<PAGE>
DELAWARE(SM)
INVESTMENTS
-----------
Delaware Delchester Fund
Current Income
2000 ANNUAL REPORT
(Current Income Artwork)
<PAGE>
A TRADITION OF SOUND INVESTING SINCE 1929
-----------------------------------------
TABLE OF CONTENTS
-----------------
Letter to Shareholders 1
Portfolio Management
Review 3
Performance Summary 5
Financial Statements
Statement of Net Assets 6
Statement of Operations 9
Statements of Changes in
Net Assets 10
Financial Highlights 11
Notes to Financial
Statements 15
Report of Independent
Auditors 17
A Commitment To Our Investors
Experienced
[ ] Our seasoned investment professionals average more than 15 years'
experience.
[ ] We began managing investments in 1929 and opened our first mutual fund in
1938. Over the past 70 years, we have weathered a full range of economic and
market environments.
Disciplined
[ ] We follow strict investment policies and clear buy/sell guidelines.
[ ] We strive to balance risk and reward in order to provide sound investment
alternatives within any given asset class.
Consistent
[ ] We clearly articulate our investment policies and follow them
consistently.
[ ] Our commitment to style consistency has earned us the confidence of
discriminating institutional and individual investors to manage
approximately $45 billion in assets as of June 30, 2000.
Comprehensive
[ ] We offer more than 70 mutual funds in these asset classes.
o Large-cap equity o High-yield bonds
o Mid-cap equity o Investment grade bonds
o Small-cap equity o Municipal bonds (23 single-state funds)
o International equity o International fixed-income
o Balanced
[ ] Our funds are available through financial advisers who can offer you
individualized attention and valuable investment advice.
Funds are not FDIC insured and are not guaranteed. It is possible to lose the
principal amount invested.
(C)Delaware Distributors, L.P.
<PAGE>
Dear Shareholder
September 11, 2000
Recap of Events - U.S. high-yield bonds continued to struggle during the
12-month period ended July 31, 2000, under the mounting pressure of reduced
investor demand, rising default rates, and poor trading conditions. Not since
1990 -- when economic recession, the savings and loan crisis, and high default
rates led prices downward -- had high-yield bonds experienced two consecutive
years of significant price decline (Source: Bloomberg).
The current market phase was set in motion during the summer of 1998 when
overseas turmoil precipitated a global flight to quality that sharply reduced
market liquidity. When demand for higher risk bonds is low, it becomes difficult
to trade in the market without suffering some losses. Liquidity problems
continued to plague the high-yield market throughout our fiscal year as other
asset classes -- particularly growth-oriented technology stocks -- may have
attracted investors' money. Higher default rates, coupled with weak investor
demand for new bonds, pushed high-yield bond prices lower (Source: Bloomberg).
The high-yield bond market experienced a brief turnaround in June 2000, however.
High-yield bonds delivered their best monthly performance in more than 18 months
and high-yield bond mutual fund flows turned positive (Source: AMG Data
Services). Like stocks, high-yield bond prices are highly sensitive to corporate
earnings. We believe the June rally was driven by strong corporate earnings
reports and rising stock prices. In addition, the rally may have been sparked by
perceptions that the Federal Reserve was finished raising short-term interest
rates. The Fed left the federal funds rate unchanged at 6.50% in June after
economic reports for the month of May indicated a slowing economy.
The rebound in high-yield bond prices was short-lived. Lukewarm reports in the
second half of the corporate earnings season may have had an effect on the
markets, as both stocks and high-yield bond prices generally turned downward
again. We believe a July report of better than expected growth in U.S. gross
domestic product (up to an annual rate of 5.2%) during the second calendar
quarter may have also stunted the rally, as Fed-watching investors seemed to
monitor every economic report with the future of interest rates in mind.
<TABLE>
<CAPTION>
<S> <C> <C>
Average Annual Total Returns
For Periods Ended July 31, 2000 12 Months Lifetime*
----------------------------------------------------------------------------------------------------------
Delaware Delchester Fund Class A -11.93% +8.47%
----------------------------------------------------------------------------------------------------------
Lipper High Current Yield Fund Average -0.62% (351 funds) +7.89% (299 funds)
----------------------------------------------------------------------------------------------------------
Salomon Smith Barney High-Yield Cash Pay Index -0.85% N/A
----------------------------------------------------------------------------------------------------------
</TABLE>
All performance shown above is at net asset value without the effect of sales
charges and assumes reinvestment of dividends and capital gains. Performance
information for all Fund classes can be found on page 5. The Lipper category
represents the average returns of high-yield bond mutual funds tracked by Lipper
(Source: Lipper). The Salomon Smith Barney High-Yield Cash Pay Index is an
unmanaged index that generally tracks the performance of high-yield bonds. You
cannot invest directly in an index. Past performance does not guarantee future
results.
*August 20, 1970 (commencement of operations).
"FIXED-INCOME INVESTORS HAVE CONTINUED TO FIGHT AN UPHILL BATTLE DURING THE
FED'S EXTENDED CAMPAIGN OF INTEREST RATE HIKES."
1
<PAGE>
Delaware Delchester Fund finished fiscal 2000 far behind its performance
benchmark, the Salomon Smith Barney High-Yield Cash Pay Index, and its peer
group of funds tracked by Lipper. The Fund returned a disappointing -11.93%
(Class A shares at net asset value with distributions reinvested) for the 12
months ended July 31, 2000.
There are two reasons for the Fund's underperformance. One is the negative
impact that trading costs had on the portfolio. Our trading costs ran high
during the fiscal year as we repositioned the portfolio in response to the
difficult market environment we faced during the first half of 1999. The other
reason is the Fund's primary focus on high-yield bonds that have been given a
quality rating of B by credit rating agencies such as Moody's and Standard &
Poor's. This focus is consistent with the Fund's objective to provide high
current income with a reasonable degree of safety. Single B bonds did not
perform well in the recent market environment.
Market Outlook - Fixed-income investors have continued to fight an uphill battle
during the Fed's extended campaign of interest rate hikes. As of this writing,
the impression on Wall Street is that the U.S. economy is approaching a more
moderate growth rate, without inflation, as desired by the Fed. In our opinion,
economic fundamentals remain strong in the U.S. and in many other parts of the
world. In addition, we would not be surprised if U.S. interest rates trended
downward over the next 18 months. We believe the outlook for the high-yield
market is becoming more promising, and that a turnaround could evolve in the
next year.
