<PAGE>
For Current Income
Delchester Fund
service and guidance
professional management
goals
1999
Semi-Annual
Report
DELAWARE(SM)
INVESTMENTS
=====================
Philadelphia o London
<PAGE>
for current
income
2
February 5, 1999
Dear Shareholder:
The start of our 1999 fiscal year, in August, coincided with the beginning of an
uncertain period for world securities markets. Economic and currency problems in
Southeast Asia, Russia and Latin America raised concerns about credit risk, and
by late August, many investors, particularly foreign investors, had fled stocks
and non-government bonds for the safe haven of U.S. Treasuries.
The resulting loss of liquidity led to sharp price declines in stock and bond
markets around the world, including the U.S. high-yield bond market. The Federal
Reserve Board responded by lowering its target for short-term interest rates,
which helped bolster stock and high-yield bond prices in late autumn. Large
capitalization U.S. stocks recovered more quickly than high-yield bonds, which
have yet to experience a full recovery. We believe that increasing investors'
appetite for above-average yields will gradually push high-yield bond prices
higher.
Delchester Fund delivered a total return of -6.76% (capital change plus
reinvested dividends for A Class shares at net asset value), for the six months
ended January 31, 1999, lagging its benchmark index and its high-yield oriented
peers. The portfolio was invested primarily in bonds rated B. This was in
keeping with the Fund's objective of high current income and its historic focus
on relatively better quality bonds among the lower rated, high-yield universe.
These bonds underperformed investment-grade bonds for the period.
Lack of liquidity caused by the global flight to U.S. Treasuries late last
summer temporarily halted new issuance of high-yield debt. New issuance
gradually resumed in November after the Federal Reserve cut the federal funds
rate (the
As high-yield market conditions
continued to improve through January,
investors tiptoed back into high-yield
bonds, attracted by their rich
yield premiums.
Cumulative Total Return
- --------------------------------------------------------------------------------
Six Months Ended
January 31, 1999
- --------------------------------------------------------------------------------
Delchester Fund A Class -6.76%
- --------------------------------------------------------------------------------
Lipper High Current Yield Fund Average (298 Funds) -3.84%
Salomon SmithBarney High-Yield Bond Index -0.22%
- --------------------------------------------------------------------------------
The performance shown above is based on net asset value without effect of sales
charges and assumes reinvestment of distributions. See page 8 for portfolio
performance for all Classes. Performance of other Fund classes varies due to
different expenses. Past performance is not a guarantee of future results.
<PAGE>
for current
income
3
rate charged between banks for overnight loans) by a total of 0.75% to 4.75%.
Still nervous about credit risk, investors who returned to the high-yield
market initially favored bonds rated BB, the highest rated of low quality bonds.
But as conditions continued to improve through January, investors tiptoed back
into lower rated bonds, attracted by their rich yield premiums.
Over the past six months, the difference between yields of high-yield
corporate bonds and similar maturity U.S. Treasuries widened dramatically (see
chart on page 7). Though this yield advantage declined somewhat by the end of
January, low rated corporate bonds still had a yield advantage above historical
averages. As of January 31, 1999, high-yield bonds provided a yield premium of
5.27 percentage points over Treasuries. Over the past five years the yield
advantage has normally been much less - about 3.9 percentage points, based on
the Salomon SmithBarney High-Yield Index.
Although uncertain market conditions have altered what had been a
near-perfect landscape for high-yield bonds, key indicators of credit risk and
market liquidity remain solid. We believe there continues to be ample credit
available to corporate issuers, and we do not anticipate that lending
institutions will restrict financial capital.
On the following pages, Paul Matlack and Gerald Nichols, Delaware
Investments' high-yield fixed-income portfolio managers, discuss the events of
the past six months and review Delchester Fund's investment strategy.
Against a backdrop of stable economic growth, steady interest rates and low
inflation, we believe that the bonds in the portfolio will continue to pay the
high income for which they were chosen and will contribute favorably to the
Fund's total return.
We expect conditions in the high-yield market to continue improving during
1999, and we will report any new developments to you this summer.
Sincerely,
/s/ Jeffrey J. Nick
- --------------------------
Jeffrey J. Nick
Chairman, President
and Chief Executive Officer
Delaware Investments Family of Funds
Jeffrey J. Nick Named Chairman
On December 17, 1998, Jeffrey J. Nick was named Chairman of the Delaware
Investments Family of Funds. He replaces Wayne A. Stork who has retired as
Chairman of the Board of Directors, but continues to serve as a Board Member.
Mr. Nick was named President and Chief Executive Officer of Delaware Investments
Family of Funds in October 1997. He has been CEO of Lincoln National Investment
Companies, an indirect parent company of Delaware Investments, since October
1996 and previously managed Lincoln's operations in the United Kingdom. Mr. Nick
holds an MBA from the University of Chicago and a Bachelor of Arts degree from
Princeton University.
<PAGE>
for current
income
4
Portfolio Managers' Review
By Paul A. Matlack Gerald T. Nichols
Vice President/Senior Portfolio Manager Vice President/Senior Portfolio Manager
February 5, 1999
Credit Quality Drove Performance
As investors' concerns about credit risk intensified last August amidst a
worldwide financial crisis, performance within the high-yield bond market was
measurably affected.
Before August 1998, investors willing to accept higher risks (lower credit
quality in exchange for potentially higher yields) were well rewarded. After
August 1998, bonds with better risk profiles took the lead. As a result, bonds
rated BB, the highest quality tier of the non-investment grade bond market,
outperformed bonds with lower credit ratings.* Delchester Fund had significant
holdings of well-capitalized single B issues. In our view, these bonds offered
above average yield, adequate credit protection and significant return
potential.
Though bonds rated B are just one credit rating below bonds rated BB, their
performance was significantly lower. The underperformance of single B bonds,
particularly in August and September at the height of the market's price
decline, hurt the Fund's performance. However, in January, investor appetite for
single B issues - due to exceptionally high yields - reversed the leadership
trend of BB bonds. For the month of January, single Bs returned +1.60%, while
bonds rated BB returned +1.15%.*
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------------------------------
As of January 31, 1999
- --------------------------------------------------------------------------------
Current 30-Day SEC Yield+ 10.03%
Average Effective Duration 4.7 years
Average Effective Maturity 7.5 years
Portfolio Turnover 62%
Number of Securities 154
* Source: Salomon SmithBarney High-Yield Index, segmented by credit quality.
