<PAGE>
FEBRUARY 14, 1996
DEAR
- ----------------------------------------
SHAREHOLDER:
- ----------------------------------------
On January 31, the Federal Reserve Board lowered short-term interest rates
for the third time since the summer of 1995. This occurred amid a very strong
bond market that benefited U.S. Government Fund during the first half of its
10th anniversary year.
For the six months ended January 31, 1996, your Fund provided a
total return of +6.18% for Class A shares (capital change plus reinvested
dividends), accomplishing its goal of providing
high current income consistent with reasonable
safety of principal.
As of January 31, U.S. Government Fund's 30-day yield of 5.70% (for
Class A shares calculated according to Securities and Exchange Commission
guidelines) was higher than that of longer-term fixed-income securities such as
a 10-year U.S. Treasury Bond, which yielded of 5.57% as of January 31. This
yield advantage emerged in January as the bond market anticipated the Federal
Reserve Board's [quarter point] cut in the Federal Funds rate.
Your Fund's yield was higher than a 10-year Treasury even though the
portfolio's average effective maturity -- and thus the risk of principal
decline should interest rates rise -- was considerably less than 10 years and
closer to that of a five-year
- -------------------------------------------------------------------------------
TOTAL RETURN YIELD
------------ -----
6 MONTHS ENDED AS OF
JAN. 31, 1996 JAN. 31, 1996
U.S. Government Fund A Class +6.18% 5.70%
Five-Year U.S. Treasury Note +6.41% 5.23%
Lipper General
U.S.Government Fund
Average (183 funds) +7.21% 5.34%
U.S. Government Fund A Class performance and that of the Lipper General
U.S. Government Fund Average is based on net asset value. For complete
Fund performance and SEC yield for all Classes, see pages 6 and 7. Unlike
U.S. Government Fund, the payment of interest and principal on a Five-Year
U.S. Treasury note is guaranteed by the U.S. government.
- -------------------------------------------------------------------------------
U.S. Treasury note. (Fund share value and monthly dividends fluctuate and are
not guaranteed. Treasuries generally pay a set amount of interest
semi-annually, and the U.S. government guarantees repayment of principal at
maturity.)
Our strategy of focusing on intermediate-term U.S. government
securities allowed the Fund to participate in the bond market's capital
appreciation during a dynamic rally. During the past six months, net asset
value per share for your Fund's Class A shares rose from $7.86 as of July 31
to $8.03 as of January 31, an increase of +2.2%.
Helping the bond market was the fact that consumer price increases
during 1995 were the lowest in nine years (2.5%), according to U.S.
government figures. Bond investors who displayed patience during the market's
setback in 1994 have since been well rewarded, as the long-term trend of
declining interest rates that began in the early 1980s appears to have
resumed.
We believe that the low inflation environment the U.S. now enjoys
bodes well for more stable rates in the future. We are optimistic that
Federal Reserve policy can promote economic growth without rekindling
inflation in 1996, a Presidential election year.
<PAGE>
We believe that for income-oriented investors, the conservative
strategy implemented by Roger A. Early, Vice President and the Fund's senior
portfolio manager, makes U.S. Government Fund an attractive way to
participate in the bond market. Inside, Mr. Early reviews the Fund's
performance since the summer and details how the Fund is positioned for the
coming months.
We thank you for being among the nearly 10,000 shareholders who have
chosen U.S. Government Fund to help meet their current income needs. As
always, Delaware Group stands ready to serve you as you strive to reach your
financial goals.
Sincerely,
WAYNE A. STORK
- -------------------------
Wayne A. Stork
Chairman, President and Chief Executive Officer
PORTFOLIO
- -------------------------------------------------------------------------------
MANAGER'S
- -------------------------------------------------------------------------------
REVIEW
- -------------------------------------------------------------------------------
During the past six months, bond market investors were faced with the task of
separating noise from reality. The noise emanated from Washington, where an
inability to reach a federal budget compromise led to two temporary
"shutdowns" of government operations. However, the market seemed to believe a
more important reality was a slowdown in private sector economic growth that
prompted the Federal Reserve Board to reduce short-term interest rates by 50
basis points (0.50%) to 5.25% as of February 29.
The bond market and the Fed generally ignored the budget posturing
and instead focused on positive news -- the country's low inflation environment.
The consumer price index -- a representative basket of goods and services
compiled by the government -- rose only 2.5% in 1995, the smallest increase
since 1986, a year when oil prices temporarily dropped to $10 a barrel.
U.S. Treasury Yields Have Declined Since July
Maturity 7/31/95 1/31/96
3 month 5.572% 5.044%
6 month 5.586% 4.959%
1 year 5.645% 4.891%
2 year 5.866% 4.917%
3 year 5.985% 5.023%
5 year 6.151% 5.228%
10 year 6.424% 5.572%
30 year 6.844% 6.024%
Source: Bloomberg Business News
PRICES OF INTERMEDIATE AND LONG-TERM U.S. TREASURIES ROSE DURING THE PAST SIX
MONTHS AS YIELDS DECLINED BY ABOUT ONE PERCENTAGE POINT.
<PAGE>
Low inflation provided a very positive climate for bonds, which
enjoyed a dynamic price rally. The yield on a 10-Year U.S. Treasury Bond fell
from 6.42% as of July 31, 1995 to 5.57% as of January 31, 1996. (Bond prices
rise when interest rates fall).
The U.S. Treasury yield curve has also "flattened" since July. That
is, the difference between the income potential of short-term U.S. Treasury
bills and long-term bonds has narrowed. Back in July, 30-year Treasury bonds
provided 1.3 percentage points (1.30%) more yield than three-month Treasury
bills. This "spread" declined to less than one percentage point as of January
31.
