<PAGE>
Delaware Delchester Fund
FOR CURRENT INCOME
service and guidance
(various photos demonstrating service and guidance,
professional management and goals)
professional management
1999
Annual
Report
goals
DELAWARE(SM)
INVESMENTS
- ---------------------
Philadelphia o London
<PAGE>
A TRADITION OF SOUND INVESTING
commitment
A Commitment
To Our Investors
Delaware Investments has a tradition of money management that dates back to
1929. We have a long and distinguished history of helping individuals and
institutions-including some of America's largest pension funds-reach their
financial goals.
Headquartered in Philadelphia, a block from the nation's oldest stock
exchange, the Delaware organization established its first mutual fund in 1938.
Delaware International Advisers Ltd., our international affiliate, was
established in 1990 and is headquartered in London.
Delaware Investments offers a full range of mutual funds. We also manage
investments for variable annuities and closed-end funds as well as offer a wide
range of retirement plan services for individuals and businesses.
Delaware Investments manages approximately $47 billion in mutual fund
assets and institutional advisory accounts for more than half-a-million
investors.
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.
tradition
Delaware Delchester
Fund's Objective
To seek as high a current income as is consistent with providing reasonable
safety.
Table of Contents
LETTER TO SHAREHOLDERS Page 1
PORTFOLIO MANAGERS' REVIEW Page 3
PERFORMANCE SUMMARY Page 8
STATEMENT OF NET ASSETS Page 9
FINANCIAL HIGHLIGHTS Page 14
current
income
<PAGE>
August 4, 1999
for current
income
1
Dear Shareholder:
FISCAL 1999 WAS AN UNUSUALLY difficult period for U.S. high-yield corporate
bonds. Despite continued economic expansion, demand for high-yield, higher risk
bonds was weak during much of the period, sharply reducing market liquidity and
generally causing high-yield bond prices to decline.
As we began our fiscal year last August, concerns about economic weakness
in Southeast Asia, Russia and Latin America triggered price declines among
virtually all U.S. securities, including domestic stocks and high-yield bonds.
The exception was U.S. Treasury bonds, which rose in value as risk-averse
investors sought a safe haven amid global economic uncertainty.
Stock and high-yield bond prices stabilized late in 1998 after the Federal
Reserve Board reduced interest rates and helped restore investor confidence.
Though stocks of large companies recouped the summer's losses-and then
some-high-yield bonds experienced only a partial price recovery.
During that recovery period, renewed investor demand focused on the highest
yielding, lowest quality segments of the market-bonds rated CCC and below.
Because Delchester Fund's management emphasizes higher quality, slightly lower
yielding bonds within the high-yield universe-those rated B and BB-the Fund did
not benefit as much from the rising prices. Then, in the second calendar quarter
of 1999, higher interest rates and volatility in the U.S. stock market reignited
concerns about credit risk. Consequently, demand for high-yield bonds of all
quality ratings weakened again and prices declined.
For the 12 months ended July 31, 1999, Delchester Fund had a total return
of -7.65% (capital change plus reinvested dividends for Class A shares at net
asset value). The Fund trailed its benchmark index, the Salomon Smith Barney
High-Yield Bond Index and its peers in the Lipper High Current Yield Fund
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR PERIODS ENDED JULY 31, 1999
From August 20, 1970*
12 Months to July 31, 1999
- --------------------------------------------------------------------------------
Delchester Fund A Class -7.65% +9.25%
- --------------------------------------------------------------------------------
Lipper High Current Yield Fund Average -1.91% (293 funds) +6.74% (4 funds)
Salomon Smith Barney High-Yield Bond Index -0.21% n/a
- --------------------------------------------------------------------------------
The performance shown above is based on net asset value without effect of sales
charges and assumes reinvestment of distributions. Performance of other Fund
classes varies due to different expenses. See page 8 for performance for all
classes. The Salomon Smith Barney High-Yield Bond Index is an unmanaged measure
of U.S. high-yield corporate bonds. You cannot invest directly in an index. Past
performance is not a guarantee of future results.
* Fund inception date.
<PAGE>
for current
income
2
IN OUR VIEW, THE STRONG ECONOMY, LOW INFLATION AND BETTER-THAN-AVERAGE CREDIT
QUALITY OF COMPANIES ISSUING HIGH-YIELD DEBT BODE WELL FOR INVESTORS SEEKING AN
ATTRACTIVE LEVEL OF INCOME FROM HIGH-YIELD, NON-INVESTMENT GRADE BONDS.
Average. Though we attribute our underperformance primarily to our focus on
bonds rated B and BB, we remain committed to that strategy because we believe it
is a sound approach for the long term.
During the fiscal period, the difference in yield between high-yield bonds
and 10-year U.S. Treasuries widened from roughly 3% at the beginning of the
period to 6% at the peak of the U.S. Treasury rally last October. As Treasury
prices rose, their yields fell.
By late March 1999, Treasury prices were falling and yields were rising as
many investors began to sell Treasuries, demonstrating a willingness to give up
the safety of Treasuries as their confidence in the economy grew. Consequently,
the yield difference between Treasuries and high-yield bonds narrowed to about
5%. Though we expected the yield difference to narrow, we thought this would be
the result of rising high-yield bond prices, not rising Treasury yields.
While a number of factors have hurt high-yield bond prices in the past
year-higher interest rates, weak demand, heavy new supply and poor
liquidity-there are also many positive factors that we believe support the
income-paying ability of issuers. In our view, the strong economy, low
inflation and better-than-average credit quality of companies issuing high-yield
debt bode well for investors seeking an attractive level of income from
high-yield, non-investment grade bonds.
On the following pages, Paul Matlack and Gerald Nichols, senior portfolio
managers of Delchester Fund, look back on the challenging environment for
high-yield bonds and provide a look ahead for fiscal 2000.
We thank you for your continued investment in Delchester Fund this past
year. Our outlook for the income-paying potential of high-yield bonds is very
positive. And given that, over time, income has contributed more to high-yield
bond total return than price changes, we remain confident that high-yield bonds
will continue to play an important role in well-allocated portfolios.
discipline
Sincerely,
/s/ Wayne A. Stork
- ------------------
WAYNE A. STORK
Director of the Fund
Chairman,
Delaware Investments Family of Funds
/s/ David K. Downes
- -------------------
DAVID K. DOWNES
President and Chief Executive Officer
Delaware Investments Family of Funds
<PAGE>
for current
income
3
Portfolio Managers' Review
BY PAUL A. MATLACK
Vice President/Senior Portfolio Manager
GERALD T. NICHOLS
Vice President/Senior Portfolio Manager
August 4, 1999
STRONG ECONOMY SUPPORTS ISSUERS' ABILITY TO PAY DEBTS
THROUGH THE SECOND QUARTER OF 1999, the U.S. economy continued to expand beyond
consensus expectations. A strong economy and rising corporate earnings generally
enhanced the ability of high-yield bond issuers to generate enough cash flow
from operations or asset sales to pay their debt obligations.
Economic data released during the writing of this report suggest that the
economy will expand during the rest of 1999. The U.S. Conference Board's Index
of Leading Economic Indicators, which is used to predict future economic
activity, rose 0.3% for the month of June. If the economy remains strong, as we
think it will, bond issuers should be able to continue making income payments on
their high-yielding, higher risk bonds.
