<PAGE>
Please Note:
the U.S. Government
Fund has changed its
name to the Delaware
American Government
Bond Fund. See inside
for more details.
Delaware American
Government Bond Fund
FOR CURRENT INCOME
service and guidance
(various photos demonstrating service and guidance,
professional management and goals)
professional management
1999
Annual
Report
goals
DELAWARE INVESMENTS
- -------------------
Philadelphia o London
<PAGE>
A TRADITION OF SOUND INVESTING
A Commitment
To Our Investors
(photo of computer keyboard)
(illustration of waterfall)
commitment
Delaware Investments has a tradition of money management that dates back to
1929. We have a long and distinguished history of helping individuals and
institutions--including some of America's largest pension funds--reach their
financial goals.
Headquartered in Philadelphia, a block from the nation's oldest stock
exchange, the Delaware organization established its first mutual fund in 1938.
Delaware International Advisers Ltd., our international affiliate, was
established in 1990 and is headquartered in London.
Delaware Investments offers a full range of mutual funds. We also manage
investments for variable annuities and closed-end funds as well as offer a wide
range of retirement plan services for individuals and businesses.
Delaware Investments manages approximately $47 billion in mutual fund
assets and institutional advisory accounts for more than half-a-million
investors.
Complete information on any fund offered by Delaware Investments can be found in
each fund's current prospectus. Prospectuses for all funds offered by Delaware
Investments are available from your financial adviser. Please read the
prospectus carefully before you invest or send money.
Delaware American Government Bond Fund's Objective
To seek 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.
Table of Contents
LETTER TO SHAREHOLDERS Page 1
PORTFOLIO MANAGER'S REVIEW Page 3
PERFORMANCE SUMMARY Page 7
STATEMENT OF NET ASSETS Page 8
FINANCIAL HIGHLIGHTS Page 11
current
income
tradition
<PAGE>
for current
income
1
August 4, 1999
Dear Shareholder:
ECONOMIC ACTIVITY IN THE UNITED STATES continues to move along ahead of
consensus expectations. This robust economic growth invigorated the stock market
during the winter and spring. In addition, a healthy U.S. economy helped support
global economic recovery, especially in emerging markets regions such as Asia
and Latin America.
An improving global outlook reduced demand for U.S. government debt over
the last year, reducing U.S. bond prices and pushing yields higher. The
long-term U.S. Treasury yield increased by 0.39 percentage points over the year,
from 5.71% on July 31, 1998 to 6.10% on July 31, 1999 (source: Bloomberg).
Yields swung considerably over the course of the year. The 30-year Treasury
yield hit a low of 4.70% last October (source: Bloomberg). These market
conditions presented a challenge to Paul Grillo, Vice President and Sr.
Portfolio Manager of the Delaware American Government Bond Fund, who seeks to
strike a balance between income and capital appreciation.
The main short-term interest rate controlled by the Federal Reserve
Board--the Federal funds target rate for overnight loans between banks--had been
4.75% for the first six months of 1999. On June 30, however, the Federal Reserve
raised this rate a quarter of a percentage point to 5.00%. The Treasury market
improved as a result and posted solid gains into the first week of July as
long-term yields dipped back under 6.00% percent. As yields dipped, prices
increased on bonds, which bolstered the bond market as a whole. U.S. equity
indexes hit new highs even after the Fed raised interest rates for the first
time since March 1997 (source: Bloomberg).
WE BELIEVE THAT FOR INVESTORS WHO SEEK BOTH CURRENT INCOME AND SOME PRESERVATION
OF PRINCIPAL, DELAWARE AMERICAN GOVERNMENT BOND FUND OFFERS AN ATTRACTIVE
BALANCE BETWEEN THE TWO.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
July 31, 1999 July 31, 1999 July 31, 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware American Government Bond Fund A Class +0.59% +5.51% +6.25%
Lipper General U.S. Government Fund Average -0.59% (180 funds) +5.79% (110 funds) +6.57% (49 funds)
Lehman Brothers Government Bond Index -0.49% +9.01% +9.05%
U.S. Consumer Price Index +1.84% +2.29% +2.94%
- --------------------------------------------------------------------------------------------------------------------------------
Performance is calculated at net asset value without effect of sales charges and
assumes reinvestment of distributions. Unlike mutual fund shares, for U.S.
