<PAGE>
For Current Income
Delchester Fund
service and guidance
professional management
goals
[water wheel graphic]
1998
Semi-Annual Report
DELAWARE
INVESTMENTS
=====================
Philadelphia o London
<PAGE>
for current
income
2
February 18, 1998
Dear Shareholder:
DOMESTIC HIGH-YIELD BOND PRICES HAVE been resilient since July, a time of
increased global market volatility. Stable credit trends, falling interest rates
and strong investor demand offset the effects of Asian economic turbulence.
Delchester Fund provided a positive total return of +6.90% for the six months
ended January 31, 1998 (capital change plus reinvested dividends for Class A
shares at net asset value). Delaware Investments is pleased to report that your
Fund outpaced its unmanaged benchmark - the Salomon Brothers High-Yield Bond
Index - during the first half of fiscal 1998, as shown below.
Since the summer, the returns from high-yield bonds have not only been higher
than other fixed-income securities, but have eclipsed the total return of stocks
as measured by the Standard & Poor's 500 Index, as illustrated below. While this
was most likely a temporary phenomenon, we believe it shows that high-yield
bonds have the potential to help diversify an investment portfolio and temper
the effects of stock market volatility.
We attribute Delaware's success since the summer to a consistent, disciplined
investment strategy that is a result of more than a generation of experience
managing high-yield bond portfolios. During the first half of 1998, Paul A.
Matlack and Gerald T. Nichols, who manage the Fund, focused on:
* bonds rated B in industries whose prospects appeared to be
clearly defined;
* new bond offerings of at least $100 million, and;
* U.S. companies with experienced management teams and underlying financial
strength.
HIGH-YIELD BONDS HAVE THE POTENTIAL TO HELP DIVERSIFY AN INVESTMENT PORTFOLIO
AND TEMPER THE EFFECTS OF STOCK MARKET VOLATILITY.
<TABLE>
<CAPTION>
CUMULATIVE/AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended 12 Months Ended
January 31, 1998 January 31, 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Delchester Fund A Class +6.90% +15.34%
Lipper High Current Yield Fund Average +5.89% (222 funds) +13.86% (192 funds)
- ---------------------------------------------------------------------------------------------------------------
Salomon Brothers High-Yield Bond Index +6.65% +14.67%
Lehman Brothers Aggregate Bond Index +4.90% +10.72%
Standard & Poor's 500 Index +3.56% +26.90%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
All performance quoted above assumes reinvestment of distributions. Fund results
and those of the Lipper Fund Average do not show the effect of sales charges.
Performance for all Fund classes can be found on page 8. Performance of other
Fund classes differs due to different charges and expenses. Past performance
does not guarantee future results.
<PAGE>
for current
income
3
Since 1995, high-yield, higher risk bonds have benefited from low
inflation and positive trends in credit quality. The default rate of high-yield
bonds has declined to approximately 1%, the lowest level since the early 1980s,
according to CS First Boston.
Demand for high-yield bonds has also remained strong. In calendar 1997,
investors allocated more than $18 billion to high-yield bond mutual funds, an
increase of 11% from a year earlier, according to Strategic Insight, a research
firm. This helped absorb a record amount of new bond supply last year as
companies sought to take advantage of falling interest rates to refinance their
debt.
As of January 31, 1997, the domestic corporate high-yield bond market
offered an additional 310 basis points (3.1%) in income potential over
comparable maturity Treasuries. This yield premium can compensate investors for
the added risks of investing in bonds of corporations whose credit ratings are
less than BBB and which have no U.S. government guarantee of bond principal.
Delaware Investments has managed high-yield bonds through a variety of
interest rate environments, and we have learned that success in this higher risk
market requires preventive medicine - a proactive approach to analyzing credit
risk and regular monitoring of external factors that might affect our ability to
provide income and preserve capital.
Inside, Mr. Matlack and Mr. Nichols review the Fund's performance
since the summer. They also explain why Delaware believes the high-yield
market may offer attractive potential for both income and total
return-oriented investors for the balance of fiscal 1998.
Delaware Investments values your continued confidence and we look
forward to reporting to you again in September.
Sincerely,
/s/ Wayne A. Stork
- -----------------------------
WAYNE A. STORK
Chairman
/s/ Jeffrey J. Nick
- -----------------------------
JEFFREY J. NICK
President and Chief Executive Officer
INTEREST INCOME IS THE PRIMARY COMPONENT OF TOTAL RETURN FROM HIGH-YIELD BONDS
ANNUALIZED TOTAL RETURNS
FIVE YEARS ENDED DECEMBER 31, 1997
Capital Income
Return Return Total
Merrill Lynch High-Yield
Bond Index 2.19% 9.69% +11.88%
10 Year Treasury Bonds 2.12% 7.75% + 9.87%
Merrill Lynch U.S
Corporate Bond Index 0.60% 7.87% + 8.47%
One-Year U.S. Treasury
Bills 0 5.07% + 5.07%
Source: Merrill Lynch. Past performance is not a guarantee of future results.
Unlike U.S. Treasuries, high-yield and corporate 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. One cannot invest
directly in these indexes, and there is no guarantee that Delchester Fund's
performance will match that of any index.
<PAGE>
for current
income
4
Portfolio Managers' Review
LAST YEAR EXTENDED A PERIOD OF unprecedented prosperity for investors in
high-yield securities. In the seven years since the trough of the last bear
market in December 1990, high-yield bonds have generated double digit returns in
six of those years. The market's average annualized rate of return during this
period was +15.6%, as measured by the unmanaged Salomon Brothers High-Yield Bond
Index. During the 1990s, average credit quality has jumped three grades from B-
to BB-. The default rate has fallen from more than 10% to less than 1%. As of
early 1998, the market had doubled in size to more than $470 billion in bonds
outstanding, issued by more than 1,200 domestic companies. (Source: Donaldson
Lufkin & Jenrette). Not surprisingly, investor perception of high-yield bonds
has undergone a dramatic transformation. Once considered a speculative
investment derided as "junk bonds," the high-yield market is today a mainstream
strategic asset class by virtue of size, quality and performance.
* Like stocks, high-yield bonds are affected by the earnings and cash flow
growth of the issuing company. Industry profit and growth expectations are also
important.
* Like other types of fixed-income investments, high-yield bonds are
affected by inflation expectations and the outlook for the economy as a whole.
Between August 1997 and January 1998, U.S. Treasury bond prices rose
more than prices of high-yield bonds as investors sought safety of principal in
the wake of Asian currency evaluations. The Pacific Rim's fiscal woes negatively
affected some high-yield bonds issued by U.S. companies whose sales and earnings
are tied to the region's economic prospects.
WE DID ESPECIALLY WELL WITH NEW BOND ISSUES, WHICH OFFERED ATTRACTIVE INCOME,
RELATIVE SAFETY OF PRINCIPAL, AND IN SOME CASES, CAPITAL APPRECIATION POTENTIAL
AS BOND PRICES ROSE SHARPLY THIS PAST AUTUMN.