THE FUND'S INVESTMENT STRATEGY
U.S. Government Fund sought to strike a balance between intermediate
and long-term bonds during the first half of fiscal 1996. Our approach allowed
the Fund to combine an attractive level of income with participation in the
bond market's appreciation. We maintained a high quality portfolio of U.S.
government securities, particularly mortgage-related securities.
Approximately 41% of the portfolio was invested in mortgage-backed
securities and collateralized mortgage obligations as of January 31, a
slightly lower percentage than six months earlier. Meanwhile, we slightly
increased the amount of net assets invested in U.S. Treasury and U.S. government
agency securities from 41% on July 31, 1995, to 42% as of the end of January.
By focusing on the intermediate segment of the bond market and on
mortgage bonds, we were able to provide more than 90% of the income available
from longer-term U.S. Treasury bonds at considerably less risk to principal
from any future increase in interest rates.
As of January 31, about 14% of the Fund's net assets were invested in
high quality corporate bonds and asset-backed securities backed by auto loans
and credit card balances. Generally, we invested in high quality corporate
issues of financial services companies that met our requirements for high
current income and liquidity.
During the past six months, we lengthened the Fund's average maturity
from 6 years to 7.1 years. We also increased average effective duration from
4.1 years to 5.4 years, helping your Fund benefit from more of the market's
capital appreciation potential. Duration is the most common measure of a
bond's sensitivity to changes in interest rates. It indicates the approximate
percentage of change in a bond's price given a 1% change in interest rates.
By focusing on the intermediate segment of the bond market and on
mortgage-related bonds, we were able to provide more than 90% of the income
available from longer-term U.S. Treasury Bonds at considerably less risk to
principal from any future increase in interest rates.
A major reason why your Fund provided such high income is that many
of the Fund's bonds are older bonds that were issued when interest rates were
higher than current levels. These bonds provide the Fund with a higher level
of income for distribution to shareholders than newer issues. Generally,
these bonds sell at a premium to par value; that is, at a price that is
higher than the bondholder receives if the bond is held to maturity and
principal returned.
<PAGE>
Premium bonds depreciate to face value as the bond's maturity nears,
which may negatively affect your Fund's net asset value. However, as of
January 31, U.S.Government Fund's average bond price (108.25) was lower than
the price of the average bond in the Lehman Brothers Government Bond Index
(109.1), an unmanaged benchmark index. That means the Fund's bonds, if held
to maturity, would depreciate less than bonds in the Index. (A price of 100
equals par or face value).
MORTGAGES PROVIDE GOOD VALUE
Emphasis on residential mortgage-related securities has historically
given the Fund an average yield-to-maturity almost one percentage point
higher than comparable maturity U.S. Treasuries. In the coming months, we
expect to maintain the Fund's focus on the mortgage sector, which, as of
January 31, offered the highest yield advantage in eight years relative to
Treasuries.
As you can see in the chart on page 5, the income potential of GNMA
(Ginnie Mae) securities relative to comparable U.S. Treasuries has increased
during the past three years even as the yields on both securities have
fallen. As of January 31, the yield on a comparable GNMA security was 6.91%,
compared to 5.57% for a 10-Year U.S. Treasury bond.
Investing in mortgage-related securities carries with it the risk that
homeowners will refinance when interest rates drop sharply. Such prepayment
can reduce the value of mortgage securities and the income potential of
mutual funds such as U.S. Government Fund because the principal returned may
have to be invested at lower interest rates. However, we believe the Fund's
mortgages are less likely to be refinanced in the months ahead than the average
mortgage security because many of the loans backing these securities date from
the mid-1980s and have already been through several periods of heavy
refinancing activity.
While we can't guarantee what will happen in the future, the Fund's
mortgage-related holdings experienced a lower rate of prepayment during the
past six months than the overall mortgage securities market. One factor that
can hold back prepayments is a weak real estate market in some markets. Some
homeowners may have loan balances greater than the current market value of
their property, which strongly discourages refinancing since such homeowners
generally have to make up the difference in cash when refinancing.
Another factor that can slow prepayments is that some homeowners who
might benefit from lower interest rates aren't able to afford the up-front
closing costs associated with refinancing, such as insurance, points and
taxes.
PORTFOLIO HIGHLIGHTS
(AS OF JANUARY 31, 1996)
Average Effective Maturity 7.1 years
Average Effective Duration 5.4 years
Average Quality AAA
Largest Source of Income -
Mortgage-Backed Securities
Number of Bonds 280
<PAGE>
OUTLOOK
Given the Federal Reserve's apparent success at keeping inflation at
a modest 2% to 3% level during the past five years, we believe the long-term
outlook for bond prices is bright. However, judging the short-term direction
of U.S. interest rates is at best a difficult task.
The American public is likely to face more fiscal policy rhetoric
from Washington in 1996. Lack of action by elected officials has in the past,
and may in the future, cause bond prices to change as quickly as the weather.
In a potentially volatile environment, your Fund remains committed
to maximizing current income by investing in what we believe to be the most
attractive, high-quality bonds available. Our strategy is based on the fact
that since the 1920s, interest income has been the primary component of total
return from government bonds. We currently view the mortgage-backed and
mortgage related securities market as offering the best income opportunities
and reasonable safety of principal.
