<PAGE> 1
(PHOTO OF COLONIAL OBJECTS)
March 1, 1995
Dear Shareholder:
Six months ago, we reported to you that the Federal Reserve Board had adopted
a new policy to "tighten" the money supply, which was intended to slow economic
growth to a more sustainable level. The Fed's goal is to inhibit inflation while
avoiding a recession, in effect, enabling a "soft landing" for the economy. The
Fed's short-term interest rate increases continued throughout the past six
months. Though the central bank now appears to be succeeding in slowing growth,
the rising interest rates have not been kind to bonds. Prices were pushed
significantly lower.
------------------------------------------------------------------------------
Total Return for
Six Months Ended
January 31, 1995
U.S. Government Fund A Class +0.11%
5-Year U.S. Treasury +0.34%
10-Year U.S. Treasury +0.16%
30-Year U.S. Treasury -0.93%
U.S. Government Fund performance is based on net asset value. Unlike U.S.
Government Fund, the payment of principal and interest on U.S. Treasuries is
guaranteed by the U.S. Government. Performance information for all classes of
U.S. Government Fund can be found on page 4.
------------------------------------------------------------------------------
The Fed raised short-term interest rates twice for a total of 1.25 percentage
points between August 1994 and January 1995, the first six months of your Fund's
current fiscal year (and another 0.50% on February 1, 1995). While the two
increases equaled the total amount of the four increases of the previous six
months, intermediate maturity bond yields didn't rise in lockstep. Bond
investors had come to anticipate the Fed's moves and believed they would prove
positive in the long run. U.S. Government Fund held its own in the difficult
environment as its high current income helped to offset price declines. During
this period, U.S. Government Fund A Class provided a total return of +0.11%
(capital change plus reinvested dividends of $0.327 per share).
If signs of unsustainable economic growth resurface, concerns about higher
inflation may reappear and the Fed may decide to raise rates again to show its
committment to controlling inflation. Nevertheless, we believe that the vast
majority of the rate increases is behind us. We do not anticipate a bond market
as difficult as 1994; which interrupted a 12-year bull market for bonds. Even
though short and intermediate range interest rates have declined slightly from
their November 1994 highs, they are still significantly higher than at the
beginning of your Fund's fiscal period. We are seeking to take advantage of
these attractive interest rate levels in order to provide meaningful current
income to shareholders.
We hope you will read the remainder of this report which contains an update
from Roger Early, Vice President and Senior Portfolio Manager of the Fund, who
explains how the Fund is positioned for the coming months. The final section of
the report provides a broad, long-term overview as U.S. Government Fund nears
the completion of its 10th year of providing shareholders with monthly income
through a professionally managed portfolio.
Sincerely,
/s/ WAYNE A. STORK /s/ BRIAN F. WRUBLE
------------------ -------------------
Wayne A. Stork Brian F. Wruble
Chairman, Board of Directors President and Chief Executive Officer
Delaware Group U.S. Government Fund Delaware Group U.S. Government Fund
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 902(g)
OF REGULATION S-T.
1
<PAGE> 2
(PHOTO OF COLONIAL OBJECTS)
Portfolio Manager's Market Review
The six months ended January 31, 1995, continued one of the most difficult
periods for fixed-income investors since the 1920s. Significant events included
additional short-term interest rate increases by the Federal Reserve; a dramatic
rise in the overall level of interest rates; a flattening of the "yield curve"
for bonds with maturities from two to 30 years; continued steepness of the yield
curve at the shortest end of the maturity range (under two years); and an almost
constant wave of headline-making issues related to rising interest rates and
their impact on highly leveraged market participants.
Though this market environment has been challenging for your Fund, we believe
its potential to provide high current income--one of its primary objectives--has
been enhanced by the higher interest rate environment. In late 1993, market
yields on intermediate government bonds averaged below 5%. As a result, an
investor should have expected, on average, to receive a 5% annualized return
over the subsequent five years. As we entered 1995, this expected return had
increased to more than 7.8% due to the rise in interest rates.
Inflation has been well behaved--the U.S. Consumer Price Index was up just
2.7% for all of 1994--but strong growth has pushed the economy closer to
capacity constraints in terms of both manufacturing operations and employment.
During our fiscal first half, August through January, the federal funds rate
(the interest rate that banks charge one another for overnight loans) rose 1.25
percentage points. Intermediate bond yields rose only +0.78%, an indication that
the Fed was regaining the confidence of bond market investors. Looking forward,
the typical pattern would be for further rate increases, if they occur, to be
met by an even more muted reaction from the government bond market, with yields
possibly rising only a fraction of any Fed increase.