DELCHESTER FUND'S
CREDIT QUALITY AND INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------
JANUARY 31, 1998
B 85%
BB 3%
AAA 3%
Unrated 7%
CCC 2%
- --------------------------------------------------------------------------------
July 31, January 31,
1997 1998
---------------------------------------
Thirty-Day Current SEC Yield* 8.51% 8.67%
Average Effective Duration 4.6 years 4.4 years
Average Effective Maturity 6.9 years 6.8 years
Portfolio Turnover 154% 178%
Number of Bond Issues 140 154
*For Class A measured according to Securities and Exchange Commission
guidelines; Thirty-Day SEC yields as of January 31, 1997 for B and C Class
shares were 8.34% and 8.32%, respectively. Institutional Class yield was 9.36%.
<PAGE>
for current
income
5
Overall, however, high-yield bonds provided higher total returns than
any other fixed-income category for the first half of fiscal 1998 because of the
market's superior income characteristics. Senior debt (bonds that have priority
in the event of a bankruptcy) and bonds with a long duration (increased
sensitivity to interest rates) performed well, especially in the
telecommunications and media sectors.
Consistently strong credit quality provided us with ample opportunity to
select both new and seasoned high-yield bonds for Delchester Fund during the
first half of fiscal 1998. We did especially well with new bond issues, which
offered attractive income, relative safety of principal, and in some cases,
capital appreciation potential as bond prices rose sharply this past autumn.
INVESTMENT STRATEGY
In managing high-yield bond portfolios over the years, Delaware Investments has
sought to provide above-average results while maintaining a conservative
approach to credit risk. As part of our research discipline, we ask ourselves
whether we would make a loan to the companies we review.
Delchester Fund emphasizes income as the dominant component of return,
and stresses capital preservation over appreciation. During the first half of
fiscal 1998, we sought to achieve this by investing primarily in bonds rated B.
We may focus on lower yielding, better quality bonds rated BB during slower
economic growth.
Our current portfolio positioning hinges on our belief that the nation's
output of goods and services (gross domestic product) will grow at a sustained
non-inflationary pace in 1998. As of January 31, more than 80% of the bonds in
the Fund's portfolio were rated B. This was about 20 percentage points higher
than the average of 174 high-yield bond funds tracked by Morningstar.
Since the summer, we have increased the Fund's income potential by
investing in Rule 144A bonds. These bonds represented 80% of new issues in 1997
and are named for a Securities and Exchange Commission rule that allows a
security to be traded among sophisticated investors without registration.
Rule 144A bonds offered an average of 100 basis points more yield with
credit risk similar to bonds that were not issued under the rule. Following
registration, Rule 144A bonds can sometimes offer capital appreciation
potential. As with all securities selected for the Fund, we carefully examine
the operating performance of companies issuing 144A bonds before making a
purchase.
AS PART OF OUR RESEARCH DISCIPLINE, WE ASK OURSELVES WHETHER WE WOULD MAKE A
LOAN TO THE COMPANIES WE REVIEW.
<PAGE>
for current
income
6
HIGH-YIELD BONDS CAN CUSHION VOLATILITY
An important catalyst for high-yield bond demand in calendar 1997 was the
increasing volatility of the stock market. In our view, investors are embracing
the notion that high-yield bonds can be a defensive investment under certain
market conditions.
During October 1997, a period of increased stock market volatility,
high-yield bonds rose in value by +0.5% (as measured by the Merrill Lynch
High-Yield Bond Index) while the Standard & Poor's 500 Index declined 3.4%. Of
course, the past doesn't guarantee the future, but we believe it is worth noting
that since 1980 the high-yield bond market has generally provided a positive
return when the S&P 500 Index has posted a negative return, according to Chase
Securities.
Thus, high-yield bonds have the potential to both diversify and balance
an investment portfolio that's focused heavily on equities.
SUMMARY OUTLOOK
The positive economic conditions that have sparked the high-yield bond market's
remarkable results over the past few years are clearly entering a mature phase.
However, we believe 1998 could be another year when high-yield bonds could
deliver attractive returns. In our view, recession in Pacific Rim countries
should keep U.S. inflation and interest rates at current modest levels without
impairing U.S. economic growth, and by extension, credit quality.
U.S. stocks - especially small company stocks - tend to be vulnerable to
a slowdown in earnings growth. However, high-yield bond prices have historically
been resilient to changes in a company's rate of growth, so long as profit
growth remained positive. Low interest rates on investment grade bonds and
potential
HIGH-YIELD BOND PRICES HAVE HISTORICALLY BEEN RESILIENT TO CHANGES IN A
COMPANY'S RATE OF GROWTH, SO LONG AS PROFIT GROWTH REMAINED POSITIVE.
DELCHESTER FUND'S ASSET MIX
A DIVERSE PORTFOLIO: A TIME-TESTED DISCIPLINE
- --------------------------------------------------------------------------------
JANUARY 31, 1998
Preferred & Convertible Preferred Stocks 2.7%
Services/Others 15.4%
Energy & Chemicals 10.3%
Metals & Mining 3.8%
Paper & Containers 7.8%
Consumer Products 7.8%
Cash 3.1%
Autos & Transportation 6.6%
Media 8.1%
Healthcare 2.0%
Leisure & Lodging 3.7%
Food & Retail 10.6%
Telecommunications & Electronics 18.1%
<PAGE>
for current
income
7
stock market volatility suggest we'll see continued heavy demand for high-yield
bond mutual funds in the coming months.
Many of the new bonds coming to market are refinancings of existing
high-yield debt. Investors who had these companies' old bonds often provide much
of the demand for new issues. With 30-year U.S. Treasury bonds currently
yielding 5.9%, we think more companies will pay investors a premium in 1998 to
tender bonds (sell them back to the issuer) before their call dates. Between
1995 and 1997, as interest rates dropped substantially, the amount of such
tender activity by corporations nearly tripled, according to Donaldson Lufkin &
Jenrette.
Increased corporate tenders and call activity in the year ahead may make
it challenging to maintain your Fund's income potential. However, we believe the
willingness of companies to pay investors a "bonus" to refinance could
potentially augment total return.
Amid one of the longest economic growth cycles of the 20th Century, we
have structured your Fund's portfolio to emphasize bonds rated B with
above-average yields. We'll be looking for bonds with abundant credit protection
and the potential to benefit from a corporate debt rating upgrade. Our success
in 1998 will depend on our ability to successfully compound income and preserve
principal.
PAUL A. MATLACK
Vice President and
Senior Portfolio Manager
GERALD T. NICHOLS
Vice President and
Senior Portfolio Manager
February 18, 1998
GLOSSARY
BASIS POINTS
A WAY OF MEASURING THE YIELD OF A BOND. A BASIS POINT IS ONE HUNDREDTH OF A
PERCENT (1/100 OF 1%).
INVESTMENT GRADE BONDS
BONDS WITH CREDIT RATINGS OF BBB AND HIGHER. PRICES OF THESE BONDS TEND TO BE
MORE SENSITIVE TO MONETARY POLICY CHANGES AS QUALITY INCREASES.
HIGH-YIELD BONDS
HIGHER RISK BONDS WITH CREDIT RATINGS LOWER THAN BBB. THE RISK OF DEFAULT
INCREASES SUBSTANTIALLY FOR BONDS RATED CCC AND LOWER. ALSO KNOWN AS JUNK
BONDS.
