<PAGE>
Strategic Income Fund
[various photos demonstrating service and guidance, professional management
and goals]
For Current Income
service and guidance
professional management
1998
Annual
Report
goals
DELAWARE(SM)
INVESTMENTS
- ---------------------
Philadelphia o London
<PAGE>
A TRADITION OF SOUND INVESTING
commitment
A Commitment
To Our Investors
Delaware Investments has a tradition of money management that 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, the Delaware organization established its first mutual fund in 1938.
Delaware International Advisers Ltd., our international affiliate, was
established in 1990 and is headquartered in London.
Delaware Investments offers a full range of mutual funds. We also manage
investments for variable annuity products, closed-end funds and offer
retirement plan services for individuals and businesses.
Delaware manages more than $42 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, which manages more than $130 billion in assets.
[photo of keyboard]
[photo of illustration from Current Income Brochure]
Strategic Income
Fund Objective
To provide investors with high current income and total return.
Table of Contents
LETTER TO SHAREHOLDERS Page 1
PORTFOLIO MANAGERS' REVIEW Page 3
PERFORMANCE SUMMARY Page 7
STATEMENT OF NET ASSETS Page 8
FINANCIAL HIGHLIGHTS Page 13
current
income
tradition
<PAGE>
August 5, 1998
for current
income
1
Dear Shareholder:
WE ARE PLEASED TO PRESENT THE 1998 annual report of Strategic Income Fund.
Strategic Income Fund attempts to provide high current income and total return
by investing in three distinct bond sectors: U.S. government and investment
grade corporate bonds, high-yield, higher risk U.S. corporate bonds and foreign
bonds.
Strategic Income Fund provided a total return of +6.23% (For Class A
shares at net asset value with distributions reinvested) for the 12 months
ended July 31, 1998. This exceeded the average return of funds with similar
investment objectives as shown below. The Fund did not perform as well as its
benchmark, the Lehman Brothers Aggregate Bond Index. This index, however, is
composed entirely of domestic bond funds, so its return does not reflect
volatility in foreign bond prices caused by economic conditions in the Pacific
Rim.
Despite vigorous U.S. economic expansion since the summer of 1997, inflation
remained in check, allowing the Federal Reserve Board to hold the line on
interest rates at 5.5%. Low unemployment and attractive interest rates resulted
in brisk consumer spending. This helped sustain economic growth as demand for
U.S. products and services waned in Asian markets.
The ongoing momentum of the American economy during the fiscal period
helped fuel solid performance for the domestic bond position of Strategic
Income Fund. Domestic bond prices surged, particularly in the high-yield
sector. Companies issued bonds at a record pace to meet investor demand for
high income potential.
The strength of the U.S. dollar drew large numbers of foreign investors to
U.S. Treasuries. A strong dollar made U.S. debt attractive to foreigners, who
were able to increase their income
DOMESTIC BOND PRICES SURGED, PARTICULARLY IN THE HIGH-YIELD SECTOR. COMPANIES
ISSUED BONDS AT A RECORD PACE TO MEET INVESTOR DEMAND FOR HIGH INCOME
POTENTIAL.
CUMULATIVE TOTAL RETURN
- --------------------------------------------------------------------------------
12 Months Ended
July 31, 1998
- --------------------------------------------------------------------------------
Strategic Income Fund A Class +6.23%
Lipper Multi-Sector Fund Average (99 Funds) +5.53%
Lehman Brothers Aggregate Bond Index +7.87%
- --------------------------------------------------------------------------------
All performance shown above is at net asset value and assumes reinvestment of
all distributions. Complete Fund performance for all classes can be found on
page 7.
Past performance is not a guarantee of future results.
<PAGE>
for current
income
2
from these investments by exchanging them into home currencies. As a result,
U.S. debt held by foreign investors rose to a record high of $1.25 trillion as
of May 1998. While these conditions benefited Strategic Income Fund's domestic
bond portfolio, they limited the returns produced by your Fund's foreign debt
investments.
Over the past year, Strategic Income Fund has been underweighted in bonds
issued by Asian governments and corporations. However, decreasing demand for
imports from the slumping Asian nations and the instability of currencies in
South Africa, New Zealand and Australia led to disappointing performance for
Strategic Income Fund's foreign bond portfolio. We view the current downturn
as temporary and believe that these markets, while subject to short-term
volatility, can offer attractive long-term income.
On the pages that follow, your Fund's portfolio management team, Paul A.
Matlack and Paul Grillo in Philadelphia and Ian G. Sims in London, discuss
Strategic Income Fund's positioning and performance for fiscal 1998 and
provide their outlook for the U.S. and foreign bond markets for the coming
year.
Sincerely,
/s/ Wayne A. Stork
- -------------------
Wayne A. Stork
Chairman
/s/ Jeffrey J. Nick
- ---------------------
Jeffrey J. Nick
President and Chief Executive Officer
PORTFOLIO HIGHLIGHTS AND ASSET MIX
- --------------------------------------------------------------------------------
July 31, 1998
- --------------------------------------------------------------------------------
Average Quality Baa(domestic)/
AA-(foreign)
Average Effective Duration 4.4 years
Average Effective Maturity 7.1 years
Current 30-Day SEC Yield 7.65%*
Number of Issues 145
- --------------------------------------------------------------------------------
* For A Class shares measured according to Securities and Exchange Commission
guidelines. Thirty-day SEC yield for B and C Classes was 7.26% as of July 31,
1998. Institutional Class yield was 8.31%.
U.S. High-Yield Bonds 43.7%
Cash 7.8%
Equities 3.0%
Foreign Bonds 24.1%
U.S. Investment Grade Corporate Bonds 6.0%
Domestic Government Bonds 15.4%
<PAGE>
for current
income
3
Portfolio Managers' Review
INVESTMENT STRATEGY
STRATEGIC INCOME FUND IS A MULTI-SECTOR fund portfolio that seeks high current
income and total return by investing primarily in:
o High-yield U.S. corporate bonds;
o Investment grade foreign government and corporate bonds; and
o Investment grade U.S. government and corporate bonds.
The Fund's investment guidelines allow us to allocate between 20% and 60%
of net assets in any one sector. We may also invest up to 10% of net assets in
U.S. stocks to generate higher total return. Our allocations are based on
detailed analysis of global economic and political trends. We consider
interest rates and the effect they may have on income potential. We look at
how economic conditions may affect bond default rates.
The difference in yield offered by long- and short-term investment grade
bonds narrowed substantially over the last 12 months, reducing the benefit of
locking in extended maturities. For this reason, we kept the average effective
maturity at around 7 to 8 years. The Fund may attempt to earn higher potential
income by extending the duration should long-term yields improve in the
future.
HIGH-YIELD U.S. BONDS
During the past 12 months, few investments offered the income-producing power
and total return potential of U.S. high-yield, higher risk corporate bonds.