-------------------------------
DRAMATIC RISE IN INTEREST RATES
1/31/94 7/29/94 1/31/95
3 month 3.023 4.355 5.99
6 month 3.234 4.849 6.403
1 year 3.502 5.357 6.781
2 year 4.115 5.982 7.235
3 year 4.379 6.261 7.343
5 year 5.021 6.726 7.502
10 year 5.643 7.104 7.577
30 year 6.237 7.393 7.696
The chart above shows the Treasury bond yield curve at six month intervals
since January 1, 1994. Source: Bloomberg.
Your Fund's Investment Strategy
Throughout the six months covered in this report, the U.S. Government Fund was
invested primarily in U.S. Government or U.S. Government-backed securities with
a portion of the portfolio in high-quality corporate bonds. As of January 31,
1995, the Fund had an average effective maturity of 5.7 years, an effective
duration of 3.4 years, and an average overall quality of AAA, the highest rating
available. Duration is the most common measure of a bond's sensitivity to
interest rates. It can indicate the approximate percentage of change in a bond's
price, given a 1% change in interest rates. When interest rates rise, bond
prices generally decline; when rates fall, bond prices generally rise.
Generally, the shorter the duration, the less the price will be affected when
interest rates rise or fall. For example, given U.S. Government Fund's duration,
we would expect share price to move between 3% and 4% if interest rates rise or
fall 1%.
2
<PAGE> 3
(PHOTO OF COLONIAL OBJECTS)
The portfolio characteristics described on the previous page support our goals
of above-market income and relative principal safety. More than 39% of the
portfolio's net assets were invested in U.S. Treasury and Agency notes as of
January 31, 1995. Mortgage-backed securities and collateralized mortgage
obligations represented 44% of net assets. In selecting these securities, we
target a combination of attractive yields (0.50% to 1.50% yield advantage over
Treasuries) and relatively predictable cash flows. These characteristics help
the Fund achieve a significant income advantage over comparable Treasuries while
maintaining a generally defensive posture and investment-grade quality.
The Fund's 15% corporate bond position also provides good income (0.40% to
1.25% yield advantage over Treasuries) while adding diversification in terms of
both the number of high-quality securities and their return characteristics.
Each of the Fund's holdings has been carefully selected for the value it brings
to the portfolio and for risk characteristics which, we believe, will suit the
goals of the Fund through a variety of interest rate environments.
__________________________________
The U.S. Government Fund Portfolio
U.S. Treasuries 33.3%
Agency Mortgage-backed Securities 1.5%
Government National Mortgage Obligations 19.6%
Government Agency Obligations 5.8%
Collateralized Mortgage Obligations 23.3%
Other 2.0%
Corporate Bonds 14.5%
Based on Net Assets as of January 31, 1995
OUTLOOK
With "real" interest rates (yield minus inflation) on government bonds at
close to 5.0%, the bond market appears to have built a sizable cushion against
any future bad news on inflation. Such a substantial yield advantage over
inflation has rarely been seen in the government bond market. While it is
possible that a resurgence of inflation could close this gap, it seems more
likely to us that the value created in the bond market by 1994s events will
represent an excellent long-term opportunity for investors. U.S. Government Fund
will continue to take advantage of the yields offered in the market today, and
will make every effort to best serve the needs of income-oriented investors by
targeting the high quality and attractive risk/return characteristics of the
government bond market.
(PHOTO OF ROGER A. EARLY)
/s/ ROGER A. EARLY
------------------
ROGER A. EARLY
VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
U.S. GOVERNMENT FUND
3
<PAGE> 4
(PHOTO OF COLONIAL OBJECTS)
A LONG-TERM OVERVIEW
Though your Fund's performance in the past six months was stronger than in the
previous six months, the effects of the Federal Reserve's interest rate
increases continued to be felt. For many shareholders, it has been difficult to
maintain a long-term perspective; however, keeping such a perspective is often a
key factor in long-term success. A year, as unusual as this past one should be
viewed in the context of the Fund's fine long-term results. As you can see from
the table, 1994 was the first calendar year, since its inception in 1985, that
U.S. Government Fund shareholders experienced a loss.
<TABLE> <CAPTION>
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Fund A Class 1986 1987 1988 1989 1990 1991 1992 1993 1994
Annual Total Returns +10.4% +3.8% +6.6% +11.4% +8.8% +15.1% +6.4% +7.8% -5.8%
Returns are based on calendar year periods and do not include the impact of sales charges.
------------------------------------------------------------------------------------------------------
</TABLE>
Over its lifetime, the U.S.Government Fund A has provided an average annual
return of +6.67%, including the impact of sales charges. A $10,000 investment
has grown to $18,414 including $11,970 in reinvested dividends. Now in its 10th
year of serving investors, U.S. Government Fund continues to offer opportunities
for high income from a conservatively managed, high-quality bond portfolio.
