A of the Securities Act
of 1933, as amended, and other securities which may not be readily
marketable. The relative illiquidity of 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, if any, have been denoted in the Statement of
Net Assets.
1997 annual report
18
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. - STRATEGIC INCOME FUND
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
Delaware Group Strategic Income Fund, Inc.
We have audited the accompanying statement of net assets and statement of
assets and liabilities of Delaware Group Income Funds, Inc. - Strategic
Income Fund (the "Fund") as of July 31, 1997, and the related statement of
operations, statement of changes in net assets, and the financial
highlights for the period October 1, 1996 (commencement of operations) to
July 31, 1997. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audit.
We conducted our audit in accordance with 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 correspond
ence 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Delaware Group Income Funds, Inc. - Strategic Income Fund at
July 31, 1997, the results of its operations, the changes in its net
assets, and the financial highlights for the period October 1, 1996
(commencement of operations) to July 31, 1997, in conformity with generally
accepted accounting principles.
ERNST AND YOUNG LLP
Philadelphia, Pennsylvania
September 5, 1997
1997 annual report
19
<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-Exempt 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
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.
1997 annual report
20
<PAGE>
THIS 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 Statem
ent 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 Strategic Income 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.
DELAWARE
GROUP
==========
Philadelphia o London
Copy Rights Delaware Distributors, L.P.
Printed in the USA on recycled paper
(210)
AR-125[7/97]TKO9/97