+ For A Class shares measured according to Securities and Exchange Commission
(SEC) guidelines. Current 30-day SEC yield as of 1/31/99 for B and C Class
shares was 9.76%. The Institutional Class yield was 10.79%.
<PAGE>
for current
income
5
Low Default Rate Reflects Financial Strength of Issuers
During the recent period of declining high-yield bond prices, the underlying
financial status of bond issuers remained relatively steady, in our view. Though
the default rate (a measure of debt issuers' failure to pay interest or repay
principal) has increased slightly, it is still below its 18-year average of
3.4%. As of January 31, 1999, the default rate was in the range of 2.5%,
according to Merrill Lynch.
Further evidence of issuers' strength is that credit agencies have downgraded
their ratings on less than 6% of corporate debt issuers, suggesting to us that a
material decline in credit quality has not occurred. The quality rating on new
high-yield debt issued in December and January was consistently strong.(Lehman
Brothers)
In light of this environment and our view that commercial banks are not
likely to restrict lending in the face of a stable U.S. economy, we have
continued to actively buy new issues for the Delchester portfolio.
Delaware Investments' High-Yield Investment Strategy
Historically, income has been the primary component of total return from
high-yield bonds. Changes in price, whether up or down, do not play as much of a
role in performance. Our goal over time is to maximize income without taking
unnecessary credit risks. We strive to achieve this by focusing Delchester Fund
on higher yielding, higher risk bonds that are rated BB or B, the top credit
tiers of non-investment grade bonds.
During the past six months, Delchester Fund was solidly concentrated in bonds
rated B, with an underweighting in BBs. We chose this position because in our
experience, bonds rated BB tend to underperform bonds with B ratings when
interest rates are stable, and we did not believe there would be a major drop in
rates. We avoided lower quality CCC bonds and deferred interest bonds (bonds
that pay interest at a later date) because we believe their potential returns
are not worth the risks they involve.
<PAGE>
for current
income
6
The recent underperformance of bonds with B ratings appears to have created
compelling investment opportunities in this market segment. Prices have yet to
fully recover and yields relative to Treasuries are now among the most
attractive in the history of the high-yield asset class. We believe yields will
eventually prove irresistible to investors who are tired of anemic government
bond yields and are willing to assume the greater risks associated with
high-yield corporate bonds.
Diversification Among Industries Helps Manage Risk
In general, we try to avoid investing too heavily in any one industry. We spread
the Fund's holdings across many sectors, though we frequently invest more in
defensive and neutral industries (such as consumer and cable companies) which
tend to be more stable than cyclical industries (such as chemical, energy and
steel companies).
Over the past six months, the strongest performers among corporate bonds
rated B were defensive, consumer-driven industries such as utilities,
supermarkets and cable TV. Cyclical industries, such as energy and financial
companies, which were a less significant component of the Fund, experienced
negative returns. Slowing worldwide demand for commodities hurt energy prices
through the end of 1998, while a global liquidity crisis stifled financial
companies.
DELCHESTER FUND: A DIVERSIFIED MIX
- --------------------------------------------------------------------------------
Top Industry Sectors As of January 31, 1999
Percentage of Assets
Industry As of 1/31/99
- --------------------------------------------------------------------------------
Telecommunications 16.55%
Food, Beverage & Tobacco 8.67%
Cable, Media & Publishing 6.44%
Consumer Products 6.19%
Automobile & Auto Equipment 5.21%
Industrial Machinery 5.19%
- --------------------------------------------------------------------------------
Includes all sectors representing more than 5% of the Delchester portfolio. The
remaining 52% of the portfolio is diversified among 15 different sectors.
<PAGE>
for current
income
7
INVESTMENT OUTLOOK
Since November, we have seen market conditions stabilize as investors became
less afraid of exposure to credit risk. However, the road ahead may not be
completely smooth. If stocks experience another sharp decline in 1999,
high-yield bonds may encounter more short-term pain before they can stage a full
price recovery.
We will strive to take advantage of the compelling low prices and rich yield
premiums in the high-yield market today. We do not think basic underpinnings of
the high-yield market have changed, and we see no immediate signs of any
impending credit problems.
This, in addition to our positive outlook for stable U.S. economic growth and
low inflation for the coming six months, leads us to believe that Delchester
Fund is poised for a rebound. We believe that the portfolio can earn high income
with some modest capital appreciation through the remainder of 1999.
HIGH-YIELD BONDS:
HISTORICALLY HIGH INCOME ADVANTAGE
- --------------------------------------------------------------------------------
TREASURIES COMPARED TO HIGH-YIELD BONDS
JANUARY 31, 1998 TO JANUARY 31, 1999
Salomon SmithBarney
High-Yield Cash Pay Index U.S. Treasury Yield
------------------------- -------------------
Jan '98 8.71% 5.41%
Feb '98 8.9% 5.58%
Mar '98 8.69% 5.63%
Apr '98 8.69% 5.63%
May '98 8.85% 5.55%
Jun '98 9.02% 5.46%
July '98 9.02% 5.49%
Aug '98 10.62% 4.99%
Sept '98 10.41% 4.37%
Oct '98 10.8% 4.46%
Nov '98 10.02% 4.65%
Dec '98 10.04% 4.63%
Jan '99 9.89% 4.62%
Source: Salomon SmithBarney High-Yield Cash Pay Index.
The graph above highlights how the spread between the yields on U.S. Treasuries
and high-yield corporate bonds widened during the summer "flight to quality."
Treasuries are generally considered to be the highest quality bonds because
principal and interest payments are guaranteed by the U.S. government. Chart
shows U.S. Treasuries with a duration equivalent to the Salomon SmithBarney
High-Yield Index. High-yield corporate bonds are of significantly lower quality
and involve greater risks.
<PAGE>
for current
income
8
Performance Summary
DELCHESTER FUND
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
10 YEARS ENDED JANUARY 31, 1999
Delchester Fund A Class U.S. Consumer Price Index (Inflation)
----------------------- -------------------------------------
1/31/89 $ 9,528 10,000
1/31/90 $ 9,131 10,520
1/31/91 $ 8,463 11,115
1/31/92 $12,235 11,404
1/31/93 $14,215 11,775
1/31/94 $16,538 12,073
1/31/95 $15,545 12,411
1/31/96 $17,845 12,743
1/31/97 $20,009 13,138
1/31/98 $23,035 13,344
1/31/99 $22,238 13,526
Chart assumes $10,000 invested on January 31, 1988, a 4.75% front-end sales
charge and reinvestment of all distributions. Performance for other Fund classes
will vary due to differing charges and expenses. Past performance does not
guarantee future results.