CLASS A CLASS B
Average Annual Total Returns Aggregate Total Returns
(Introduced August 16, 1985) (Introduced May 2, 1994)
Lifetime +6.67% Lifetime -0.70%
Excluding Sales Charge
5 Years +5.59% Lifetime -4.46%
Including Sales Charge
1 Year -10.30%
Including Sales Charge
Through January 31, 1995
------------------------------------------
U.S. Government Fund Long-Term Performance
Aug-85 $ 9,520
Oct-85 $ 9,689
Jan-86 $ 9,942
Apr-86 $10,348
Jul-86 $10,542
Oct-86 $10,779
Jan-87 $10,995
Apr-87 $10,812
Jul-87 $10,995
Oct-87 $11,063
Jan-88 $11,616
Apr-88 $11,724
Jul-88 $11,852
Oct-88 $12,241
Jan-89 $12,245
Apr-89 $12,367
Jul-89 $13,113
Oct-89 $13,254
Jan-90 $13,357
Apr-90 $13,282
Jul-90 $14,049
Oct-90 $14,204
Jan-91 $14,833
Apr-91 $15,160
Jul-91 $15,522
Oct-91 $16,264
Jan-92 $16,631
Apr-92 $16,777
Jul-92 $17,537
Oct-92 $17,703
Jan-93 $18,226
Apr-93 $18,650
Jul-93 $19,063
Oct-93 $19,379
Jan-94 $19,557
Apr-94 $18,438
Jul-94 $18,325
Oct-94 $18,261
Jan-95 $18,414
The chart shows the growth of a $10,000 investment from August 16, 1985, through
January 31, 1995, including the impact of the maximum sales charge of 4.75% and
the reinvestment of all dividends. No adjustments were made for the payment of
taxes.
<PAGE> 5
RETURN AND SHARE VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS.
CLASS A returns reflect the impact of the 4.75% maximum sales charge and the
12b-1 fee, and take into account the reinvestment of all distributions. During
this period, an expense limitation was in effect and its impact is reflected in
the illustration.
CLASS B performance reflects the reinvestment of all distributions. Class B
shares do not carry a front-end sales charge, but have 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. Lifetime performance excluding sales
charge assumes the investment was not redeemed. Class B was initially offered on
5/2/94. Performance for this short time period may not be representative of
longer term results.
The average annual total returns for U.S. Government Fund's Institutional Class,
which is available without sales or asset-based distribution charges only to
certain eligible institutional accounts, were +7.42%, +6.93% and -5.57% for the
lifetime, five-year, one-year periods and a total return of +0.26% for the six
months ended 1/31/95. The Institutional Class was initially made available
6/1/92; performance prior to that was adjusted to eliminate sales charge, but
not the asset-based distribution charge.
4
<PAGE> 6
Financial Statements
DELAWARE GROUP GOVERNMENT FUND, INC.--GOVERNMENT INCOME SERIES*
STATEMENT OF INVESTMENTS
January 31, 1995
(Unaudited)
PAR MARKET
VALUE VALUE
U.S. TREASURY OBLIGATIONS-33.99%
U.S. Treasury Bonds 13.125% 5/15/01..... $ 2,250,000 $ 2,862,421
U.S. Treasury Bonds 13.375% 8/15/01..... 13,975,000 18,075,782
U.S. Treasury Bonds 14.25% 2/15/02...... 38,525,000 52,285,629
TOTAL U.S. TREASURY OBLIGATIONS ----------
(COST $73,697,004)..................... 73,223,832
----------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION
OBLIGATIONS (GNMA)-20.00%
GNMA II 9.00% 2001 to 2005.............. 1,781,250 1,812,980
GNMA II 10.00% 2015 to 2021............. 6,787,156 7,124,396
GNMA 10.00% 2018........................ 2,202,480 2,342,201
GNMA GPM (Graduated Payment Mortgage)
10.25% 2019 to 2021.................... 1,612,648 1,695,548
GNMA II GPM 10.25% 2018 to 2019......... 130,594 136,328
GNMA II 10.50% 2015 to 2021............. 3,080,017 3,270,593
GNMA I GPM 10.75% 2017 ................. 44,595 47,529
GNMA II GPM 10.75% 2016 to 2019......... 1,748,582 1,850,491
GNMA 11.00% 2009 to 2015................ 4,295,021 4,690,971
GNMA GPM 11.00% 2010 to 2013............ 632,839 680,641
GNMA II 11.00% 2015 to 2019............. 772,441 830,133
GNMA 11.50% 2014 to 2015................ 423,829 462,446
GNMA GPM 11.50% 2013 to 2014............ 748,842 804,186
GNMA GPM 11.75% 2013.................... 772,524 831,911
GNMA 12.00% 2011 to 2015................ 8,961,420 9,966,783
GNMA GPM 12.00% 2011 to 2013............ 324,177 350,821
GNMA II 12.00% 2014 to 2015............. 431,046 479,405
GNMA II Jumbo 12.00% 2013 to 2015....... 1,244,614 1,359,352