Demand from income-oriented investors was huge, and this sector provided an
opportunity to earn higher than average income. Contributing to the strong
performance of high-yield bonds were:
o Attractive yields - With bond prices on the rise, yields have declined.
High-yield bonds offered as much as 300 basis points (3%) more yield than other
fixed-income investments.
o Attractive credit quality - During the 1990s average credit quality has
improved from B- to BB-. Default rates remain less than the long-term historical
average of 3%.
With nearly 50% of net assets allocated to this sector, your Fund was
positioned to take advantage of price gains that resulted from increased demand.
Income is our primary consideration in selecting bonds for the high-yield
sector of Strategic Income Fund. However, the Fund also considered capital
preservation and liquidity by focusing on bonds:
o With at least a B rating
o With at least $100 million in issuance outstanding
o Offered by U.S. corporations with strong management.
We anticipate a record number of new issues to come to market during the
remainder of calendar 1998. Investor demand, however, is likely to remain
strong, in our view.
DURING THE PAST 12 MONTHS, FEW INVESTMENTS OFFERED THE INCOME-PRODUCING POWER
AND TOTAL RETURN POTENTIAL OF U.S. HIGH-YIELD CORPORATE BONDS.
overview
(photo of family on beach)
<PAGE>
for current
income
4
FOREIGN BONDS
In selecting foreign bonds for Strategic Income Fund's portfolio, we look for
quality bonds, rated "A" or better by Standard and Poor's, that deliver high
current income and have an average effective maturity of five to 10 years. We
select intermediate-term bonds to take advantage of their relatively high
yields and we attempt to minimize the risk of long-term exposure to inflation.
Of course, foreign investments have special risks including less stable
governments and economies, and currency fluctuations.
The economic recession in Asian markets continued to worsen during fiscal
1998, adding volatility to international bond investing. Decreasing demand for
exports from Asian economies led to global supply gluts and falling prices for
consumer goods and raw materials. Strategic Income Fund had minimal exposure
to Pacific Rim countries. However, weakening Asian currencies led to
disappointing total returns.
One nation hit hard by currency devaluation was South Africa, where bonds
offered exceptional yields. South Africa represented Strategic Income Fund's
largest country allocation outside of the U.S. and this worked well for most of
fiscal 1998. However, during the last three months, South African bond prices
suffered from a 20% devaluation of the rand. We view this situation as a
short-term development, and we believe the South African economy remains
fundamentally sound.
In Europe, bond performance was more impressive, as governments reformed
their fiscal policies to qualify for membership in the European Monetary
Union. Bonds in EMU member states benefited from the expectation of growth
from a consolidated European economy. Over the last 12 months, EMU convergence
has led bonds from Italy, Spain and Sweden to outperform bonds in the larger
economies of Germany and France.
Bond issues from the United Kingdom provided superior income and total
return during the past year. Although not an EMU country, U.K. bonds were
aided by the relative strength of the British pound. We expect to reduce our
bond holdings in the U.K. during the coming year, however, and reallocate
assets to nations offering superior income potential.
Another country whose bonds performed well during the year was Greece.
INTEREST INCOME - THE PRIMARY COMPONENT
OF TOTAL RETURN FROM HIGH-YIELD BONDS
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS - FIVE YEARS ENDED 7/31/98
Merrill Lynch Ten Year
High-Yield Bond Index Treasuries
- --------------------------------------------------------------------------------
Total Return +10.65% +7.57%
Income Return +9.38% +7.55%
Capital Return +1.27% +0.87%
- --------------------------------------------------------------------------------
Source: Merrill Lynch. Past performance is not a guarantee of future results.
Unlike U.S. Treasuries, high-yield bonds are not guaranteed as to the timely
payment of interest and repayment of principal. The performance figures given
above are not intended to reflect the past or future performance of any mutual
fund offered by Delaware Investments. There is no guarantee that Strategic
Income Fund's performance will match that of any index.
<PAGE>
for current
income
5
[photo of globes]
Intermediate-term bonds in Greece offered exceptional yield and strong total
return. Although Greece was denied membership in the EMU, bond performance
benefited from improved fiscal policies adopted for EMU compliance.
INVESTMENT GRADE U.S. BONDS
Vigorous economic growth, low inflation and a strong U.S. dollar led to brisk
sales of high quality corporate bonds during fiscal 1998. Volatility in the
stock market and Asia also contributed to higher bond prices as "flight to
quality" investors favored the relative safety of high-quality fixed income
securities. Price gains in the bond market, however, resulted in falling
yields and made it difficult for Strategic Income Fund to locate income
opportunities.
Strategic Income Fund focused on mortgage-backed securities, which offered
some of the highest potential yields within the U.S. investment grade sector.
The balance of the Fund's domestic investment grade portfolio was allocated to
U.S. Treasury bonds and high-quality corporate bonds.
Prices for mortgage-related securities are particularly sensitive to
falling interest rates. As borrowing costs drop, property owners often attempt
to reduce their monthly payments by refinancing their mortgages. Proceeds from
mortgage prepayments must then be reinvested into new securities at
potentially lower interest rates. Low interest rates led to investor concern
about increasing prepayments, resulting in weaker prices for mortgage-related
securities during fiscal 1998.
Strategic Income Fund attempted to reduce the risk of mortgage prepayments
by focusing on commercial mortgage-backed securities. Nearly 11% of the Fund
was invested in commercial mortgages, which, unlike residential mortgages,
carry penalties for prepayment, and are less likely to be refinanced. The
commercial mortgage-backed securities in the Fund are high quality bonds,
rated A or better by Standard and Poor's.
OVER THE LAST 12 MONTHS, EMU CONVERGENCE HAS LED BONDS FROM ITALY, SPAIN, AND
SWEDEN TO OUTPERFORM BONDS IN THE LARGER ECONOMIES OF GERMANY AND FRANCE.
foreign
bonds
WE SEARCH THE WORLD FOR BONDS WITH
HIGH INCOME POTENTIAL AND RELATIVE STABILITY
<TABLE>
<CAPTION>
Yield Yield Yield Yield
7/31/98 7/31/98 7/31/98 7/31/98
Bonds Greek Government Bonds South African Government Bonds U.S. Treasuries New Zealand Government Bonds
<S> <C> <C> <C> <C>
3 mo 12.26% 21.10% 5.08% 7.12%
6 mo 12.07% 19.75% 5.20% 7.32%
1 yr 11.53% 19.75% 5.37%
2 yr 10.58% 17.07% 5.48% 6.80%
3 yr 9.58% 5.46% 6.65%
4 yr 9.08% 6.56%
5 yr 8.59% 16.52% 5.50%
6 yr 8.30% 6.39%
7 yr 8.06% 15.73%
8 yr
9 yr 7.67% 6.24%
10 yr 7.51% 15.80% 5.50% 6.15%
15 yr 7.36% 15.55%
20 yr 15.49%
30 yr 15.40% 5.71%
</TABLE>
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.
Source: Bloomberg Business News.