REDUCED DEMAND PUTS DAMPER ON HIGH-YIELD BOND PRICES
Throughout fiscal 1999, the high-yield bond market generally suffered from
reduced demand and a corresponding low level of liquidity. The lack of liquidity
stemmed in large part from the unwillingness of Wall Street underwriters to
create markets for the issues they had underwritten.
We believe that dealers were reluctant to commit capital to the market
because of losses in 1998 when many investors sold high-yield bonds in order to
buy Treasuries. As a result of those losses, many firms implemented new risk
management guidelines, which included reducing their exposure to the bond market
by lowering inventories of corporate bonds and mortgage-backed securities.
WHY INVEST IN HIGH-YIELD BONDS?
o Broader portfolio diversification. High-yield bonds behave differently than
either stocks or high-quality bonds. Though there is no guarantee that they
will continue to behave this way, we believe it's likely because their
value depends both on the interest rate environment (similar to bonds) and
whether corporations are enjoying favorable economic conditions (similar
to stocks). Adding high-yield bonds to a portfolio provides another layer
of diversification that can help reduce the volatility risk of your overall
portfolio.
o High income potential. High-yield bonds involve greater risk, but they also
typically offer the highest income potential of any fixed-income
alternative.
o Stock-like return potential with less volatility. Though past performance
is not a guarantee of future results, over the long term, high-yield bonds
have historically delivered returns comparable to the long-term average of
stocks with a lower level of volatility than stocks. (Source: Lipper
Analytical Services, Inc.)
overview
<PAGE>
for current
income
4
We believe many firms are also keeping inventories light as a precaution in
case interest rates move higher this year. When interest rates rise, bond prices
generally decline. We also think uncertainty about Y2K may be contributing to
reduced activity.
Should sentiment shift and high-yield bond prices rebound, we believe that
ultimately Wall Street's underwriters and market makers will commit more capital
to high-yield, higher risk bonds, seeking to capture their upside potential. We
don't expect this to happen before year-end, so for now, we believe high-yield
bond performance will be primarily driven by income, not rising prices.
PORTFOLIO POSITIONING
In managing Delchester Fund, we look for bonds that offer a high level of income
from issuers who demonstrate a strong likelihood of being able to pay their
debts. This approach has enabled Delchester Fund to provide a high level of
income over the years. As of July 31, 1999, the Fund's 30-Day SEC yield was
9.78% for A Class shares. (Yields for other classes can be found on page 5.)
Consistent with Delchester Fund's primary objective to provide high current
income, we continued to focus on bonds rated B, which typically have higher
yields than bonds rated BB. As of July 31, single B bonds represented 80% of net
assets with the remaining 20% allocated to BB bonds.
In an effort to capture yield and preserve capital, we invested about $80
million of portfolio net assets in high-coupon, callable bonds. We believe these
bonds have little downside risk for two reasons:
o high expectations that the issuing companies will redeem the bonds before
their call date, and
o their prices tend to remain in line with the call price regardless of how
the market behaves.
(Chart)
DELCHESTER FUND A CLASS
INCOME PER SHARE
- ----------------------------------
$0.598 $0.608 $0.597
- ----------------------------------
Fiscal Fiscal Fiscal
1997 1998 1999
- ----------------------------------
Past performance is not a guarantee of future results.
Income may fluctuate.
<PAGE>
for current
income
5
PORTFOLIO CHARACTERISTICS
- -----------------------------------------
AS OF JULY 31, 1999
Current 30-Day SEC Yield+ 9.78%
Average Effective Duration 4.9 years
Average Effective Maturity 7.4 years
Portfolio Turnover 85%
Number of Securities 173
- -----------------------------------------
+ For A Class shares measured according to Securities and Exchange Commission
(SEC) guidelines. Current 30-Day SEC yield as of 7/31/99 for B and C Class
shares was 9.53%. The Institutional Class yield was 10.57%.
We had several holdings of small bond issues that detracted from our
performance. However, because of the liquidity problems that the high-yield bond
market has experienced, we continued to hold these bonds. Their small size-$100
to $150 million offerings-made it difficult for us to find buyers willing to pay
our asking price. Rather than realize a capital loss, we held the bonds and
continued to collect the high income they paid.
Given the fact that smaller bond offerings (up to $100 million) now appear
less likely to gain sponsorship from Wall Street, we have begun to focus on even
larger, more liquid issues. As we invest new cash or reinvest the proceeds from
bonds that have been called, we are shifting toward bonds that were issued in an
offering of $200 million or more. Increasing the Fund's holdings of larger issue
bonds should position us better for the market conditions going forward.
Though our emphasis on bonds rated BB and B was the primary reason for the
Fund's underperformance in fiscal 1999, we continue to structure the portfolio
with a bias toward bonds in the higher tiers of non-investment grade issues,
rather than those with the lowest credit ratings. Our goal is to help preserve
capital in down markets.
INVESTMENT OUTLOOK
The high-yield bond market is in the midst of an unusual period in its history.
In spite of a near perfect domestic economy and the prospect of imminent
economic recovery in Asia and Latin America, the high-yield bond market has been
stymied by poor trading liquidity and an uncertain market outlook.
If the U.S. economy remains strong and fundamental conditions in the
high-yield market-relatively strong credit quality, low default rates and
above-average yields-do not change, we believe investors will eventually
reallocate assets to high-yield bonds, seeking to capture the compelling
opportunities for high current income with potential for capital appreciation.
outlook
SECTOR ALLOCATION
- --------------------------------------------------------------------------------
TOP INDUSTRY SECTORS AS OF JULY 31, 1999
Percentage of Assets
- --------------------------------------------------------------------------------
Telecommunications 20.10%
Cable, Media & Publishing 8.58%
Chemicals 7.23%
Leisure, Lodging and Entertainment 6.20%
Food, Beverage & Tobacco 5.98%
Metals and Mining 5.25%
Includes all sectors representing more than 5% of the Delchester portfolio. The
remaining 46.66% of the portfolio is diversified among 21 different sectors.
<PAGE>
for current
income
6
(Chart)
DELCHESTER FUND
PROVIDING HIGH INCOME FOR THREE DECADES
- --------------------------------------------------------------------------------
ANNUAL INCOME FROM A $100,000 INVESTMENT
AUGUST 20, 1970 - JULY 31, 1999
Total Account Value = $1,416,914
Jul. '71 $ 4,806 -- Delchester begins operations 8/20/70
Jul. '72 $ 7,272
Jul. '73 $ 8,570 -- Arab oil embargo
Jul. '74 $ 9,366
Jul. '75 $ 10,625
Jul. '76 $ 11,458 -- High-yield bond market less than $4 billion
Jul. '77 $ 12,602
Jul. '78 $ 13,865
Jul. '79 $ 15,336 -- Double-digit inflation
Jul. '80 $ 18,151
Jul. '81 $ 21,698
Jul. '82 $ 25,566 -- Recession, high unemployment
Jul. '83 $ 29,181
- --------------------------------------------------------------------------------
Chart assumes $100,000 invested on August 20, 1970, a 4.75% 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.