DURATION
THE MOST COMMON MEASURE OF A BOND'S SENSITIVITY TO INTEREST RATES. IT
INDICATES THE APPROXIMATE CHANGE IN A BOND'S PRICE GIVEN A 1% MOVEMENT IN
INTEREST RATES.
(Photo of Keyboard)
<PAGE>
for current
income
8
DELCHESTER FUND
PROVIDING HIGH INCOME FOR MORE THAN THREE DECADES
- --------------------------------------------------------------------------------
ANNUAL INCOME FROM A $100,000 INVESTMENT
AUGUST 20, 1970 TO JANUARY 31, 1998
TOTAL INCOME = $1,244,601
Yearly Income
-------------
Jan-71 $1,577 Jan-85 38,902 $120,000
Jan-72 6,574 Jan-86 51,952 $100,000
Jan-73 7,766 Jan-87 52,066 $ 80,000
Jan-74 9,130 Jan-88 55,401 $ 60,000
Jan-75 9,733 Jan-89 60,236 $ 40,000
Jan-76 11,388 Jan-90 66,680 $ 20,000
Jan-77 11,938 Jan-91 71,192 $ 0
Jan-78 13,146 Jan-92 76,238
Jan-79 13,912 Jan-93 84,561
Jan-80 15,992 Jan-94 92,441
Jan-81 19,476 Jan-95 98,890
Jan-82 23,439 Jan-96 95,276
Jan-83 29,081 Jan-97 103,247
Jan-84 29,940 Jan-98 104,812
Chart assumes $100,000 invested on August 20, 1970, a 3.75% front-end sales
charge and reinvestment of all distributions. Performance for other Delchester
classes will vary due to differing charges and expenses.
Past performance does not guarantee future results.
<TABLE>
<CAPTION>
DELCHESTER FUND PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS THROUGH JANUARY 31, 1998
Lifetime Ten Years Five Years One Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (Est. 8/20/70)
Excluding Sales Charge +9.95% +10.49% +10.18% +15.34%
Including Sales Charge +9.76% +9.94% +9.12% +9.83%
- ---------------------------------------------------------------------------------------------------------------
Class B (Est. 5/2/94)
Excluding Sales Charge +9.62% +14.49%
Including Sales Charge +9.00% +10.49%
- ---------------------------------------------------------------------------------------------------------------
Class C (Est. 11/29/95)
Excluding Sales Charge +13.10% +14.48%
Including Sales Charge +13.10% +13.48%
</TABLE>
Delchester Fund invests primarily in high-yield securities, which involves
greater risk 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. Results include reinvestment of distributions and
the effect of sales charges as shown below. Lifetime performance for B and C
shares excluding sales charge assumes contingent sales charges did not apply or
the investment was not redeemed. Past performance does not guarantee 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.
Average Annual Institutional Class Returns Through January 31, 1998
Lifetime 10 Years Five Years One Year Six Months*
Delchester Fund +10.05% +10.75% +10.44% +15.63% +7.03%
*Cumulative Return. Institutional Class shares are available without sales or
asset-based distribution charges only to certain eligible institutional
accounts. Delchester Fund's Institutional Class was initially made available
6/1/92; performance prior to that date was adjusted to eliminate the effect of
the sales charge.
<PAGE>
for current income 9
FINANCIAL STATEMENTS
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF NET ASSETS
JANUARY 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------
CORPORATE BONDS - 94.28%
Aerospace & Defense - 1.22%
Atlas Air sr nts 10.75% 8/1/05 .................. $ 7,600,000 $ 8,170,000
Burke Industries sr nts 144A
10.00% 8/15/07 ................................. 8,985,000 9,524,100
----------
17,694,100
----------
AUTOMOBILE & AUTO EQUIPMENT - 3.73%
Accuride sr sub nts 144A 9.25% 2/1/08 ........... 7,000,000 7,008,750
ADV Accessory/AAS Cap sr sub nts 144A
9.75% 10/1/07 .................................. 4,600,000 4,651,750
Cambridge Industries sr sub nts
10.25% 7/15/07 ................................. 9,700,000 10,233,500
Delco Remy International sr sub nts
10.625% 8/1/06 ................................. 10,750,000 11,784,688
Safety Components International sr sub nts
10.125% 7/15/07 ................................ 8,400,000 8,820,000
Stanadyne Automobile sr sub nts144A
10.25% 12/15/07 ................................ 11,200,000 11,424,000
----------
53,922,688
----------
BANKING, FINANCE & INSURANCE - 0.15%
Western Financial Bank sub nts
8.875% 8/1/07 .................................. 2,300,000 2,239,625
---------
2,239,625
---------
BUILDING & MATERIALS - 3.10%
American Architectural sr nts 144A
11.75% 12/1/07 ................................. 7,500,000 7,762,500
American Builders and Contractors sr sub nts
10.625% 5/15/07 ................................ 7,425,000 7,768,406
Atrium sr sub nts 10.50% 11/15/06 ............... 11,025,000 11,741,625
Kevco sr sub nts 10.375% 12/1/07 ................ 7,600,000 7,847,000
Reliant Building sr sub nts 10.875% 5/1/04 ...... 9,250,000 9,747,188
----------
44,866,719
----------
CABLE, MEDIA, & PUBLISHING - 8.11%
*Adelphia Communications sr nts
9.50% 2/15/04 .................................. 8,917,262 9,619,496
*Allbritton Communications sr sub nts 144A
8.875% 2/1/08 .................................. 1,700,000 1,712,750
American Banknote units 11.25% 12/1/07 .......... 9,500,000 9,618,750
*Echostar DBS sr nts 12.50% 7/1/02 ............... 9,100,000 10,203,375
Frontiervision Holdings sr disc nts
11.875% 9/15/07 ................................ 6,000,000 4,620,000
Galaxy Telecommunication L.P. sr sub nts
12.375% 10/1/05 ................................ 7,500,000 8,362,500
Knology Holdings units 11.875% 10/15/07 ......... 8,000,000 4,400,000
Liberty Group Operating units 144A
9.375% 2/1/08 .................................. 3,900,000 3,997,500
*Marcus Cable sr disc nts 14.25% 12/15/05 ........ 19,200,000 17,160,000
Northland Cable Television sr sub nts 144A
10.25% 11/15/07 ................................ 9,100,000 9,782,500
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------
CORPORATE BONDS (CONTINUED)
CABLE, MEDIA, & PUBLISHING (CONTINUED)
Pegasus sr nts 9.625% 10/15/05 ................. $ 7,000,000 $ 7,358,750
Perry-Judd sr sub nts 144A
10.625% 12/15/07 ............................. 6,000,000 6,285,000
STC Broadcasting sr sub nts
11.00% 3/15/07 ............................... 8,250,000 9,136,875
Sullivan Graphics sr sub nts 12.75% 8/1/05 ..... 10,375,000 10,647,344
United International Holdings sr nts
10.75% 2/15/08 ............................... 7,200,000 4,252,968
-----------
117,157,808
-----------
CHEMICALS - 4.10%
Huntsman sr sub nts 144A 9.50% 7/1/07 .......... 11,000,000 11,550,000
Koppers Industries sr sub nts
9.875% 12/1/07 ............................... 9,500,000 9,998,750
Laroche Industries sr sub nts 144A
9.50% 9/15/07 ................................ 12,000,000 11,970,000
PCI Chemicals Canada sr nts
9.25% 10/15/07 ............................... 3,900,000 3,958,500
+*Sterling Chemical Holdings sr disc nts
13.50% 8/15/08 ............................... 17,575,000 10,984,375
Texas Petrochemical sr sub nts
11.125% 7/1/06 ............................... 9,750,000 10,737,188
-----------
59,198,813
-----------
COMPUTER & TECHNOLOGY - 0.66%