<PAGE>
for current
income
6
Another 9% of the Fund was invested in discount mortgages. Discount
mortgages help reduce the risk of prepayment because they have interest rates
that are lower than current rates, and offer no incentive for property owners
to refinance.
A strong U.S. dollar and a reduction in the federal budget deficit
resulted in a tightening supply of 5-, 10- and 30-year U.S. Treasury bonds.
Strategic Income Fund took advantage of strong investor demand for Treasuries
by lending U.S. Treasuries in the Fund's portfolio to institutional investors
- - at a premium. This strategy allowed the Fund to generate an additional
75-100 basis points of yield on a bond during the loan period, while still
taking full advantage of any price appreciation.
MARKET OUTLOOK
In the coming year, we believe selected high-yield and investment grade bonds
are likely to provide solid results. Disappointing second-quarter U.S.
corporate earnings have some investors concerned that stock prices may be
higher than justified. We anticipate more investors may reallocate assets to
fixed-income investments.
Current economic conditions have created an environment that should
promote strength in the high-yield sector. Tame inflation and low interest
rates have left few alternatives for investors with an income objective.
After growing at a rate of nearly 5.5% during the first quarter of 1998,
economic growth in the U.S slowed dramatically during the second quarter to
just 1.4%. We view the recent cooling of the economy as a short-term and
potentially positive development for bond funds. A slowing economy should help
reduce the risk of inflation and lead to higher bond prices.
The foreign bond market experienced volatility and disappointing total
returns, as the financial crises in Asia and Russia began to impact the rest
of the world. We anticipate improved performance from our foreign bond
portfolio in the coming year as currencies stabilize. The EMU should continue
to benefit European bonds, particularly in Italy, Sweden and Spain, and
produce attractive opportunities for total return in the coming year.
We believe Strategic Income Fund, by investing in several bond market
sectors, is positioned to anticipate and respond to developments in the
domestic and international bond markets. In the coming year, we believe the
flexibility of the Fund will allow us to reduce our exposure to unproductive
markets and allocate more of the Fund's assets to the sectors we expect to
produce high current income and attractive total return for our shareholders.
u.s. bonds
PAUL A. MATLACK
Delaware Management Company
U.S. High Yield Bonds
PAUL GRILLO
Delaware Management Company
U.S. Investment Grade Bonds
IAN SIMS
Delaware International Advisers Ltd.
Foreign Bonds
August 12, 1998
(photo of family on beach)
<PAGE>
for current
income
7
Performance Summary
STRATEGIC INCOME FUND'S LIFETIME PERFORMANCE
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
OCTOBER 1, 1996 TO JULY 31, 1998
Strategic Income Lehman Brothers Aggregate
Fund A Class Bond Index
Oct. 1, 1996 $ 9,532 $10,000
Oct. 31, 1996 $ 9,636 $10,000
Jan. 31, 1997 $ 9,897 $10,108
Apr. 30, 1997 $ 9,950 $10,171
July 31, 1997 $10,476 $10,670
Oct. 31, 1997 $10,734 $10,892
Jan. 31, 1998 $10,927 $11,191
Apr. 30, 1998 $11,122 $11,272
July 31, 1998 $11,102 $11,507
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.
STRATEGIC INCOME FUND PERFORMANCE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS THROUGH JULY, 31, 1998
Lifetime One Year
- --------------------------------------------------------------------------------
Class A (Est. 10/1/96)
Excluding Sales Charge +8.93% +6.23%
Including Sales Charge +6.12% +1.25%
- --------------------------------------------------------------------------------
Class B (Est. 10/1/96)
Excluding Sales Charge +8.11% +5.32%
Including Sales Charge +6.06% +1.48%
- --------------------------------------------------------------------------------
Class C (Est. 10/1/96)
Excluding Sales Charge +8.11% +5.31%
Including Sales Charge +8.11% +4.35%
Strategic Income Fund invests a portion of its portfolio in high-yield bonds,
which involves greater risks than investing in higher quality fixed-income
securities. Return and share value will fluctuate 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. Past
performance is not a guarantee of future results. Performance for Class B and
C shares excluding sales charge assumes either contingent sales charges did
not apply or the investment was not redeemed.
A voluntary expense limitation has been in effect since inception.
Performance would have been lower if the expense limitation was not in effect.
Class A shares have a maximum 4.75% 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, and 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 shares are redeemed within 12 months, a 1%
contingent deferred sales charge applies.
The average annual total returns for the lifetime and one-year periods as of
July 31, 1998, for Strategic Income Fund's Institutional Class, which is
available without sales or asset-based distribution charges only to certain
eligible institutional accounts were +9.14% and +6.36% respectively.
<PAGE>
8 for current income
Financial Statements
DELAWARE GROUP INCOME FUNDS, INC. -
STRATEGIC INCOME FUND
STATEMENT OF NET ASSETS
JULY 31, 1998
- --------------------------------------------------------------------------------
PRINCIPAL MARKET VALUE
AMOUNT* (U.S. $)
---------------------------------------------
CORPORATE BONDS - 46.05%
AUTOMOBILES & AUTOMOTIVE PARTS - 1.22%
Stanadyne Automotive
sr sub notes 10.25% 12/15/07 ............ $500,000 $ 518,125
----------
518,125
----------
BANKING, FINANCE & INSURANCE - 2.43%
Credit Foncier de France
sr sub notes 8.00% 01/14/02 ............. 200,000 211,500