Treasury securities, the U.S. government guarantees the repayment of interest
and principal at maturity. The Lipper General U.S. Government Fund Average is an
index of all active U.S. government funds with similar investment objectives.
The Lehman Brothers Government Bond Index is an index of U.S. government bonds.
Complete Fund performance for all classes can be found on page 7. Past
performance does not guarantee future results.
</TABLE>
<PAGE>
for current
income
2
Delaware American Government Bond Fund provided a total return of +0.59%
(for Class A shares with distributions reinvested at net asset value) for the
year ended July 31, 1999. Despite difficult bond market conditions, your Fund
faired better than its peer group, represented on the prior page by the Lipper
General U.S. Government Fund Average.
As of July 31, 1999, your Fund's 30-day current yield measured by the
Securities and Exchange Commission's (SEC) guidelines was 5.34% (for Class A
shares).
Over the last year, the overwhelming majority of your Fund's assets were
invested in non-Treasury securities. Of this group, 52.3% were invested in
mortgage-backed securities and collateralized mortgage obligations. These
securities performed well throughout the last year. In general, they provided
better yield and appreciation potential than Treasury securities, which we felt
were overvalued.
Though bonds may remain in the shadow of stocks as long as economic growth
continues in 1999, we still believe they have a role in well-balanced
portfolios. We believe that for investors who seek both current income and some
preservation of principal, Delaware American Government Bond Fund offers an
attractive balance between the two.
On the pages that follow, Paul Grillo, your Fund's portfolio manager,
explains Delaware American Government Bond Fund's positioning during the period
and provides an outlook for fiscal 2000. Thank you for your continued confidence
in Delaware Investments.
Sincerely,
/S/WAYNE A. STORK
- -----------------
WAYNE A. STORK
Chairman,
Delaware Investments Family of Funds
/S/DAVID K. DOWNES
- ------------------
DAVID K. DOWNES
President and Chief Executive Officer,
Delaware Investments Family of Funds
SHAREHOLDER NEWS:
A NEW NAME FOR YOUR MUTUAL FUND
On August 16, 1999, the name of the U.S. Government Fund became the Delaware
American Government Bond Fund. This will help differentiate your Fund from
Delaware's other U.S. government bond fund, the U.S. Government Securities Fund
(a mutual fund formerly advised by Voyageur Asset Management). The objective and
the investment strategy of your Fund will stay the same. NASDAQ symbols for your
Fund will also not change.
If you have any questions about this change, or your account in general, our
Shareholder Service Representatives are ready to assist you. Call us at
1.800.523.1918.
<PAGE>
for current
income
3
Portfolio Manager's Review
PAUL GRILLO
Vice President and Senior Portfolio Manager
August 4, 1999
(photo of three people talking)
MORTGAGE-BACKED SECURITIES AND CMOS ARE THE CORE OF OUR CURRENT STRATEGY
THREE FEDERAL RESERVE INTEREST RATE cuts provided the key economic backdrop for
the majority of our fiscal year. In order to maximize Delaware American
Government Bond Fund's income stream in a lower rate environment, we invested
44.6% of your Fund's net assets in mortgage-backed securities and collateralized
mortgage obligations (CMOs). review
CMOs are mortgage-backed bonds that separate mortgage pools into different
maturity classes, called tranches. CMOs are usually backed by
government-guaranteed mortgages or other top grade mortgages. These securities
delivered better income than Treasury securities over the course of fiscal 1999
(source: Bloomberg).
Complementing the mortgage-backed holdings in your Fund's portfolio were
U.S. Treasury bonds, which represented 28.9% of the portfolio. This combination
allowed us to strike a balance between income and safety of principal. In
addition, the average credit quality of your Fund's holdings continues to be
rated AAA, the highest rating available.
Mortgage-backed securities generally yield more than Treasuries of
comparable maturity. However, when interest rates fall, mortgage-backed
securities carry the risk that homeowners will refinance their mortgages,
requiring bondholders like us to reinvest principal at current rates. This could
have been detrimental to us in the falling rate environment in the early part of
our fiscal year. However, we believed the extra yield provided by
mortgage-backed securities would compensate us for any prepayment risks.