DELCHESTER FUND PERFORMANCE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS THROUGH JANUARY 31, 1999
Lifetime Ten Years Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 8/20/70)
Excluding Sales Charge +9.45% +8.87% +6.15% -3.41%
Including Sales Charge +9.27% +8.35% +5.12% -8.07%
- --------------------------------------------------------------------------------
Class B (Est. 5/2/94)
Excluding Sales Charge +6.57% -4.13%
Including Sales Charge +6.28% -7.63%
- --------------------------------------------------------------------------------
Class C (Est. 11/29/95)
Excluding Sales Charge +7.36% -4.14%
Including Sales Charge +7.36% -5.01%
Delchester Fund invests primarily in high-yield bonds, which involve
greater risk than higher quality bonds. Returns reflect reinvestment of
distributions and any applicable sales charges as noted below. Return and
share value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. B and C Class results excluding
sales charge assume either that contingent sales charges did not apply or
the investment was not redeemed. Past performance is not a guarantee of
future results.
Class A shares have a 4.75% maximum front-end sales charge and a 12b-1
fee.
Class B shares do not carry a front-end sales charge, but are subject to a
1% annual distribution and service fee. They are subject to a deferred
sales charge of up to 4% if redeemed before the end of the sixth year.
Class C shares have a 1% annual distribution and service fee. If redeemed
within 12 months, a 1% contingent deferred sales charge applies.
Institutional Class shares are available without sales or asset-based
distribution charges only to certain eligible institutional accounts.
Average annual Institutional Class returns through January 31, 1999 were:
Lifetime 10 Years Five Years One Year
Delchester Fund (Est.6/1/92) +9.56% +9.15% +6.41% -3.17%
<PAGE>
for current income 9
Financial Statements
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF NET ASSETS
JANUARY 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------
CORPORATE BONDS - 88.16%
AEROSPACE & DEFENSE - 1.68%
Amtran co guarantee 9.625% 12/15/05 ............. $ 4,000,000 $ 4,000,000
Atlas Air sr nts 9.25% 4/15/08 .................. 9,250,000 9,435,000
Federal Data co guarantee
10.125% 8/1/05 ................................. 10,450,000 10,345,500
-----------
23,780,500
-----------
AUTOMOBILE & AUTO EQUIPMENT - 5.21%
Accuride sr sub nts 9.25% 2/1/08 ................ 10,000,000 10,025,000
ADV Accessory/AAS Capital co guarantee
9.75% 10/1/07 .................................. 7,350,000 7,350,000
*Eagle Picher Ind co guarantee
9.375% 3/1/08 .................................. 12,100,000 11,646,250
*Federal Mogul 144A nts 7.50% 1/15/09 ............ 5,400,000 5,427,000
*Hayes Lemmerz International co guarantee
8.25% 12/15/08 ................................. 7,000,000 7,105,000
Motors and Gears sr nts 10.75% 11/15/06 ......... 9,150,000 9,424,500
Newcor co guarantee 9.875% 3/1/08 ............... 6,550,000 6,255,250
Special Devices sr sub nts 144A
11.375% 12/15/08 ............................... 1,300,000 1,326,000
Stanadyne Automotive co guarantee
10.25% 12/15/07 ................................ 11,200,000 11,340,000
Talon Automotive sr sub nts
9.625% 5/1/08 .................................. 3,700,000 3,621,375
-----------
73,520,375
-----------
BANKING, FINANCE & INSURANCE - 0.54%
Willis Corroon 144A sr sub nts
9.00% 2/1/09 ................................... 7,600,000 7,619,000
-----------
7,619,000
-----------
BUILDING & MATERIALS - 2.23%
American Builders & Contractors co guarantee
10.625% 5/15/07 ................................ 4,100,000 3,854,000
Collins & Aikman Floorcovers sr sub nts
10.00% 1/15/07 ................................. 12,820,000 13,461,000
Wesco Distribution co guarantee
9.125% 6/1/08 .................................. 9,250,000 9,400,313
+Wesco International sr disc nts
11.125% 6/1/08 ................................. 7,750,000 4,746,875
-----------
31,462,188
-----------
CABLE, MEDIA & PUBLISHING - 6.44%
American Banknote co guarantee
11.25% 12/1/07 ................................. 10,750,000 7,242,813
Echostar DBS 144A sr nts 9.25% 1/2/06 ........... 15,500,000 16,042,500
Mail-Well 144A sr sub nts 8.75% 12/15/08 ........ 11,000,000 11,247,500
Pathnet sr nts 12.25% 4/15/08 ................... 5,800,000 3,886,000
*Pegasus Communications sr nts
9.625% 10/15/05 ................................ 7,000,000 7,280,000
PSINET sr nts 10.00% 2/15/05 .................... 8,600,000 8,987,000
+PX Escrow sr disc nts 9.625% 2/1/06 ............. 14,000,000 7,770,000
<PAGE>
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------
CORPORATE BONDS (Continued)
CABLE, MEDIA & PUBLISHING (CONTINUED)
+Radio Unica co guarantee 11.75% 8/1/06 .......... $ 4,250,000 $ 2,316,250
STC Broadcasting sr sub nts 11.00% 3/15/07 ...... 5,250,000 5,610,938
Sullivan Graphics sr sub nts 12.75% 8/1/05 ...... 10,375,000 10,790,000
+United International Holdings sr disc nts
10.75% 2/15/08 ................................. 14,600,000 9,709,000
-----------
90,882,001
-----------
CHEMICALS - 4.49%
Aqua Chemical sr sub nts 11.25% 7/1/08 .......... 9,200,000 8,556,000
Brunner Mond Group sr sub nts
11.00% 7/15/08 ................................. 6,600,000 5,082,000
Geo Specialty Chemicals sr sub nts