/s/ ROGER A. EARLY
- -------------------------
Roger A. Early
Vice President
Senior Portfolio Manager
A Growing Income Advantage For Mortgages
Yield Difference between GNMA securities and 10-Year U.S. Treasury bonds
1992 to 1995
(CHART GOES HERE)
Basis Points*
DEC. 95 119
117
119
123
128
126
121
121
123
123
126
123
120
115
120
116
118
116
113
112
118
116
116
110
112
112
123
118
115
117
108
114
105
103
96
104
105
107
107
103
104
103
99
103
99
96
109
102
103
103
106
110
Dec-94 108
111
108
115
111
109
102
101
105
103
106
107
112
100
101
102
103
107
100
105
105
108
101
106
105
105
112
101
104
100
108
107
98
111
110
112
107
102
111
115
99
93
101
96
82
81
84
88
72
75
90
92
Dec-93 90
92
89
92
101
101
98
97
90
98
81
90
104
89
89
83
74
91
98
83
81
84
84
83
80
82
86
83
85
86
89
88
92
87
91
98
92
88
98
90
99
99
90
81
90
87
85
86
82
83
79
85
84
90
Dec-93 93
92
91
91
93
99
103
102
103
106
89
102
106
89
90
89
84
72
70
69
72
65
55
53
66
74
69
65
71
68
79
76
82
75
73
75
75
79
88
83
82
82
84
66
79
84
77
95
87
80
70
Jan-92 63
*Note: 100 basis points equals 1 percentage point of yield or $100 in annual
income on a $10,000 investment.
Source: Bloomberg Business News. The above chart does not represent the yield
of U.S. Government Fund. Direct owners of GNMA securities may receive a
partial return of principal along with periodic interest payments. U.S.
Treasury bond holders receive a return of principal at maturity.
DURING THE PAST THREE YEARS, THE YIELD ADVANTAGE THAT SECURITIES ISSUED BY
THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE) HAVE ENJOYED OVER
COMPARABLE MATURITY U.S. TREASURIES HAS NEARLY DOUBLED FROM 63 BASIS
POINTS (0.63%) AS OF JANUARY 3, 1992 TO 119 BASIS POINTS (1.19%) AS OF
DECEMBER 29, 1995.
<PAGE>
A PERSPECTIVE ON
- -------------------------------------------------------------------------------
LONG-TERM
- -------------------------------------------------------------------------------
PERFORMANCE
- -------------------------------------------------------------------------------
Throughout its history, U.S. Government Fund has sought to provide
shareholders with an attractive current income relative to U.S. Treasury
securities. As you can see on the next page, a $10,000 investment in U.S.
Government Fund on December 31, 1985, would have provided much more income
than if an investor had purchased two five-year U.S. Treasury notes on
December 31, 1985 and December 31, 1990.
Below, you can see in the performance table that U.S. Government
Fund has provided an attractive average annual total return of +7.28% (for
Class A shares with distributions reinvested) during its lifetime. This
amount is nearly twice the annual average increase in consumer prices since
1985, which means the "real" purchasing power of such an investment would
have grown even though interest rates declined sharply during the past 10
U.S.Government Fund Performance
Average Annual Total Return Through January 31, 1996
<TABLE>
<CAPTION>
LIFETIME TEN YEARS FIVE YEARS ONE YEAR
<S> <C> <C> <C> <C> <C>
Class A (Est. 1985) +7.28% +7.18% +6.03% +7.96%
Class B (Est. 1994)
excluding sales charge +6.53% -- -- +12.52%
including sales charge +4.38% -- -- +8.52%
Class C* (Est. 1995)
excluding sales charge +2.20% -- -- --
including sales charge +1.20% -- -- --
*aggregate return through January 31, 1996
</TABLE>
<PAGE>
U.S. Government A Class Annual Income vs.
Annual Income From Two Five-Year U.S. Treasury Notes
Annual income from a $10,000 investment*
Class A shares purchased at 4.75% sales charge with distributions paid in cash.
U.S. Government Fund Five-Year U.S. Treasury Notes
-------------------- -----------------------------
Jan-87 $927 $681
Jan-88 $891 $681
Jan-89 $804 $681
Jan-90 $790 $681
Jan-91 $761 $681
Jan-92 $786 $593
Jan-93 $791 $593
Jan-94 $765 $593
Jan-95 $688 $593
Jan-96 $653 $593
U.S. Government Fund Five-Year U.S. Treasury Notes
-------------------- -----------------------------
Total Income for 10 Years: $7,805 $6,370
*Treasury note interest is guaranteed by the U.S. government and fixed for the
life of the security. Principal repayment is guaranteed at maturity. U.S.
Government Fund dividends and share value are not guaranteed and fluctuate
with changing market conditions.
DURING THE PAST 10 YEARS, U.S. GOVERNMENT FUND WOULD HAVE PROVIDED A GREATER
ANNUAL INCOME THAN TWO FIVE-YEAR U.S. TREASURY NOTES EVEN AS INTEREST RATES
FELL.
RETURN AND SHARE VALUE WILL FLUCTUATE WITH RISING AND FALLING INTEREST RATES
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. The
30-day yield as of January 31, 1996 was 5.70%, calculated according to SEC
guidelines.
Class B performance reflects the reinvestment of all distributions. Class B
shares do not carry a front-end sales charge, but are subject to a 1% annual
distribution and service fee. They are subject to a deferred sales charge of
up to 4% if redeemed before the end of the fourth year. Lifetime performance
excluding sales charge assumes the investment was not redeemed. Class B was
initially offered on May 2, 1994. The 30-day yield as of January 31, 1996 was
5.26%, calculated according to SEC guidelines.