GNMA GPM 12.25% 2014.................... 247,903 269,517
GNMA 12.50% 2010 to 2016................ 1,509,904 1,694,397
GNMA II 12.50% 2013 to 2015............. 2,178,021 2,400,589
TOTAL GOVERNMENT NATIONAL MORTGAGE ----------
ASSOCIATION OBLIGATIONS
(COST $43,801,903)..................... 43,101,218
----------
GOVERNMENT AGENCY
OBLIGATIONS-5.88%
Cajun Electric Power 9.52% 3/15/19...... 10,000,000 10,682,360
Federal Home Loan Bank Step Up Coupon
8.00% 8/8/14........................... 2,000,000 1,996,364
TOTAL GOVERNMENT AGENCY OBLIGATIONS ----------
(COST $13,855,100)..................... 12,678,724
----------
<PAGE> 7
PAR MARKET
VALUE VALUE
COLLATERALIZED MORTGAGE
OBLIGATIONS-23.78%
Collateralized Mortgage Securities
11.45% 11/1/15 ........................ $ 612,513 $ 646,775
Federal Home Loan Mortgage Corporation
26-F 9.50% 2/15/20..................... 1,974,185 2,043,564
Federal Home Loan Mortgage Corporation
1765-B BA 10.00% 1/15/17............... 2,480,920 2,567,752
Federal Home Loan Mortgage Corporation
1614 10.00% 6/15/20.................... 6,747,693 7,006,479
Federal National Mortgage Association
Alpha 7.00% 11/25/10................... 212,583 194,513
Federal National Mortgage Association
88-15A 9.00% 6/25/18................... 73,244 73,771
Federal National Mortgage Association
10.75% 9/1/11.......................... 194,305 209,940
Federal National Mortgage Association
11.00% 9/25/09......................... 3,821,257 4,155,617
Federal National Mortgage Association
Alpha 11.50% 5/1/09.................... 3,538,786 3,910,359
Federal National Mortgage Association
Strip Series F-2 11.50% 5/25/09........ 1,681,949 1,858,554
Federal National Mortgage Association
Strip Series C-2 12.00% 5/25/09........ 4,528,042 5,094,047
Federal National Mortgage Association
Strip Series 35-2 12.00% 7/25/18....... 3,991,710 4,486,932
Investors GNMA Mortgage-Backed
Securities Trust Series 84-F5 10.875%
10/25/13............................... 3,972,546 4,229,667
Kidder Peabody Mortgage Assets Trust
20C 9.50% 10/01/18..................... 950,000 964,287
Small Business Administration 2.233%
10/23/13 (Interest only)(1)............ 40,499,891 3,779,045
Small Business Administration 2.642%
1/8/14 (Interest only)(1).............. 43,449,140 4,970,582
Travelers Mortgage Securities 1-Z2
12.00% 3/1/14.......................... 4,570,097 5,029,963
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS -----------
(COST $53,672,274)..................... 51,221,847
-----------
------------------
* This Fund is known and does business as U.S. Government Fund.
5
<PAGE> 8
STATEMENT OF INVESTMENTS (Continued)
PAR MARKET
VALUE VALUE
CORPORATE BONDS-14.85%
Auburn Hills Trust gtd exch ctfs
12.00% 5/1/20......................... $ 4,000,000 $ 5,394,884
British Columbia Hydro 12.50% 1/15/14.. 7,000,000 8,261,889
British Columbia Hydro 15.50% 7/15/11.. 2,500,000 2,917,675
Hydro-Quebec 13.25% 12/15/13........... 2,270,000 2,728,994
Quebec Province 13.25% 9/15/14......... 4,360,000 5,324,214
RBSG Capital 10.125% 3/1/04............ 1,908,000 2,118,893
Republic of Finland 9.625% 4/1/28...... 5,000,000 5,239,650
------------
TOTAL CORPORATE BONDS (COST $32,409,845) 31,986,199
------------
AGENCY MORTGAGE-BACKED
SECURITIES-1.50%
Federal Home Loan Mortgage Corporation
251402 10.25% 4/1/08.................. 106,198 112,321
Federal Home Loan Mortgage Corporation
200001 11.50% 7/1/99 to 12/1/00....... 1,871,676 2,031,938
Federal Home Loan Mortgage Corporation
Gold 17183 12.00% 12/1/10............. 557,397 620,278
Federal National Mortgage Association
11.25% 6/1/00 to 1/1/01............... 312,425 331,463
Federal National Mortgage Association
14.25% 9/1/99......................... 124,675 134,220
TOTAL AGENCY MORTGAGE-BACKED ------------
SECURITIES (COST $3,255,642).......... 3,230,220
------------
TOTAL MARKET VALUE OF SECURITIES
OWNED-100.00% (COST $220,691,768)..... $215,442,040
============
---------
(1) This security represents the right to receive the monthly interest payments
on an underlying pool of mortgage loans. No payments of principal on the pool
are passed through to interest only holders.