10.125% 8/1/08 ................................. 5,800,000 5,655,000
Huntsman sr sub nts 9.50% 7/1/07 ................ 11,000,000 11,192,500
*Koppers Industries co guarantee
9.875% 12/1/07 ................................. 9,500,000 9,405,000
*LaRoche Industries sr sub nts 9.50% 9/15/07 ..... 16,500,000 13,860,000
*+Sterling Chemical Holdings sr disc nts
13.50% 8/15/08 ................................. 23,325,000 9,563,250
-----------
63,313,750
-----------
COMPUTER & TECHNOLOGY - 0.72%
+Cellnet Data Systems sr disc nts
14.00% 10/1/07 ................................. 12,000,000 5,400,000
+Electronic Retailing Systems sr disc nts
13.25% 2/1/04 .................................. 13,200,000 4,834,500
-----------
10,234,500
-----------
CONSUMER PRODUCTS - 6.19%
Albecca sr sub nts 10.75% 8/15/08 ............... 9,500,000 9,476,250
*Derby Cycle/Lyon sr nts 10.00% 5/15/08 .......... 8,900,000 8,210,250
Desa International co guarantee
9.875% 12/15/07 ................................ 13,300,000 10,640,000
*Drypers sr nts 10.25% 6/15/07 ................... 10,575,000 10,257,750
*French Fragrance sr nts 10.375% 5/15/07 ......... 9,000,000 9,157,500
Home Interiors and Gifts co guarantee
10.125% 6/1/08 ................................. 10,350,000 10,350,000
Iron Age co guarantee 9.875% 5/1/08 ............. 9,000,000 8,212,500
+Iron Age Holdings sr disc nts
12.125% 5/1/09 ................................. 4,000,000 2,120,000
Outboard Marine sr nts 10.75% 6/1/08 ............ 9,000,000 8,640,000
Riddell Sports co gurantee 10.50% 7/15/07 ....... 8,000,000 7,580,000
+Spin Cycle units 12.75% 5/1/05 .................. 5,000,000 2,650,000
-----------
87,294,250
-----------
ELECTRONICS, INFORMATION & DATA - 0.80%
Elgar Holdings co guarantee 9.875% 2/1/08 ....... 2,300,000 2,070,000
+Rhythms Netconnections units
13.50% 5/15/08 ................................. 16,600,000 9,213,000
-----------
11,283,000
-----------
<PAGE>
10 for current income
DELCHESTER FUND
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------
CORPORATE BONDS (Continued)
ENERGY - 3.38%
First Wave Marine sr nts 11.00% 2/1/08 .......... $ 6,900,000 $ 6,486,000
Michael Petroleum sr nts 11.50% 4/1/05 .......... 7,600,000 5,244,000
Rutherford-Moran Oil co guarantee
10.75% 10/1/04 ................................. 10,450,000 12,017,500
*Statia Terminals mtg nts 11.75% 11/15/03 ........ 6,250,000 6,375,000
*+Transamerican Energy sr nts 13.00% 6/15/02 ...... 11,750,000 3,231,250
*Transamerican Energy sr nts 11.50% 6/15/02 ...... 9,950,000 2,786,000
+Transamerican Refining 144A sr nts
15.00% 12/1/03 ................................. 2,000,000 1,980,000
Transamerican Refining units 16.00% 6/30/03 ..... 9,000,000 2,700,000
+Universal Compression sr disc nts
9.875% 2/15/08 ................................. 11,000,000 6,875,000
-----------
47,694,750
-----------
ENVIRONMENTAL SERVICES - 0.45%
Hydrochem Industrial Services co guarantee
10.375% 8/1/07 ................................. 6,410,000 6,377,950
-----------
6,377,950
-----------
FOOD, BEVERAGE & TOBACCO - 8.67%
Ameriking sr nts 10.75% 12/1/06 ................. 9,300,000 9,811,500
Ameriserve Food Distributors co guarantee
10.125% 7/15/07 ................................ 19,000,000 16,387,500
Carrols 144A sr sub nts 9.50% 12/1/08 ........... 10,000,000 10,175,000
Core-Mark International sr sub nts
11.375% 9/15/03 ................................ 7,975,000 8,134,500
+Del Monte Foods sr disc nts
12.50% 12/15/07 ................................ 25,150,000 17,982,250
*DiGiorgio sr nts 10.00% 6/15/07 ................. 12,500,000 11,781,250
Favorite Brands sr nts 10.75% 5/15/06 ........... 9,200,000 7,383,000
Fleming co guarantee 10.50% 12/1/04 ............. 13,225,000 12,563,750
*Fresh Foods co guarantee 10.75% 6/1/06 .......... 6,200,000 5,890,000
*Jitney-Jungle Stores co guarantee
10.375% 9/15/07 ................................ 13,700,000 14,796,000
Luiginos 144A co guarantee 10.00% 2/1/06 ........ 7,500,000 7,500,000
-----------
122,404,750
-----------
HEALTHCARE & PHARMACEUTICALS - 3.12%
+Alaris Medical sr disc nts 11.125% 8/1/08 ....... 9,000,000 5,310,000
Alliance Imaging sr sub nts 9.625% 12/15/05 ..... 10,350,000 10,194,750
Dynacare sr nts 10.75% 1/15/06 .................. 9,750,000 9,945,000
Insight Health Services co guarantee
9.625% 6/15/08 ................................. 10,000,000 9,750,000
Kinetic Concepts co guarantee
9.625% 11/1/07 ................................. 9,000,000 8,820,000
-----------
44,019,750
-----------
INDUSTRIAL MACHINERY - 5.19%
Burke Industries co guarantee
10.00% 8/15/07 ................................. 8,985,000 8,850,225
Grove Worldwide sr sub nts 9.25% 5/1/08 ......... 14,950,000 13,828,750
Premier Graphics sr nts 11.50% 12/1/05 .......... 6,600,000 6,608,250
Republic Engineered Steel mtg nts
9.875% 12/15/01 ................................ 19,600,000 20,114,500
<PAGE>
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------
CORPORATE BONDS (Continued)
INDUSTRIAL MACHINERY (CONTINUED)
Safety Components International sr sub nts
10.125% 7/15/07 ................................ $ 8,400,000 $ 8,473,500
Spinnaker Industries sr nts 10.75% 10/15/06 ..... 4,700,000 4,089,000
+Thermadyne Holdings debs 12.50% 6/1/08 .......... 5,500,000 2,701,875