<PAGE>
for current
income
7
Jul. '84 $ 32,580
Jul. '85 $ 48,190 -- High-yield market grows to $78 billion
Jul. '86 $ 49,624
Jul. '87 $ 53,110
Jul. '88 $ 58,385 -- Credit quality of new issuance drops, defaults rise
Jul. '89 $ 63,289
Jul. '90 $ 69,198 -- High-yield bond yields average 18.7%
Jul. '91 $ 72,943
Jul. '92 $ 80,466
Jul. '93 $ 88,794
Jul. '94 $ 95,985 -- Fed raises interest rates to fight inflation
Jul. '95 $ 96,183
Jul. '96 $ 99,758 -- Credit quality improves, default rates drop
Jul. '97 $104,908
Jul. '98 $112,546
Jul. '99 $116,631 -- in annual income Account grows to $1.4 million
- --------------------------------------------------------------------------------
Delchester Fund's return and share value will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Past performance
is not a guarantee of future results.
Complete performance for all classes can be found on page 8.
<PAGE>
for current
income
8
(Chart)
DELCHESTER FUND
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
10 YEARS ENDED JULY 31, 1999
Delaware Delchester U.S. Consumer Salomon Smith Barney
Fund A Class Price Index High-Yield Bond Index
- --------------------------------------------------------------------------------
Aug. '89 $ 9,525 $10,000 $10,000
Jul. '90 9,120 10,465 9,880
Jul. '91 10,442 10,931 11,132
Jul. '92 12,942 11,276 13,695
Jul. '93 14,814 11,589 15,917
Jul. '94 15,050 11,910 16,425
Jul. '95 16,323 12,239 18,801
Jul. '96 17,646 12,597 20,482
Jul. '97 20,739 12,881 23,718
Jul. '98 22,912 13,098 26,252
Jul. '99 $21,160 $13,339 $26,286
- --------------------------------------------------------------------------------
Chart assumes $10,000 invested on July 31, 1989, 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 JULY 31, 1999
Lifetime Ten Years Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 8/20/70)
Excluding Sales Charge. 9.25% 8.39% 7.10% -7.65%
Including Sales Charge. 9.06% 7.86% 6.07% -12.02%
- --------------------------------------------------------------------------------
Class B (Est. 5/2/94)
Excluding Sales Charge. 5.67% 6.30% -8.34%
Including Sales Charge. 5.54% 6.03% -11.67%
- --------------------------------------------------------------------------------
Class C (Est. 11/29/95)
Excluding Sales Charge. 5.95% -8.34%
Including Sales Charge. 5.95% -9.18%
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 the
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 have 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.
Performance for Institutional Class shares prior to 6/1/92 is based on A Class
performance adjusted to eliminate the up-front sales charge. Average annual
Institutional Class returns through July 31, 1999 were:
Lifetime Ten Years Five Year One Year
Delchester Fund 9.36% 8.66% 7.36% -7.42%
<PAGE>
for current income 9
Financial Statements
DELAWARE GROUP INCOME FUNDS, INC. - DELCHESTER FUND
STATEMENT OF NET ASSETS
JULY 31, 1999
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Corporate Bonds - 92.44%
Aerospace & Defense - 1.43%
Atlas Air sr nts 9.25% 4/15/08 ............... $ 9,250,000 $ 8,960,937
Federal Data co guarantee 10.125% 8/1/05 ..... 9,450,000 9,154,687
-----------
18,115,624
-----------
Automobile & Auto Equipment - 2.48%
ADV Accessory/AAS Capital co guarantee
9.75% 10/1/07............................... 7,350,000 6,826,312
Federal Mogul nts 7.50% 1/15/09............... 8,900,000 8,265,875
Hayes Lemmerz International co guarantee
8.25% 12/15/08 ............................. 7,000,000 6,632,500
Stanadyne Automotive co guarantee
10.25% 12/15/07............................. 11,200,000 9,618,000
-----------
31,342,687
-----------
Banking, Finance & Insurance - 3.31%
Avis Rent A Car sr sub nts 11.00% 5/1/09 ..... 6,800,000 6,987,000
RBF Finance co guarantee 11.3875% 3/15/09..... 9,400,000 9,776,000
RBF Finance co guarantee 11.375% 3/15/09 ..... 8,000,000 8,320,000
Willis Corroon sr sub nts 9.00% 2/1/09 ....... 17,200,000 16,748,500
-----------
41,831,500
-----------
Building & Materials - 4.86%
Collins & Aikman Floorcovers sr sub nts
10.00% 1/15/07 ............................. 5,970,000 6,022,237
Engle Homes co guarantee 9.25% 2/1/08......... 6,700,000 6,465,500
Falcon Products sr sub nts 11.375% 6/15/09 ... 1,600,000 1,606,000
Formica sr sub nts 10.875% 3/1/09............. 10,900,000 10,668,375
Group Maintenance sr sub nts 9.75% 1/15/09 ... 9,650,000 9,457,000
+K Hovnanian Enterprises co guarantee
9.1325% 5/1/09 ............................. 9,300,000 9,218,625
Standard Pacific sr nts 8.50% 4/15/09......... 9,100,000 8,929,375
Wesco Distribution co guarantee
9.125% 6/1/08............................... 9,250,000 9,099,687
-----------
61,466,799
-----------
Cable, Media & Publishing - 8.58%
Adelphia Communications sr nts 7.875% 5/1/09 . 13,100,000 12,183,000
Charter Communications sr notes
8.625% 4/1/09............................... 13,000,000 12,610,000
Echostar DBS sr notes 9.25% 2/1/06 ........... 19,500,000 19,743,750
Mail-Well co guarantee 8.75% 12/15/08......... 11,000,000 10,601,250
**PX Escrow sr disc nts 9.625% 2/1/06......... 9,500,000 5,783,125
Pathnet sr nts 12.25% 4/15/08................. 5,800,000 3,364,000
Pegasus Communications sr nts
9.625% 10/15/05............................. 7,000,000 6,895,000
Sinclair Broadcast Group sr sub nts
8.75% 12/15/07 ............................. 13,800,000 13,627,500
Sullivan Graphics sr sub nts 12.75% 8/1/05 ... 10,375,000 10,725,156
**21st Century Telecom Group sr disc nts
12.25% 2/15/08 ............................. 12,300,000 5,535,000
**United International Holdings sr disc nts
10.75% 2/15/08 ............................. 5,300,000 3,100,500
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Corporate Bonds (Continued)
Cable, Media & Publishing (Continued)
Young Broadcasting co guarantee
8.75% 6/15/07............................... $ 4,500,000 $ 4,410,000
------------
108,578,281
------------
Chemicals - 7.23%
Aqua Chemical sr sub nts 11.25% 7/1/08 ....... 9,200,000 6,704,500
Brunner Mond Group sr sub nts
11.00% 7/15/08 ............................. 6,600,000 4,182,750
Geo Specialty Chemicals sr sub nts
10.125% 8/1/08 ............................. 5,800,000 5,618,750
Huntsman sr sub nts 9.50% 7/1/07 ............. 11,000,000 10,656,250
Koppers co guarantee 9.875% 12/1/07........... 9,500,000 9,690,000
LaRoche Industries sr sub nts 9.50% 9/15/07... 16,500,000 12,045,000
Lyondell Chemical sr sub nts 10.875% 5/1/09... 13,000,000 13,292,500
NL Industries sr nts 11.75% 10/15/03 ......... 7,500,000 7,903,125
+Sterling Chemical secured 12.375% 7/15/06.... 4,900,000 5,010,250
ZSC Specialty Chemical 11.00% 7/1/09 ......... 16,000,000 16,400,000
------------
91,503,125
------------
Computers & Technology - 2.47%
**Cellnet Data Systems sr disc nts
14.00% 10/1/07 ............................. 12,000,000 5,280,000
Statia Terminals mtg nts 11.75% 11/15/03 ..... 6,250,000 6,820,312