We have increased your Fund's investment in collateralized mortgage
obligations (CMOs) significantly since July 31, 1998, when they represented
14.9% of the portfolio. This past December, CMOs represented only 14.1% of the
portfolio. As of July 31, 1999, they grew to 17.0% of the Fund's total holdings.
As mentioned earlier, CMOs (in which the Fund invests) are usually backed by
government-guaranteed or other top grade mortgages and generally have AAA bond
ratings. For a slight sacrifice of yield, CMOs lessen the anxiety investors
would have about the possibility of prepayment. These securities provide
consistent income and are a relatively safe haven in times of bond market
turbulence, such as this past year.
<PAGE>
for current
income
4
(photo of computer keyboard)
We slightly reduced your Fund's allocation to U.S. Treasuries from 30.9%
on July 31, 1998, to 28.9% as of July 31, 1999. Prices of these securities
declined significantly during the last eight months, and then subsequently
rebounded. Improved global economic conditions in late 1998 decreased demand for
U.S. government securities and their inherent high credit quality. We took note
of this decline early on and began reducing our position in U.S. Treasuries
steadily over the first three months of 1999. We have added back to it since
then as more of a value investment.
strategy
YOUR FUND'S
INVESTMENT STRATEGY
In managing your Fund's sensitivity to interest rate changes, our goal is to
provide a degree of stability for the share price, without giving up income
potential. To do so, we keep the Fund's duration within a range of four to six
years. We consider 5.0 years to be the neutral point. That would generally be
our target when we anticipate neither a significant rise nor a significant
decline in interest rates.
Duration measures a bond's sensitivity to interest rates. As of July 31,
1999, your Fund's duration stood at 4.6 years. This positioning, slightly
shorter than our neutral point, reflects our cautious outlook for the first half
of the coming fiscal year. The bond market may have to absorb some very strong
economic reports on the U.S. economy and with the stock market still strong, if
somewhat volatile, we think the bond market may be a bit weak.
We plan to continue our focus on mortgage securities, including
collateralized mortgage obligations. We will apply quantitative analysis to help
us identify mortgage securities that:
o offer high income potential;
o are less likely to be prepaid; and
o are not well-followed by other investment professionals.
We think bonds with this combination of characteristics will be effective
investments for the portfolio, offering both income and a degree of safety.
Your Fund invests primarily in securities issued or guaranteed by the U.S.
government, its agencies, instrumentalities or government sponsored enterprises.
However, the Fund is also allowed to invest up to 20% of its assets in
non-government securities, such as high-quality corporate bonds, asset-backed
securities, certificates of deposit and commercial paper, among others.
<PAGE>
for current
income
5
During the past year, we used this capability and invested close to 20% of
the portfolio in non-government securities. Our most significant holdings in
non-government securities were high-quality corporate bonds, 14.7% of assets.
These bonds looked especially attractive to us in December, because their prices
fell substantially amid last year's liquidity crisis, and in our view offered
exceptional yields and values. They continued to be attractively valued
throughout the first half of fiscal 1999.
Asset-backed securities represented nearly 4.1% of the Fund. These
securities represent loans that are pooled by credit providers such as banks,
who securitize these loans and then pass principal and income along to investors
such as your Fund. Given the strong economic scenario in the U.S., we believe
borrowers will continue to make timely interest and principal payments on loans.
For these reasons, we think asset-backed securities will continue to perform
well for your Fund.
OUTLOOK
The U.S. seems to be the engine of growth for the entire world at this time. We
believe strong forward momentum for the U.S. economy is likely to result in
solid growth (about 3% annually) for the remainder of this year. We don't think
this will create an inflationary environment if labor productivity can maintain
respectable gains.