See accompanying notes
DELAWARE GROUP GOVERNMENT FUND, INC.--
GOVERNMENT INCOME SERIES
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1995
(Unaudited)
ASSETS:
Investments at market................................. $215,442,040
Receivable for investment securities sold............. 15,387,795
Interest receivable .................................. 6,191,871
Receivable for fund shares sold....................... 326,758
Other assets.......................................... 23,003
------------
237,371,467
------------
LIABILITIES:
Payable for investment securities purchased........... 15,977,260
Dividends payable..................................... 659,118
Payable for Fund shares repurchased................... 229,897
Accounts payable and other accrued expenses........... 509,969
------------
17,376,244
------------
NET ASSETS:........................................... $219,995,223
============
Shares outstanding (26,949,569 Government Fund A Class
shares 1,071,520 Government Institutional Class
shares and 617,166 Government Fund B Class shares)... 28,638,255
============
Net asset value....................................... $7.68
=====
See accompanying notes
6
<PAGE> 9
DELAWARE GROUP GOVERNMENT FUND, INC.--
GOVERNMENT INCOME SERIES
STATEMENT OF OPERATIONS
Six Months Ended January 31, 1995
(Unaudited)
INVESTMENT INCOME:
Interest.................................. $11,013,836
EXPENSES:
Management fees ($679,801) and
directors' fees ($7,030)................. $686,831
Distribution expenses..................... 333,825
Dividend disbursing and transfer agent
fees and expenses........................ 187,655
Custodian fees............................ 43,530
Reports and statements to shareholders.... 39,430
Salaries expense.......................... 28,771
Registration fees......................... 26,064
Taxes, other than income.................. 17,050
Professional fees......................... 10,475
Other..................................... 38,571 1,412,202
-------- ----------
NET INVESTMENT INCOME..... 9,601,634
----------
NET REALIZED LOSS AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized loss from security
transactions ............................ (9,707,390)
Net unrealized appreciation of investments
during the period........................ 402,956
NET REALIZED AND UNREALIZED ----------
LOSS ON INVESTMENTS...................... (9,304,434)
NET INCREASE IN NET ASSETS ----------
RESULTING FROM OPERATIONS................ $297,200
==========
See accompanying notes
<PAGE> 10
DELAWARE GROUP GOVERNMENT FUND, INC.--
GOVERNMENT INCOME SERIES
STATEMENT OF CHANGES IN NET ASSETS
Six Months
Ended Year
1/31/95 Ended
(Unaudited) 7/31/94
OPERATIONS:
Net investment income..................... $ 9,601,634 $ 20,651,759
Net realized loss from security
transactions............................. (9,707,390) (17,423,444)
Net unrealized appreciation (depreciation)
during the period........................ 402,956 (12,175,863)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ............... 297,200 (8,947,548)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME:
U.S. Government Fund A Class.............. (8,926,312) (19,323,672)
U.S. Government Fund Institutional Class.. (539,302) (1,311,823)
U.S. Government Fund B Class.............. (136,020) (16,264)
------------ ------------
(9,601,634) (20,651,759)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
U.S. Government Fund A Class............. 21,698,883 68,533,648
U.S. Government Fund Institutional Class. 2,040,979 5,414,311
U.S. Government Fund B Class............. 2,992,973 2,212,838
Net asset value of shares issued upon
reinvestment of dividends from net
investment income:
U.S. Government Fund A Class............. 5,047,100 10,968,182
U.S. Government Fund Institutional Class. 538,111 1,309,324
U.S. Government Fund B Class............. 86,360 10,324
------------ ------------
32,404,406 88,448,627
------------ ------------
Cost of shares repurchased:
U.S. Government Fund A Class............. (33,650,128) (52,578,968)
U.S. Government Fund Institutional Class. (7,814,841) (7,365,833)
U.S. Government Fund B Class............. (425,650) (9,670)
------------ ------------
(41,890,619) (59,954,471)
------------ ------------
Increase (decrease) in net assets derived
from capital share transactions.......... (9,486,213) 28,494,156
------------ ------------
NET DECREASE
IN NET ASSETS............................ (18,790,647) (1,105,151)
NET ASSETS:
Beginning of period....................... 238,785,870 239,891,021
------------ ------------
End of period............................. $219,995,223 $238,785,870
============ ============
See accompanying notes
7
<PAGE> 11
DELAWARE GROUP GOVERNMENT FUND, INC.--GOVERNMENT INCOME SERIES
NOTES TO FINANCIAL STATEMENTS
January 31, 1995
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Delaware Group Government Fund, Inc. (the "Fund") is a diversified, open-end
investment company of the series type, organized under the laws of Maryland and
is registered under the Investment Company Act of 1940 (as amended). The
Government Income Series (the "Series") currently offers the U. S. Government
Fund A Class (formerly known as Government Income Series II through May 31,
1992, and then U.S. Government Fund class through May 1, 1994), the U.S.