On the following pages, Delaware Delchester Fund's portfolio manager Gerald
Nichols discusses the Fund's results for fiscal 2000 in greater detail and
shares his outlook for the year ahead. We thank you for selecting Delaware
Delchester Fund and look forward to reporting to you again in six months.
Sincerely,
/s/ Wayne A. Stork /s/ David K. Downes
Wayne A. Stork David K. Downes
Chairman, President and Chief Executive Officer,
Delaware Investments Family of Funds Delaware Investments Family of Funds
"WE BELIEVE THE OUTLOOK FOR THE HIGH-YIELD MARKET IS BECOMING MORE PROMISING,
AND THAT A TURNAROUND COULD EVOLVE IN THE NEXT YEAR."
(Current Income Artwork)
2
<PAGE>
PORTFOLIO MANAGEMENT REVIEW
---------------------------
Gerald T. Nichols
Senior Portfolio Manager
September 11, 2000
The Fund's Results
During the 12-month period ended July 31, 2000, an imbalance between the supply
and demand of high-yield bonds weighed heavily on bond prices. Although the
supply of new high-yield bonds was much lower than in previous years, we felt
there was little appetite for what was being issued. In our opinion, an
uncertain economic outlook and rising default rates among high-yield bond issues
-- caused by the inability of companies to repay principal and interest on their
debt -- muted investors' interest in the high-yield bond market.
Portfolio Highlights
Reduced liquidity continued to pose problems for Delaware Delchester Fund
because it limited our ability to sell bonds without losing significant value.
Early in fiscal 2000, we began to reposition the portfolio with a slant toward
"New Economy" issuers -- specifically those in technology and
telecommunications. In the past, Delaware Delchester Fund typically invested in
"Old Economy" companies -- those in more traditional industries such as steel,
chemicals, and paper.
We also began to focus on larger bond issues, increasing our universe of
possible investments. As of July 31, 2000, 70% of your Fund's investments were
in bond issues that were brought to market as at least $300 million offerings.
In the past, the average offering we bought into was smaller -- typically about
$100 million. While this approach served us well in the 1990s, we believe that
the potential for continued success relies heavily on our ability to change with
the times.
Unfortunately, the cost of repositioning the portfolio, which involved selling
many of our old positions, was very expensive due to poor market liquidity.
Trading costs early in the fiscal year had a negative impact on the Fund's
return for the 12-month period.
The Fund's performance was also hurt by its focus on high-yield bonds rated B by
Standard & Poor's. Delaware Delchester Fund has greater exposure to B-rated
bonds than is reflected in its benchmark, the Salomon Smith Barney High-Yield
Cash Pay Index. The prices of higher-rated, lower-yielding BB bonds, which made
up less of the portfolio, performed better than B bonds during the fiscal year
(Source: Moody's Investors Service).
The changes we've been implementing are designed to properly position Delaware
Delchester Fund for the 21st Century. Given the recent poor conditions in the
market, that has meant bringing the portfolio closer in line with its benchmark,
so that it more closely mirrors the benchmark's sector allocations. In addition,
we have tried to add value to the portfolio by focusing more on individual issue
selection than on any one particular industry.
If you look at our sector allocation on page 4, you will see that we made one
exception to this approach in fiscal 2000. We realized that by limiting our
holdings in the telecommunications sector, we would in fact be making a major
bet against the market, since telecommunications represented roughly 35% of the
Salomon Smith Barney High-Yield Cash Pay Index. For this reason, about 31% of
the Fund's holdings were in the telecommunications sector as of July 31, 2000.
"THE CHANGES WE'VE BEEN IMPLEMENTING ARE DESIGNED TO PROPERLY POSITION DELAWARE
DELCHESTER FUND FOR THE 21ST CENTURY."
Portfolio Characteristics
----------------------------------------------------
Current 30-Day SEC Yield* 11.65%
----------------------------------------------------
Average Effective Duration** 4.38 years
----------------------------------------------------
Average Effective Maturity*** 6.77 years
----------------------------------------------------
Portfolio Turnover 82%
----------------------------------------------------
Number of Securities 121
----------------------------------------------------
*For Class A shares measured according to Securities and Exchange Commission
(SEC) guidelines. Current 30-day SEC yield as of 7/31/00 for both Class B and
C shares was 11.48%. The Institutional Class yield was 12.53%.
**Average effective duration is a common measure of a bond or bond fund's
sensitivity to interest rates, accounting for bond call features.
***Average effective maturity is the average time remaining until scheduled
replacement by issuers of portfolio securities.
3
<PAGE>
Delaware Delchester Fund
Sector Allocation
As of July 31, 2000
Cable, Media & Publishing 10.88%
Competitive Local Exchange Carriers 10.33%
Enhanced Specialized Mobil Radio/Personal Communications 9.02%
Other* 37.37%
Chemicals 3.13%
Food, Beverages & Tobacco 3.22%
Retail 3.59%
Energy 6.13%
Data/Internet Services 4.02%
Leisure, Lodging & Entertainment 6.14%
Long Distance Services 6.17%
*Other bonds, equities, cash, and other assets account for 37.37% of net assets.
(Current Income Artwork)
New Investment Opportunities Approved for Delchester Fund
Over the past several years, we have witnessed a marked increase in the
investment returns available from U.S. stocks and foreign high-yield bonds.
Conversely, the domestic high-yield bond market has suffered two consecutive
years of decline. These trends have been a source of weakness for Delaware
Delchester Fund.
In June 2000, the Board of Trustees of Delaware Group Income Funds approved an
expansion of Delaware Delchester Fund's investment opportunities in an effort to
make the Fund more competitive and better able to attain its objective of high
current income. The Fund may now invest up to 20% of its total assets in foreign
bonds and up to 20% of its assets in stocks. We believe that being able to
select from a broader universe of securities will benefit Delaware Delchester
Fund, especially in times when the domestic high-yield bond market is weak, as
it has been in recent years.
Outlook
The last two years have been unusually difficult for U.S. high-yield bonds.
Despite the fact that the U.S. economy has never been in better shape,
lower-rated issues in the high-yield bond market -- which typically are more
sensitive to the economy -- have performed poorly and had a high rate of
default. In our opinion, much of the trouble stems from the global financial
crisis of 1998, which pushed down commodity prices worldwide and caused many
companies in commodity-based industries to default on their debt obligations.