Olympic Financial Units 11.50% 03/15/07 ..... 350,000 350,875
Southern Investments United Kingdom
sr notes 6.375% 11/15/01 ................ 200,000 201,000
Summit Bancorp sub notes 8.625% 12/10/02 .... 100,000 108,875
U.S. Bancorp sub notes 8.125% 05/15/02 ...... 150,000 159,938
----------
1,032,188
----------
BUILDING & MATERIALS - 0.49%
American Builders and Contractors
sr sub notes 10.625% 05/15/07 ........... 200,000 207,250
----------
207,250
----------
CABLE, MEDIA, & PUBLISHING - 1.12%
American Banknote
sr sub notes 11.25% 12/01/07 ............ 300,000 304,500
Turner Broadcasting 8.375% 07/01/13 ......... 150,000 171,938
----------
476,438
----------
CHEMICALS - 1.57%
Octel Developments sr notes 10.00% 05/01/06 . 650,000 669,500
----------
669,500
----------
CONSUMER PRODUCTS - 2.84%
AAI. Fostergrant sr notes 10.75% 07/15/06 ... 475,000 479,750
Drypers sr notes 10.25% 06/15/07 ............ 350,000 364,875
Precise Technology
sr sub notes 11.125% 06/15/07 ........... 350,000 361,375
----------
1,206,000
----------
ELECTRONICS & ELECTRICAL EQUIPMENT - 0.02%
American Radio Systems 11.375% 01/15/09 ..... 6,000 6,953
----------
6,953
----------
ENERGY - 3.68%
First Wave Marine sr notes 11.00% 02/01/08 .. 350,000 373,625
Panaco sr notes 10.625% 10/01/04 ............ 750,000 752,813
Transamerican Energy
sr notes 11.50% 06/15/02 ................ 475,000 437,000
----------
1,563,438
----------
FOOD, BEVERAGE & TOBACCO - 3.67%
Big V Supermarkets
sr sub notes 11.00% 02/15/04 ............ 350,000 369,250
CFP Holdings sr notes 11.625% 01/15/04 ...... 175,000 164,500
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL MARKET VALUE
AMOUNT* (U.S. $)
---------------------------------------------
CORPORATE BONDS (CONTINUED)
FOOD, BEVERAGE & TOBACCO (CONTINUED)
Community Distributors sr notes 10.25% 10/15/04 $400,000 $414,000
DiGiorgio sr notes 10.00% 06/15/07 .......... 350,000 350,875
Fleming sr sub notes 10.50% 12/01/04 ........ 250,000 261,875
---------
1,560,500
---------
HEALTHCARE & PHARMACEUTICALS - 0.30%
Cardinal Health notes 6.00% 01/15/06 ........ 130,000 127,400
---------
127,400
---------
INDUSTRIAL MACHINERY - 2.72%
Alliance Laundry Systems
sr sub notes 9.625% 05/01/08 ............ 500,000 510,000
Anthony Crane Rentals
10.375% 08/01/08 ........................ 400,000 402,000
Embotelladora Andina
notes 7.00% 10/01/07 .................... 100,000 94,250
U.S. Filter 6.375% 05/15/01 ................. 150,000 150,188
---------
1,156,438
---------
LEISURE, LODGING & ENTERTAINMENT - 2.61%
American General Institute
Cap A 7.57% 12/01/45 .................... 100,000 105,625
Silver Cinemas
sr sub notes 10.50% 04/15/05 ............ 500,000 512,500
Trump Atlantic City
1st mtg notes 11.25% 05/01/06 ........... 100,000 98,625
Trump Atlantic City Association Funding
11.25% 05/01/06 ......................... 400,000 394,000
---------
1,110,750
---------
METALS & MINING - 5.27%
Anker Coal Group sr notes 9.75% 10/01/07 .... 100,000 92,250
Doe Run Resources sr notes 11.25% 03/15/05 .. 500,000 516,875
JTM Industries 10.00% 04/15/08 .............. 550,000 561,000
Metallurg sr notes 11.00% 12/01/07 .......... 350,000 369,688
Schuff Steel sr notes 10.50% 06/01/08 ....... 700,000 701,750
---------
2,241,563
---------
PACKAGING & CONTAINERS - 1.21%
Portola Packaging sr notes 10.75% 10/01/05 .. 150,000 157,875
Riverwood International
sr sub notes 10.875% 04/01/08 ........... 350,000 357,875
---------
515,750
---------
RETAIL - 4.88%
Advance Stores sr sub notes 10.25% 04/15/08.. 500,000 523,750
Frank's Nursery and Crafts
sr sub notes 10.25% 03/01/08 ............ 500,000 516,250
US Office Products sr sub notes 9.75% 06/15/08 500,000 503,750
<PAGE>
for current income 9
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET VALUE
AMOUNT* (U.S. $)
---------------------------------------------
CORPORATE BONDS (CONTINUED)
RETAIL (CONTINUED)
Wilsons The Leather Expert
sr notes 11.25% 08/15/04 ................ $500,000 $ 530,000
----------
2,073,750
----------
TELECOMMUNICATIONS - 0.72%
MCI Communications notes 6.125% 04/15/02 .... 200,000 199,500
Metrocall sr sub notes 10.375% 10/01/07 ..... 100,000 105,500
----------
305,000
----------
TEXTILES, APPAREL & FURNITURE - 2.15%
Anvil Knitwear sr notes 10.875% 03/15/07 .... 150,000 155,438
Ntex sr notes 11.50% 06/01/06 ............... 500,000 498,750
Scovill Fasteners sr notes 11.25% 11/30/07 .. 250,000 261,250
----------
915,438
----------
TRANSPORTATION & SHIPPING - 1.73%
Continental Airlines
pass thru certificates 6.80% 01/02/09 ... 125,000 126,875
Federal Express
pass thru certificates 7.65% 01/15/14 ... 98,538 103,834
MC Shipping sr notes 11.25% 03/01/08 ........ 500,000 506,250
----------
736,959
----------
MISCELLANEOUS - 7.42%
ATC Group Services 12.00% 01/15/08 .......... 500,000 470,000
Derby Cycle/Lyon Cycle
sr notes 10.00% 05/15/08 ................ 500,000 503,750
EV International 11.00% 03/15/07 ............ 500,000 471,875
Highwaymaster Communications
sr notes 13.75% 09/15/05 ................ 125,000 81,250
MSX International
sr sub notes 11.375% 01/15/08 ........... 500,000 520,000
Norton McNaughton sr notes 12.50% 06/01/05 .. 750,000 753,750
Sony unsec notes 6.125% 03/04/03 ............ 100,000 100,500
Spinnaker Industries sr notes 10.75% 10/15/06 250,000 255,000
----------
3,156,125
----------
Total Corporate Bonds (cost of $19,492,483).. 19,579,565
----------
FOREIGN BONDS - 24.06%
AUSTRALIA - 2.43%
Australian Government 13.00% 07/15/00 ....... A$ 200,000 138,845
Bank of Austria 10.875% 11/17/04 ............ 150,000 112,725
Commerzbank 10.50% 01/19/00 ................. 200,000 129,392
Queensland Treasury Global 8.00% 08/14/01 ... 1,000,000 651,134
----------
1,032,096
----------
CANADA - 2.28%
Electric Power Development 10.375% 09/27/01 . C$ 200,000 149,446