*Decisionone Notes sr sub nts 9.75% 8/1/07 ..... 3,000,000 3,127,500
Phase Metrics sr nts 144A 10.75% 2/1/05 ........ 6,300,000 6,386,625
-----------
9,514,125
-----------
CONSUMER PRODUCTS - 7.84%
Coleman Escrow sr disc nts
10.50% 5/15/01 ............................... 34,000,000 23,077,500
+*CLN Holdings sr disc nts 10.50% 5/15/01 ........ 5,925,000 3,695,719
Desa International sr sub nts 144A
9.875% 12/15/07 .............................. 8,800,000 9,229,000
Drypers sr nts 10.25% 6/15/07 .................. 10,575,000 11,037,656
French Fragrances sr nts 10.375% 5/15/07 ....... 9,000,000 9,630,000
Precise Technology sr sub nts
11.125% 6/15/07 .............................. 3,975,000 4,109,156
Revlon Consumer Products sr sub nts 144A
8.625% 2/1/08 ................................ 14,000,000 14,087,500
+*Revlon Worldwide sr disc nts
10.00% 3/15/01 ............................... 13,400,000 9,916,000
Riddell Sports sr nts 10.50% 7/15/07 ........... 8,000,000 8,500,000
Shop Vac sr nts 10.625% 9/1/03 ................. 9,500,000 10,509,375
Zeta Consumer Products sr nts 144A
11.25% 11/30/07 .............................. 9,200,000 9,464,500
-----------
113,256,406
-----------
<PAGE>
10 for current income
DELCHESTER FUND
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------
CORPORATE BONDS (CONTINUED)
ELECTRONICS/INFORMATION/DATA - 5.05%
+Cellnet Data Systems units 14.00% 10/1/07 ....... $12,000,000 $ 6,180,000
Communications Instruments sr sub nts 144A
10.00% 9/15/04 ................................ 6,950,000 7,332,250
Electronic Retailing Systems sr disc nts
13.25% 2/1/04 ................................. 13,200,000 8,926,500
Elgar Holdings sr nts 9.875% 2/1/08 ............. 5,600,000 5,600,000
EV International sr nts 11.00% 3/15/07 .......... 9,000,000 9,405,000
Federal Data sr sub nts 10.125% 8/1/05 .......... 10,450,000 10,698,188
Highwaymaster Communications sr nts
13.75% 9/15/05 ................................ 10,600,000 11,130,000
International Logistics sr nts 144A
9.75% 10/15/07 ................................ 2,875,000 2,892,969
TELEX Communications sr sub nts
10.50% 5/1/07 ................................. 10,500,000 10,775,625
----------
72,940,532
----------
Energy - 6.16%
First Wave Marine sr nts 11.00% 2/1/08 .......... 6,900,000 7,141,500
Gothic Energy sr nts 12.25% 9/1/04 .............. 1,400,000 1,478,750
Panaco sr nts 10.625% 10/1/04 ................... 9,350,000 9,490,250
Rutherford-Moran Oil sr sub nts
10.75% 10/1/04 ................................ 10,450,000 11,181,500
*Statia Terminals sr nts 11.75% 11/15/03 ......... 6,250,000 6,625,000
Transamerica Refining units 144A
16.00% 6/30/03 ................................ 9,000,000 9,270,000
*Transamerican Energy sr nts
13.00% 6/15/02 ................................ 11,750,000 9,723,125
Transamerican Energy sr disc nts
11.50% 6/15/02 ................................ 9,950,000 10,136,563
Trench Electric sr nts 144A 10.25% 12/15/07 ..... 8,600,000 8,815,000
United Refining sr unsec nts 10.75% 6/15/07 ..... 14,250,000 15,229,688
----------
89,091,376
----------
ENVIRONMENTAL SERVICES - 0.81%
ATC Group Services sr sub nts 144A
12.00% 1/15/08 ................................ 4,800,000 4,956,000
Hydrochem Industrial sr sub nts
10.375% 8/1/07 ................................ 6,410,000 6,738,513
----------
11,694,513
----------
FOOD, BEVERAGE & TOBACCO - 5.77%
*Ameriking sr nts 10.75% 12/1/06 ................. 9,300,000 9,823,125
Ameriserve Food Distributors co guarantee
10.125% 7/15/07 ............................... 14,250,000 15,390,000
B & G Foods sr sub nts 144A
9.625% 8/1/07 ................................. 9,500,000 9,761,250
Core-Mark sr sub nts 11.375% 9/15/03 ............ 7,975,000 8,573,125
Del Monte Foods sr disc nts 144A
12.50% 12/15/07 ............................... 18,600,000 11,415,750
DiGiorgio sr nts 10.00% 6/15/07 ................. 12,500,000 12,421,875
Grupo Azucarero Mexico sr nts 144A
11.50% 1/15/05 ................................ 2,700,000 2,706,750
International Home Foods co guarantee
10.375% 11/1/06 ............................... 3,325,000 3,724,000
*Windy Hill Pet Food sr sub nts
9.75% 5/15/07 ................................. 8,900,000 9,523,000
----------
83,338,875
----------
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------
CORPORATE BONDS (CONTINUED)
HEALTHCARE & PHARMACEUTICALS - 1.98%
Alliance Imaging sr sub nts 9.625% 12/15/05 ....... $ 8,550,000 $ 8,881,313
Dynacare sr nts 10.75% 1/15/06 .................... 9,750,000 10,395,938
Kinetic Concepts Notes sr sub nts
9.625% 11/1/07 .................................. 9,000,000 9,405,000
----------
28,682,251
----------
INDUSTRIAL MACHINERY - 2.38%
*Hawk sr nts 10.25% 12/1/03 ........................ 8,400,000 9,156,000
Motors and Gears sr nts 10.75% 11/15/06 ........... 8,500,000 9,286,250
Motors and Gears sr nts 144A
10.75% 11/15/06 ................................. 10,800,000 11,799,000
Roller Bearing co guarantee 9.625% 6/15/07 ........ 4,000,000 4,120,000
----------
34,361,250
----------
LEISURE, LODGING & ENTERTAINMENT - 3.72%
Booth Creek Ski Holdings sr nts
12.50% 3/15/07 .................................. 11,400,000 11,556,750
*Casino America sr nts 12.50% 8/1/03 ............... 9,900,000 10,976,625
*Hollywood Casino sr nts 12.75% 11/1/03 ............ 12,450,000 13,741,688
Station Casinos sr sub nts 9.75% 4/15/07 .......... 7,225,000 8,254,563
Town Sports International sr nts
9.75% 10/15/04 .................................. 6,100,000 6,229,625
Trump Atlantic City Association Funding sr nts 144A
11.25% 5/1/06 ................................... 3,000,000 3,060,000
----------
53,819,251
----------
METALS & MINING - 3.79%
Bayou Steel first mtg 10.25% 3/1/01 ............... 5,000,000 5,168,750
Commonwealth Aluminum sr sub nts
10.75% 10/1/06 .................................. 8,825,000 9,531,000
Metallurg sr nts 144A 11.00% 12/1/07 .............. 8,950,000 9,352,750
Renco Metals sr nts 11.50% 7/1/03 ................. 14,900,000 15,998,875
Renco Steel sr nts 144A 10.875% 2/1/05 ............ 3,500,000 3,535,000
*Westmin Resources sr nts 11.00% 3/15/07 ........... 9,650,000 11,121,625
----------
54,708,000
----------
PACKAGING & CONTAINERS - 2.53%
AEP Industries sr sub nts 144A
9.875% 11/15/07 ................................. 4,800,000 5,064,000
Calmar sr sub nts 11.50% 8/15/05 .................. 14,500,000 15,569,375
Graham Packaging sr sub nts 144A
8.75% 1/15/08 ................................... 4,500,000 4,567,500
Graham Packaging sr disc nts 144A
10.75% 1/15/09 .................................. 7,000,000 4,383,750
Silgan Holdings debs 13.25% 7/15/06 ............... 6,054,048 6,939,452
----------
36,524,077
----------
PAPER & FOREST PRODUCTS - 5.29%
*Gaylord Container sr nts 9.75% 6/15/07 ............ 9,950,000 10,149,000
*Four M sr nts 12.00% 6/1/06 ....................... 14,225,000 15,167,406
MAXXAM Group sr nts 11.25% 8/1/03 ................. 12,250,000 13,107,500
MAXXAM Group Holdings sr nts