Since then, the default rate among high-yield bonds has been rising. In November
1999, 6.1% of the companies issuing high-yield bonds were in default, the
highest level since 1992. The default rate leveled off at just above 5% by
mid-year 2000, still higher than the historic average (Source: Moody's Investors
Service). We believe the default rate was driven higher by an excess supply of
commodities in the world in general, and a more restrictive bank lending
environment. The result is that banks have been very reluctant to lend to
lower-rated issuers.
It appears to us that, after the short rally experienced earlier this summer,
long-hurting high-yield investors seem eager to stage a longer rally. If nothing
else, many investors seem to expect a rally based purely on market cycles
turning the compass in favor of high yield. We believe there are indicators
suggesting that a turnaround could evolve during the next year. For instance,
many analysts point to the similarities between the current period of rising
interest rates and 1994, when seven increases moved short-term rates upward by
3.00%. High-yield markets rallied throughout the following year (Source: Salomon
Smith Barney).
It appears to us there are both similarities and differences between the two
periods. As for Delaware Delchester Fund, we will begin the process of
implementing the new investment policies adopted this past June. At the same
time, in an effort to better manage credit risk, we will be working to raise the
quality of the portfolio on an issue-by-issue basis. We'll still focus on
B-rated bonds for their high current income, but we will have a bias for larger
issues because they tend to enjoy greater liquidity than those of smaller
companies. This should offer us the flexibility to move in and out of positions
more easily.
4
<PAGE>
FUND BASICS
-----------
Fund Objective
The Fund seeks as high a level of current income as is consistent with providing
reasonable safety.
Total Fund Assets
$747.99 million
Number of Holdings
121
Fund Start Date
August 20, 1970
Your Fund Manager
Gerald T. Nichols is a graduate of the University of Kansas, where he received a
BS in Business Administration and an MS in finance. Prior to joining Delaware in
1989, Mr. Nichols worked at Waddell & Reed, Inc. and as an investment officer
for a merchant banking firm. He is a CFA charterholder.
Nasdaq Symbols
Class A DETWX
Class B DHYBX
Class C DELCX
DELAWARE DELCHESTER FUND PERFORMANCE
------------------------------------
Growth of a $10,000 Investment
July 31, 1990 through July 31, 2000
Delaware U.S. Consumer Salomon Smith Barney
Delchester Fund Price Index High-Yield Cash Pay Index
Jul-90 $9,531.00 $10,000.00 $10,000.00
Jul-91 $10,931.00 $10,445.00 $11,268.00
Jul-92 $13,526.00 $10,775.00 $13,859.00
Jul-93 $15,482.00 $11,074.00 $16,110.00
Jul-94 $15,729.00 $11,380.00 $16,625.00
Jul-95 $17,059.00 $11,695.00 $19,030.00
Jul-96 $18,442.00 $12,040.00 $20,733.00
Jul-97 $21,675.00 $12,308.00 $24,007.00
Jul-98 $23,945.00 $12,515.00 $26,565.00
Jul-99 $22,115.00 $12,784.00 $26,511.00
Jul-00 $19,524.00 $13,326.00 $26,286.00
Chart assumes $10,000 invested on July 31, 1990, and includes the effect of a
4.75% front-end sales charge and reinvestment of distributions. Performance for
other Fund classes will vary due to differing charges and expenses. Values are
plotted as of July 31 each year.
Average Annual Total Returns
Through July 31, 2000 Lifetime 10 Years Five Years One Year
--------------------------------------------------------------------------------
Class A (Est. 8/20/70)
Excluding Sales Charge +8.47% +7.43% +2.73% -11.93%
Including Sales Charge +8.29% +6.92% +1.75% -16.17%
--------------------------------------------------------------------------------
Class B (Est. 5/2/94)
Excluding Sales Charge +2.51% -- +1.97 -12.57%
Including Sales Charge +2.51% -- +1.71 -15.74%
--------------------------------------------------------------------------------
Class C (Est. 11/29/95)
Excluding Sales Charge +1.68% -- -- -12.57%
Including Sales Charge +1.68% -- -- -13.36%
--------------------------------------------------------------------------------
<PAGE>
An expense limitation was in effect for all classes of Delaware Delchester Fund
starting June 1, 2000. Performance would have been lower if the expense
limitation were not in effect.
Delaware 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. Class B and C results, excluding sales charge, assume
either that contingent deferred sales charges were not applied 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 also subject to a contingent
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.
The average annual total returns for the lifetime, 10-year, five-year and
one-year periods ended July 31, 2000 for Delaware Delchester Fund Institutional
Class (Est. 8/20/70) were +8.58%, +7.70%, +2.99%, and -11.70% respectively.
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 Class A
performance adjusted to eliminate the up-front sales charge.