Government Fund Institutional Class (formerly known as the U.S. Government Fund
(Institutional) class) and effective May 2, 1994, the U.S. Government Fund B
Class. Each class of the Series will share proportionately in the investment
income and expenses of the Series, except that the Government Fund Institutional
Class will not incur any distribution fee under the 12b-1 Plan.
The Fund uses the services of an independent pricing organization whose methods
are reviewed and approved by the Fund's Board of Directors. U.S. Government and
other debt securities are valued at the mean between the last reported bid and
asked prices. Short-term investments having a maturity of less than 60 days are
valued at amortized cost. Prices for other debt securities are primarily
retrieved from an independent pricing service. However, for some of these
securities, quotes will be obtained directly from brokers who supply a bid and
asked price, from which a mean value is derived. Securities for which quotations
are not available, are valued at fair value as determined in good faith by the
Board of Directors of the fund. No securities were valued on this basis in the
accompanying financial statements.
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Gains and losses are based upon the specific
identification method for both financial statement and federal income tax
purposes. Income and expenses are recorded on the accrual basis. Expenses
directly attributable to a Series are paid by that Series. Other common expenses
are apportioned on the basis of net assets of the respective Series.
No provision for federal income taxes was made since it is the intention of the
Fund to comply with the provisions of the Internal Revenue Code available to
regulated investment companies and to make requisite distributions to
shareholders.
The Series is permitted to borrow money as a temporary measure for extraordinary
or emergency purposes. The Series had a line of credit arrangement with Chemical
Bank for an amount not to exceed $500,000. As of and for the six months ended
January 31, 1995, there were no borrowings under this line of credit.
2. INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
In accordance with the terms of the Investment Management Agreement, Delaware
Management Company, Inc., the investment manager of the Fund, will receive a fee
to be paid monthly, which is computed on the net assets of the Series as of the
close of business each day at the annual rate of 0.60%, less all amounts paid to
unaffiliated directors. Pursuant to the Distribution Agreement between the Fund
and Delaware Distributors, L.P., an affiliate of Delaware Management Company,
Inc., the Distributor will be paid monthly a fee which is computed on the net
assets of the Fund as of the close of business each day at the annual rate not
to exceed .30% of the average daily net assets attributable to the U.S.
Government Fund A Class for the year and at the annual rate of 1.00% of the
average daily net assets attributable to the U.S. Government Fund B Class for
the year.
On December 12, 1994, Delaware Management Holdings, Inc., which indirectly owns
all of the outstanding stock of Delaware Management Company, Inc., entered into
an agreement of merger with Lincoln National Corporation. This merger will
result in Delaware Management Holdings, Inc., becoming a wholly-owned subsidiary
of Lincoln National Corporation. The transaction is subject to the receipt of
all regulatory and shareholder approvals.
Certain officers, directors and shareholders of Delaware Management Company,
Inc. are officers and/or directors of the Fund. Officer, directors, and
employees of Delaware Management Company, Inc., who are also officers, directors
and employees of the Fund, do not receive any compensation from the Fund.
Salaries of officers and employees who are exclusively employed by the Delaware
Group of Funds are apportioned on the basis of net assets of the respective
Funds. For the six months ended January 31, 1995, expenses related to such
salaries for the Series amounted to $28,771. During the six months ended January
31, 1995, Delaware Service Company, Inc., an affiliate of Delaware Management
Company, Inc., received $187,655 for providing dividend disbursing and transfer
agent services to the Fund. In addition, Delaware Distributors, L.P., another
affiliate of Delaware Management Company, Inc., received $34,931 from
commissions earned on sales of U.S. Government Fund A captial stock.
On January 31, 1995, the Series had an investment management fee payable to
Delaware Management Company, Inc. of $8,427. Also, the Series had dividend
disbursing and transfer agent fees and expenses payable to Delaware Service
Company, Inc. of $1,469. In addition, the Series owes Delaware Management
Company Inc. and its affiliates, Delaware Service Company, Inc. and Delaware
Distributors, L.P., $8,064, $661 and $10,759, respectively, for other
expenses related to operations.