*Tokheim 144A sr sub nts 11.375% 8/1/08 .......... 8,300,000 8,569,750
-----------
73,235,850
-----------
LEISURE, LODGING & ENTERTAINMENT - 3.31%
+Aladdin Gaming units 13.50% 3/1/10 .............. 18,000,000 4,995,000
HMH Properties sr nts 8.45% 12/1/08 ............ 14,000,000 14,035,000
+Premier Parks sr disc nts 10.00% 4/1/08 ......... 14,050,000 9,729,625
*Silver Cinemas sr sub nts 10.50% 4/15/0 ......... 8,750,000 6,037,500
Town Sports International sr nts
9.75% 10/15/04 ................................. 3,425,000 3,382,189
United Artists sr sub nts 9.75% 4/15/08 ......... 8,800,000 8,492,000
-----------
46,671,314
-----------
METALS & MINING - 4.07%
Commonwealth Aluminum sr sub nts
10.75% 10/1/06 ................................. 8,825,000 8,836,030
Doe Run Resources co guarantee
11.25% 3/15/05 ................................. 9,000,000 7,830,000
Great Lakes Carb co guarantee
10.25% 5/15/08 ................................. 10,250,000 10,506,250
*Jorgensen Earle M. sr nts 9.50% 4/1/05 .......... 13,700,000 13,083,500
Metallurg co guarantee 11.00% 12/1/07 ........... 11,750,000 10,927,500
Ormet co guarantee 11.00% 8/15/08 ............... 6,500,000 6,207,500
-----------
57,390,780
-----------
PACKAGING & CONTAINERS - 2.86%
*Gaylord Container sr nts 9.75% 6/15/07 .......... 9,950,000 9,228,625
*Gaylord Container sr sub nts
9.875% 2/15/08 ................................. 9,500,000 7,600,000
+Graham Packaging/GPC Capital sr disc nts
10.75% 1/15/09 ................................. 7,000,000 5,110,000
*Riverwood International co guarantee
10.875% 4/1/08 ................................. 20,200,000 18,382,000
-----------
40,320,625
-----------
PAPER & FOREST PRODUCTS - 0.67%
MAXXAM Group sr nts 12.00% 8/1/03 ............... 9,400,000 9,447,000
-----------
9,447,000
-----------
RETAIL - 3.74%
Advance Stores co guarantee
10.25% 4/15/08 ................................. 9,200,000 9,338,000
Franks Nursery & Crafts sr sub nts
10.25% 3/1/08 .................................. 13,200,000 13,200,000
Leslies Poolmart sr nts 10.375% 7/15/04 ......... 10,450,000 10,868,000
Sonic Automotive co guarantee
11.00% 8/1/08 .................................. 9,600,000 9,408,000
*US Office Products co guarantee
9.75% 6/15/08 .................................. 13,500,000 10,023,750
-----------
52,837,750
-----------
<PAGE>
for current income 11
DELCHESTER FUND
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------
CORPORATE BONDS (Continued)
TELECOMMUNICATIONS - 16.55%
+21st Century Telecom Group sr sub nts
12.25% 2/15/08 ................................. $16,600,000 $ 6,992,750
American Mobile Satellite sr nts
12.25% 4/1/08 .................................. 14,050,000 7,727,500
Arch Communications sr nts 12.75% 7/1/07 ........ 10,000,000 9,900,000
BTI Telecom sr nts 10.50% 9/15/07 ............... 18,925,000 14,761,500
*Caprock Communications sr nts
12.00% 7/15/08 ................................. 13,500,000 13,500,000
Convergent Communication units
13.00% 4/1/08 .................................. 7,500,000 5,775,000
*+DTI Holdings sr disc nts
12.50% 3/1/08 .................................. 11,500,000 2,875,000
*+Echostar Communications sr nts
12.125% 7/1/04 ................................. 223,745 255,069
+Econophone sr disc nts
11.00% 2/15/08 ................................. 9,200,000 4,600,000
EV International co guarantee
11.00% 3/15/07 ................................. 9,000,000 8,100,000
+FirstWorld Communication units
13.00% 4/15/08 ................................. 18,500,000 7,585,000
*+GST USA co guarantee
13.875% 12/15/05 ............................... 14,000,000 9,940,000
+KMC Telecom Holdings sr disc nts
12.50% 2/15/08 ................................. 33,000,000 16,995,000
*+McCaw International sr disc nts
13.00% 4/15/07 ................................. 14,900,000 8,213,625
*Metrocall unsec sr sub nts 10.375% 10/1/07 ...... 12,900,000 12,706,500
Metromedia Fiber sr nts 10.00% 11/15/08 ......... 11,650,000 12,349,000
MetroNet Communications sr disc nts
9.95% 6/15/08 .................................. 9,800,000 6,590,500
+Nextel Communications sr disc nts
9.95% 2/15/08 .................................. 23,100,000 14,899,500
NextLink Communications 144A sr nts
10.75% 11/15/08 ................................ 8,400,000 8,757,000
Nextlink Communications sr nts
9.625% 10/1/07 ................................. 5,000,000 4,925,000
+RCN sr disc nts 9.80% 10/15/07 .................. 4,750,000 2,778,750
+RCN sr disc nts 9.80% 2/15/08 ................... 8,500,000 4,558,125
RCN sr nts 10.00% 10/15/07 ...................... 3,800,000 3,629,000
Splitrock Services units 11.75% 7/15/08 ......... 6,600,000 5,808,000
*Telex Communications co guarantee
10.50% 5/1/07 .................................. 6,000,000 5,392,500
+Teligent sr disc nts 11.50% 3/1/08 .............. 7,000,000 3,500,000
*Teligent sr nts 11.50% 12/1/07 .................. 20,700,000 19,716,750
*USA Mobile Communication sr nts
14.00% 11/1/04 ................................. 4,500,000 4,713,750
*+Viatel units 12.50% 4/15/08 ..................... 10,200,000 6,069,000
------------
233,613,819
------------
<PAGE>
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------
CORPORATE BONDS (Continued)
TEXTILES & FURNITURE - 1.43%
Globe Manufacturing sr sub nts