General Electric Capital of Canada
7.125% 02/12/04 ......................... 80,000 56,274
Government of Canada 10.25% 03/15/14 ........ 550,000 542,621
InterAmerica Development Bank Notes
7.25% 11/03/03 .......................... 100,000 70,590
Kansai International Airport 8.00% 07/02/03 . 80,000 57,629
Kingdom of Norway 8.375% 01/27/03 ........... 130,000 94,615
----------
971,175
----------
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET VALUE
AMOUNT* (U.S. $)
---------------------------------------------
FOREIGN BONDS (Continued)
GREECE - 2.41%
European Investment Bank 17.50% 03/08/99 .... Grd 30,000,000 $105,217
Ford Credit Europe 9.45% 03/01/00 ........... 120,000,000 401,840
Hellenic Republic 11.00% 11/26/99 ........... 120,000,000 409,552
International Finance 15.25% 05/11/99 ....... 30,000,000 106,168
----------
1,022,777
----------
ITALY - 2.12%
European Investment Bank 12.75% 02/15/00 .... Itl 300,000,000 191,587
Italian Government 9.50% 02/01/01 ........... 500,000,000 318,819
Italian Government 12.00% 01/01/03 .......... 530,000,000 390,503
----------
900,909
----------
MEXICO - 1.01%
+Mexican Cetes Government 10/22/98 .......... Mxp 400,000 427,475
----------
427,475
----------
NEW ZEALAND - 4.08%
New Zealand Government 6.50% 02/15/00 ....... Nz$ 400,000 203,080
New Zealand Government 8.00% 02/15/01 ....... 350,000 183,927
New Zealand Government 8.00% 04/15/04 ....... 700,000 383,570
New Zealand Government 8.00% 11/15/06 ....... 1,700,000 964,317
----------
1,734,894
----------
POLAND - 0.70%
International Bank of Reconstruction &
Development 19.50% 06/17/99 ............. Plz 1,000,000 296,747
----------
296,747
----------
SOUTH AFRICA - 4.60%
Electric Supply Communication 11.00% 6/01/08 Sa 4,500,000 559,045
Republic of South Africa 12.50% 01/15/02 .... 6,650,000 975,654
Republic of South Africa 13.00% 08/31/10 .... 3,000,000 421,996
----------
1,956,695
----------
SWEDEN - 2.96%
Swedish Government 8.00% 08/15/07 ........... Sk 1,000,000 154,358
Swedish Government 10.25% 05/05/00 .......... 1,800,000 248,814
Swedish Government 10.25% 05/05/03 .......... 5,500,000 857,067
----------
1,260,239
----------
UNITED KINGDOM - 1.47%
Anglian Water 12.00% 01/07/14 ............... Gbp 60,000 149,382
Blue Circle 10.75% 11/29/13 ................. 40,000 89,596
Glaxo Wellcome 8.75% 12/01/05 ............... 60,000 109,987
John Lewis 10.50% 01/23/14 .................. 40,000 89,923
Nippon Telegraph & Telephone
10.875% 05/10/01 ........................ 30,000 53,158
Pearson 10.50% 06/13/08 ..................... 40,000 81,073
Thames Water Utilities 10.50% 11/21/01 ...... 30,000 53,403
----------
626,522
----------
Total Foreign Bonds (cost of $11,624,956) ... 10,229,529
----------
AGENCY MORTGAGE-BACKED SECURITIES - 4.32%
Federal Home Loan Mortgage Corporation
6.00% 11/01/26 .......................... $55,543 54,571
Federal Home Loan Mortgage Corporation
6.50% 01/25/15 .......................... 50,000 50,453
<PAGE>
10 for current income
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET VALUE
AMOUNT* (U.S. $)
---------------------------------------------
AGENCY MORTGAGE-BACKED
SECURITIES (CONTINUED)
Federal National Mortgage Association
6.50% 07/30/24 .......................... $150,000 $151,102
Federal National Mortgage Association
6.50% 06/01/28 .......................... 779,560 776,393
Federal National Mortgage Association
7.00% 01/01/13 .......................... 142,142 144,940
Federal National Mortgage Association
7.00% 07/01/28 .......................... 250,000 253,750
Federal National Mortgage Association
7.50% 03/01/28 .......................... 199,519 205,069
Government National Mortgage Association
7.00% 12/15/27 .......................... 98,613 100,308
Government National Mortgage Association
9.50% 09/15/17 .......................... 45,940 50,032
Government National Mortgage Association
10.00% 07/15/17 ......................... 45,775 50,711
---------
Total Agency Mortgage-Backed Securities
(cost of $1,828,201) .................... 1,837,329
---------
ASSET-BACKED SECURITIES - 3.57%
CIT Group Securitization -
Series 95-2 A2 6.00% 05/15/26 ........... 62,848 62,874
CIT RV Trust 1998-A A5 6.12% 07/15/14 ....... 200,000 200,719
Chase Manhattan RV Owner Trust -
Series 1997-A A9 6.32% 12/15/08 ......... 40,000 40,402
Countrywide Home Equity Loan -
Series 97-1 A4 6.95% 05/25/21 ........... 150,000 152,093
EQCC Home Equity Loan Trust -
Series 1998-2 Class A3f 6.23% 03/15/13 .. 150,000 150,281
First Plus Home Loan Trust 6.27% 05/10/13 ... 100,000 99,438
First Union Residential Securitization
Trust - Series 96-2 A2 6.46% 09/25/11 ... 140,000 140,058
MetLife Capital Equipment Loan Trust -
Series 97-AA 6.85% 05/20/08 ............. 255,000 262,178
NationsCredit Grantor Trust -
Series 97-2 A1 6.35% 04/15/14 ........... 79,334 80,005
Oakwood Mortgage Investors -
Series 97C A3 6.65% 11/15/27 ............ 75,000 76,156
The Money Store Home Equity Trust -
Series 97-AA9 7.235% 04/15/27 ........... 100,000 102,508
World Omni Automobile Lease Securitization -
Series 97-B 6.20% 11/25/03 .............. 150,000 150,796
---------
Total Asset-Backed Securities
(cost of $1,503,404) .................... 1,517,508
---------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 5.15%
Asset Securitization
Series 96-D2 A1 6.92% 02/14/29 .......... 191,479 198,000
Series 96-D3 A1B 7.21% 10/13/26 ......... 100,000 104,375
Series 97-D5 A2 7.07% 02/14/41 .......... 150,000 154,359
Series 97-D5 A3 7.12% 02/14/41 .......... 200,000 204,625
Series 97-D4 A1A 7.35% 04/14/29 ......... 79,937 82,585
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET VALUE
AMOUNT* (U.S. $)
---------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Contitrade Services Home Equity Loan Trust -