Nasdaq Symbol Institutional Class: DETIX
5
<PAGE>
Statement of Net Assets
DELAWARE DELCHESTER FUND
------------------------
Principal Market
July 31, 2000 Amount Value
--------------------------------------------------------------------------------
Corporate Bonds - 83.48%
Automobile & Auto Parts - 2.57%
American Axle & Manufacturing
9.75% 3/1/09 .................................. $10,300,000 $ 9,810,750
Holley Performance Products
12.25% 9/15/07 ................................ 4,600,000 2,875,000
Venture Holdings 12.00% 6/1/09 .................. 10,000,000 6,550,000
-----------
19,235,750
-----------
Building & Materials - 2.30%
+Formica 10.875% 3/1/09 .......................... 11,100,000 8,658,000
+K Hovnanian Enterprises
9.125% 5/1/09 ................................. 9,300,000 8,556,000
-----------
17,214,000
-----------
Bundled Services - 1.59%
+**RCN 11.125% 10/15/07 ............................ 14,000,000 8,120,000
+RCN 10.125% 1/15/10 ............................. 4,600,000 3,726,000
-----------
11,846,000
-----------
Cable, Media & Publishing - 10.88%
+Adelphia Communications
9.375% 11/15/09 ............................... 3,750,000 3,431,250
**Century Communications
11.135% 1/15/08 ............................... 19,000,000 7,790,000
+**Charter Communications
11.75% 1/15/10 ................................ 18,200,000 10,328,500
+Echostar DBS 9.25% 2/1/06 ....................... 2,800,000 2,723,000
**Fox Kids Worldwide
10.25% 11/1/07 ................................ 9,000,000 6,255,000
**PX Escrow 9.625% 2/1/06 ......................... 9,500,000 4,322,500
Sinclair Broadcast Group
8.75% 12/15/07 ................................ 8,800,000 8,052,000
Sullivan Graphics 12.75% 8/1/05 ................. 9,975,000 10,174,500
+Telewest 9.875% 2/1/10 .......................... 9,000,000 8,685,000
**United International Holdings
10.75% 2/15/08 ................................ 14,600,000 10,694,500
+United Pan-Europe Communications
11.25% 2/1/10 ................................. 8,000,000 6,880,000
+Ziff Davis Media 12.00% 7/15/10 ................. 2,000,000 2,040,000
-----------
81,376,250
-----------
Chemicals - 3.13%
Avecia Group 11.00% 7/1/09 ...................... 9,100,000 9,191,000
Huntsman 9.50% 7/1/07 ........................... 11,000,000 10,175,000
+Lyondell Chemical 10.875% 5/1/09 ................ 4,000,000 4,035,000
-----------
23,401,000
-----------
Competitive Local Exchange Carriers - 10.33%
+Hyperion Telecommunications
12.25% 9/1/04 ................................. 8,650,000 8,433,750
**KMC Telecom Holdings
12.50% 2/15/08 ................................ 28,000,000 14,140,000
KMC Telecom Holdings
13.50% 5/15/09 ................................ 3,700,000 3,297,625
Metromedia Fiber 10.00% 11/15/08 ................ 16,650,000 16,317,000
<PAGE>
Principal Market
Amount Value
--------------------------------------------------------------------------------
Corporate Bonds (continued)
Competitive Local Exchange Carriers (continued)
Nextlink Communications
10.75% 11/15/08 ............................... $ 9,200,000 $ 9,050,500
**Nextlink Communications
12.125% 12/1/09 ............................... 8,750,000 4,987,500
Teligent 11.50% 12/1/07 ......................... 15,000,000 11,550,000
**Teligent 11.50% 3/1/08 .......................... 12,575,000 5,344,375
Versatel Telecom 13.25% 5/15/08 ................. 4,000,000 4,140,000
-----------
77,260,750
-----------
Computers & Technology - 0.51%
Unisys 11.75% 10/15/04 .......................... 3,600,000 3,816,000
-----------
3,816,000
-----------
Consumer Products - 0.58%
Drypers 10.25% 6/15/07 .......................... 6,625,000 4,339,375
-----------
4,339,375
-----------
Data/Internet Services - 4.02%
+Covad Communications Group
12.50% 2/15/09 ................................ 7,000,000 5,425,000
Exodus Communications
11.625% 7/15/10 ............................... 10,000,000 10,100,000
Globix 12.50% 2/1/10 ............................ 8,000,000 6,360,000
Psinet 11.00% 8/1/09 ............................ 10,000,000 8,150,000
-----------
30,035,000
-----------
Electronics & Electrical Equipment - 1.22%
+Protection One 7.375% 8/15/05 ................... 11,600,000 9,135,000
-----------
9,135,000
-----------
Energy - 6.13%
Clark USA 10.875% 12/1/05 ....................... 7,600,000 4,208,500
Chesapeake Energy 9.625% 5/1/05 ................. 9,500,000 9,310,000
Clark R & M 8.875% 11/15/07 ..................... 2,700,000 1,829,250
First Wave Marine 11.00% 2/1/08 ................. 5,100,000 3,034,500
+Frontier Oil 11.75% 11/15/09 .................... 13,500,000 13,938,750
RBF Finance 11.375% 3/15/09 ..................... 8,725,000 9,510,250
**Universal Compression
9.875% 2/15/08 ................................ 5,500,000 4,001,250
-----------
45,832,500
-----------
Enhanced Specialized Mobile Radio /
Personal Communication Services - 9.02%
+**Airgate 13.50% 10/1/09 .......................... 11,000,000 6,242,500
**McCaw International
13.00% 4/15/07 ................................ 9,000,000 6,975,000
**Microcell Telecommunications
14.00% 6/1/06 ................................. 7,800,000 7,332,000
+Nextel International 12.75% 8/1/10 .............. 8,500,000 8,457,500
Nextel Partners 11.00% 3/15/10 .................. 6,500,000 6,451,250
+**Nextel Partners 14.00% 2/1/09 ................... 9,114,000 6,265,875
Telecorp PCS 10.625% 7/15/10 .................... 7,850,000 7,967,750
**Telecorp PCS 11.625% 4/15/09 .................... 10,375,000 6,951,250
Voicestream Wireless
10.375% 11/15/09 .............................. 10,000,000 10,800,000
-----------
67,443,125
-----------
6
<PAGE>
Statement of Net Assets (continued)
Principal Market
Delaware Delchester Fund Amount Value
--------------------------------------------------------------------------------
Corporate Bonds (continued)
Environmental Services - 2.51%
+Allied Waste 10.00% 8/1/09 ...................... $14,900,000 $12,981,625
Norcal Waste System
13.50% 11/15/05 ............................... 5,550,000 5,813,625
-----------
18,795,250
-----------
Food, Beverage & Tobacco - 3.22%
Ameriking 10.75% 12/1/06 ........................ 4,100,000 3,459,375
Carrols 9.50% 12/1/08 ........................... 8,200,000 6,970,000
**Del Monte Foods 12.50% 12/15/07 ................. 3,800,000 2,878,500
DiGiorgio 10.00% 6/15/07 ........................ 8,650,000 7,655,250
Fresh Foods 10.75% 6/1/06 ....................... 6,200,000 3,131,000
-----------
24,094,125
-----------
Healthcare & Pharmaceuticals - 1.11%
Insight Health Services
9.625% 6/15/08 ................................ 7,300,000 6,606,500