10.00% 8/1/08 .................................. $12,950,000 $ 12,043,500
*Scovill Fasteners co guarantee
11.25% 11/30/07 ................................ 8,400,000 8,148,000
--------------
20,191,500
--------------
TRANSPORTATION & SHIPPING - 2.99%
American Reefer mtg nts 10.25% 3/1/08 ........... 4,650,000 2,813,250
*Continental Airlines nts 8.00% 12/15/05 ......... 7,000,000 6,991,250
Eletson Holdings mtg nts 9.25% 11/15/03 ......... 5,000,000 4,900,000
Holt Group sr nts 9.75% 1/15/06 ................. 11,000,000 7,700,000
Millenium Seacarriers units 12.00% 7/15/05 ...... 3,800,000 3,192,000
Navigator Gas Transport nts 10.50% 6/30/07 ...... 9,400,000 7,896,000
Navigator Gas Transport unit
12.00% 6/30/07 ................................. 8,000,000 8,640,000
--------------
42,132,500
--------------
MISCELLANEOUS - 3.43%
Allied Waste NA 144A sr nts 7.875% 1/1/09 ....... 13,000,000 13,422,500
Comforce Operating sr nts 12.00% 12/1/07 ........ 6,550,000 6,550,000
*Group Maintenance 144A sr sub nts
9.75% 1/15/09 .................................. 6,900,000 7,072,500
Indesco International sr sub nts
9.75% 4/15/08 .................................. 4,500,000 4,117,500
Protection One 144A sr sub nts
8.125% 1/15/09 ................................. 5,800,000 5,916,000
*Trench Electric co guarantee
10.25% 12/15/07 ................................ 12,000,000 11,340,000
--------------
48,418,500
--------------
Total Corporate Bonds
(cost $1,360,519,405) 1,244,146,402
--------------
U.S. TREASURY OBLIGATIONS - 7.41%
U.S. Treasury Notes 5.00% 2/15/99 ............... 104,550,000 104,566,529
--------------
Total U.S. Treasury Obligations
(cost $104,573,681) 104,566,529
--------------
NUMBER
OF SHARES
---------
PREFERRED STOCKS - 1.98%
Dobson Communications ........................... 5,351 5,351,005
*E.Spire Communications .......................... 115,203 5,644,985
Eagle-Picher Holdings ........................... 101,000 4,949,000
Nebco Evans Holding ............................. 71,614 4,816,103
Nextel Communications ........................... 1 940
Pegasus Communications .......................... 11,611 1,265,599
Pegasus Communications Unit ..................... 45,000 4,995,000
**Terex-Appreciation Rights ....................... 55,200 938,400
--------------
Total Preferred Stocks (cost $35,613,255) 27,961,032
--------------
<PAGE>
12 for current income
DELCHESTER FUND
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES VALUE
---------------------------
WARRANTS - 0.05%
**American Mobile Satellite ....................... 52,791 $ 35,125
**American Banknote ............................... 134,181 107,500
**Cellnet Data Systems ............................ 164,052 180,000
**DTI Holdings .................................... 17,848 575
**Electronic Retailing System ..................... 13,200 66,000
**Gothic Energy ................................... 19,600 19,600
**KMC Telecom Holdings ............................ 14,000 168,000
**McCaw International ............................. 1,188 16,800
**Pathnet ......................................... 5,800 58,000
--------------
Total Warrants (cost $1,407,557) 651,600
--------------
TOTAL MARKET VALUE OF SECURITIES - 97.60%
(cost $1,502,113,898) ..................................... $1,377,325,563
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 2.40% ................................ 33,925,990
--------------
NET ASSETS APPLICABLE TO 240,129,147
DELCHESTER FUND SHARES
OUTSTANDING - 100.00% ..................................... $1,411,251,553
==============
NET ASSET VALUE - DELCHESTER FUND
A CLASS ($930,860,943/
158,389,417 SHARES) ....................................... $5.88
=====
NET ASSET VALUE - DELCHESTER FUND
B CLASS ($374,813,488/
63,775,468 SHARES) ........................................ $5.88
=====
NET ASSET VALUE - DELCHESTER FUND
C CLASS ($60,709,777/
10,329,934 SHARES) ........................................ $5.88
=====
NET ASSET VALUE - DELCHESTER FUND
INSTITUTIONAL CLASS ($44,867,345/
7,634,328 SHARES) ......................................... $5.88
=====
COMPONENTS OF NET ASSETS AT JANUARY 31, 1999:
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 ..................... $1,712,295,905
Undistributed net investment income .......................... 85,089
Accumulated net realized loss on investments ................. (176,341,106)
Net unrealized depreciation of investments ................... (124,788,335)
--------------
Total Net Assets ............................................. $1,411,251,553
==============
- ---------------------------
*Security on loan.
**Non-income producing security for the period ended January 31, 1999
+Zero coupon security as of January 31, 1999. The coupon shown is the step-up
rate.
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELCHESTER FUND A CLASS
Net asset value A Class (A) .................................. $5.88
Sales charge (4.75% of offering price or 4.93%
of amount invested per share) (B) ......................... 0.29
-----
Offering price ............................................... $6.17
=====
- ---------------------------
(A) Net asset value per share illustrated is the estimated amount which would be
paid upon the redemption or repurchase of shares.
(B) See How to Buy Shares in the current Prospectus for purchases of $100,000 or
more.