Unisys sr nts 11.75% 10/15/04................. 8,600,000 9,632,000
Unisys sr nts 12.00% 4/15/03 ................. 8,700,000 9,504,750
------------
31,237,062
------------
Consumer Products - 4.18%
Desa International co guarantee
9.875% 12/15/07............................. 13,300,000 9,908,500
Drypers sr nts 10.25% 6/15/07................. 10,575,000 8,446,781
Fisher Scientific International sr sub nts
9.00% 2/1/08 ............................... 1,850,000 1,780,625
Home Interiors & Gifts co guarantee
10.125% 6/1/08 ............................. 13,050,000 12,968,437
+Iron Age co guarantee 9.875% 5/1/08.......... 9,000,000 7,065,000
**Iron Age sr disc nts 12.125% 5/1/09......... 4,000,000 1,360,000
+Outboard Marine co guarantee
10.75% 6/1/08............................... 9,000,000 6,165,000
Riddell Sports co guarantee 10.50% 7/15/07 ... 2,000,000 1,790,000
Spinnaker Industries sr nts 10.75% 10/15/06... 4,700,000 3,431,000
------------
52,915,343
------------
Energy - 1.11%
First Wave Marine sr nts 11.00% 2/1/08 ....... 5,100,000 4,787,625
**Transamerica Refining sr nts
15.00% 12/1/03 ............................. 2,138,332 2,116,949
**Universal Compression sr disc nts
9.875% 2/15/08 ............................. 11,000,000 7,150,000
------------
14,054,574
------------
<PAGE>
10 for current income
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
Principal Market
Amount Value
-------------------------------------------------------------------------------
Corporate Bonds (Continued)
Environmental Services - 0.33%
Norcal Waste System co guarantee
13.25% 11/15/05............................... $ 3,800,000 $ 4,213,250
-----------
4,213,250
-----------
Food, Beverage & Tobacco - 5.98%
Albecca co guarantee 10.75% 8/15/08............. 9,500,000 7,695,000
+Ameriserve Food Distributors co guarantee
10.125% 7/15/07............................... 19,000,000 15,010,000
Canadaigua Wine co guarantee 8.50% 7/15/07 ..... 12,075,000 11,652,375
Carrols co guarantee 9.50% 12/1/08 ............. 8,200,000 7,820,750
+CKE Restaurants co guarantee 9.125% 5/1/09 .... 5,000,000 4,650,000
Core-Mark International sr sub nts
11.375% 9/15/03............................... 2,975,000 2,915,500
**Del Monte Foods sr disc nts 12.50% 12/15/07... 7,075,000 5,297,406
DiGiorgio sr nts 10.00% 6/15/07................. 10,500,000 10,145,625
**Electronic Retailing Systems sr disc nts
13.25% 2/1/04................................. 13,200,000 4,290,000
Fresh Foods co guarantee 10.75% 6/1/06 ......... 6,200,000 6,207,750
-----------
75,684,406
-----------
Healthcare & Pharmaceuticals - 3.05%
Alaris Medical sr disc nts 11.125% 8/1/08....... 11,800,000 6,372,000
Alliance Imaging sr sub nts 9.625% 12/15/05..... 9,450,000 9,390,937
+Dynacare sr nts 10.75% 1/15/06 ................ 4,950,000 5,042,813
Insight Health Services co guarantee
9.625% 6/15/08 ............................... 10,000,000 9,500,000
Kinetic Concepts co guarantee 9.625% 11/1/07 ... 9,000,000 8,223,750
-----------
38,529,500
-----------
Industrial Machinery - 2.84%
Burke Industries co guarantee 10.00% 8/15/07 ... 8,985,000 6,828,600
Safety Components International sr sub nts
10.125% 7/15/07............................... 8,400,000 7,297,500
+Tokheim sr sub nts 11.375% 8/1/08.............. 8,300,000 8,051,000
United Rentals nts 9.00% 4/1/09................. 14,000,000 13,737,500
-----------
35,914,600
-----------
Leisure, Lodging & Entertainment - 6.20%
**Aladdin Gaming sr disc nts 13.50% 3/1/10 ..... 18,000,000 7,740,000
Cinemark USA Series C sr sub nts
9.625% 8/1/08................................. 3,000,000 2,902,500
Derby Cycle sr nts 10.00% 5/15/08............... 8,900,000 7,197,875
Florida Panthers co guarantee
9.875% 4/15/09 ............................... 10,750,000 10,373,750
Harrahs Operating co guarantee
7.875% 12/15/05............................... 13,800,000 13,248,000
+HMH Properties sr nts 8.45% 12/1/08............ 9,000,000 8,550,000
Mohegan Tribal Gaming sr sub nts
8.75% 1/1/09 ................................. 10,650,000 10,490,250
Park Place Entertainment sr sub nts
7.875% 12/15/05............................... 9,400,000 8,906,500
+Town Sports International sr nts
9.75% 10/15/04 ............................... 3,425,000 3,283,719
United Artists Theatre sr sub nts
9.75% 4/15/08................................. 8,800,000 5,720,000
-----------
78,412,594
-----------
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Corporate Bonds (Continued)
Metals & Mining - 5.25%
AK Steel sr nts 7.875% 2/15/09 ................. $ 9,300,000 $ 9,067,500
AK Steel sr nts 9.125% 12/15/06................. 1,800,000 1,863,000
+Algoma Steel mtg nts 12.375% 7/15/05........... 13,550,000 13,516,125
Doe Run Resources co guarantee
11.25% 3/15/05 ............................... 9,000,000 8,178,750
Great Lakes Carbon co guarantee
10.25% 5/15/08 ............................... 10,250,000 10,442,187
+Jorgensen Earle sr nts 9.50% 4/1/05............ 7,200,000 6,831,000
Metallurg co guarantee 11.00% 12/1/07........... 7,000,000 6,851,250
Parker Drilling co guarantee 9.75% 11/15/06..... 10,500,000 9,660,000
-----------
66,409,812
-----------
Packaging & Containers - 0.88%
Ameriking sr nts 10.75% 12/1/06................. 4,550,000 4,817,313
Stone Container sr sub units 12.25% 4/1/02 ..... 6,225,000 6,256,125
-----------
11,073,438
-----------
Paper & Forest Products - 0.77%
MAXXAM Group sr nts 12.00% 8/1/03............... 9,400,000 9,717,250
-----------
9,717,250
-----------
Retail - 3.51%
Advance Stores co guarantee 10.25% 4/15/08 ..... 9,200,000 8,763,000
+Fleming co guarantee 10.50% 12/1/04............ 7,700,000 7,276,500
+Frank's Nursery & Crafts sr sub nts
10.25% 3/1/08................................. 13,200,000 13,167,000
+Jitney-Jungle Stores co guarantee
10.375% 9/15/08............................... 13,700,000 5,480,000
Leslie's Poolmart sr nts 10.375% 7/15/04 ....... 9,450,000 9,721,688
-----------
44,408,188
-----------
Telecommunications - 20.10%
AMSC Acquisition co guarantee 12.25% 4/1/08..... 9,350,000 7,713,750
Arch Communications sr nts 12.75% 7/1/07 ....... 8,200,000 7,503,000
BTI Telecom sr nts 10.50% 9/15/07............... 9,025,000 8,517,344
+Call-Net Enterprises sr disc nts
10.80% 5/15/09 ............................... 14,250,000 8,318,438
CBS Radio sub debs 11.375% 1/15/09 ............. 7,400 8,640
+Covad Comm Group sr nts 12.50% 2/15/09 ........ 4,750,000 4,607,500
**Econophone sr disc nts 11.00% 2/15/08......... 16,700,000 9,352,000
**GST USA co guarantee sr disc nts
13.875% 12/15/05 ............................. 14,000,000 11,760,000
Hyperion Telecommunications sr nts
12.25% 9/1/04................................. 9,250,000 9,805,000
Intermedia Communications 9.50% 3/1/09 ......... 10,200,000 9,792,000
**KMC Telecom Holdings sr disc nts
12.50% 2/15/08 ............................... 33,000,000 17,655,000
McleodUSA sr nts 8.125% 2/15/09................. 10,000,000 9,075,000