12.00% 8/1/03 ................................... 9,400,000 10,281,250
*Riverwood International co guarantee
10.875% 4/1/08 .................................. 20,200,000 19,947,500
Stone Container sr sub nts 12.25% 4/1/02 .......... 7,500,000 7,734,375
----------
76,387,031
----------
<PAGE>
for current income 11
DELCHESTER FUND
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------
CORPORATE BONDS (CONTINUED)
Retail - 4.81%
Central Tractor sr nts 10.625% 4/1/07 .......... $ 5,000,000 $ 5,362,500
Fleming sr sub nts 10.50% 12/1/04 .............. 13,225,000 14,068,094
J Crew Group debs 144A 13.125% 10/15/08 ........ 3,900,000 1,915,875
*J Crew Operating sr sub nts 144A
10.375% 10/15/07 ............................. 4,500,000 4,314,375
*Jitney-Jungle Stores co guarantee
10.375% 9/15/07 .............................. 13,700,000 14,590,500
*Leslie's Poolmart sr nts 10.375% 7/15/04 ....... 10,450,000 10,946,375
Petro Stopping Centers sr nts 10.50% 2/1/07 .... 10,400,000 11,115,000
*Shoppers Food Warehouse sr nts
9.75% 6/15/04 ................................ 6,900,000 7,150,125
----------
69,462,844
----------
TELECOMMUNICATIONS - 13.06%
Allegiance Telecom units 144A
11.75% 2/15/08 ............................... 11,500,000 6,468,750
Arch Communications sr disc nts
10.875% 3/15/08 .............................. 19,000,000 9,405,000
BTI Telecom sr nts 10.50% 9/15/07 .............. 18,925,000 20,297,063
Comcast Cellular sr nts 9.50% 5/1/07 ........... 5,500,000 5,850,625
CSK Auto co guarantee 11.00% 11/1/06 ........... 14,400,000 15,858,000
GST USA co guarantee 13.875% 12/15/05 .......... 14,000,000 11,585,000
*Iridium LLC/Capital sr nts 144A
11.25% 7/15/05 ............................... 7,000,000 7,148,750
KMC Telecom Holdings units
12.50% 2/15/08 ............................... 14,000,000 7,735,000
McCaw International units 13.00% 4/15/07 ....... 11,200,000 6,944,000
*Metrocall sr sub nts 10.375% 10/1/07 ........... 12,900,000 13,238,625
Metronet Communications sr sub nts
10.75% 11/1/07 ............................... 4,600,000 2,972,750
*Nextel Communications sr disc nts
9.75% 8/15/04 ................................ 9,000,000 8,617,500
Nextel Communications sr disc nts
10.65% 9/15/07 ............................... 14,500,000 9,696,875
*Nextlink Communications sr nts
9.625% 10/1/07 ............................... 5,000,000 5,337,500
*Paging Network sr sub nts 10.125% 8/1/07 ....... 9,400,000 9,787,750
RCN sr nts 10.00% 10/15/07 ..................... 3,800,000 4,075,500
RCN sr disc nts 11.125% 10/15/07 ............... 10,000,000 6,737,500
RCN sr nts 144A 10.00% 2/15/08.................. 17,500,000 10,820,600
Telegroup sr disc nts 144A 10.50% 11/1/04 ...... 2,000,000 1,642,500
Teligent sr nts 11.50% 12/1/07 ................. 17,000,000 17,892,500
USA Mobile Telecommunications sr nts
14.00% 11/1/04 ............................... 6,300,000 6,575,625
----------
188,687,413
----------
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------
CORPORATE BONDS (CONTINUED)
TEXTILES & FURNITURE - 2.75%
*Anvil Knitwear sr nts 10.875% 3/15/07 ....... $ 10,000,000 $ 10,412,500
CMI Industries sr sub nts 9.50% 10/1/03 ..... 4,000,000 3,945,000
Collins & Aikman Floorcove sr sub nts
10.00% 1/15/07 ............................. 16,420,000 17,425,725
Scovill Fasteners sr nts 144A
11.25% 11/30/07 ............................ 7,700,000 8,008,000
-------------
39,791,225
-------------
TRANSPORTATION & SHIPPING - 2.88%
Chemical Leaman sr nts 10.375% 6/15/05 ...... 7,430,000 7,847,938
Equimar Shipholdings co guarantee
9.875% 7/1/07 ............................. 9,800,000 9,224,250
International Shipholdings sr nts 144A
7.75% 10/15/07 ............................ 1,500,000 1,496,250
Navigator Gas Transport nts 144A
10.50% 6/30/07 ............................ 9,400,000 10,116,750
Navigator Gas Transport units
12.00% 6/30/07 ............................ 8,000,000 9,120,000
Pegasus Shipping Hellas co guarantee 144A
11.875% 11/15/04 .......................... 3,000,000 2,981,250
Southern Pacific sr nts 11.25% 11/1/04 ...... 900,000 893,250
-------------
41,679,688
-------------
SERVICES/OTHER - 4.39%
IMO Industries sr sub nts 11.75% 5/1/06 ..... 16,965,000 18,894,769
Ryder Transportation sr sub nts
10.00% 12/1/06 ............................ 6,650,000 6,857,813
*Speedy Muffler King co guarantee
10.875% 10/1/06 ........................... 5,750,000 4,003,438
Williams Scotsman co guarantee
9.875% 6/1/07 ............................. 10,750,000 11,206,875
Comforce Operating sr nts 144A
12.00% 12/1/07 ............................ 6,550,000 6,844,750
MSX International sr sub nts 144A
11.375% 1/15/08 ........................... 5,600,000 5,768,000
Spinnaker Industries sr nts
10.75% 10/15/06 ........................... 9,500,000 9,880,000
-------------
63,455,645
-------------
Total Corporate Bonds
(cost $1,308,694,420) ..................... 1,362,474,255
-------------
U.S. Treasury Obligations - 7.24%
U.S. Treasury Note 9.00% 5/15/98 ............ 103,670,000 104,738,827
-----------
Total U.S. Treasury Obligations
(cost $104,872,432) ....................... 104,738,827
-----------
<PAGE>
12 for current income
DELCHESTER FUND
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER MARKET
OF SHARES VALUE
----------------------------
CONVERTIBLE PREFERRED STOCKS - 1.45%
*American Communication Services ............. 9,850 $11,155,125
Pantry Pride cv 14.875% pfd ................. 97,500 9,762,188
---------------
Total Convertible Preferred Stocks
(cost $20,296,375 ) ....................... 20,917,313
---------------
PREFERRED STOCKS - 1.30%
Cablevision Systems pik pfd ................. 3,207 370,400
Dobson Communications ....................... 4,750 4,910,313
Echostar Communications ..................... 66,500 7,248,500
Pegasus Communications Unit ................. 45,000 5,130,000
Terex-Appreciation Rights ................... 55,200 1,104,000
---------------
Total Preferred Stocks
(cost $16,516,423 ) ........................ 18,763,213
---------------
STOCK WARRANTS - 0.03%
**Electronic Retailing System Warrants ........ 13,200 396,000
**Highway Master Warrants ..................... 8,700 8,700
---------------
Total Stock Warrants (cost $544,058) ........ 404,700
---------------
TOTAL MARKET VALUE OF SECURITIES OWNED - 104.30%
(COST $1,450,923,708) ............................... $ 1,507,298,308
LIABILITIES NET OF RECEIVABLES AND
OTHER ASSETS - (4.30%) .............................. (62,173,813)
---------------
NET ASSETS APPLICABLE TO 156,443,338 DELCHESTER
FUND A CLASS, 47,742,177 DELCHESTER
FUND B CLASS, 4,603,454 DELCHESTER FUND
C CLASS, AND 6,185,878 DELCHESTER FUND
INSTITUTIONAL CLASS SHARES ($1 PAR VALUE)
OUTSTANDING; EQUIVALENT TO
$6.72 PER SHARE - 100.00% ........................... $ 1,445,124,495
===============
COMPONENTS OF NET ASSETS AT JANUARY 31, 1998:
Common stock, $1 par value, 500,000,000 shares
authorized to the Fund with 350,000,000 shares