Class C performance is presented for a two month period and may not be
representative of longer term results. C shares have a 1% annual distribution
and service fee. If redeemed within 12 months, a 1% contingent deferred sales
charge applies. Class C was initially offered on November 29, 1995. The
30-day yield as of January 31, 1996 was 5.26%, calculated according to SEC
guidelines.
The average annual total returns for the lifetime, 10-year, five-year and
one-year periods ended January 31, 1996 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
+8.00%, +7.92%, +7.37% and +13.64%.
<PAGE>
FINANCIAL
- ------------------------------------------------------------------------------
STATEMENTS
- ------------------------------------------------------------------------------
DELAWARE GROUP GOVERNMENT FUND, INC.
GOVERNMENT INCOME SERIES*
STATEMENT OF NET ASSETS
JANUARY 31, 1996
(UNAUDITED)
Principal Market
Amount Value
U.S. GOVERNMENT OBLIGATIONS - 36.08%
U.S. Treasury Bonds 8.125% 8/15/19 .......... $ 4,505,000 $ 5,623,591
U.S. Treasury Bonds 13.125% 5/15/01 ......... 2,875,000 3,908,246
U.S. Treasury Bonds 14.25% 2/15/02 .......... 22,690,000 33,066,815
U.S. Treasury Notes 5.875% 2/15/04 .......... 1,150,000 1,175,427
U.S. Treasury Notes 7.50% 5/15/02 ........... 4,000,000 4,451,400
U.S. Treasury Strips 0.00% 2/15/17 .......... 91,630,000 24,595,325
U.S. Treasury Strips 0.00% 5/15/17 .......... 5,950,000 1,572,287
-----------
Total U.S. Government Obligations
(Cost $70,483,512).......................... 74,393,091
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS (GNMA) - 18.70%
GNMA I 9.00% 2021............................ 2,885,567 3,085,753
GNMA II 9.00% 2001 to 2005 .................. 1,431,518 1,517,022
GNMA I 10.00% 2018........................... 1,813,815 1,997,463
GNMA II 10.00% 2015 to 2021 ................. 5,227,708 5,800,748
GNMA I GPM (Graduated Payment Mortgage)
10.25% 2019 to 2021......................... 890,675 981,412
GNMA II GPM 10.25% 2018 to 2019 ............. 114,276 125,918
GNMA II 10.50% 2015 to 2021 ................. 2,267,986 2,538,709
GNMA I GPM 10.75% 2017....................... 44,027 48,788
GNMA II GPM 10.75% 2016 to 2019 ............. 1,106,646 1,226,303
GNMA I 11.00% 2009 to 2015 .................. 3,695,127 4,172,032
GNMA I GPM 11.00% 2010 to 2013 .............. 450,649 507,382
GNMA II 11.00% 2015 to 2019 ................. 529,896 588,625
GNMA I 11.50% 2015........................... 149,109 169,518
GNMA I GPM 11.50% 2013 to 2014 .............. 664,828 747,413
GNMA II 11.50% 2014 to 2015 ................. 183,065 204,003
GNMA II GPM 11.50% 2014...................... 23,747 26,419
GNMA I GPM 11.75% 2013....................... 681,406 778,293
GNMA I 12.00% 2011 to 2015 .................. 7,394,097 8,484,723
GNMA I GPM 12.00% 2011 to 2013 .............. 250,373 287,303
GNMA II 12.00% 2014 to 2015 ................. 1,090,348 1,235,715
GNMA II GPM 12.00% 2013...................... 324,183 360,045
GNMA I GPM 12.25% 2014....................... 195,267 225,167
- ------------
*This Fund is known and does business as U.S. Government Fund.
<PAGE>
Principal Market
Amount Value
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS (GNMA) (Continued)
GNMA I 12.50% 2010 to 2016 .................. $1,244,467 $ 1,442,413
GNMA II 12.50% 2013 to 2015 ................. 1,764,936 2,005,959
-------------
Total Government National Mortgage
Association Obligations
(Cost $37,649,519).......................... 38,557,126
-------------
GOVERNMENT AGENCY OBLIGATIONS - 5.37%
Cajun Electric Power 9.52% 3/15/19 .......... 10,000,000 11,075,000
------------
Total Government Agency Obligations
(Cost $11,855,100).......................... 11,075,000
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 18.78%
Collateralized Mortgage Securities Corporation
11.45% 11/1/15............................... 517,071 571,767
Federal Home Loan Mortgage Corporation
26-F 9.50% 2/15/20........................... 1,583,603 1,711,984
Federal Home Loan Mortgage Corporation
1765-B BA 10.00% 1/15/17..................... 2,160,348 2,261,614
Federal Home Loan Mortgage Corporation
1614 10.00% 6/15/20.......................... 5,227,921 5,675,116
Federal National Mortgage Association
Strip Series J-1 7.00% 11/1/10............... 168,066 167,646
Federal National Mortgage Association
88-15A 9.00% 6/25/18......................... 60,526 65,976
Federal National Mortgage Association
Strip Series D-2 11.00% 4/1/09............... 3,205,997 3,542,627
Federal National Mortgage Association
Strip Series F-2 11.50% 5/1/09............... 1,426,578 1,590,635
Federal National Mortgage Association
Strip Series H-2 11.50% 5/1/09............... 3,011,647 3,357,987
Federal National Mortgage Association
Strip Series C-2 12.00% 5/25/09.............. 3,883,668 4,369,126
Federal National Mortgage Association
Strip Series 35-2 12.00% 7/1/18.............. 3,354,281 3,780,904
Investors GNMA Mortgage-Backed Securities
Trust Series 84-F5 10.875% 10/25/13 ......... 3,275,760 3,767,737
Kidder Peabody Mortgage Assets Trust
20C 9.50% 10/01/18........................... 777,000 846,210
Resolution Trust Corporation
1995-C1 6.55% 2/25/27........................ 2,500,000 2,516,406
Travelers Mortgage Securities