Summary of Abbreviations:
co guarantee -- company guaranteed
debs -- debentures
disc -- discount
mtg -- mortgage
nts -- notes
sr -- senior
sub -- subordinated
See accompanying notes
<PAGE>
for current income 13
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest ........................................ $76,278,067
Dividends ....................................... 1,513,398 $77,791,465
----------- -----------
EXPENSES:
Management fees ................................. 3,950,818
Distribution Expenses ........................... 3,234,683
Dividend disbursing and transfer agent
fees and expenses ............................ 1,194,094
Accounting and administration ................... 281,206
Registration fees ............................... 60,000
Taxes (other than taxes on income) .............. 50,000
Professional fees ............................... 44,000
Reports and statements to shareholders .......... 38,500
Directors fees .................................. 12,795
Custodian fees .................................. 5,000
Other ........................................... 95,746 8,966,842
----------- -----------
NET INVESTMENT INCOME ........................... 68,824,623
-----------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS:
Net realized loss on investments ................ (27,888,601)
Net change in unrealized appreciation/depreciation
of investments ............................... (141,453,170)
-----------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS ............................... (169,341,771)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS .............................. ($100,517,148)
============
See accompanying notes
<PAGE>
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
1/31/99 7/31/98
(UNAUDITED)
-------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income ........................ $ 68,824,623 $129,596,682
Net realized gain (loss) on investments ...... (27,888,601) 45,654,625
Net change in unrealized appreciation /
depreciation of investments ............... (141,453,170) (33,736,187)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations ................. (100,517,148) 141,515,120
-------------- --------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income:
A Class ................................... (49,272,548) (94,068,758)
B Class ................................... (17,223,629) (26,481,128)
C Class ................................... (2,600,895) (2,685,408)
Institutional Class ....................... (2,106,602) (4,338,358)
-------------- --------------
(71,203,674) (127,573,652)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
A Class ................................... 128,874,396 196,600,397
B Class ................................... 85,298,575 140,491,313
C Class ................................... 22,910,305 36,526,139
Institutional Class ....................... 19,676,018 46,366,224
Net asset value of shares issued upon
reinvestment of dividends from net
investment income:
A Class ................................... 24,402,753 44,559,762
B Class ................................... 7,402,116 10,738,318
C Class ................................... 1,516,783 1,568,430
Institutional Class ....................... 1,913,521 3,815,302
-------------- --------------
291,994,467 480,665,885
-------------- --------------
Cost of shares repurchased:
A Class ................................... (164,892,001) (222,496,607)
B Class ................................... (51,242,258) (50,887,559)
C Class ................................... (8,537,049) (6,294,131)
Institutional Class ....................... (25,568,439) (40,696,971)
-------------- --------------
(250,239,747) (320,375,268)
-------------- --------------
Increase in net assets derived from capital
share transactions ........................ 41,754,720 160,290,617
-------------- --------------
Net increase (decrease) in net assets ........ (129,966,102) 174,232,085
NET ASSETS:
Beginning of period .......................... 1,541,217,655 1,366,985,570
-------------- --------------
End of period ................................ $1,411,251,553 $1,541,217,655
============== ==============
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
ENDED YEAR ENDED
1/31/99 7/31/98 7/31/97 7/31/96 7/31/95 7/31/94
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .................. $6.650 $6.570 $6.140 $6.280 $6.450 $7.070
Income from investment operations:
Net investment income .............................. 0.307 0.608 0.598 0.628 0.668 0.744
Net realized and unrealized gain (loss)
from investments .................................. (0.760) 0.070 0.430 (0.141) (0.167) (0.618)
------ ------ ------ ------ ------ ------
Total from investment operations ................... (0.453) 0.678 1.028 0.487 0.501 0.126
------ ------ ------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income ............... (0.317) (0.598) (0.598) (0.627) (0.671) (0.746)
------ ------ ------ ------ ------ ------
Total dividends and distributions .................. (0.317) (0.598) (0.598) (0.627) (0.671) (0.746)
------ ------ ------ ------ ------ ------
Net asset value, end of period ..................... $5.880 $6.650 $6.570 $6.140 $6.280 $6.450
====== ====== ====== ====== ====== ======
Total Return(1) ....................................... (6.76%) 10.73% 17.53% 8.10% 8.46% 1.60%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ............ $930,861 $1,060,136 $1,030,328 $973,939 $1,020,763 $983,569
Ratio of expenses to average net assets ............ 1.07%(2) 1.06% 1.04% 1.02% 1.09% 1.05%
Ratio of net investment income
to average net assets ............................. 10.07%(2) 9.16% 9.48% 10.11% 10.77% 10.48%
Portfolio turnover ................................. 62% 117% 154% 108% 92% 92%
</TABLE>
- -----------------------
(1)Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
(2)Ratios have been annualized and total return has not been 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
--------------------------------------------------------------------------
SIX MONTHS 5/2/94(2)
ENDED YEAR ENDED TO
1/31/99 7/31/98 7/31/97 7/31/96 7/31/95 7/31/94
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................. $6.650 $6.570 $6.140 $6.280 $6.450 $6.730
Income from investment operations:
Net investment income ............................. 0.284 0.556 0.550 0.581 0.624 0.120
Net realized and unrealized gain (loss)
from investments ................................. (0.760) 0.072 0.430 (0.141) (0.170) (0.280)
------ ------ ------ ------ ------ ------
Total from investment operations .................. (0.476) 0.628 0.980 0.440 0.454 (0.160)
------ ------ ------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income .............. (0.294) (0.548) (0.550) (0.580) (0.624) (0.120)
------ ------ ------ ------ ------ ------
Total dividends and distributions ................. (0.294) (0.548) (0.550) (0.580) (0.624) (0.120)
------ ------ ------ ------ ------ ------
Net asset value, end of period .................... $5.880 $6.650 $6.570 $6.140 $6.280 $6.450
====== ====== ====== ====== ====== ======
Total Return(1) ...................................... (7.12%) 9.91% 16.66% 7.30% 7.64% (3)
Ratios and supplemental data:
Net assets, end of period (000 omitted) ........... $374,813 $376,463 $273,499 $176,266 $111,860 $21,776
Ratio of expenses to average net assets ........... 1.82%(4) 1.81% 1.79% 1.77% 1.82% 1.83%
Ratio of net investment income
to average net assets ............................ 9.32%(4) 8.41% 8.73% 9.36% 10.14% 9.70%
Portfolio turnover ................................ 62% 117% 154% 108% 92% 92%
</TABLE>
(1)Total investement return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
(2)Commencement of operations; ratios have been annualized and total returns
have not been annualized.
(3)Total return has been omitted as management believes that such information
for this relatively short period is not meaningful.
(4)Ratios have been annualized and total return has not been 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 C CLASS
-------------------------------------------------
SIX MONTHS 11/25/95(2)
ENDED YEAR ENDED TO
1/31/99 7/31/98 7/31/97 7/31/96
(UNAUDITED)
<S> <C> <C> <C> <C>
Net asset value, beginning of period ...................... $6.650 $6.570 $6.140 $6.210
Income from investment operations:
Net investment income .................................. 0.292 0.555 0.550 0.385
Net realized and unrealized gain (loss)
from investments ...................................... (0.768) 0.073 0.430 (0.069)
------ ------ ------ ------
Total from investment operations ....................... (0.476) 0.628 0.980 0.316
------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income ................... (0.294) (0.548) (0.550) (0.386)
------ ------ ------ ------
Total dividends and distributions ...................... (0.294) (0.548) (0.550) (0.386)
------ ------ ------ ------
Net asset value, end of period ......................... $5.880 $6.650 $6.570 $6.140
====== ====== ====== ======
Total Return(1) ........................................... (7.12%) 9.91% 16.66% 5.20%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ................ $60,710 $50,945 $19,094 $4,953
Ratio of expenses to average net assets ................ 1.82%(3) 1.81% 1.79% 1.77%
Ratio of net investment income to average net assets ... 9.32%(3) 8.41% 8.73% 9.36%
Portfolio turnover ..................................... 62% 117% 154% 108%
</TABLE>
- -------------------
(1)Total investement return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
(2)Commencement of operations; ratios have been annualized and total returns
have not been annualized.