allocated to Delchester Fund A Class, 50,000,000
shares allocated to Delchester Fund B Class,
50,000,000 shares allocated to Delchester
Fund C Class and 50,000,000 shares allocated
to Delchester Fund Institutional Class ................ $1,556,837,562
Undistributed net investment income .................... 335,666
Accumulated net realized loss on investments ........... (168,423,333)
Net unrealized appreciation of investments ............. 56,374,600
--------------
Total Net Assets ....................................... $1,445,124,495
==============
- ----------
*Security on loan.
**Non-income producing security for the six-month period ended January 31, 1998.
+Zero coupon security as of January 31, 1998. The coupon shown is the step-up
rate.
Summary of Abbreviations:
co guarantee - company guaranteed pfd - preferred
cv - convertible pik - pay-in-kind
debs - debentures sr - senior
disc - discount sub - subordinated
first mtg - first mortgage unsec - unsecured
nts - notes
See accompanying notes
<PAGE>
for current income 13
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest ......................................... $67,825,223
Dividends ........................................ 725,156 $68,550,379
-----------
EXPENSES:
Management fees .................................. 3,953,024
Distribution expenses ............................ 2,916,368
Dividend disbursing and
transfer agent fees and expenses ............... 1,003,362
Accounting and administration .................... 295,948
Reports and statements to shareholders ........... 227,822
Registration fees ................................ 69,686
Professional fees ................................ 32,542
Directors fees ................................... 13,235
Other ............................................ 4,167 8,516,154
----------- -----------
NET INVESTMENT INCOME ............................ 60,034,225
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments .......................... 26,149,251
Net change in unrealized appreciation ..................... 5,512,219
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS ........................................... 31,661,470
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS .......................................... $91,695,695
===========
See accompanying notes
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
1/31/98 7/31/97
(UNAUDITED)
----------------------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ...................... $ 60,034,225 $ 119,783,445
Net realized gain on investments ........... 26,149,251 47,638,271
Net increase in unrealized appreciation ..-- 5,512,219 39,751,252
--------------- ---------------
Net increase in net assets
resulting from operations ................ 91,695,695 207,172,968
--------------- ---------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income:
A Class .................................. (45,482,355) (94,104,779)
B Class .................................. (11,776,621) (19,288,798)
C Class .................................. (974,148) (967,413)
Institutional Class ...................... (1,906,547) (5,288,670)
--------------- ---------------
(60,139,671) (119,649,660)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
A Class .................................. 94,683,286 189,097,203
B Class .................................. 62,459,525 114,988,203
C Class .................................. 12,878,844 15,224,523
Institutional Class ...................... 21,170,571 26,230,680
Net asset value of shares issued upon
reinvestment of dividends from net
investment income:
A Class .................................. 20,792,947 45,057,620
B Class .................................. 4,539,454 7,617,766
C Class .................................. 543,080 613,365
Institutional Class ...................... 1,632,961 4,464,404
--------------- ---------------
218,700,668 403,293,764
--------------- ---------------
Cost of shares repurchased:
A Class .................................. (117,308,651) (245,410,292)
B Class .................................. (26,405,333) (40,864,850)
C Class .................................. (2,181,829) (2,539,287)
Institutional Class ...................... (26,221,954) (49,688,282)
--------------- ---------------
(172,117,767) (338,502,711)
--------------- ---------------
Increase in net assets derived from capital
share transactions ....................... 46,582,901 64,791,053
--------------- ---------------
NET INCREASE IN NET ASSETS ................. 78,138,925 152,314,361
NET ASSETS:
Beginning of period ...................... 1,366,985,570 1,214,671,209
--------------- ---------------
End of period ............................ $ 1,445,124,495 $ 1,366,985,570
=============== ===============
See accompanying notes
<PAGE>
14 for current income
DELAWARE GROUP INCOME FUNDS INC. - DELCHESTER FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
Delchester Fund A Class
-------------------------------------------------------------------------------------
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
1/31/1998 7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $ 6.570 $ 6.140 $ 6.280 $ 6.450 $ 7.070 $ 6.900
Income from investment operations:
Net investment income.................. 0.293 0.598 0.628 0.668 0.744 0.774
Net realized and unrealized gain (loss)
from investments ..................... 0.150 0.430 (0.141) (0.167) (0.618) 0.165
----------- ----------- --------- ----------- ---------- ---------
Total from investment operations ...... 0.443 1.028 0.487 0.501 0.126 0.939
----------- ----------- --------- ----------- ---------- ---------
Less dividends and distributions:
Dividends from net investment income .. (0.293) (0.598) (0.627) (0.671) (0.746) (0.769)
----------- ----------- --------- ----------- ---------- ---------
Total dividends and distributions ..... (0.293) (0.598) (0.627) (0.671) (0.746) (0.769)
----------- ----------- --------- ----------- ---------- ---------
Net asset value, end of period ............ $ 6.720 $ 6.570 $ 6.140 $ 6.280 $ 6.450 $ 7.070
=========== =========== ========= =========== ========== =========
Total Return(1)............................ 6.90% 17.53% 8.10% 8.46% 1.60% 14.46%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $1,051,658 $1,030,328 $973,939 $1,020,763 $ 983,569 $955,113
Ratio of expenses to average net assets 1.05%(2) 1.04% 1.02% 1.09% 1.05% 1.04%
Ratio of net investment income to
average net assets .................. 8.75%(2) 9.48% 10.11% 10.77% 10.48% 11.17%
Portfolio turnover .................... 118%(2) 154% 108% 92% 92% 72%
</TABLE>
- ----------
(1) Does not include maximum sales charge of 4.75% nor the 1% limited
contingent deferred sales charge that would apply in the event of certain
redemptions within 12 months of purchase of A Class shares. Does not
include contingent deferred sales charge which varies from 1-4% depending
upon the holding period for Class B and Class C shares.