Series 91-2 A 7.70% 09/15/06 ............ $ 48,583 $ 48,555
General Electric Capital Mortgage Services -
Series 1998-6 1A6 6.75% 04/25/28 ........ 200,000 198,813
LB Commercial Conduit Mortgage Trust -
Series 98-C1 6.675% 02/18/08 ............ 100,000 100,469
Lehman Large Loan -
Series 97-LLI A1 6.79% 06/12/04 ......... 147,506 151,239
Nomura Asset Securities -
Series 95-MD3 A1A 8.17% 03/04/20 ........ 63,579 65,904
Residential Accredit Loans
Series 96-QS2 A6 7.45% 04/25/23 ......... 75,000 75,961
Series 96-QS3 A13 7.29% 06/25/26 ........ 86,853 86,853
Series 97-QS6 A5 7.50% 06/25/12 ......... 206,445 213,372
Series 97-QS3 A3 7.50% 04/25/27 ......... 100,000 100,375
Series 98-QS9 A3 6.75% 07/25/28 ......... 200,000 200,938
Residential Funding Mortgage
Series 1994-S10 6.50% 03/25/09 .......... 100,000 101,544
Series 1998-S6 6.75% 03/25/28 ........... 100,000 99,363
----------
Total Collateralized Mortgage Obligations
(cost $2,166,651) ....................... 2,187,330
----------
MUNICIPAL BONDS - 0.22%
Philadelphia, Pennsylvania Authority For
Industrial Development Tax Claim Revenue -
Class A 6.488% 06/15/04 ................. 92,929 94,207
----------
Total Municipal Bonds (cost of $92,929) ..... 94,207
----------
U.S. TREASURY OBLIGATIONS - 5.68%
U.S. Treasury Bond 6.125% 11/15/27 .......... 325,000 343,565
U.S. Treasury Note 5.375% 02/15/01 .......... 350,000 349,051
U.S. Treasury Note 5.50% 02/28/03 ........... 750,000 748,170
U.S. Treasury Note 5.50% 05/31/03 ........... 100,000 99,824
U.S. Treasury Note 5.625% 05/15/08 .......... 865,000 873,010
----------
Total U.S. Treasury Obligations
(cost $2,410,369) ....................... 2,413,620
----------
NUMBER OF
SHARES
---------
COMMON STOCK - 0.27%
Real Estate - 0.27%
Kilroy Realty ............................... 5,000 113,438
----------
Total Common Stock (cost of $115,000) 113,438
----------
PREFERRED STOCKS - 2.75%
TELECOMMUNICATIONS - 2.41%
21st Century Telecommunications ............. 985 1,024,161
----------
1,024,161
----------
CABLE, MEDIA & PUBLISHING - 0.34%
Pegasus Communications Unit
pik 12.75% 01/01/07 ..................... 250 28,103
<PAGE>
for current income 11
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER MARKET VALUE
OF SHARES (U.S. $)
---------------------------------------------
PREFERRED STOCKS (Continued)
CABLE, MEDIA & PUBLISHING (CONTINUED)
Pegasus Communications ...................... 1,000 $ 115,750
-----------
143,853
-----------
Total Preferred Stocks (cost of $1,060,522) . 1,168,014
-----------
WARRANTS - 0.13%
BANKING, FINANCE & INSURANCE - 0.13%
** 21st Century Telecommunications ......... 950 52,250
** American Banknote ....................... 300 3,000
-----------
Total Warrants (cost of $55,265) ............ 55,250
-----------
PRINCIPAL
AMOUNT*
----------
REPURCHASE AGREEMENTS - 7.03%
With PaineWebber 5.60% 08/03/98
(dated 07/31/98, collateralized by $1,488,000
U.S. Treasury Notes 6.125% due 12/31/01,
market value $1,521,442) ................ $1,491,000 1,491,000
With JP Morgan Securities 5.60% 08/03/98
(dated 07/31/98, collateralized by $1,513,000
U.S. Treasury Notes 6.00% due 06/30/99,
market value $1,527,318) ................ 1,496,000 1,496,000
-----------
Total Repurchase Agreements
(cost $2,987,000) ....................... 2,987,000
-----------
TOTAL MARKET VALUE OF SECURITIES - 99.23%
(cost $43,336,780) ...................... 42,182,790
RECEIVABLES AND OTHER ASSETS NET OF
LIABILITIES - 0.77% ........................ 330,589
-----------
NET ASSETS APPLICABLE TO 7,761,243 SHARES
($0.01 PAR VALUE) OUTSTANDING - 100.00% . $42,513,379
===========
NET ASSET VALUE - STRATEGIC INCOME FUND A CLASS
($17,871,162/ 3,261,140 shares) ......... $5.48
=====
NET ASSET VALUE - STRATEGIC INCOME FUND B CLASS
($15,602,067/ 2,849,040 shares) ......... $5.48
=====
NET ASSET VALUE - STRATEGIC INCOME FUND C CLASS
($5,276,118/ 962,902 shares) ............ $5.48
=====
NET ASSET VALUE - STRATEGIC INCOME FUND
INSTITUTIONAL CLASS
($3,764,032/688,161 shares) ............. $5.47
=====
<PAGE>
COMPONENTS OF NET ASSETS AT JULY 31, 1998:
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 .............................. $43,442,671
Undistributed net investment income*** .......................... 22,120
Accumulated net realized gain on investments .................... 207,164
Net unrealized depreciation of investments and foreign currencies (1,158,576)
-----------
Total net assets ................................................ $42,513,379
===========
- ----------------------
* Principal amount is stated in the currency in which each bond is denominated.
A$ - Australian Dollars Nz$ - New Zealand Dollars
Gbp - British Pounds Plz - Polish Zloty
C$ - Canadian Dollars Sa - South African Rand
Grd - Greek Drakma Sk - Swedish Kroner
Itl - Italian Lira $ - U.S. Dollars
Mxp - Mexican Peso
** Non-income producing securities
*** Undistributed net investment income includes net realized gains
(losses) on foreign currencies. Net realized gains on foreign currencies are
distributed as net investment income in accordance with provisions of the
Internal Revenue Code.
+ Effective yield 19.24%.
Summary of abbreviations:
mtg - mortgage
pik - pay-in-kind
sr - senior
sub - subordinated
unsec - unsecured
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
STRATEGIC INCOME FUND A CLASS
Net asset value A Class (A) ..................................... $5.48
Sales charge (4.75% of offering price or 4.93%, of the
amount invested per share)(B) ............................... 0.27
-----
Offering price .................................................. $5.75
=====
- ----------------------
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See How to Buy Shares in the current Prospectus for purchases of $100,000
or more.