We also don't foresee any stampede into fixed-income securities as long as
the stock market continues to perform well. That means we don't expect increased
demand to push bond prices higher. We do think a bond's income will be the key
driver of return in the rest of 1999, just as it has historically been over
longer term periods. Considering the contribution of income to bond returns, a
continued low inflation environment bodes well for fixed-income investors. Low
inflation means less reduction in the purchasing power of the bond's income over
time. We plan to maintain our conservative stance in the first half of fiscal
2000. We may extend our average duration later in the year, but only if we begin
to see slower economic growth. outlook
We do anticipate that one market condition could raise Treasury prices as
we near the third and fourth quarters of 1999: Year 2000 concerns may create an
increasing appetite for bonds of higher credit quality. Regardless, we foresee
the 30-year Treasury bond staying in a relatively narrow yield range for the
remainder of the year.
<PAGE>
for current
income
6
(photo of family on beach)
The taxable fixed-income arena endured a great deal of turbulence
throughout 1998. We expect 1999 to be less exciting, based on two key factors:
o Although U.S. economic growth has continued, it appears to us that weaker
growth outside U.S. borders has offset it, preventing our economy from
overheating.
o Immediately following the Russian crisis, virtually all taxable
fixed-income markets suffered. In contrast, the response to the subsequent
difficulties in South America was much more subdued (Source: Salomon Smith
Barney). We think investors are reacting more judiciously to situations in
foreign countries.
WE INTEND TO KEEP A WATCHFUL EYE ON CHANGES IN CONSUMER AND PRODUCER PRICES TO
GAUGE THEIR POTENTIAL EFFECTS ON YOUR FUND'S PERFORMANCE FOR THE REMAINDER OF
THE YEAR.
We believe the Federal Reserve's 0.25 percent interest rate increase on
June 30 represented fine-tuning, rather than a fundamental change in policy. In
addition, we don't think the Federal Reserve will significantly change its
interest rate policy for the rest of 1999.
We believe the Delaware American Government Bond Fund is a potential safe
harbor during times of market volatility. Your Fund is designed to pay higher
income than short-term securities, with less risk to principal than longer term,
fixed-income investments. Your Fund strives to offer its shareholders a
relatively steady level of current income, making it an attractive choice for
investors who look for income from their investments to help meet certain
expenses.
For Delaware American Government Bond Fund, we are cautiously optimistic
that the coming year will provide a favorable environment. We intend to keep a
watchful eye on changes in consumer and producer prices to gauge their potential
effects on markets, monetary policy and your Fund's performance for the
remainder of the year.
PORTFOLIO HIGHLIGHTS AND ASSET MIX
- --------------------------------------------------------------------------------
AS OF JULY 31, 1999
(Pie chart)
Mortgage-Backed Securities 35.3%
Asset-Backed Securities 4.1%
U.S. Treasuries 28.9%
Collateralized Mortgage Obligations (CMOs) 17.0%
Corporate Bonds 14.7%
July 31, July 31,
1999 1998
- --------------------------------------------------------------------------------
Average Effective Duration 4.6 years 4.8 years
Average Effective Maturity 8.0 years 8.3 years
Average Quality AAA AAA
Thirty-Day Current SEC Yield* 5.34% 5.33%
- --------------------------------------------------------------------------------
* For Class A shares measured according to the Securities and Exchange
Commission guidelines. For B Class, C Class and the Institutional Class
shares, the 30-day SEC current yields as of July 31, 1999 were 4.89%, 4.89%
and 5.91%, respectively.
<PAGE>
for current
income
7
Performance Summary
(Line chart)
DELAWARE AMERICAN GOVERNMENT BOND FUND'S LONG-TERM PERFORMANCE
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
AUGUST 1, 1989 TO JULY 31, 1999
Lehman Brothers Delaware American U.S.
Government Government Bond Consumer
Bond Index Fund A Class Price Index
- --------------------------------------------------------------------------------
Aug. '89 $10,000 $ 9,521 $10,000
Dec. '89 10,227 9,786 10,137
Dec. '90 10,870 10,647 10,756
Dec. '91 12,901 12,259 11,085
Dec. '92 13,945 13,040 11,403
Dec. '93 16,374 14,057 11,720
Dec. '94 15,109 13,241 12,034
Dec. '95 19,778 15,056 12,331
Dec. '96 19,613 15,479 12,749
Dec. '97 22,579 16,759 12,966
Dec. '98 25,623 17,951 13,175
Jul. '99 $23,783 $17,436 $13,360
Chart assumes $10,000 invested on August 1, 1989, a 4.75% maximum front-end
sales charge and reinvestment of all distributions. The Lehman Brothers
Government Bond Index is an index of U.S. government bonds. Performance for
other Fund classes will vary due to differing charges and expenses.