+Metrocall unsec sr sub nts 10.375% 10/01/07.... 6,100,000 4,803,750
Metromedia Fiber sr nts 10.00% 11/15/08......... 11,650,000 11,839,313
**Microcell Telecommunications sr disc nts
14.00% 5/15/09 ............................... 13,700,000 11,199,750
Mobile Telecommunications sr nts
13.50% 12/15/02............................... 20,000,000 22,775,000
**+NEXTEL Communications sr disc nts
9.95% 2/15/08................................. 18,500,000 13,181,250
<PAGE>
for current income 11
STATEMENT OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Corporate Bonds (Continued)
Telecommunications (Continued)
Nextlink Communications sr nts
9.625% 10/1/07............................. $ 8,700,000 $ 8,439,000
Psinet sr notes 11.00% 8/1/09 ............... 14,000,000 13,860,000
RCN sr nts 10.00% 10/15/07................... 3,800,000 3,762,000
Rhythms Netconnections sr nts
12.75% 4/15/09............................. 4,750,000 4,465,000
**Telecorp PCS sr disc nts 11.625% 4/15/09... 18,500,000 10,452,500
**Teligent sr disc nts 11.50% 3/1/08......... 7,000,000 4,270,000
+Teligent sr nts 11.50% 12/1/07.............. 20,700,000 20,648,250
+USA Mobile Communication sr nts
14.00% 11/1/04............................. 4,500,000 4,359,375
**Viatel sr disc nts 12.50% 4/15/08 ......... 15,925,000 10,032,750
Worldwide Fiber sr nts 12.00% 8/1/09......... 6,000,000 6,045,000
--------------
254,240,610
--------------
Textiles, Apparel & Furniture - 1.21%
Globe Manufacturing co guarantee
10.00% 8/1/08 ............................. 10,750,000 8,075,938
Grove Worldwide sr sub nts 9.25% 5/1/08 ..... 10,400,000 7,176,000
--------------
15,251,938
--------------
Transportation & Shipping - 1.22%
Continental Airlines nts 8.00% 12/15/05 ..... 7,000,000 6,597,500
Millenium Seacarriers co guarantee
12.00% 7/15/05............................. 3,800,000 2,128,000
Navigator Gas Transport nts 10.50% 6/30/07... 9,400,000 4,512,000
Navigator Gas Transport unit 12.00% 6/30/07 . 8,000,000 2,240,000
--------------
15,477,500
--------------
Utilities - 0.43%
HS Resources co guarantee 9.25% 11/15/06..... 5,400,000 5,440,500
--------------
5,440,500
--------------
Miscellaneous - 5.02%
Allied Waste sr sub nts 10.00% 8/1/09 ....... 17,000,000 16,957,500
Indesco International sr sub nts
9.75% 4/15/08 ............................. 4,500,000 3,015,000
Lear sr nts 8.11% 5/15/09 ................... 16,500,000 16,355,625
Pierce Leahy sr sub nts 11.125% 7/15/06 ..... 3,300,000 3,597,000
Polaroid sr nts 11.50% 2/15/06............... 3,000,000 3,157,500
Protection One sr sub nts 8.125% 1/15/09..... 5,800,000 5,307,000
** Spincycle sr disc nts 12.75% 5/1/05 ..... 5,000,000 850,000
St John Knits sr sub nts 12.50% 7/1/09....... 2,850,000 2,832,188
Trench Electric & Trench co guarantee
10.25% 12/15/07 ........................... 12,000,000 11,385,000
--------------
63,456,813
--------------
Total Corporate Bonds (cost $1,284,585,426) 1,169,275,394
--------------
Convertible Bonds - 0.51%
+ Premier Graphics 11.50% 12/1/05 ......... 6,600,000 6,426,750
--------------
Total Convertible Bonds (cost $6,600,000) 6,426,750
--------------
- --------------------------------------------------------------------------------
Number Market
of Shares Value
- --------------------------------------------------------------------------------
Preferred Stocks - 3.19%
Dobson Communications pik ............... 5,687 $ 5,232,040
*Eagle-Picher Holdings .................. 101,000 5,201,500
Intermedia Communications pik ........... 87,259 8,725,880
+Nebco Evans Holding .................... 75,699 3,027,960
Nextel Communications pik ............... 103,250 11,151,000
Nextel Communications pik ............... 1 1,023
*Pegasus Communications pik.............. 19,047 1,999,935
*Pegasus Communications unit ............ 45,000 5,017,500
*TCR Holdings Class B.................... 92,152 5,529
*TCR Holdings Class C.................... 50,683 2,838
*TCR Holdings Class D.................... 133,619 7,082
*TCR Holdings Class E.................... 276,454 17,417
-----------
Total Preferred Stocks (cost $46,200,784) 40,389,704
-----------
Warrants & Rights - 0.94%
*Aladdin Gaming.......................... 18,000 180
*American Banknote ...................... 10,750 107,500
*American Mobile Satellite .............. 14,050 702,500
*Cellnet Data Systems.................... 12,000 126,000
*Electronic Retailing System ............ 13,200 1,650
*Gothic Energy .......................... 19,600 19,600
*KMC Telecom Holdings.................... 14,000 350,000
*McCaw International .................... 11,200 28,000
*Millenium Seacarriers .................. 3,800 4,750
*Pathnet ................................ 5,800 58,000
*Rhythms Netconnections.................. 66,400 9,211,008
*Spincycle .............................. 5,000 50
*Terex-Appreciation...................... 55,200 1,324,800
-----------
Total Warrants & Rights (cost $1,694,971) 11,934,038
-----------
Convertible Preferred Stocks -
0.47%
+E.Spire Communications pik.............. 122,637 5,978,559
-----------
Total Convertible Preferred Stocks
(cost $11,953,596) 5,978,559
-----------
<PAGE>
12 for current income
Statement of Net Assets (Continued)
- --------------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES - 97.55%
(cost $1,351,034,777)....................................... $1,234,004,445
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES - 2.45%....... 31,043,178
--------------
NET ASSETS APPLICABLE TO 228,409,259
SHARES ($1.00 PAR VALUE) OUTSTANDING - 100.00% ............. $1,265,047,623
==============
NET ASSET VALUE - DELCHESTER FUND A CLASS
($813,787,312 / 146,932,231 SHARES).................................. $5.54
=====
NET ASSET VALUE - DELCHESTER FUND B CLASS
($349,960,051 / 63,186,875 SHARES) .................................. $5.54
=====
NET ASSET VALUE - DELCHESTER FUND C CLASS
($62,613,172 / 11,305,134 SHARES).................................... $5.54
=====
NET ASSET VALUE - DELCHESTER FUND INSTITUTIONAL CLASS
($38,687,088 / 6,985,019 SHARES) .................................... $5.54
=====
COMPONENTS OF NET ASSETS AT JULY 31, 1999:
Common stock, $1 par value, 500,000,000 shares authorized to
the Fund with 350,000,000 allocated to the Delchester Fund
A Class, 50,000,000 shares allocated to the Delchester Fund
B Class, 50,000,000 shares allocated to the Delchester Fund
C Class and 50,000,000 shares allocated to the Delchester
Fund Institutional Class ................................... $1,589,453,932
Undistributed net investment income........................... 730,874
Accumulated net realized loss on investments ................. (208,106,851)
Net unrealized depreciation of investments ................... (117,030,332)
---------------
Total net assets ............................................. $1,265,047,623
===============
- ----------
* Non-Income producing security for the year ended July 31, 1999.