See accompanying notes
<PAGE>
12 for current income
DELAWARE GROUP INCOME FUNDS, INC. -
STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest .................................... $2,817,565
Dividends ................................... 105,263
Foreign tax withheld ........................ (6,525) $2,916,303
----------
EXPENSES:
Management fees ............................. 212,472
Distribution expense ........................ 187,478
Dividend disbursing and transfer agent fees
and expenses ............................ 91,542
Registration fees ........................... 64,152
Amortization of organization expenses ....... 33,186
Professional fees ........................... 29,156
Accounting and Administration fees .......... 16,780
Reports and statements to shareholders ...... 13,901
Taxes (other than taxes on income) .......... 3,162
Directors' fees ............................. 3,014
Custodian fees .............................. 2,271
Other ....................................... 12,920
----------
670,034
Less expenses absorbed by Delaware
Management Company ...................... (238,239) 431,795
---------- ----------
NET INVESTMENT INCOME ....................... 2,484,508
----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain on:
Investment transactions ................. 520,175
Foreign currencies ...................... 1,108
----------
Net realized gain ....................... 521,283
Net change in unrealized appreciation/depreciation
of investments and foreign currencies ... (1,290,402)
----------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS AND FOREIGN CURRENCIES ...... (769,119)
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ......................... $1,715,389
==========
See accompanying notes
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED 10/01/96*
7/31/98 TO 7/31/97
-----------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ....................... $2,484,508 $ 852,824
Net realized gain on investments
and foreign currencies .................. 521,283 309,154
Net change in unrealized appreciation/
depreciation of investments and
foreign currencies ...................... (1,290,402) 131,826
----------- -----------
Net increase in net assets
resulting from operations ............... 1,715,389 1,293,804
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Strategic Income Fund A Class ........... (1,072,908) (372,603)
Strategic Income Fund B Class ........... (836,538) (225,684)
Strategic Income Fund C Class ........... (261,064) (55,686)
Strategic Income Fund Institutional Class (292,986) (200,724)
Net realized gain on investment transactions:
Strategic Income Fund A Class ........... (260,060) --
Strategic Income Fund B Class ........... (218,690) --
Strategic Income Fund C Class ........... (67,987) --
Strategic Income Fund Institutional Class (73,555) --
----------- -----------
(3,083,788) (854,697)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Strategic Income Fund A Class ........... 11,710,278 9,997,064
Strategic Income Fund B Class ........... 10,936,630 7,087,454
Strategic Income Fund C Class ........... 4,184,459 2,029,588
Strategic Income Fund Institutional Class 160,252 3,112,438
Net asset value of shares issued upon reinvestment
of dividends from net investment income and net
realized gain on investment transactions:
Strategic Income Fund A Class ........... 937,123 250,324
Strategic Income Fund B Class ........... 652,466 129,461
Strategic Income Fund C Class ........... 158,936 23,810
Strategic Income Fund Institutional Class 365,597 194,119
----------- -----------
29,105,741 22,824,258
----------- -----------
Cost of shares repurchased:
Strategic Income Fund A Class ........... (3,355,061) (1,269,709)
Strategic Income Fund B Class ........... (2,362,012) (464,293)
Strategic Income Fund C Class ........... (859,105) (142,624)
Strategic Income Fund Institutional Class (18,853) (15,671)
----------- -----------
(6,595,031) (1,892,297)
----------- -----------
Increase in net assets derived from capital
share transactions ...................... 22,510,710 20,931,961
----------- -----------
NET INCREASE IN NET ASSETS .................. 21,142,311 21,371,068
NET ASSETS:
Beginning of period ......................... 21,371,068 --
----------- -----------
End of period ............................... $42,513,379 $21,371,068
=========== ===========
- ----------------------
* Date of commencement of operations.
See accompanying notes
<PAGE>
for current income 13
DELAWARE GROUP INCOME FUNDS, INC -
STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
STRATEGIC STRATEGIC STRATEGIC STRATEGIC
INCOME INCOME INCOME INCOME
FUND FUND FUND FUND
A CLASS A CLASS B CLASS B CLASS
-------------------------- --------------------------
YEAR 10/1/96(1) YEAR 10/1/96(1)
ENDED TO ENDED TO
7/31/98 7/31/97 7/31/98 7/31/97
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................ $5.700 $5.500 $5.700 $5.500
Income from investment operations:
Net investment income(2) ........................................ 0.444 0.337 0.402 0.308
Net realized and unrealized gain (loss) from investments and
foreign currencies ............................................ (0.104) 0.204 (0.100) 0.203
------ ------ ------ ------
Total from investment operations. ............................... 0.340 0.541 0.302 0.511
------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income ............................ (0.440) (0.341) (0.402) (0.311)
Distributions from net realized gain on investment transactions . (0.120) none (0.120) none
------ ------ ------ ------
Total dividends and distributions ............................... (0.560) (0.341) (0.522) (0.311)
------ ------ ------ ------
Net asset value, end of period ...................................... $5.480 $5.700 $5.480 $5.700
====== ====== ====== ======
Total return(3) ..................................................... 6.23% 10.11% 5.32% 9.53%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ......................... $17,871 $9,144 $15,602 $6,878
Ratio of expenses to average net assets ......................... 1.00% 1.00% 1.75% 1.75%
Ratio of expenses to average net assets prior to
expense limitation ............................................ 1.73% 2.12% 2.48% 2.87%
Ratio of net investment income to average net assets ............ 7.93% 7.76% 7.18% 7.01%
Ratio of net investment income to average net assets prior
to expense limitation ......................................... 7.20% 6.64% 6.45% 5.89%
Portfolio turnover .............................................. 175% 183% 175% 183%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC STRATEGIC STRATEGIC STRATEGIC
INCOME INCOME INCOME FUND INCOME FUND
FUND FUND INSTITUTIONAL INSTITUTIONAL
C CLASS C CLASS CLASS CLASS
------------------------- -----------------------------
YEAR 10/1/96(1) YEAR 10/1/96(1)
ENDED TO ENDED TO
7/31/98 7/31/97 7/31/98 7/31/97
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................ $5.700 $5.500 $5.700 $5.500
Income from investment operations:
Net investment income(2) ........................................ 0.402 0.313 0.458 0.367
Net realized and unrealized gain (loss) from investments and
foreign currencies ............................................ (0.100) 0.198 (0.111) 0.187
------ ------ ------ ------
Total from investment operations. ............................... 0.302 0.511 0.347 0.554
------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income ............................ (0.402) (0.311) (0.457) (0.354)
Distributions from net realized gain on investment transactions . (0.120) none (0.120) none
------ ------ ------ ------
Total dividends and distributions ............................... (0.522) (0.311) (0.577) (0.354)
------ ------ ------ ------
Net asset value, end of period ...................................... $5.480 $5.700 $5.470 $5.700
====== ====== ====== ======
Total return(3) ..................................................... 5.31% 9.53% 6.36% 10.36%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ......................... $5,276 $1,944 $3,764 $3,405
Ratio of expenses to average net assets ......................... 1.75% 1.75% 0.75% 0.75%
Ratio of expenses to average net assets prior to
expense limitation ............................................ 2.48% 2.87% 1.48% 1.87%
Ratio of net investment income to average net assets ............ 7.18% 7.01% 8.18% 7.90%
Ratio of net investment income to average net assets prior
to expense limitation ......................................... 6.45% 5.89% 7.45% 6.78%
Portfolio turnover .............................................. 175% 183% 175% 183%
</TABLE>
- ----------------------
(1) Date of commencement of operations; ratios have been annualized and total
returns have not been annualized.
(2) Per share information for the year ended July 31, 1998 was based on the
average shares outstanding method.
(3) Does not include maximum sales charge of 4.75% nor the 0.50%-1% limited
contingent deferred sales charge that would apply in the event of certain
redemptions within 24 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>
14 for current income
DELAWARE GROUP INCOME FUNDS, INC -
STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
- --------------------------------------------------------------------------------
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 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 continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes has been made in the
financial statements. Income and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
Class Accounting - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements - The Fund may invest in a pooled cash account along
with other members of the Delaware Investments Family of Funds. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is
held by the Fund's custodian bank until the maturity of the respective
repurchase agreements. Each repurchase agreement is at least 100%
collateralized. However, in the event of default or bankruptcy by the
counterparty to the agreement, realization of the collateral may be subject to
legal proceedings.
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 that result
from fluctuations in foreign currency exchange rates in the statement of
operations. 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.