8
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
Investment securities based on cost for federal income tax purposes at January
31, 1995, are as follows:
Cost of investments....................... $222,276,667
Aggregate unrealized appreciation......... 891,102
Aggregate unrealized depreciation......... (7,725,729)
------------
Market value of investments............... $215,442,040
============
Net loss based on cost of specific certificate or bond for federal income tax
purposes was $8,438,040 for the six months ended January 31, 1995. For federal
income tax purposes, the Series had accumulated capital losses at July 31, 1994,
of $30,414,393 which may be carried forward and applied against future capital
gains. The capital loss carryforward expires as follows: 1995-$1,310,956,
1996-$5,736,818, 1997-$2,596,096, 1998-$1,746,916, 2001-$1,622,896 and
2002-$17,400,711.
During the six months ended January 31, 1995, the Series had purchases of
$54,031,767 and sales of $41,088,050 of investment securities, other than U.S.
Government securities and short-term debt securities having maturities of one
year or less.
4. CAPITAL STOCK
Transactions in capital stock shares were as follows:
Six Months Year
Ended Ended
1/31/95 7/31/94
Shares sold:
U.S. Government Fund A Class.............. 2,797,769 7,858,366
U.S. Government Fund Institutional Class.. 261,717 620,478
U.S. Government Fund B Class.............. 383,375 276,928
Shares issued upon reinvestment of
dividends from net investment income:
U.S. Government Fund A Class.............. 649,339 1,283,572
U.S. Government Fund Institutional Class.. 69,182 153,345
U.S. Government Fund B Class.............. 11,130 1,297
---------- ----------
4,172,512 10,193,986
---------- ----------
Shares repurchased:
U.S. Government Fund A Class.............. (4,328,563) (6,116,272)
U.S. Government Fund Institutional Class.. (1,012,075) (850,281)
U.S. Government Fund B Class.............. (54,345) (1,219)
---------- ----------
(5,394,983) (6,967,772)
---------- ----------
Net increase (decrease)................... (1,222,471) 3,226,214
========== ==========
5. COMPONENTS OF NET ASSETS
Common stock, $.01 par value, 200,000,000 shares
authorized to the Fund.................................... $265,660,507
Accumulated net undistributed loss:
Net realized loss from security transactions.............. (40,415,556)
Net unrealized depreciation of investments................ (5,249,728)
------------
Total net assets applicable to 26,949,569 U.S. Government
Fund A Class shares, 1,071,520 U.S. Government Fund
Institutional Class shares and 617,166 Government Fund
B Class shares, equivalent to $7.68 per share............. $219,995,223
============
9
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND U.S. GOVERNMENT
INSTITUTIONAL CLASS FUND B CLASS
----------------------------------------------------------------- ------------------
PERIOD
SIX SIX FROM
MONTHS MONTHS 5/2/94(2)
ENDED YEAR ENDED ENDED TO
1/31/95(3) 7/31/94 7/31/93 7/31/92(1) 7/31/91 7/31/90 1/31/95(3) 7/31/94
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $8.000 $ 9.010 $ 9.020 $ 8.700 $ 8.590 $ 8.750 $ 8.000 $ 8.190
Income from investment operations:
Net investment income........................ 0.339 0.739 0.791 0.792 0.774 0.771 0.299 0.151
Net realized and unrealized gain
(loss) from security transactions........... (0.320) (1.010) (0.010) 0.320 0.110 (0.160) (0.320) (0.190)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations............. 0.019 (0.271) 0.781 1.112 0.884 0.611 (0.021) (0.039)
Less distributions:
Dividends.................................... (0.339) (0.739) (0.791) (0.792) (0.774) (0.771) (0.299) (0.151)
Distributions from net realized
gain on security transactions............... none none none none none none none none
------ ------ ------ ------ ------ ------ ------ ------
Total distributions.......................... (0.339) (0.739) (0.791) (0.792) (0.774) (0.771) (0.299) (0.151)
Net asset value, end of period................ $7.680 $8.000 $9.010 $9.020 $8.700 $8.590 $7.680 $8.000
====== ====== ====== ====== ====== ====== ====== ======
Total return(4)............................... 0.52% (3.23%) 9.04% 13.27% 10.76% 7.40% (0.48%) (0.46%)
Ratios/Supplemental Data
Net assets, end of period (000 omitted)...... $8,231 $14,016 $16,475 $19,421 $13,427 $8,359 $4,741 $2,215
Ratio of expenses to average net assets...... 0.93% 0.94% 0.97% 0.91% 0.88% 0.89% 1.93% 1.94%
Ratio of net investment income to average
net assets.................................. 8.62% 8.60% 8.74% 8.85% 8.99% 9.00% 7.62% 7.60%
Portfolio turnover rate...................... 107% 309% 285% 196% 149% 127% 107% 309%
</TABLE>
---------
The per share data for the period 1990 to 1991 is derived from data of the
Government Income Series I class which, like the U.S. Government Fund
Institutional Class a new class of shares, was not subject to Rule 12b-1
distribution expenses. Government Income Series I class was converted into
U.S. Government Fund A Class on June 1, 1992 pursuant to a Plan of
Recapitalization approved by shareholders of Government Income Series I
class.