** Zero coupon security as of July 31, 1999. The coupon shown is the step-up
rate.
+ Security is partially or fully on loan.
Summary of Abbreviations:
co guarantee - company guaranteed
debs - debentures
disc - discount
mtg - mortgage
nts - notes
pik - payment-in-kind
sr - senior
sub - subordinated
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELCHESTER FUND
Net asset value A Class (A)...................................... $5.54
Sales Charge (4.75% of offering price or 5.05% of the
amount invested per share) (B) ................................ 0.28
-----
Offering price .................................................. $5.82
=====
- ----------
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See How to Buy Shares in the current prospectus for purchases of $100,000
or more.
See accompanying notes
<PAGE>
for current income 13
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENT OF OPERATIONS
JULY 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest.........................................$150,607,232
Dividends ....................................... 3,949,145 $ 154,556,377
------------- --------------
EXPENSES:
Management fees ................................. 8,019,247
Distribution expense............................. 6,526,122
Dividend disbursing and transfer agent fees
and expenses................................... 2,462,064
Accounting and administration ................... 548,706
Registration fees ............................... 132,000
Reports and statements to shareholders........... 123,500
Taxes (other than taxes on income)............... 97,500
Professional fees ............................... 83,773
Custodian fees................................... 75,281
Directors' fees ................................. 27,669
Other ........................................... 122,614 18,218,476
------------- --------------
Less fees paid indirectly ....................... (76,974)
--------------
Total expenses................................... 18,141,502
--------------
NET INVESTMENT INCOME ........................... 136,414,875
--------------
Net realized and unrealized loss on investments:
Net realized loss on investments................. (116,092,305)
Net change in unrealized appreciation/
depreciation of investments.................... (133,695,167)
--------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS................................. (249,787,472)
--------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................... $(113,372,597)
==============
See accompanying notes
<TABLE>
<CAPTION>
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Year Ended Year Ended
7/31/99 7/31/98
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income............................. $ 136,414,875 $ 129,596,682
Net realized gain (loss) on investments........... (116,092,305) 45,654,625
Net change in unrealized
appreciation/depreciation of investments ....... (133,695,167) (33,736,187)
--------------- ---------------
Net increase (decrease) in net assets
resulting from operations....................... (113,372,597) 141,515,120
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
A Class......................................... (93,848,121) (94,068,758)
B Class......................................... (34,447,633) (26,481,128)
C Class......................................... (5,567,284) (2,685,408)
Institutional Class............................. (4,285,105) (4,338,358)
--------------- ---------------
(138,148,143) (127,573,652)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
A Class......................................... 262,422,657 196,600,397
B Class......................................... 144,465,555 140,491,313
C Class......................................... 39,555,223 36,526,139
Institutional Class............................. 37,514,075 46,366,224
Net asset value of shares issued upon reinvestment
of distributions from net investment income:
A Class......................................... 46,328,049 44,559,762
B Class......................................... 14,801,100 10,738,318
C Class......................................... 3,200,182 1,568,430
Institutional Class............................. 3,912,815 3,815,302
--------------- ---------------
552,199,656 480,665,885
--------------- ---------------
Cost of shares repurchased:
A Class......................................... (385,857,248) (222,496,607)
B Class......................................... (120,695,619) (50,887,559)
C Class......................................... (21,113,944) (6,294,131)
Institutional Class............................. (49,182,137) (40,696,971)
--------------- ---------------
(576,848,948) (320,375,268)
--------------- ---------------
Increase (decrease) in net assets derived
from capital share transactions................. (24,649,292) 160,290,617
--------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS............. (276,170,032) 174,232,085
NET ASSETS:
Beginning of year................................. 1,541,217,655 1,366,985,570
--------------- ---------------
End of year....................................... $1,265,047,623 $1,541,217,655
=============== ===============
</TABLE>
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 year were
as follows:
<TABLE>
<CAPTION>
Delchester Fund A Class
--------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
7/31/99 7/31/98 7/31/97 7/31/96 7/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year....................... $ 6.650 $ 6.570 $ 6.140 $ 6.280 $ 6.450
Income (loss) from investment operations:
Net investment income ................................. 0.597 0.608 0.598 0.628 0.668
Net realized and unrealized gain (loss) on investments. (1.102) 0.070 0.430 (0.141) (0.167)
------------ ------------ ------------ ------------ ------------
Total from investment operations....................... (0.505) 0.678 1.028 0.487 0.501
------------ ------------ ------------ ------------ ------------
Less dividends:
Dividends from net investment income................... (0.605) (0.598) (0.598) (0.627) (0.671)
------------ ------------ ------------ ------------ ------------
Total dividends ....................................... (0.605) (0.598) (0.598) (0.627) (0.671)
------------ ------------ ------------ ------------ ------------
Net asset value, end of year............................. $ 5.540 $ 6.650 $ 6.570 $ 6.140 $ 6.280
============ ============ ============ ============ ============
Total return(1).......................................... (7.65%) 10.73% 17.53% 8.10% 8.46%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ............... $ 813,787 $ 1,060,136 $ 1,030,328 $ 973,939 $ 1,020,763
Ratio of expenses to average net assets ............... 1.10% 1.06% 1.04% 1.02% 1.09%
Ratio of net investment income to average net assets... 10.12% 9.16% 9.48% 10.11% 10.77%
Portfolio turnover..................................... 85% 117% 154% 108% 92%
- ----------
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.
</TABLE>
See accompanying notes
<PAGE>
for current income 15
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each year were
as follows:
<TABLE>
<CAPTION>
Delchester Fund B Class
--------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
7/31/99 7/31/98 7/31/97 7/31/96 7/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year....................... $ 6.650 $ 6.570 $ 6.140 $ 6.280 $ 6.450
Income (loss) from investment operations:
Net investment income ................................. 0.557 0.556 0.550 0.581 0.624
Net realized and unrealized gain (loss) on investments. (1.103) 0.072 0.430 (0.141) (0.170)
------------ ------------ ------------ ------------ ------------
Total from investment operations....................... (0.546) 0.628 0.980 0.440 0.454
------------ ------------ ------------ ------------ ------------
Less dividends:
Dividends from net investment income................... (0.564) (0.548) (0.550) (0.580) (0.624)
------------ ------------ ------------ ------------ ------------
Total dividends ....................................... (0.564) (0.548) (0.550) (0.580) (0.624)
------------ ------------ ------------ ------------ ------------
Net asset value, end of year........................... $ 5.540 $ 6.650 $ 6.570 $ 6.140 $ 6.280
============ ============ ============ ============ ============
Total return(1) ......................................... (8.34%) 9.91% 16.66% 7.30% 7.64%
Ratios and supplemental data:
Net assets, end of year (000 omitted) ................. $ 349,960 $ 376,463 $ 273,499 $ 176,266 $ 111,860
Ratio of expenses to average net assets ............... 1.85% 1.81% 1.79% 1.77% 1.82%
Ratio of net investment income to average net assets... 9.37% 8.41% 8.73% 9.36% 10.14%
Portfolio turnover..................................... 85% 117% 154% 108% 92%
- ----------
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.