Kinetic Concepts 9.625% 11/1/07 ................. 2,250,000 1,721,250
-----------
8,327,750
-----------
Leisure, Lodging & Entertainment - 6.14%
+Florida Panthers 9.875% 4/15/09 ................. 8,050,000 7,607,250
Hollywood Casino 11.25% 5/1/07 .................. 8,300,000 8,507,500
Hollywood Casino 13.00% 8/1/06 .................. 8,000,000 8,520,000
+Outboard Marine 10.75% 6/1/08 ................... 5,000,000 2,425,000
**Premier Parks 10.00% 4/1/08 ..................... 6,650,000 4,422,250
+Trump-Atlantic City 11.25% 5/1/06 ............... 10,700,000 7,383,000
+Venetian Casino 12.25% 11/15/04 ................. 7,000,000 7,087,500
-----------
45,952,500
-----------
Long Distance Services - 6.17%
BTI Telecom 10.50% 9/15/07 ...................... 9,025,000 6,836,438
Call-Net Enterprises 10.80% 5/15/09 ............. 13,500,000 4,117,500
+Flag Telecom 11.625% 3/30/10 .................... 9,800,000 9,261,000
+RSL Communications
12.25% 11/15/06 ............................... 7,000,000 2,625,000
+Viatel 11.50% 3/15/09 ........................... 5,956,000 3,841,620
+**Viatel 12.50% 4/15/08 ........................... 16,425,000 6,323,625
Williams Communications Group
10.875% 10/1/09 ............................... 3,575,000 3,432,000
Worldwide Fiber 12.00% 8/1/09 ................... 10,500,000 9,712,500
-----------
46,149,683
-----------
Metals & Mining - 2.54%
+Algoma Steel 12.375% 7/15/05 .................... 2,500,000 2,250,000
Doe Run Resources 11.25% 3/15/05 ................ 5,400,000 2,727,000
Jorgensen Earle 9.50% 4/1/05 .................... 6,250,000 5,468,750
+P & L Coal Holdings 9.625% 5/15/08 .............. 9,000,000 8,572,500
-----------
19,018,250
-----------
Miscellaneous - 1.35%
+Blount 13.00% 8/1/09 ............................ 10,000,000 10,112,500
-----------
10,112,500
-----------
<PAGE>
Principal Market
Amount Value
--------------------------------------------------------------------------------
Corporate Bonds (continued)
Paper & Forest Products- 1.79%
MAXXAM Group 12.00% 8/1/03 ...................... $ 9,400,000 $ 8,718,500
**SF Holdings 12.75% 3/15/08 ...................... 9,250,000 4,671,250
-----------
13,389,750
-----------
Retail- 3.59%
Advance Stores 10.25% 4/15/08 ................... 9,200,000 7,636,000
Buhrman 12.25% 11/1/09 .......................... 9,700,000 10,160,750
+Fleming 10.50% 12/1/04 .......................... 9,800,000 9,040,500
-----------
26,837,250
-----------
Transportation & Shipping - 1.91%
Avis Group Holdings 11.00% 5/1/09 ............... 8,075,000 8,559,500
+Budget Group 9.125% 4/1/06 ...................... 7,575,000 5,719,125
-----------
14,278,625
-----------
Utilities - 0.87%
Trench Electric & Trench
10.25% 12/15/07 ............................... 9,250,000 6,521,250
-----------
6,521,250
-----------
Total Corporate Bonds
(cost $697,288,873) ........................... 624,411,683
-----------
U.S. Treasury Obligations - 7.02%
U.S. Treasury Note 6.125% 9/30/00 ............... 52,585,000 52,552,134
-----------
Total U.S. Treasury Obligations
(cost $52,559,038) ............................ 52,552,134
-----------
Number
of Shares
Common Stock - 0.01%
*SF Holdings ..................................... 1,850 83,250
-----------
Total Common Stock (cost $4,318) ................ 83,250
-----------
Preferred Stocks - 6.23%
+Dobson Communications pik 12.44% ................ 14,468 13,792,183
+Eagle-Picher Holdings 11.75% .................... 1,010 2,045,250
Intermedia Communications
pik 13.50% .................................... 16,871 13,201,925
Nebco Evans Holding pik 11.25% .................. 80,016 30,006
Nextel Communications pik 13.00% ................ 3,977 4,245,642
Nextel Communications pik 11.124% ............... 1 1,003
Nextlink Communications pik 14.00% .............. 103,500 4,968,000
Pegasus Communications pik 12.75% ............... 1 1,329
Sinclair Capital pik 11.624% .................... 90,000 8,302,500
*TCR Holdings B .................................. 52,152 522
*TCR Holdings C .................................. 28,683 287
*TCR Holdings D .................................. 75,619 756
*TCR Holdings E .................................. 156,454 1,565
-----------
Total Preferred Stocks
(cost $63,684,642) ............................ 46,590,968
-----------
7
<PAGE>
Statement of Net Assets (continued)
Number Market
Delaware Delchester Fund of Shares Value
--------------------------------------------------------------------------------
Warrants & Rights - 0.35%
*American Banknote ................................. 10,750 $ 10,750
*Cellnet Data Systems .............................. 9,300 5,812
*Electronic Retailing System ....................... 13,200 132
*Gothic Energy ..................................... 19,600 196
*KMC Telecom Holdings .............................. 14,000 420,000
*Millenium Seacarriers ............................. 3,800 475
*McCaw International ............................... 11,200 601,815
*Pegasus Communications ............................ 4,500 774,000
*Spincycle ......................................... 5,000 50
*Terex ............................................. 55,200 779,700
------------
Total Warrants & Rights
(cost $1,244,830) ............................... 2,592,930
------------
Convertible Preferred Stocks - 1.64%
E.Spire Communications pik 12.75% ................. 21,354 5,178,350
Global Crossing 17.50% ............................ 16,000 2,736,000
PSI Net 8.75% ..................................... 156,000 4,368,000
------------
Total Convertible Preferred Stock
(cost $26,860,610) .............................. 12,282,350
------------
Total Market Value of Securities - 98.73%
(cost $841,642,311) ............................. 738,513,315
Receivables and Other Assets Net
of Liabilities - 1.27% .......................... 9,473,312
------------
Net Assets Applicable to 170,358,240
Shares Outstanding - 100% ....................... $747,986,627
============
Net Asset Value - Delaware Delchester
Fund A Class
($485,580,961 / 110,592,127 Shares) ............. $4.39
-----
Net Asset Value - Delaware Delchester
Fund B Class
($208,784,191 / 47,554,638 Shares) .............. $4.39
-----
Net Asset Value - Delaware Delchester
Fund C Class
($33,870,938 / 7,713,654 Shares) ................ $4.39
-----
Net Asset Value - Delaware Delchester
Fund Institutional Class
($19,750,537 / 4,497,821 Shares) ................ $4.39
-----
----------------------
*Non-income producing security for the year ended July 31, 2000.
**Zero coupon security as of July 31, 2000. The coupon shown is the step-up
rate.