<PAGE>
Other - Expenses common to all Funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). Costs used in calculating realized gains and losses on the
sale of investment securities are those of the specific securities sold.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. 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.
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 (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 daily net assets, 0.625% on the next $500 million and 0.60% on the
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 investments 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, brokerage commissions, extraordinary expenses and
distribution expenses exceed 0.75% of average daily net assets of the Fund
through December 31, 1999. Total expenses absorbed by DMC for the period ended
July 31, 1998, were $238,239.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of
DMC, to provide dividend disbursing, transfer agent and accounting services
for the Fund. For the year ended July 31, 1998, the Fund expensed $91,542 for
dividend disbursing and transfer agent services and $12,734 for accounting
services. At July 31, 1998, the Fund had a liability for such fees and other
expenses payable to DSC of $82,869.
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 year ended July 31, 1998, DDLP earned $30,551 for commissions on sales
of the Fund A Class shares. At July 31, 1998, the Fund had a liability to DDLP
for distribution fees and other expenses payable of $142,118.
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.
<PAGE>
for current income 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. Investments
For the year ended July 31, 1998, the Fund made purchases of $58,104,728 and
sales of $39,898,804 of investment securities other than U.S. government
securities and temporary cash investments. For the year ended July 31,1998,
the Fund made purchases of $14,921,804 and sales of $13,781,108 of U.S.
government securities.
At July 31, 1998, the aggregate cost of securities for federal income tax
purposes was $43,337,266.
At July 31, 1998, net unrealized depreciation for federal income tax purposes
aggregated $1,154,476 of which $480,554 related to unrealized appreciation of
securities and $1,635,030 related to unrealized depreciation of securities.
4. Capital Stock
Transactions in capital stock shares were as follows:
YEAR 10/01/96*
ENDED TO
7/31/98 7/31/97
------- -------
Shares sold:
Strategic Income Fund A Class .................... 2,090,197 1,786,116
Strategic Income Fund B Class .................... 1,948,372 1,266,123
Strategic Income Fund C Class .................... 746,554 361,988
Strategic Income Fund Institutional Class ........ 28,625 565,743
Shares issued upon reinvestment of dividends
from net investment income and net realized
gain on investments:
Strategic Income Fund A Class .................... 167,315 44,619
Strategic Income Fund B Class .................... 116,603 23,076
Strategic Income Fund C Class .................... 28,415 4,239
Strategic Income Fund Institutional Class ........ 65,280 34,615
--------- ---------
5,191,361 4,086,519
--------- ---------
Shares repurchased:
Strategic Income Fund A Class .................... (600,061) (227,046)
Strategic Income Fund B Class .................... (422,357) (82,777)
Strategic Income Fund C Class .................... (152,911) (25,383)
Strategic Income Fund Institutional Class ........ (3,338) (2,764)
--------- ---------
(1,178,667) (337,970)
--------- ---------
Net Increase ......................................... 4,012,694 3,748,549
========= =========
- ----------------------
* Date of commencement of operations.
5. Lines of Credit
The Fund has a committed line of credit for $1,600,000. No amount was
outstanding at July 31, 1998, 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. The 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. The Fund may also use these
contracts to hedge the U.S. dollar value of securities it already owns
denominated in foreign currencies.
<PAGE>
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 and 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.
No forward foreign currency contracts were outstanding at July 31, 1998.
7. Market and 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.
8. Securities Lending
During the year ended July 31, 1998, the Fund participated in securities
lending. Security loans are required at all times to be secured by collateral
at least equal to 102% of the market value of the securities on loan. However,
in the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings. In the event that the borrower fails to return loaned securities,
and cash collateral being maintained by the borrower is insufficient to cover
the value of loaned securities and provided such collateral insufficiency is
not the result of investment losses, the lending agent has agreed to pay the
amount of the shortfall to the Fund or, at the option of the lending agent,
replace the loaned securities. No securities were on loan as of July 31, 1998.
<PAGE>
16 for current income
DELAWARE GROUP INCOME FUNDS, INC -
STRATEGIC INCOME FUND
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
DELAWARE GROUP INCOME FUNDS, INC. - STRATEGIC INCOME FUND
We have audited the accompanying statement of net assets of Delaware Group
Income Funds, Inc. - Strategic Income Fund (the "Fund") as of July 31, 1998,
and the related statement of operations for the year then ended, and the
statements of changes in net assets and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 1998, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Income Funds, Inc. - Strategic Income Fund at July 31, 1998,
the results of its operations for the year then ended, and the changes in its
net assets and its financial highlights for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
/s/ Ernst & Young
Philadelphia, Pennsylvania
September 4, 1998
<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 Statement of Additional
Information. The figures in this report represent past results which are not a
guarantee of future results. The return and principal value of an investment
in the Fund will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost.
Board of Directors
WAYNE A. STORK
Chairman
Delaware Investments Family of Funds
Philadelphia, PA
JEFFREY J. NICK
President and Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
WALTER P. BABICH
Board Chairman, Citadel Constructors, Inc.
King of Prussia, PA
JOHN H. DURHAM
Partner, Complete Care Services
Horsham, 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
THOMAS F. MADISON
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
CHARLES E. PECK
Secretary/Treasurer, Enterprise Homes, Inc.
Fredericksburg, VA
Affiliated Officers
DAVID K. DOWNES
Executive Vice President, Chief Financial Officer
and Chief Operating Officer
Delaware Investments Family of Funds
Philadelphia, PA
GEORGE M. CHAMBERLAIN, JR.
Senior Vice President, Secretary
and General Counsel
Delaware Investments Family of Funds
Philadelphia, PA
BRUCE D. BARTON
President and Chief Executive Officer
Delaware Distributors, L.P.
Philadelphia, PA
[photo of globes]
<PAGE>
directors
& officers
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
Delaware Management Company
Philadelphia, Pennsylvania
INTERNATIONAL AFFILIATE
Delaware International Advisers Ltd.
London, England
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
Philadelphia, Pennsylvania
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
Philadelphia, Pennsylvania
1818 Market Street
Philadelphia, PA 19103-3682
<PAGE>
(Photo of Globe)
This report must be preceded or accompanied by a current Strategic Income Fund
Prospectus and the Delaware Investments Performance Update for the most
recently completed calendar quarter. For a prospectus of any other mutual fund
from Delaware Investments, contact your financial adviser or Delaware.
For Shareholders
1.800.523.1918
For Securities Dealers
1.800.362.7500
For Financial Institutions
Representatives Only
1.800.659.2265
www.delawarefunds.com
Be sure to consult your financial adviser when making investments. Mutual
funds can be a valuable part of your financial plan; however, shares of the
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.
(C) Delaware Distributors, L.P.
DELAWARE(SM)
INVESTMENTS
- ---------------------
Philadelphia o London
Printed in the USA
on recycled paper
(1018)
AR-125[7/98]TKO9/98