1-Z2 12.00% 3/1/14........................... 3,949,482 4,491,301
-----------
Total Collateralized Mortgage Obligations
(Cost $38,339,536)........................... 38,717,036
-----------
<PAGE>
Statement of Net Assets (Continued)
Principal Market
Amount Value
ASSET-BACKED SECURITIES - 2.09%
Standard Credit Card Master Trust
1994-2A 7.25% 4/7/08 ...................... $4,000,000 $ 4,320,800
-------------
Total Asset-Backed Securities
(Cost $4,143,125) ......................... 4,320,800
-------------
CORPORATE BONDS - 11.93%
British Columbia Hydro 12.50% 1/15/14 ...... 7,000,000 8,540,000
Hydro-Quebec 13.25% 12/15/13 ............... 2,270,000 2,806,288
NationsBank 10.20% 7/15/15 ................. 4,000,000 5,380,000
RBSG Capital 10.125% 3/1/04 ................ 1,908,000 2,373,075
Republic of Finland 9.625% 4/1/28 .......... 5,000,000 5,506,250
-------------
Total Corporate Bonds
(Cost $23,096,913) ........................ 24,605,613
-------------
AGENCY MORTGAGE-BACKED SECURITIES - 3.27%
FHA Project Loan 241(f) 8.75% 10/1/27 ...... 702,394 739,050
Federal Home Loan Mortgage Corporation
10.25% 4/1/08 ............................. 88,966 97,223
Federal Home Loan Mortgage Corporation
11.50% 7/1/99 to 3/15/16 .................. 4,511,000 4,980,120
Federal Home Loan Mortgage Corporation
Gold 12.00% 12/1/10 ....................... 329,863 376,869
Federal National Mortgage Association
10.75% 9/1/11 ............................. 183,656 204,489
Federal National Mortgage Association
11.25% 6/1/00 to 1/1/01 ................... 225,460 241,524
Federal National Mortgage Association
14.25% 9/1/99 ............................. 90,074 100,545
-----------
Total Agency Mortgage-Backed Securities
(Cost $6,628,478).......................... 6,739,820
-----------
Principal Market
Amount Value
REPURCHASE AGREEMENTS - 2.42%
With Chase Manhattan 5.88% 2/1/96
(dated 1/31/96 collateralized
by $4,959,000 U.S. Treasury Notes
7.25% due 11/30/96, market value
$5,106,572)....................................... $5,001,000 $5,001,000
-----------
Total Repurchase Agreements
(Cost $5,001,000)................................. 5,001,000
-----------
TOTAL MARKET VALUE OF SECURITIES OWNED - 98.64%
(Cost $197,197,183)........................................... 203,409,486
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES 1.36%...................................... 2,806,179
-----------
NET ASSETS APPLICABLE TO 23,233,206
U.S. GOVERNMENT FUND A CLASS SHARES,
1,174,534, U.S. GOVERNMENT FUND B CLASS SHARES,
86,460 U.S. GOVERNMENT FUND C CLASS SHARES AND
1,172,594 U.S. GOVERNMENT INSTITUTIONAL CLASS SHARES
($.01 PAR VALUE) OUTSTANDING; EQUIVALENT TO
$8.03 PER SHARE - 100.00%..................................... $206,215,665
============
COMPONENTS OF NET ASSETS AT JANUARY 31, 1996
Common stock, $.01 par value, 500,000,000
shares authorized to the Fund with 80,000,000
shares allocated to U.S. Government Fund A Class,
80,000,000 shares allocated to U.S. Government
Fund B Class, 50,000,000 shares allocated to
U.S. Government Fund C Class and 20,000,000
shares allocated to U.S.Government Fund
Institutional Class........................................... $240,851,807
Accumulated undistributed:
Net realized loss from security transactions ................. (40,848,445)
Net unrealized appreciation of investments ................... 6,212,303
-----------
Total Net Assets............................................... $206,215,665
============
See accompanying notes
<PAGE>
Delaware Group Government Fund, Inc.
Government Income Series
Statement of Operations
Six Months Ended January 31, 1996
(Unaudited)
INVESTMENT INCOME:
Interest................................. $ 9,653,117
EXPENSES:
Management fees ($635,518)
and directors' fees ($7,417) ............ 642,935
Distribution expenses..................... 337,707
Dividend disbursing and transfer
agent fees and expenses.................. 183,409
Salaries.................................. 24,238
Registration fees......................... 20,782
Reports and statements to shareholders ... 19,810
Taxes (other than income)................. 17,340
Custodian fees............................ 15,000
Professional fees......................... 9,048
Other..................................... 63,888 1,334,157
-----------
NET INVESTMENT INCOME..................... 8,318,960
-----------
NET REALIZED LOSS AND
UNREALIZED GAIN ON INVESTMENTS:
Net realized loss from security transactions ........ (1,078,010)
Net unrealized appreciation of
investments during the period ...................... 5,650,582
-----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS.................................. 4,572,572
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................... $12,891,532
===========
COMPUTATION OF NET ASSET VALUE AND
OFFERING PRICE FOR THE U.S. GOVERNMENT
FUND A CLASS - January 31, 1996
Net asset value per share (A) ....................... $8.03
Sales charge (4.75% of offering price or 4.98% of
amount invested per share)(B) ...................... .40
-----
Offering price....................................... $8.43
=====
- ---------
(A) Net asset value per share illustrated is the estimated amount which would
be paid upon the redemption or repurchase of shares.