DELAWARE AMERICAN GOVERNMENT BOND FUND'S PERFORMANCE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS THROUGH JULY 31, 1999
Lifetime Ten Years Five Years One Year
Class A (Est. 8/16/85)
Excluding Sales Charge +6.86% +6.25% +5.51% +0.59%
Including Sales Charge +6.49% +5.73% +4.48% -4.25%
Class B (Est. 5/2/94)
Excluding Sales Charge +4.45% +4.77% -0.11%
Including Sales Charge +4.31% +4.47% -3.90%
Class C (Est. 11/29/95)
Excluding Sales Charge +3.87% -0.11%
Including Sales Charge +3.87% -1.06%
All performance includes reinvestment of distributions and applicable sales
charge as described below. 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. Performance for Class B and C shares
excluding sales charge assumes either the investment was not redeemed or that
contingent sales charges did not apply.
Class A shares have a 4.75% maximum sales charge and a 12b-1 fee.
Class B shares do not carry a front-end sales charge, but are subject to a 1%
annual distribution and service fee. They are 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 shares are
redeemed within 12 months, a 1% contingent deferred sales charge applies.
Delaware American Government Bond Fund's Institutional Class, initially offered
June 2, 1992, is available without sales or asset-based distribution charges
only to certain eligible institutional accounts. Performance prior to the class
inception date was adjusted to eliminate the effect of the sales charge, but not
Class A's asset-based distribution charge. As of July 31, 1999, the average
annual total returns for the lifetime, 10-year, five-year and one-year periods
were +7.10%, +6.55%, +5.82%, and +0.89%, respectively.
<PAGE>
8 for current income
FINANCIAL STATEMENTS
DELAWARE GROUP GOVERNMENT FUND, INC. - GOVERNMENT INCOME SERIES+
STATEMENT OF NET ASSETS
JULY 31, 1999
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------
AGENCY MORTGAGE-BACKED
SECURITIES - 27.63%
Federal Home Loan Mortgage Association Project
Loan 8.75% 10/1/27 $ 687,244 $ 731,915
Federal Home Loan Mortgage Corporation
6.00% 11/1/26 ...................................... 647,279 606,420
9.00% 12/1/05 ...................................... 972,818 1,007,779
10.25% 4/1/08 ...................................... 23,209 25,269
11.50% 5/1/00 to 3/1/16 ............................ 1,230,241 1,387,027
Federal Home Loan Mortgage Corporation-Gold
7.50% 3/1/28 ....................................... 292,445 292,719
12.00% 12/1/10 ..................................... 53,508 61,133
Federal National Mortgage Association
6.00% 5/15/08 to 12/1/28 ........................... 6,855,676 6,405,723
7.00% 3/1/28 to 8/1/29 ............................. 27,394,370 26,767,416
7.50% 12/1/27 to 10/1/29 ........................... 3,416,424 3,415,357
8.50% 2/1/29 ....................................... 4,028,795 4,239,677
10.00% 1/1/19 to 5/1/22 ............................ 1,324,748 1,413,421
10.75% 9/1/11 ...................................... 59,361 65,390
11.25% 6/1/00 to1/1/01 ............................. 41,389 43,851
14.25% 9/1/99 ...................................... 422 423
-----------
Total Agency Mortgage-Backed Securities
(cost $48,015,349) ................................. 46,463,520
-----------
ASSET-BACKED SECURITIES - 4.10%
ADVANTA Home Equity Loan Trust
1992-4 A1 7.20% 11/25/08 ........................... 1,043,230 1,040,622
CIT RV Trust 1998-A A5 6.12% 7/15/14 ................. 3,000,000 2,960,100
Cook County, Illinois, Chicago Heights School District,
Taxable-Series B 13.15% 12/1/05 .................... 1,055,000 1,397,084
Honda Auto Lease Trust 6.45% 9/16/02 ................. 1,500,000 1,500,938
-----------
Total Asset-Backed Securities
(cost $6,938,452) .................................. 6,898,744
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS (CMO) - 16.96%
Collateralized Mortgage Securities Corporation F-1
11.45% 11/1/15 ..................................... 162,981 179,687
Federal Home Loan Mortgage Corporation
Series 1608 GA 9.00% 6/15/21 ....................... 4,261,048 4,483,923
Series 2113 QD 6.00% 2/15/23 ....................... 10,000,000 9,747,751
Series 2121 MD 6.00% 2/1/29 ........................ 3,500,000 3,402,083
Series 26-F 9.50% 2/15/20 .......................... 517,748 545,919
- ----------------------
+ Effective August 16, 1999, Government Income Series became known as the
Delaware American Government Bond Fund.