(2) Annualized.
See accompanying notes
<PAGE>
for current income 15
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
Delchester Fund B Class Delchester Fund C Class
----------------------------------------------------- ---------------------------------
Six Months Year Year Year 5/2/94(2) Six Months Year 11/29/95(2)
Ended Ended Ended Ended to Ended Ended to
1/31/98 7/31/97 7/31/96 7/31/95 7/31/94 1/31/98 7/31/97 7/31/96
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $6.570 $6.140 $6.280 $ 6.450 $6.730 $6.570 $6.140 $6.210
Income from investment operations:
Net investment income ................. 0.266 0.550 0.581 0.624 0.120 0.268 0.550 0.385
Net realized and unrealized gain (loss)
from investments .................. 0.152 0.430 (0.141) 0.170) (0.280) 0.150 0.430 (0.069)
------ ------ ------- ------- ------- ------ ------ -------
Total from investment operations ...... 0.418 0.980 0.440 0.454 (0.160) 0.418 0.980 0.316
------ ------ ------- ------- ------- ------ ------ -------
Less dividends and distributions:
Dividends from net investment income .. (0.268) (0.550) (0.580) (0.624) (0.120) (0.268) (0.550) (0.386)
------ ------ ------- ------- ------- ------ ------ -------
Total dividends and distributions ..... (0.268) (0.550) (0.580) (0.624) (0.120) (0.268) (0.550) (0.386)
------ ------ ------- ------- ------- ------ ------ -------
Net asset value, end of period ............ $6.720 $6.570 $6.140 $6.280 $6.450 $6.720 $6.570 $6.140
====== ====== ======= ====== ======= ====== ====== ======
Total Return(1) ........................... 6.50% 16.66% 7.30% 7.64% (3) 6.49% 16.66% 5.20%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) ........................ $320,937 $273,499 $176,266 $111,860 $21,776 $30,946 $19,094 $4,953
Ratio of expenses to average
net assets .......................... 1.80%(4) 1.79% 1.77% 1.82% 1.83% 1.80%(4) 1.79% 1.77%
Ratio of net investment income to
average net assets .................. 8.00%(4) 8.73% 9.36% 10.14% 9.70% 8.00%(4) 8.73% 9.36%
Portfolio turnover .................... 118%(4) 154% 108% 92% 92% 118%(4) 154% 108%
</TABLE>
(1) Does not include maximum sales charge of 4.75% nor the 1% limited
contingent deferred sales charge that would apply in the event of certain
redemptions within 12 months of purchase of A Class shares. Does not
include contingent deferred sales charge which varies from 1-4% depending
upon the holding period for Class B and Class C shares.
(2) Date of commencement of trading; ratios and total return have been
annualized.
(3) Total return has been omitted as management believes that such information
for this relatively short period is not meaningful.
(4) Annualized.
See accompanying notes
<PAGE>
16 for current income
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
Delchester Fund Institutional Class
------------------------------------------------------------------------------
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
1/31/98 7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $6.570 $6.140 $6.280 $6.450 $7.070 $6.900
Income from investment operations:
Net investment income 0.300 0.614 0.644 0.685 0.758 0.787
Net realized and unrealized gain (loss)
from investments .................... 0.151 0.429 (0.142) (0.169) (0.617) 0.165
----- ----- ----- ----- ----- -----
Total from investment operations ...... 0.451 1.043 0.502 0.516 0.141 0.952
----- ----- ----- ----- ----- -----
Less dividends and distributions:
Dividends from net investment income .. (0.301) (0.613) (0.642) (0.686) (0.761) (0.782)
----- ----- ----- ----- ----- -----
Total dividends and distributions ..... (0.301) (0.613) (0.642) (0.686) (0.761) (0.782)
----- ----- ----- ----- ----- -----
Net asset value, end of period ............ $6.720 $6.570 $6.140 $6.280 $6.450 $7.070
====== ====== ====== ====== ====== ======
Total Return .............................. 7.03% 17.82% 8.37% 8.72% 1.82% 14.67%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $41,583 $44,065 $59,513 $ 61,742 $ 71,122 $ 35,909
Ratio of expenses to average net assets 0.80%(1) 0.79% 0.77% 0.82% 0.83% 0.86%
Ratio of net investment income to
average net assets .................. 9.00%(1) 9.73% 10.36% 11.14% 10.70% 11.35%
Portfolio turnover .................... 118%(1) 154% 108% 92% 92% 72%
</TABLE>
- ----------
(1) Annualized.
See accompanying notes
<PAGE>
for current income 17
DELAWARE GROUP INCOME FUNDS, INC. - DELCHESTER FUND
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Delaware Group Income Funds, Inc. - Delchester Fund (the "Fund") is registered
as a diversified open-end investment company under the Investment Company Act
of 1940, as amended. The Fund is organized as a Maryland Corporation and
offers four classes of shares. The Delchester Fund A Class carries a front-end
sales charge of 4.75%. The Delchester Fund B Class carries a back-end deferred
sales charge. The Delchester Fund C Class carries a level load deferred sales
charge and Delchester Institutional Class has no sales charge. The Fund's
objective is to seek as high a current income as is consistent with providing
reasonable safety.
1. Significant Accounting Policies
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation - Securities listed on an exchange are valued at the 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. Long-term debt securities
are valued by an independent pricing service and such prices are believed to
reflect the fair value of such securities. Other securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
Federal Income Taxes - The Fund intends to continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes has been made in the
financial statements. Income and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
Class Accounting - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements - The Fund may invest in a pooled cash account along
with other members of Delaware Investments. The aggregate daily balance of the
pooled cash account is invested in repurchase agreements secured by
obligations of the U.S. government. The respective collateral is held by the
Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 100% collateralized.