(B) See PURCHASING SHARES in the current PROSPECTUS for purchases of $100,000
or more for U.S. Government Fund A Class.
See accompanying notes
<PAGE>
Delaware Group Government Fund, Inc.
Government Income Series
Statement of Changes in Net Assets
Six Months
Ended Year
1/31/96 Ended
(Unaudited) 7/31/95
OPERATIONS:
Net investment income..................... $ 8,318,960 $ 18,963,735
Net realized loss from security
transactions............................ (1,078,010) (10,373,225)
Net unrealized appreciation
during the period....................... 5,650,582 6,214,405
------------ ------------
Net increase in net assets
resulting from operations 12,891,532 14,804,915
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME:
A Class................................. (7,651,510) (17,686,022)
B Class................................. (307,176) (376,635)
C Class................................. (3,746) --
Institutional Class..................... (356,528) (901,078)
------------ ------------
(8,318,960) (18,963,735)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
A Class................................. 8,380,581 31,347,463
B Class................................. 3,432,380 6,000,585
C Class................................. 688,293 --
Institutional Class..................... 1,087,487 2,264,170
Net asset value of shares issued upon
reinvestment of dividends from net
investment income:
A Class................................. 4,471,121 9,991,918
B Class................................. 131,898 198,985
C Class................................. 3,740 --
Institutional Class..................... 356,437 898,901
------------ ------------
18,551,937 50,702,022
------------ ------------
Cost of shares repurchased:
A Class................................. (36,453,631) (54,016,027)
B Class................................. (1,715,780) (1,016,216)
C Class................................. (100) --
Institutional Class..................... (531,906) (8,504,256)
------------ ------------
(38,701,417) (63,536,499)
============ ============
Decrease in net assets derived from
capital share transactions .............. (20,149,480) (12,834,477)
------------ ------------
NET DECREASE IN NET ASSETS ................ (15,576,908) (16,993,297)
NET ASSETS:
Beginning of period...................... 221,792,573 238,785,870
------------ ------------
End of period............................ $206,215,665 $221,792,573
============ ============
See accompanying notes
<PAGE>
DELAWARE GOUP GOVERNMENT FUND, INC.
GOVERNMENT INCOME SERIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1996
(UNAUDITED)
Delaware Group Government Fund, Inc. (the "Company") 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 Company currently offers the Government Income Series
(the "Fund"). The Fund offers four classes of shares. The Fund seeks to
provide high current income consistent with safety of principal by investing
primarily in debt obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
1. Significant Accounting Policies
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Fund for financial
statement preparation:
Security Valuation - Securities listed on an exchange are valued at the last
quoted sales price as of 4:00 p.m. on the valuation date. Securities not
traded or not listed on an exchange are valued at the mean of the last quoted
bid and asked prices. Long-term debt securities are valued by an independent
pricing service and are believed to reflect the fair value of such securities.
Money market instruments having less than 60 days maturity are valued at
amortized cost.
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 is required
in the financial statements.
Repurchase Agreements - The Fund may invest in a pooled cash account along
with other members of the Delaware Group 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 repurchase agreements.
Each repurchase agreement is a least 100% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement,
realization of the collateral may be subject to legal proceedings.
Class Accounting - Investment income, common expenses and gain (loss) are
allocated to the various classes of the Fund on the basis of daily net
assets. Distribution expenses relating to a specific class are charged
directly to that class.
Other - Expenses common to all funds within the Delaware Group 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. Interest
income is recorded on an accrual basis. Original issue discounts are accreted
to interest income over the lives of the respective securities. The Fund
declares dividends daily from net investment income and pays such dividends
monthly.
Certain fund expenses are paid directly by brokers. The amount of these
expenses is less than 0.01% of the Fund's average net assets.
2. Investment Management Fees and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Fund
pays Delaware Management Company, Inc. (DMC), the Investment
Manager of the Fund, an annual fee which is calculated daily at the rate of
0.60% of the average daily net assets of the Fund, less fees paid to the
independent directors. At January 31, 1996, the Fund had a liability for
Investment Management fees and other expenses payable to DMC for $14,285.
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 Class and the C Class. No distributions
expenses are paid by the Institutional Class. At January 31, 1996, the Fund
had a liability for distribution fees and other expenses payable to DDLP for
$9,853. For the six months ended January 31, 1996, the Fund paid DDLP
$32,182 for commissions earned on sales of U.S. Government Fund A Class
shares.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of
DMC, to serve as dividend disbursing and transfer agent for the Fund. For the
six months ended January 31, 1996, the Fund expensed $173,209 for these
services. At January 31, 1996, the Fund had a liability for such fees and
other expenses payable to DSC for $10,933.
Certain officers of the Investment Manager are officers, directors, and/or
employees of the Fund. These officers, directors, and employees are paid no
compensation by the Fund.
<PAGE>
3. Investments
During the six months ended January 31, 1996, the Fund made purchases
of $3,845,037 and sales of $26,999,768 of investment securities other than
direct U.S. Government securities and temporary cash investments.
At January 31, 1996, net unrealized appreciation for federal income tax
purposes aggregated $6,212,303 of which $7,435,272 related to unrealized
appreciation of securities and $1,222,969 related to unrealized depreciation
of securities.
The realized loss for federal income tax purposes was $2,560,986 for the six
months ended January 31, 1996. For federal income tax purposes, the Fund had
accumulated capital losses at July 31, 1995 of $38,309,234 which may be
carried forward and applied against future capital gains. The capital loss
carryforward expires as follows: 1996 - $5,736,818, 1997 - $2,596,096, 1998
- - $1,746,916, 2001 - $1,622,896, 2002 - $17,400,711 and 2003 - $9,205,797.