+Security is partially or fully on loan.
pik - payment in kind
--------------------------------------------------------------------------------
Components of Net Assets at July 31, 2000:
Shares of beneficial interest (unlimited
authorization - no par) ......................... $1,304,475,663
Undistributed net investment income ................ 1,045,764
Accumulated net realized
loss on investments ............................. (454,405,804)
Net unrealized depreciation of investments ......... (103,128,996)
--------------
Total net assets ................................ $747,986,627
==============
Net Asset Value and Offering Price Per
Share - Delaware Delchester Fund
Net assets value A class (A) ....................... $4.39
Sales charge (4.75% of offering price or 5.01%
of the amount invested per share) (B) ........... 0.22
-----
Offering price ..................................... $4.61
=====
----------------------
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
8
<PAGE>
Statement of Operations
Year Ended July 31, 2000 Delaware Delchester Fund
--------------------------------------------------------------------------------
Investment Income:
Interest ........................................ $110,069,147
Dividends ....................................... 8,069,513 $ 118,138,660
------------ -------------
Expenses:
Management fees ................................. 6,209,644
Distribution expense ............................ 5,000,595
Dividend disbursing and transfer agent fees
and expenses .................................. 2,143,820
Reports and statements to shareholders .......... 567,200
Accounting and administration ................... 416,500
Registration fees ............................... 217,272
Taxes (other than taxes on income) .............. 216,200
Professional fees ............................... 149,500
Custodian fees .................................. 131,710
Trustees' fees .................................. 24,720
Other ........................................... 295,717 15,372,878
------------ -------------
Less expenses absorbed or waived ................ (246,897)
Less expenses paid indirectly ................... (99,467)
-------------
Total expenses .................................. 15,026,514
-------------
Net Investment Income ........................... 103,112,146
-------------
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized loss on investments ................ (246,298,953)
Net change in unrealized appreciation /
depreciation of investments ................... 13,901,336
-------------
Net Realized and Unrealized Loss on Investments.. (232,397,617)
-------------
Net Decrease in Net Assets Resulting from
Operations .................................... $(129,285,471)
=============
See accompanying notes
9
<PAGE>
Statements of Changes in Net Assets
Delaware Delchester Fund
--------------------------------------------------------------------------------
Year Ended
7/31/00 7/31/99
Increase (Decrease) in Net Assets from
Operations:
Net investment income ........................... $103,112,146 $ 136,414,875
Net realized loss on investments ................ (246,298,953) (116,092,305)
Net change in unrealized appreciation /
depreciation of investments .................... 13,901,336 (133,695,167)
-----------------------------
Net decrease in net assets resulting from
operations .................................... (129,285,471) (113,372,597)
-----------------------------
Distributions to Shareholders from:
Net investment income:
A Class ....................................... (68,052,624) (93,848,121)
B Class ....................................... (27,139,509) (34,447,633)
C Class ....................................... (4,519,734) (5,567,284)
Institutional Class ........................... (3,085,389) (4,285,105)
-----------------------------
(102,797,256) (138,148,143)
-----------------------------
Capital Share Transactions:
Proceeds from shares sold:
A Class ....................................... 104,979,713 262,422,657
B Class ....................................... 44,260,404 144,465,555
C Class ....................................... 13,913,843 39,555,223
Institutional Class ........................... 16,288,872 37,514,075
Net asset value of shares issued upon
reinvestment of dividends from net
investment income:
A Class ....................................... 32,843,273 46,328,049
B Class ....................................... 11,107,733 14,801,100
C Class ....................................... 2,342,333 3,200,182
Institutional Class ........................... 3,080,348 3,912,815
-----------------------------
228,816,519 52,199,656
-----------------------------
Cost of shares repurchased:
A Class ....................................... (315,900,764) (385,857,248)
B Class ....................................... (132,061,852) (120,695,619)
C Class ....................................... (34,296,375) (21,113,944)
Institutional Class ........................... (31,535,797) (49,182,137)
-----------------------------
(513,794,788) (576,848,948)
-----------------------------
Decrease in net assets derived from capital
share transactions ............................ (284,978,269) (24,649,292)
-----------------------------
Net decrease in net assets ...................... (517,060,996) (276,170,032)
Net Assets:
Beginning of year ............................... 1,265,047,623 1,541,217,655
-----------------------------
End of year ..................................... $747,986,627 $1,265,047,623
=============================
See accompanying notes
10
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Selected data for each share of the Fund outstanding
throughout each year were as follows: Delaware Delchester Fund A Class
---------------------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/00 7/31/99 7/31/98 7/31/97 7/31/96
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................. $5.540 $6.650 $6.570 $6.140 $6.280
Income (loss) from investment operations:
Net investment income(2) ..................................... 0.524 0.597 0.608 0.598 0.628
Net realized and unrealized gain (loss) on investments ....... (1.155) (1.102) 0.070 0.430 (0.141)
--------------------------------------------------------
Total from investment operations ............................. (0.631) (0.505) 0.678 1.028 0.487
--------------------------------------------------------
Less dividends:
Dividends from net investment income ......................... (0.519) (0.605) (0.598) (0.598) (0.627)
--------------------------------------------------------
Total dividends .............................................. (0.519) (0.605) (0.598) (0.598) (0.627)
--------------------------------------------------------
Net asset value, end of year ................................... $4.390 $5.540 $6.650 $6.570 $6.140
========================================================
Total return(1) ................................................ (11.93%) (7.65%) 10.73% 17.53% 8.10%
Ratios and supplemental data:
Net assets, end of year (000 omitted) ........................ $485,581 $813,787 $1,060,136 $1,030,328 $973,939
Ratio of expenses to average net assets ...................... 1.27% 1.10% 1.06% 1.04% 1.02%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly .................... 1.30% 1.10% 1.06% 1.04% 1.02%
Ratio of net investment income to average net assets ......... 10.55% 10.12% 9.16% 9.48% 10.11%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly ......... 10.52% 10.12% 9.16% 9.48% 10.11%
Portfolio turnover ........................................... 82% 85% 117% 154% 108%
</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) The average share outstanding has been applied for per share information for
the year ended July 31, 2000.