However, in the event of default or bankruptcy by the counterparty to the
agreement, realization of the collateral may be subject to legal proceedings.
Other - Expenses common to all Funds within Delaware Investments are allocated
amongst the funds on the basis of average net assets. Security transactions
are recorded on the date the securities are purchased or sold (trade date).
Costs used in calculating realized gains and losses on the sale of investment
securities are those of the specific securities sold. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the
accrual basis. Original issue discounts are accreted to interest income over
the lives of the respective securities. The Fund declares and pays dividends
from net investment income daily and capital gains, if any, annually.
Certain Fund expenses are paid through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Fund's average
daily net assets.
<PAGE>
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Fund
pays Delaware Management Company (DMC) the Investment Manager of the Fund, an
annual fee which is calculated daily at the rate of 0.60% on the first $500
million of average daily net assets, 0.575% on the next $250 million and 0.55%
on the average daily net assets in excess of $750 million. At January 31,
1998, the Fund had a liability for Investment Management fees and other
expenses payable to DMC of $118,177.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of
DMC, to serve as dividend disbursing, accounting, and transfer agent for the
Fund. For the six months ended January 31, 1998, the Fund expensed $1,003,362
for dividend disbursing and transfer agent services and $226,704 for
accounting services. At January 31, 1998, the Fund had a liability for such
fees and other expenses payable to DSC of $90,969.
Pursuant to the Distribution Agreement, the Fund pays Delaware Distributors,
L.P. (DDLP), the Distributor and an affiliate of DMC, an annual fee not to
exceed 0.30% of the average daily net assets of the A Class and 1.00% of the
average daily net assets of the B and C Class. For the six months ended
January 31, 1998, DDLP earned $248,753 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 six-month period ended January 31, 1998, the Fund made purchases of
$934,896,855 and sales of $746,970,634 of investment securities other than
U.S. government securities and temporary cash investments. During the
six-month period ended January 31, 1998, the Fund made purchases of
$508,757,424 and sales of $541,889,523 of long-term U.S. government
securities.
At January 31, 1998, the aggregate cost of securities for federal income tax
purposes was $1,450,923,708.
At January 31, 1998, unrealized appreciation for federal income tax purposes
aggregated $56,374,600 of which $64,542,308 related to unrealized appreciation
of securities and $8,167,708 related to unrealized depreciation of securities.
For federal income tax purposes, the Fund had a capital loss carryforward at
July 31, 1997, of $191,344,902 which may be carried forward and applied
against future capital gains. The capital loss carryforward expires as
follows: 1998 - $10,861,752, 1999 - $89,261,440, 2002 - $3,628,131, and 2003 -
$87,593,579.
<PAGE>
18 for current income
NOTES TO FINANCIAL STATMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. Capital Stock
Transactions in capital stock were as follows:
Six Months Ended Year Ended
1/31/98 7/31/97
(Unaudited)
Shares sold:
A Class .................................. 14,308,396 29,886,498
B Class .................................. 9,443,191 18,171,332
C Class .................................. 1,946,690 2,401,059
Institutional Class ..................... 3,205,157 4,110,657
Shares issued upon reinvestment of
dividends from net investment income:
A Class .................................. 3,147,931 7,101,822
B Class .................................. 687,218 1,198,602
C Class .................................. 82,165 96,296
Institutional Class ...................... 247,235 712,863
---------- ----------
33,067,982 63,679,129
---------- ----------
Shares repurchased:
A Class .................................. (17,767,702) (38,750,393)
B Class .................................. (3,998,494) (6,448,410)
C Class .................................. (330,355) (398,589)
Institutional Class ..................... (3,970,626) (7,805,689)
---------- ----------
(26,067,177) (53,403,081)
---------- ----------
Net Increase ............................. 7,000,805 10,276,048
========== ==========
5. Lines of Credit
The Fund has a committed line of credit for $42,900,000. No amount was
outstanding at January 31, 1998, or at any time during the six-month period.
6. Market and Credit Risk
The Fund may invest in high-yield fixed income securities which carry ratings
of BB or lower by S&P and/or Ba or lower by Moody's. Investments in these
higher yielding securities may be accompanied by a greater degree of credit
risk than higher rated securities. Additionally, lower rated securities may be
more susceptible to adverse economic and competitive industry conditions than
investment grade securities.
The Fund may invest up to 10% of its total assets in illiquid securities which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The
relative illiquidity of some of these securities may adversely affect the
Fund's ability to dispose of such securities in a timely manner and at a fair
price when it is necessary to liquidate such securities.
7. Securities Lending
Security loans are required at all times to be secured by collateral at least
equal to 102% of the market value of the securities on loan. However, in the
event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings. In the event that the borrower fails to return loaned securities,
and cash collateral being maintained by the borrower is insufficient to cover
the value of loaned securities and provided such collateral insufficiency is
not the result of investment losses, the lending agent has agreed to pay the
amount of the shortfall to the Fund or, at the option of the lending agent,
replace the loaned securities. The market value of securities on loan to
brokers and the related cash collateral received at January 31, 1998, was
$89,108,171 and $90,890,334, respectively.
<PAGE>
DELAWARE INVESTMENTS FAMILY 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
Social Awareness Fund
Blue Chip Fund
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
REIT 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
High-Yield Opportunities Fund
Strategic Income Fund
U.S. Government Fund
Delaware-Voyageur
U.S. Government Securities Fund
Limited-Term Government Fund
FOR TAX-EXEMPT 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
Tax-Free Money Fund
ASSET ALLOCATION FUNDS
Growth Portfolio
Balanced Portfolio
Income Portfolio
*Available for the following states: Arizona, California, Colorado, Florida,
Idaho, Iowa, Kansas, Minnesota, Missouri, North Dakota, New Jersey, New
Mexico, New York, Ohio, Oregon, Pennsylvania, Utah, Washington, Wisconsin.
Insured and intermediate bond funds are available in selected states.
funds
Complete information on any fund offered by Delaware Investments can be found in
each fund's current prospectus. Prospectuses for all funds offered by Delaware
Investments are available from your financial adviser. Please read the
prospectus carefully before you invest or send money.
(Photo of keyboard)
<PAGE>
THIS SEMI-ANNUAL REPORT IS FOR THE INFORMATION OF DELCHESTER FUND SHAREHOLDERS,
BUT IT MAY BE USED WITH PROSPECTIVE investors when preceded or accompanied by a
current Prospectus for Delchester Fund, which sets forth details about charges,
expenses, investment objectives and operating policies of the Fund. You should
read the prospectus carefully before you invest. Summary investment results are
documented in the Fund's current Statement of Additional Information. The
figures in this report represent past results which are not a guarantee of
future results. The return and principal value of an investment in the Fund will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
Delaware Management Company
Philadelphia, Pennsylvania
INTERNATIONAL AFFILIATE
Delaware Investment 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
(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
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.
Printed in the USA
on recycled paper
SA-024 [1/98] PP3/98
(534)
Copy Rights Delaware Distributors, L.P.
DELAWARE
INVESTMENTS
=====================
Philadelphia o London