4. Capital Stock
Transactions in capital stock shares were as follows:
Six Months Year
Ended Ended
1/31/96 7/31/95
Shares sold:
U.S. Government Fund A Class ................. 1,056,225 4,028,169
U.S. Government Fund B Class ................. 432,417 767,507
U.S. Government Fund C Class ................. 86,006 --
U.S. Government Fund Institutional Class ..... 136,864 290,401
Shares issued upon reinvestment of dividends
from net investment income:
U.S. Government Fund A Class ................. 562,083 1,279,474
U.S. Government Fund B Class ................. 16,568 25,477
U.S. Government Fund C Class ................. 466 --
U.S. Government Fund Institutional Class ..... 44,787 115,153
---------- ----------
2,335,416 6,506,181
---------- ----------
Shares repurchased:
U.S. Government Fund A Class ................. (4,600,753) (6,923,016)
U.S. Government Fund B Class ................. (215,019) (129,422)
U.S. Government Fund C Class ................. (12) --
U.S. Government Fund Institutional Class ..... (66,960) (1,100,347)
---------- ----------
(4,882,744) (8,152,785)
---------- ----------
Net decrease.................................... (2,547,328) (1,646,604)
========== ==========
5. Lines of Credit
The Fund has a committed line of credit for $500,000. No amount was
outstanding at January 31, 1996 or at any time during the six months ended
January 31, 1996.
6. Concentration of Credit Risk
The Fund invests in securities whose value is derived from an underlying pool
of mortgages or consumer loans. Some of these securities are collateralized
mortgage obligations (CMOs). CMOs are debt securities issued by U.S.
Government agencies or by financial institutions and other mortgage lenders
which are collateralized by a pool of mortgages held under an indenture. The
Fund invests in private-backed CMOs only if they are 100% collateralized at
the time of issuance by securities or certificates issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. Prepayment of
mortgages may shorten the stated maturity of the obligations and can result
in a loss of premium, if any has been paid. Certain of these securities may
be stripped (securities which provide only the principal or interest feature
of the underlying security). The yield to maturity on an interest-only CMO is
extremely sensitive not only to changes in prevailing interest rates, but
also to the rate of principal payments (including prepayments) on the related
underlying mortgage assets and a rapid rate of principal payments may have a
material adverse affect on the fund's yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities
even if the securities are rated in the highest rating categories. The Fund
will, from time to time, invest in higher risk interest-only CMOs. At January
31, 1996, the fund had no holdings in interest-only CMOs.
<PAGE>
Notes to Financial Statements (Continued)
7. Financial Highlights
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
U.S. Government Fund A Class
-----------------------------------------------------------
Six Months
Ended Year Ended
1/31/96(2) 7/31/95 7/31/94 7/31/93 7/31/92 7/31/91
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............................... $7.860 $8.000 $9.010 $9.020 $8.700 $8.590
Income from investment operations:
Net investment income .............................................. 0.308 0.656 0.714 0.763 0.769 0.753
Net realized and unrealized gain (loss) from security transactions.. 0.170 (0.140) (1.010) (0.010) 0.320 0.110
------ ------ ------ ------ ------ ------
Total from investment operations ................................... 0.478 0.516 (0.296) 0.753 1.089 0.863
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income............................... (0.308) (0.656) (0.714) (0.763) (0.769) (0.753)
Distributions from net realized gain on security transactions...... none none none none none none
------ ------ ------ ------ ------ ------
Total distributions................................................ (0.308) (0.656) (0.714) (0.763) (0.769) (0.753)
------ ------ ------ ------ ------ ------
Net asset value, end of period ..................................... $8.030 $7.860 $8.000 $9.010 $9.020 $8.700
====== ====== ====== ====== ====== ======
Total return(1)..................................................... 6.18% 6.82% (3.51%) 8.70% 12.98% 10.48%
Ratios/supplemental data:
Net assets, end of period (000 omitted)............................. $186,663 $206,083 $222,555 $223,416 $184,401 $150,491
Ratio of expenses to average net assets ............................ 1.22% 1.24% 1.23% 1.26% 1.17% 1.13%
Ratio of net investment income to average net assets ............... 7.72% 8.40% 8.31% 8.45% 8.60% 8.74%
Portfolio turnover ................................................. 61% 70% 309% 285% 196% 149%
</TABLE>
- ----------------------
1 Does not reflect the 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 have been annualized and total return has not been annualized.
<PAGE>
Notes to Financial Statements (Continued)
7. Financial Highlights (Continued)
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
U.S.