(3)Ratios have been annualized and total return has not been annualized.
See accompanying notes
<PAGE>
for current income 17
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
ENDED YEAR ENDED
1/31/99 7/31/98 7/31/97 7/31/96 7/31/95 7/31/94
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................ $6.650 $6.570 $6.140 $6.280 $6.450 $7.070
Income from investment operations:
Net investment income ............................ 0.316 0.620 0.614 0.644 0.685 0.758
Net realized and unrealized gain (loss)
from investments ................................ (0.761) 0.075 0.429 (0.142) (0.169) (0.617)
------ ------ ------ ------ ------ ------
Total from investment operations ................. (0.445) 0.695 1.043 0.502 0.516 0.141
------ ------ ------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income ............. (0.325) (0.615) (0.613) (0.642) (0.686) (0.761)
------ ------ ------ ------ ------ ------
Total dividends and distributions ................ (0.325) (0.615) (0.613) (0.642) (0.686) (0.761)
------ ------ ------ ------ ------ ------
Net asset value, end of period ................... $5.880 $6.650 $6.570 $6.140 $6.280 $6.450
====== ====== ====== ====== ====== ======
Total Return ........................................ (6.65%) 11.00% 17.82% 8.37% 8.72% 1.82%
Ratios and supplemental data:
Net assets, end of period (000 omitted) .......... $44,867 $53,673 $44,065 $59,513 $61,742 $71,122
Ratio of expenses to average net assets .......... 0.82%(1) 0.81% 0.79% 0.77% 0.82% 0.83%
Ratio of net investment income
to average net assets ........................... 10.32%(1) 9.41% 9.73% 10.36% 11.14% 10.70%
Portfolio turnover ............................... 62% 117% 154% 108% 92% 92%
</TABLE>
(1) Ratios have been annualized and total return has not been annualized.
See accompanying notes
<PAGE>
18 for current income
DELAWARE GROUP INCOME FUNDS, INC. - DELCHESTER FUND
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
Delaware Group Income Funds, Inc. 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 five series: the
Delchester Fund, the High-Yield Opportunities Fund, the Strategic Income Fund,
the Corporate Bond Fund and the Extended Duration Bond Fund. These financial
statements and related notes pertain to the Delchester Fund (The "Fund"). The
Fund offers four classes of shares. The A Class carries a front-end sales charge
of 4.75%. The B Class carries a back-end deferred sales charge. The C Class
carries a level load deferred sales charge and the 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. 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 Funds' 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.
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.
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. 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.
<PAGE>
Certain Fund expenses are paid through "soft dollar" arrangements with brokers.
The amount of these expenses is less than 0.01% of the Fund's average daily net
assets.
2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Fund
pays Delaware Management Company, Inc. (DMC) the Investment Manager of the Fund,
an annual fee which is calculated daily at the rate of 0.60% on the first $500
million of average daily net assets of the Fund, 0.575% on the next $250
million, and 0.550% on the average daily net assets in excess of $750 million.
For the six months ended January 31, 1999 the Fund had a liability for
Investment Management fees and other expenses payable to DMC of $3,950,818.
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. The Fund pays DSC a monthly fee based on the number of shareholder
accounts, shareholder transactions and average net assets, subject to certain
minimums. For the six months ended January 31, 1999, the Fund had a liability
for such fees and other expenses payable to DSC of $222,861.
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. No distribution expenses are paid
by the Institutional Class. For the six months ended January 31, 1999, the Fund
had a liability for distribution fees and other expenses payable to DDLP of
$577,017.
For the six months ended January 31, 1999, DDLP earned $262,566 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 months ended January 31, 1999, the Fund made purchases of
$432,100,952 and sales of $457,347,040 of investment securities other than U.S.
government securities and temporary cash investments.
At January 31, 1999, the aggregate cost of securities for federal income tax
purposes was $1,502,113,898
At January 31, 1999, unrealized depreciation for federal income tax purposes
aggregated $124,788,335 of which $16,610,692 related to unrealized appreciation
of securities and $141,399,027 related to unrealized depreciation of securities.
For federal income tax purposes, the Fund had a capital loss carryforward at
July 31, 1998 of $145,009,543 which may be carried forward and applied against
future capital gains. The capital loss carryforward expires as follows: 1999 -
$53,787,833, 2002 - $3,628,131, and 2003 - $87,593,579.
<PAGE>
for current income 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. Capital Stock
Transactions in capital stock shares were as follows:
SIX MONTHS
ENDED YEAR
1/31/99 ENDED
(UNAUDITED) 7/31/98
----------- ----------
Shares sold:
A Class ................................. 21,778,408 29,471,425
B Class ................................. 14,298,825 21,058,076
C Class ................................. 3,818,215 5,466,954
Institutional Class ..................... 3,323,212 6,933,908
Shares issued upon reinvestment of
dividends from net investment income:
A Class ................................. 4,077,060 6,683,860
B Class ................................. 1,238,022 1,609,981
C Class ................................. 254,025 234,859
Institutional Class ..................... 318,797 572,273
---------- ----------
49,106,564 72,031,336
---------- ----------
Shares repurchased:
A Class ................................. (26,957,262) (33,418,788)
B Class ................................. (8,398,090) (7,641,608)
C Class ................................. (1,406,734) (942,339)
Institutional Class ..................... (4,082,487) (6,135,486)
---------- ----------
(40,844,573) (48,138,221)
---------- ----------
Net Increase ............................. 8,261,991 23,893,115
========== ==========
5. Lines of Credit
The Fund has a committed line of credit for $56,300,000. No amount was
outstanding at January 31, 1999, or at any time during the fiscal year.
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 U.S. Treasury
Obligations and/or cash 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, the 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, 1999, was $81,215,607, and $82,839,919, respectively.
<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 Delchester Fund Prospectus and the Delaware Investments Performance
Update for the most recently completed calendar quarter. The prospectus 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 documentated 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 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
(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.
(C) Delaware Distributors, L.P.
DELAWARE(SM)
INVESTMENTS
=====================
Philadelphia o London
Printed in the USA
on recycled paper
SA-024[1/99] PP3/99
(1476)