</TABLE>
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
---------------------------------------------
Year Year Year 11/29/95(2)
Ended Ended Ended to
7/31/99 7/31/98 7/31/97 7/31/96
<S> <C> <C> <C> <C>
Net asset value, beginning of period..................... $ 6.650 $ 6.570 $ 6.140 $ 6.210
Income (loss) from investment operations:
Net investment income ................................. 0.566 0.555 0.550 0.385
Net realized and unrealized gain (loss) on investments. (1.111) 0.073 0.430 (0.069)
--------- --------- ----------- ---------
Total from investment operations....................... (0.545) 0.628 0.980 0.316
--------- --------- ----------- ---------
Less dividends:
Dividends from net investment income................... (0.565) (0.548) (0.550) (0.386)
--------- --------- ----------- ---------
Total dividends ....................................... (0.565) (0.548) (0.550) (0.386)
--------- --------- ----------- ---------
Net asset value, end of period........................... $ 5.540 $ 6.650 $ 6.570 $ 6.140
========= ========= =========== =========
Total return(1).......................................... (8.34%) 9.91% 16.66% 5.20%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ............... $ 62,613 $ 50,945 $ 19,094 $ 4,953
Ratio of expenses to average net assets ............... 1.85% 1.81% 1.79% 1.77%
Ratio of net investment income to average net assets... 9.37% 8.41% 8.73% 9.36%
Portfolio turnover..................................... 85% 117% 154% 108%
- ----------
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 Commencement of operations; ratios have been annualized and total return
has not been annualized.
</TABLE>
See accompanying notes
<PAGE>
for current income 17
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each year were
as follows:
<TABLE>
<CAPTION>
Delchester Fund Institutional Class
--------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
7/31/99 7/31/98 7/31/97 7/31/96 7/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year....................... $ 6.650 $ 6.570 $ 6.140 $ 6.280 $ 6.450
Income (loss) from investment operations:
Net investment income ................................. 0.613 0.620 0.614 0.644 0.685
Net realized and unrealized gain (loss) on investments. (1.104) 0.075 0.429 (0.142) (0.169)
------------ ------------ ------------ ------------ ------------
Total from investment operations....................... (0.491) 0.695 1.043 0.502 0.516
------------ ------------ ------------ ------------ ------------
Less dividends:
Dividends from net investment income................... (0.619) (0.615) (0.613) (0.642) (0.686)
------------ ------------ ------------ ------------ ------------
Total dividends ....................................... (0.619) (0.615) (0.613) (0.642) (0.686)
------------ ------------ ------------ ------------ ------------
Net asset value, end of year............................. $ 5.540 $ 6.650 $ 6.570 $ 6.140 $ 6.280
============ ============ ============ ============ ============
Total return(1).......................................... (7.42%) 11.00% 17.82% 8.37% 8.72%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ............... $ 38,687 $ 53,673 $ 44,065 $ 59,513 $ 61,742
Ratio of expenses to average net assets ............... 0.85% 0.81% 0.79% 0.77% 0.82%
Ratio of net investment income to average net assets... 10.37% 9.41% 9.73% 10.36% 11.14%
Portfolio turnover..................................... 85% 117% 154% 108% 92%
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.
</TABLE>
See accompanying notes
<PAGE>
18 for current income
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
- --------------------------------------------------------------------------------
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 investment objective of the Delchester Fund 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 Fund's Board of Directors.
Federal Income Taxes - The Fund intends to continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes has been made in the
financial statements. Income and capital gain distributions are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles.
Class Accounting - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements - The Fund may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements secured
by obligations of the U.S. government. The respective collateral is held by the
Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 100% collateralized. However,
in the event of default or bankruptcy by the counterparty to the agreement,
realization of the collateral may be subject to legal proceedings.
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.
Certain expenses of the Fund are paid through "soft dollar" arrangements with
brokers. These transactions are done subject to best price and execution. The
amount of these expenses was approximately $31,693 for the year ended July 31,
1999. In addition, the Fund receives earnings credits from its custodian when
positive cash balances are maintained, which are used to offset custody fees.
These credits were $45,281 for the year ended July 31, 1999. The expenses paid
under the above arrangements are included in their respective expense captions
on the Statement of Operations with the corresponding expense offset shown as
"Fees paid indirectly."
2. Investment Management and Other Transactions with Affiliates
Commencing April 1, 1999, and in accordance with the terms of the Investment
Management Agreement, the Fund pays Delaware Management Company, Inc. ("DMC"),
the Investment Manager of the Fund, an annual fee which is calculated daily at
the rate of 0.65% on the first $500 million of average daily net assets, 0.60%
on the next $500 million, 0.55% on the next $1,500 million and 0.50% on net
assets over 2,500 million. Prior to April 1, 1999, the Fund paid DMC an annual
free which was calculated at the rate of 0.60% on the first 500 million of
average daily net assets, 0.575% on the next 150 million and 0.55% on net assets
over 750 million, less the fees paid to the unaffiliated directors. At July 31,
1999, the Fund had a liability for Investment Management fees and other expenses
payable to DMC of $147,314.
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. At July 31, 1999, the Fund had a liability for such fees and other
expenses payable to DSC of $84,976.
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 year ended July 31, 1999, DDLP earned $421,078 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 year ended July 31, 1999, the Fund made purchases of $1,155,375,974
and sales of $1,152,181,753 of investment securities other than U.S. government
securities and temporary cash investments.
At July 31, 1999, the aggregate cost of securities for federal income tax
purposes was $1,351,115,777. At July 31, 1999, net unrealized depreciation for
federal income tax purposes aggregated $117,111,332 of which $16,563,545 related
to unrealized appreciation of securities and $133,674,877 related to unrealized
depreciation of securities.
For federal income tax purposes, the Fund had a capital loss carryforward at
July 31, 1999 of $102,204,548, which may be carried forward and applied against
future capital gains. The capital loss carryforward expires as follows: 2002 -
$3,628,131, 2003 - $87,593,579, and 2007 - $10,982,838.