Government Fund
U.S. Government Fund B Class C Class
----------------------------------- ---------------
Six Period Period
Months Year 5/2/94(3) 11/29/95(3)
Ended Ended to to
1/31/96(5) 7/31/95 7/31/94 1/31/96
<S> <C> <C> <C> <C>
Net asset value, beginning of period $7.860 $8.000 $8.190 $7.950
Income from investment operations:
Net investment income .................. 0.280 0.601 0.151 0.095
Net realized and unrealized gain
(loss) from security transactions...... 0.170 (0.140) (0.190) 0.080
------ ------ ------ ------
Total from investment operations......... 0.450 0.461 (0.039) 0.175
------ ------ ------ ------
Less distributions:
Dividends from net investment income.... (0.280) (0.601) (0.151) (0.095)
Distributions from net realized
gain on security transactions.......... none none none none
------ ------ ------ ------
Total distributions .................... (0.280) (0.601) (0.151) (0.095)
------ ------ ------ ------
Net asset value, end of period........... $8.030 $7.860 $8.000 $8.030
====== ====== ====== ======
Total return4 ........................... 5.81% 6.08% (0.46%) 2.20%
Ratios/supplemental data:
Net assets, end of period (000 omitted).. $9,437 $7,394 $2,215 $695
Ratio of expenses to average net assets.. 1.92% 1.94% 1.94% 1.92%
Ratio of net investment income
to average net assets .................. 7.01% 7.66% 7.60% 7.01%
Portfolio turnover ...................... 61% 70% 309% 61%
</TABLE>
<TABLE>
<CAPTION>
U.S. Government Fund Institutional Class(1)
---------------------------------------------------------------
Six
Months
Ended Year Ended
1/31/96(5) 7/31/95 7/31/94 7/31/93 7/31/92(2) 7/31/91
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $7.860 $8.000 $9.010 $9.020 $8.700 $8.590
Income from investment operations:
Net investment income.................... 0.320 0.679 0.739 0.791 0.792 0.774
Net realized and unrealized gain
(loss) from security transactions ...... 0.170 (0.140) (1.010) (0.010) 0.320 0.110
------ ------ ------ ------ ------ ------
Total from investment operations ......... 0.490 0.539 (0.271) 0.781 1.112 0.884
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income .... (0.320) (0.679) (0.739) (0.791) (0.792) (0.774)
Distributions from net realized
gain on security transactions........... none none none none none none
------ ------ ------ ------ ------ ------
Total distributions...................... (0.320) (0.679) (0.739) (0.791) (0.792) (0.774)
------ ------ ------ ------ ------ ------
Net asset value, end of period ........... $8.030 $7.860 $8.000 $9.010 $9.020 $8.700
====== ====== ====== ====== ====== ======
Total return(4)........................... 6.34% 7.14% (3.23%) 9.04% 13.27% 10.76%
Ratios/supplemental data:
Net assets, end of period (000 omitted)... $9,421 $8,316 $14,016 $16,475 $19,421 $13,427
Ratio of expenses to average net assets... 0.92% 0.94% 0.94% 0.97% 0.91% 0.88%
Ratio of net investment income
to average net assets.................... 8.01% 8.66% 8.60% 8.74% 8.85% 8.99%
Portfolio turnover........................ 61% 70% 309% 285% 196% 149%
</TABLE>
<PAGE>
1 The per share data for the period ended 1991 is derived from data of the
Government Income Series I class, like the 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.
2 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 $0.068 and
$0.657, 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 $0.014 and $0.135, respectively. All net investment
income was distributed to shareholders.
3 Date of initial public offering; ratios have been annualized and total
return has not been annualized.
4 Does not include contingent deferred sales charge which varies from 1% - 4%
for the U.S. Government Fund B Class and 1% for the U.S. Government Fund C
Class depending upon the holding period.
5 Ratios have been annualized and total return has not been annualized.
<PAGE>
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 for U.S. Government Fund, which sets
forth details about charges, expenses, investment objectives and operating
policies of the Fund. You should read the prospectus carefully before you
invest. Summary investment results are documented in the Fund's current
STATEMENT OF ADDITIONAL INFORMATION. The figures in this report represent
past results which are not a guarantee of future results. The return and
principal value of an investment in the Fund will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost.
DELAWARE GROUP
- ------------------------------------------------------------------------------
OF FUNDS
- ------------------------------------------------------------------------------
FOR GROWTH OF CAPITAL
Trend Fund
DelCap Fund
Value Fund
FOR TOTAL RETURN
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
Delaware Fund
FOR GLOBAL DIVERSIFICATION
International Equity Fund
Global Assets Fund
Global Bond Fund
FOR CURRENT INCOME
Delchester Fund
U.S. Government Fund
Limited-Term Government Fund
FOR TAX-FREE CURRENT INCOME
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Tax-Free Pennsylvania Fund
MONEY MARKET FUNDS
Delaware Cash Reserve
U.S. Government Money Fund
Tax-Free Money Fund
CLOSED-END EQUITY/INCOME*
Dividend and Income Fund
Global Dividend and Income Fund
For a prospectus of any Delaware Group fund, contact your financial adviser
or Delaware Group.
* Delaware Group Dividend and Income Fund and Delaware Group Global Dividend
and Income Fund purchases can be made through any registered broker.
<PAGE>
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.
This report must be preceded or accompanied by a current U.S.Government Fund
PROSPECTUS and the Delaware Group Fund Performance Update for the most
recently completed calendar quarter. For a prospectus of any other Delaware
Group fund, contact your financial adviser or Delaware Group.
INVESTMENT MANAGER
Delaware Management Company, Inc.
Philadelphia
INTERNATIONAL AFFILIATE
Delaware International Advisers Ltd.
London
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
Philadelphia
SHAREHOLDER SERVICING, DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
Philadelphia
1818 Market Street
Philadelphia, PA 19103-3682
Nationwide (800) 523-4640
SECURITIES DEALERS ONLY
Nationwide (800) 362-7500
FINANCIAL INSTITUTIONS REPRESENTATIVES ONLY
Nationwide (800) 659-2265
/c/ Copy Rights Delaware Distributors, L.P.
Printed in the U.S.A. on recycled paper.
SA - 023 [1/96] PP3/96
================
U.S.
GOVERNMENT
FUND
================
1996
SEMI-ANNUAL
REPORT
A Tradition of Sound Investing Since 1929
DELAWARE
GROUP
=========
Philadelphia * London