See accompanying notes
11
<PAGE>
Financial Highlights (continued)
<TABLE>
<CAPTION>
Selected data for each share of the Fund outstanding
throughout each year were as follows: Delaware Delchester Fund B Class
---------------------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/00 7/31/99 7/31/98 7/31/97 7/31/96
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................. $5.540 $6.650 $6.570 $6.140 $6.280
Income (loss) from investment operations:
Net investment income(2) ..................................... 0.487 0.557 0.556 0.550 0.581
Net realized and unrealized gain (loss) on investments ....... (1.154) (1.103) 0.072 0.430 (0.141)
--------------------------------------------------------
Total from investment operations ............................. (0.667) (0.546) 0.628 0.980 0.440
--------------------------------------------------------
Less dividends:
Dividends from net investment income ......................... (0.483) (0.564) (0.548) (0.550) (0.580)
--------------------------------------------------------
Total dividends .............................................. (0.483) (0.564) (0.548) (0.550) (0.580)
--------------------------------------------------------
Net asset value, end of year ................................... $4.390 $5.540 $6.650 $6.570 $6.140
========================================================
Total return(1) ................................................ (12.57%) (8.34%) 9.91% 16.66% 7.30%
Ratios and supplemental data:
Net assets, end of year (000 omitted) ........................ $208,784 $349,960 $376,463 $273,499 $176,266
Ratio of expenses to average net assets ...................... 2.00% 1.85% 1.81% 1.79% 1.77%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly .................... 2.03% 1.85% 1.81% 1.79% 1.77%
Ratio of net investment income to average net assets ......... 9.82% 9.37% 8.41% 8.73% 9.36%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly ......... 9.79% 9.37% 8.41% 8.73% 9.36%
Portfolio turnover ........................................... 82% 85% 117% 154% 108%
</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) The average share outstanding has been applied for per share information for
the year ended July 31, 2000.
See accompanying notes
12
<PAGE>
Financial Highlights (continued)
<TABLE>
<CAPTION>
Selected data for each share of the Fund outstanding
throughout each year were as follows: Delaware Delchester Fund C Class
---------------------------------------------------------------------------------------------------------------------------------
11/29/95(2)
Year Ended to
7/31/00 7/31/99 7/31/98 7/31/97 7/31/96
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........................... $5.540 $6.650 $6.570 $6.140 $6.210
Income (loss) from investment operations:
Net investment income(3) ..................................... 0.487 0.566 0.555 0.550 0.385
Net realized and unrealized gain (loss) on investments ....... (1.154) (1.111) 0.073 0.430 (0.069)
--------------------------------------------------------
Total from investment operations ............................. (0.667) (0.545) 0.628 0.980 0.316
--------------------------------------------------------
Less dividends:
Dividends from net investment income ......................... (0.483) (0.565) (0.548) (0.550) (0.386)
--------------------------------------------------------
Total dividends .............................................. (0.483) (0.565) (0.548) (0.550) (0.386)
--------------------------------------------------------
Net asset value, end of period ................................. $4.390 $5.540 $6.650 $6.570 $6.140
========================================================
Total return(1) ................................................ (12.57%) (8.34%) 9.91% 16.66% 5.20%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ...................... $33,871 $62,613 $50,945 $19,094 $4,953
Ratio of expenses to average net assets ...................... 2.00% 1.85% 1.81% 1.79% 1.77%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly .................... 2.03% 1.85% 1.81% 1.79% 1.77%
Ratio of net investment income to average net assets ......... 9.82% 9.37% 8.41% 8.73% 9.36%
Ratio of net investment income to average net assets prior to
expense limitation and expenses paid indirectly ............ 9.79% 9.37% 8.41% 8.73% 9.36%
Portfolio turnover ........................................... 82% 85% 117% 154% 108%
</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) Commencement of operations; ratios have been annualized and total return has
not been annualized.
(3) The average share outstanding has been applied for per share information for
the year ended July 31, 2000.
See accompanying notes
13
<PAGE>
Financial Highlights (continued)
<TABLE>
<CAPTION>
Selected data for each share of the Fund outstanding
throughout each year were as follows: Delaware Delchester Fund Institutional Class
---------------------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/00 7/31/99 7/31/98 7/31/97 7/31/96
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................. $5.540 $6.650 $6.570 $6.140 $6.280
Income (loss) from investment operations:
Net investment income(2) ..................................... 0.538 0.613 0.620 0.614 0.644
Net realized and unrealized gain (loss) on investments ....... (1.156) (1.104) 0.075 0.429 (0.142)
--------------------------------------------------------
Total from investment operations ............................. (0.618) (0.491) 0.695 1.043 0.502
--------------------------------------------------------
Less dividends:
Dividends from net investment income ......................... (0.532) (0.619) (0.615) (0.613) (0.642)
--------------------------------------------------------
Total dividends .............................................. (0.532) (0.619) (0.615) (0.613) (0.642)
--------------------------------------------------------
Net asset value, end of year ................................... $4.390 $5.540 $6.650 $6.570 $6.140
========================================================
Total return(1) ................................................ (11.70%) (7.42%) 11.00% 17.82% 8.37%
Ratios and supplemental data:
Net assets, end of year (000 omitted) ........................ $19,751 $38,687 $53,673 $44,065 $59,513
Ratio of expenses to average net assets ...................... 1.00% 0.85% 0.81% 0.79% 0.77%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly .................... 1.03% 0.85% 0.81% 0.79% 0.77%
Ratio of net investment income to average net assets ......... 10.82% 10.37% 9.41% 9.73% 10.36%
Ratio of net investment income to average net assets prior to
expense limitation and expenses paid indirectly ............ 10.79% 10.37% 9.41% 9.73% 10.36%
Portfolio turnover ........................................... 82% 85% 117% 154% 108%
</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.
(2) The average share outstanding has been applied for per share information for
the year ended July 31, 2000.
See accompanying notes
14
<PAGE>
Notes to Financial Statements
July 31, 2000
--------------------------------------------------------------------------------
Delaware Group Income Funds (the "Company") is organized as a Delaware business
trust and offers five funds: Delaware Delchester Fund, Delaware High-Yield
Opportunities Fund, Delaware Strategic Income Fund, Delaware Corporate Bond Fund
and Delaware Extended Duration Bond Fund. These financial statements and related
notes pertain to the Delaware Delchester Fund (the "Fund"). Delaware Delchester
Fund is a diversified open-end investment company under the Investment Company
Act of 1940, as amended. 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 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 accounting principles
generally accepted in the United States and are consistently followed by the
Fund.
Security Valuation - All equity securities are valued at the last quoted sales
price as of the close of the New York Stock Exchange on the valuation date. If
on a particular day an equity security does not trade, then the mean between the
bid and the asked prices will be used. Long-term debt securities are valued by
an independent pricing service and such prices are believed to reflect the fair
value of 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 Trustees.
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 accounting
principles generally accepted in the United States.