(1)The per share data and ratios for Government Income Series I class and the
U.S. Government Fund Institutional Class have been combined for 1992. For the
ten months ended May 31, 1992, the Government Income Series I class'
operating expenses and net investment income per share were $.068 and $.657,
respectively. For the two months ended July 31, 1992, the U.S. Government
Fund Institutional Class' operating expenses and net investment income per
share were $.014 and $.135, respectively. All net investment income was
distributed to shareholders.
(2)Date of initial public offering; ratios have been annualized and total return
has not been annualized.
(3)Ratios and total return have been annualized.
(4)Does not include contingent deferred sales charge which varies form 1%-4%
depending upon the holding period for U.S. Government Fund B Class.
10
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND A CLASS
----------------------------------------------------------------
SIX
MONTHS
ENDED YEAR ENDED
1/31/95(2) 7/31/94 7/31/93 7/31/92 7/31/91 7/31/90
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............................. $ 8.000 $ 9.010 $ 9.020 $ 8.700 $8.590 $ 8.750
Income from investment operations:
Net investment income............................................ 0.327 0.714 0.763 0.769 0.753 0.749
Net realized and unrealized gain (loss) from security
transactions.................................................... (0.320) (1.010) (0.010) 0.320 0.110 (0.160)
------- ------- ------- ------- ------ -----
Total from investment operations................................. 0.007 (0.296) 0.753 1.089 0.863 0.589
Less distributions:
Dividends........................................................ (0.327) (0.714) (0.763) (0.769) (0.753) (0.749)
Distributions from net realized gain on security transactions.... none none none none none none
------- ------- ------- ------- ------ -------
Total distributions.............................................. (0.327) (0.714) (0.763) (0.769) (0.753) (0.749)
Net asset value, end of period.................................... $ 7.680 $ 8.000 $ 9.010 $ 9.020 $8.700 $ 8.590
======= ======= ======= ======= ====== =======
Total return(1)................................................... 0.22% (3.51%) 8.70% 12.98% 10.48% 7.14%
Ratios/Supplemental Data
Net assets, end of period (000 omitted).......................... $207,023 $222,555 $223,416 $184,401 $150,491 $140,772
Ratio of expenses to average net assets.......................... 1.23% 1.23% 1.26% 1.17% 1.13% 1.14%
Ratio of net investment income to average net assets............. 8.32% 8.31% 8.45% 8.60% 8.74% 8.75%
Portfolio turnover rate.......................................... 107% 309% 285% 196% 149% 127%
</TABLE>
--------
(1) Does not reflect maximum sales charge of 4.75% nor the 1% limited contingent
deferred sales charge that would apply in the event of certain redemptions
within 12 months of purchase.
(2) Ratios and total return have been annualized.
-----------------------------------------------------------------------------
This semi-annual report is for the information of U.S. Government Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current PROSPECTUS, which gives details about charges,
expenses, investment objectives and operating policies of the Fund. Summary
investment results are documented in the current STATEMENT OF ADDITIONAL
INFORMATION. If used with prospective investors after March 31, 1995, this
report must also be accompanied by a U.S. Government Fund Performance Update for
the most recently completed calendar quarter. The figures in this report
represent past 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.
11
<PAGE> 15
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, tax-free funds, money market funds,
closed-end equity/income funds and global funds give investors the ability to
create a portfolio that fits their personal financial goals. For more
information, including a prospectus of any Delaware Group fund, contact your
financial adviser or call Delaware Group at 800-523-4640 or 215-988-1333 in
Philadelphia. Read the prospectus carefully before investing.
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, ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND
INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. SHARES OF
THE FUND ARE NOT BANK OR CREDIT UNION DEPOSITS.
INVESTMENT MANAGER SHAREHOLDER SERVICING,
Delaware Management Company, Inc. DIVIDEND DISBURSING
AND TRANSFER AGENT
INTERNATIONAL AFFILIATE Delaware Service Company, Inc.
Delaware International Advisers Ltd.
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
2/95-PP-SA-023 Printed in the U.S.A.
DELAWARE GROUP
A TRADITION OF SOUND INVESTING SINCE 1929
(PHOTO OF U.S. COLONIAL DOCUMENTS
AND VARIOUS COLONIAL OBJECTS)
1995
SEMI-
ANNUAL
REPORT
Delaware
Group
U.S. Government Fund
BULK RATE
U.S. POSTAGE
PAID
Permit No.145
Conshohocken, PA