<PAGE>
for current income 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4.Capital Stock
Transactions in capital stock shares were as follows:
Year Ended Year Ended
7/31/99 7/31/98
------------ ------------
Shares sold:
A Class................................... 45,019,162 29,471,425
B Class................................... 24,566,824 21,058,076
C Class................................... 6,698,639 5,466,954
Institutional Class....................... 6,430,933 6,933,908
Shares issued upon reinvestment of
distributions from net investment income:
A Class................................... 7,889,317 6,683,860
B Class................................... 2,524,327 1,609,981
C Class................................... 546,980 234,859
Institutional Class....................... 666,501 572,273
------------ ------------
94,342,683 72,031,336
------------ ------------
Shares repurchased:
A Class................................... (65,467,458) (33,418,788)
B Class................................... (20,540,987) (7,641,608)
C Class................................... (3,604,913) (942,339)
Institutional Class....................... (8,187,222) (6,135,486)
------------ ------------
(97,800,580) (48,138,221)
------------ ------------
Net increase (decrease)..................... (3,457,897) 23,893,115
============ ============
5. Lines of Credit
The Fund has a committed line of credit for $56,300,000. No amount was
outstanding at July 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
The Fund may participate, along with other funds in the Delaware Investments
Family of Funds, in a Security Lending Agreement ("Lending Agreement"). Security
loans made pursuant to the Lending Agreement are required at all times to be
secured by U.S. Treasury obligations and/or cash collateral at least equal to
100% of the market value of the securities. Cash collateral received is invested
in fixed income securities, with a weighted average maturity not to exceed 90
days, rated in one of the top tiers by Standard & Poors Rating Group or Moody's
Investor Service, Inc. or repurchase agreements collateralized by such
securities. However, in the event of default or bankruptcy by the lending agent,
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 the collateral received is insufficient to cover the value of the loaned
securities and provided such collateral 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 discretion of the lending agent, replace the loaned securities. The
market value of securities on loan and the related collateral received at July
31, 1999 was $41,142,911 and $41,965,770, respectively. Net income from
securities lending was $201,866 and is included in interest income in the
Statements of Operations.
- --------------------------------------------------------------------------------
DELAWARE GROUP INCOME FUNDS, INC. -
DELCHESTER FUND
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
DELAWARE GROUP INCOME FUNDS, INC. - DELCHESTER FUND
We have audited the accompanying statement of net assets of Delaware Group
Income Funds, Inc. - Delchester Fund (the "Fund") as of July 31, 1999, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of July 31, 1999, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Income Funds, Inc. - Delchester Fund at July 31, 1999, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and its financial highlights
for each of the periods indicated therein, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
September 6, 1999
<PAGE>
20 for current income
PROXY RESULTS (UNAUDITED)
- --------------------------------------------------------------------------------
The Delaware Group Income Funds, Inc. shareholders voted on the following
proposals at the annual meeting of shareholders on March 17, 1999 or as
adjourned. The description of each proposal and number of shares voted are as
follows:
1. To elect the Delaware Group Income Funds, Inc. Board of Directors.
Shares Shares Voted
Voted Withheld
For Authority
----------- ------------
Jeffrey J. Nick .... 167,789,240 14,445,510
Walter P. Babich.... 167,879,941 14,354,809
John H. Durham...... 168,015,378 14,219,372
Anthony D. Knerr.... 168,075,457 14,159,293
Ann R. Leven........ 168,052,435 14,182,315
Thomas F. Madison... 168,053,081 14,181,669
Charles E. Peck..... 168,093,442 14,141,308
Wayne A. Stork...... 168,129,118 14,105,632
Jan L. Yeomans...... 168,135,284 14,099,466
2. To approve the reclassification of the Delchester Fund investment
objective from fundamental to non-fundamental.
For Against Abstain
-----------------------------------------------
121,894,575 5,912,922 12,046,999
3. To approve standardized fundamental investment restrictions for the
Delchester Fund (proposal involves separate votes on seven sub-proposals 3A-3G).
3A. To adopt a new fundamental investment restriction concerning
concentration of the investments in the same industry.
For Against Abstain
-----------------------------------------------
124,091,456 4,019,861 11,743,179
3B. To adopt a new fundamental investment restriction concerning borrowing
money and issuing senior securities.
For Against Abstain
-----------------------------------------------
122,745,271 5,144,629 11,964,596
3C. To adopt a new fundamental investment restriction concerning
underwriting.
For Against Abstain
-----------------------------------------------
123,490,295 4,274,550 12,089,652
3D. To adopt a new fundamental investment restriction concerning investments
in real estate.
For Against Abstain
-----------------------------------------------
123,281,733 4,966,750 11,606,014
3E. To adopt a new fundamental investment restriction concerning investments
in commodities.
For Against Abstain
-----------------------------------------------
122,369,127 5,534,572 11,950,798
3F. To adopt a new fundamental investment restriction concerning lending by
the Fund.
For Against Abstain
-----------------------------------------------
122,610,160 5,213,187 12,031,150
3G. To reclassify all current fundamental investment restrictions as
non-fundamental.
For Against Abstain
-----------------------------------------------
121,109,899 5,891,863 12,852,735
4. To approve a new investment management agreement with Delaware Management
Company for the Delchester Fund.
For Against Abstain
-----------------------------------------------
121,914,896 6,000,781 11,938,820
5. To ratify the selection of Ernst & Young LLP, as the independent auditors
for Delaware Group Income Funds, Inc.
For Against Abstain
-----------------------------------------------
170,342,196 1,709,355 10,183,195
6. To approve the restructuring of the Delaware Group Income Funds, Inc.
from a Maryland Corporation into a Delaware Business Trust.
For Against Abstain
-----------------------------------------------
133,129,206 5,660,859 12,632,334
<PAGE>
THIS 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 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
or send money. The figures in this report represent past results which are not a
guarantee of future results. The return and principal value of an investment in
the Fund will fluctuate so that shares, when redeemed, may be worth more or less
than their original cost.
Board of Trustees
WAYNE A. STORK
Chairman
Delaware Investments Family of Funds
Philadelphia, PA
WALTER P. BABICH
Board Chairman, Citadel Constructors, Inc.
King of Prussia, PA
DAVID K. DOWNES
President and Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
JOHN H. DURHAM
Partner, Complete Care Services
Horsham, PA
ANTHONY D. KNERR
Consultant, Anthony Knerr & Associates
New York, NY
ANN R. LEVEN
Treasurer, National Gallery of Art
Washington, DC
THOMAS F. MADISON
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
CHARLES E. PECK
Secretary/Treasurer, Enterprise Homes, Inc.
Fredericksburg, VA
JAN L. YEOMANS
Vice President and Treasurer
3M Corporation
St. Paul, Minnesota
Affiliated Officers
RICHARD J. FLANNERY
Executive Vice President and General Counsel
Delaware Investments Family of Funds
Philadelphia, PA
BRUCE D. BARTON
President and Chief Executive Officer
Delaware Distributors, L.P.
Philadelphia, PA
ERIC E. MILLER
Senior Vice President, Secretary
and Deputy General Counsel
Delaware Investments Family of Funds
Philadelphia, PA
directors
& officers
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
Delaware Management Company
Philadelphia, Pennsylvania
INTERNATIONAL AFFILIATE
Delaware International Advisers Ltd.
London, England
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
Philadelphia, Pennsylvania
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
Philadelphia, Pennsylvania
1818 Market Street
Philadelphia, PA 19103-3682
<PAGE>
When used with prospective investors, this report must be preceded or
accompanied by a current Delaware Delchester Fund Prospectus and the Delaware
Investments Performance Update for the most recently completed calendar quarter.
For a prospectus of any other mutual fund from Delaware Investments, contact
your financial adviser or Delaware Investments.
For Shareholders
1.800.523.1918
For Securities Dealers
1.800.362.7500
For Financial Institutions
Representatives Only
1.800.659.2265
www.delawareinvestments.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 - London
Printed in the USA
on recycled paper
(2100) J5062
AR-024[7/99]PPL9/99