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 102% 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.
<PAGE>
--------------------------------------------------------------------------------
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 monthly and capital gains, if any,
annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. These transactions are done subject to best execution. The amount of
these expenses was approximately $22,989 for the year ended July 31, 2000. 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 $76,478 for the year ended July 31, 2000. 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 "Expenses
paid indirectly."
2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Fund
pays Delaware Management Company (DMC), the Investment Manager of the Fund, an
annual fee which is calculated daily at the rate of 0.65% on the first $500
million of average daily net assets, 0.60% on the next $500 million, 0.55% on
the next $1.5 billion and 0.50% over $2.5 billion. At July 31, 2000, the Fund
had a liability for investment management fees and other expenses payable to DMC
of $132,763.
Effective June 1, 2000, DMC has elected to waive that portion of the management
fee and reimburse the Fund to the extent that annual operating expenses,
exclusive of taxes, interest, brokerage commissions, distribution and
extraordinary expenses, exceed 0.90% of average daily net assets of the Fund
through November 30, 2000.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of DMC,
to provide dividend disbursing, transfer agent, accounting and administration
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, 2000, the Fund had a liability for such fees
and other expenses payable to DSC of $36,037.
15
<PAGE>
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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. At July 31, 2000, the Fund had a
liability for distribution fees and other expenses payable to DDLP of $45,157.
For the year ended July 31, 2000, DDLP earned $108,017 for commissions on sales
of the Fund A Class shares.
Certain officers of DMC, DSC and DDLP are officers, trustees and/or employees of
the Fund. These officers, trustees and employees are paid no compensation by the
Fund.
3. Investments
For the year ended July 31, 2000, the Fund made purchases of $777,061,043 and
sales of $1,114,640,866 of investment securities other than U.S. government
securities and temporary cash investments.
At July 31, 2000, the aggregate cost of securities for federal income tax
purposes was $842,457,562. At July 31, 2000, net unrealized depreciation for
federal income tax purposes aggregated $103,944,247 of which $10,071,828 related
to unrealized appreciation of securities and $114,016,075 related to unrealized
depreciation of securities.
For federal income tax purposes, the Fund had a capital loss carryforward at
July 31, 2000 of $249,908,324, 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, 2007 - $10,982,838 and 2008 - $147,703,776.
4. Capital Shares
Transactions in capital shares were as follows:
Year Ended
7/31/00 7/31/99
Shares sold
A Class ...................................... 20,807,077 45,019,162
B Class ...................................... 8,825,817 24,566,824
C Class ...................................... 2,837,846 6,698,639
Institutional Class .......................... 3,174,399 6,430,933
Shares issued upon reinvestment of
distributions from net investment income
A Class ...................................... 6,647,731 7,889,317
B Class ...................................... 2,246,282 2,524,327
C Class ...................................... 471,313 546,980
Institutional Class .......................... 623,318 666,501
------------ -----------
45,633,783 94,342,683
------------ -----------
Shares repurchased
A Class ...................................... (63,794,912) (65,467,458)
B Class ...................................... (26,704,336) (20,540,987)
C Class ...................................... (6,900,639) (3,604,913)
Institutional Class .......................... (6,284,915) (8,187,222)
------------ -----------
(103,684,802) (97,800,580)
------------ -----------
Net decrease ................................... (58,051,019) (3,457,897)
============ ===========
<PAGE>
--------------------------------------------------------------------------------
5. Line of Credit
Effective October 8, 1999, the Fund, along with certain other funds in the
Delaware Investments Family of Funds (the "Participants"), participate in a
$683,500,000 revolving line of credit facility to be used for temporary or
emergency purposes as an additional source of liquidity to fund redemptions of
investor shares. The Participants are charged an annual commitment fee, which is
allocated across the Participants on the basis of each Fund's allocation of the
entire facility. The Participants may borrow up to a maximum of one third of
their net assets under the agreement. Prior to October 8, 1999, the Delaware
Delchester Fund had committed line of credit of $56,300,000. The Fund had no
amounts outstanding at July 31, 2000 or at any time during the fiscal year.
6. Market and Credit Risk
The Fund invests 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 participates, 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, 2000 was $120,219,026 and $125,029,880, respectively. Net income from
securities lending was $284,902 and is included in interest income on the
statement of operations.
16
<PAGE>
Notes to Financial Statements (continued)
July 31, 2000
--------------------------------------------------------------------------------
8. Tax Information (Unaudited)
The information set forth below is for the Fund's fiscal year as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in early 2001. Please
consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2000, the Fund designates as long-term
capital gains and ordinary income distributions paid during the year as follows:
(A) (B)
Long-Term Ordinary (C)
Capital Gains Income Total (D)
Distributions Distributions Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
------------- ------------- ------------- ------------
-- 100% 100% --
(A) and (B) are based on a percentage of the Fund's total distributions.
(D) is based on a percentage of ordinary income of the Fund.
-------------------
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
Report of Independent Auditors
--------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
Delaware Group Income Funds - Delaware Delchester Fund
We have audited the accompanying statement of net assets of Delaware Delchester
Fund (the "Fund") as of July 31, 2000, 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 auditing standards generally accepted
in the United States. 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, 2000, 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 Delchester Fund at July 31, 2000, 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 accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 6, 2000
17
<PAGE>
DELAWARE(SM)
INVESTMENTS
-----------------
Philadelphia o London
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
This annual report is for the information of Delaware Delchester Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current Prospectus for Delaware 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. 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.
<PAGE>
--------------------------------------------------------------------------------
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
Private Investor
Horsham, PA
Anthony D. Knerr
Consultant, Anthony Knerr & Associates
New York, NY
Ann R. Leven
Former Treasurer, National Gallery of Art
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Charles E. Peck
Retired
Fredericksburg, VA
Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN
AFFILIATED OFFICERS
Charles E. Haldeman, Jr.
President and Chief Executive Officer
Delaware Management Holdings, Inc.
Philadelphia, PA
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
Investment Manager
Delaware Management Company
Philadelphia, PA
International Affiliate
Delaware International Advisers Ltd.
London, England
National Distributor
Delaware Distributors, L.P.
Philadelphia, PA
Shareholder Servicing, Dividend
Disbursing and Transfer Agent
Delaware Service Company, Inc.
Philadelphia, PA
1818 Market Street
Philadelphia, PA 19103-3682
(3647) Printed in the USA
AR-024 [7/00] PPL 9/00 (J6280)