PRINCIPAL MARKET
AMOUNT VALUE
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Federal National Mortgage Association
Series 35-2 12.00% 7/25/18 ......................... $ 1,132,952 $ 1,239,584
Series 88-15A 9.00% 6/25/18 ........................ 19,978 20,955
Series C-2 12.00% 5/1/09 ........................... 1,697,496 1,895,209
Series D-2 11.00% 4/1/09 ........................... 1,444,877 1,578,351
Series F-2 11.50% 5/25/09 .......................... 697,316 770,428
Series H-2 11.50% 5/1/09 ........................... 1,312,697 1,450,293
Series J-1 7.00% 11/1/10 ........................... 62,290 62,231
Investor GNMA Mortgage-Backed Securities
Trust Series 84-F5 10.875% 10/25/13 ................ 1,208,260 1,329,531
Travelers Mortgage Securities
1-Z2 12.00% 3/1/14 ................................. 1,669,592 1,802,446
-----------
Total Collateralized Mortgage Obligations
(cost $29,123,783) ................................. 28,508,391
-----------
CORPORATE BONDS - 14.70%
American General Institute 7.57% 12/1/46 ............. 2,000,000 1,910,000
Commercial Credit 10.00% 5/15/09 ..................... 1,500,000 1,766,250
Daimler-Benz North America 7.375% 9/15/06 ............ 4,350,000 4,431,563
Fidelity Investments 7.57% 6/15/29 ................... 2,000,000 1,950,000
General Electric Capital 8.85% 3/1/07 ................ 5,950,000 6,611,938
NationsBank 10.20% 7/15/15 ........................... 4,000,000 4,935,000
RBSG Capital 10.125% 3/1/04 .......................... 1,908,000 2,144,115
United Health Care 6.60% 12/1/03 ..................... 1,000,000 968,750
-----------
Total Corporate Bonds (cost $25,432,173) ............. 24,717,616
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS - 7.73%
GNMA
6.50% 12/15/23 ..................................... 435,095 414,292
9.50% 9/15/17 to 3/15/23 ........................... 1,474,350 1,595,625
10.00% 1/15/18 to 9/15/18 .......................... 539,124 596,237
11.00% 12/15/09 to 9/15/14 ......................... 1,398,905 1,582,675
11.50% 7/15/15 ..................................... 79,704 90,116
12.00% 12/15/12 to 12/15/15 ........................ 2,765,127 3,177,170
12.25% 3/15/14 ..................................... 89,333 102,649
12.50% 5/15/10 to 1/15/16 .......................... 522,388 605,807
GNMA GPM
11.50% 3/15/13 to 8/15/14 .......................... 177,817 201,267
11.75% 8/15/13 ..................................... 423,829 481,973
GNMA II
9.00% 10/20/01 to 10/20/05 ......................... 464,308 486,327
10.00% 11/20/15 to 6/20/21 ......................... 1,188,574 1,306,649
10.50% 3/20/16 to 7/20/21 .......................... 645,339 716,327
11.00% 5/20/15 to 7/20/19 .......................... 155,074 173,872
11.50% 10/20/14 to 10/20/15 ........................ 132,311 149,399
12.00% 1/20/14 to 3/20/15 .......................... 142,685 163,859
12.50% 10/20/13 to 7/20/15 ......................... 767,602 889,428
<PAGE>
for current income 9
STATEMENT OF NET ASSETS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS (CONTINUED)
GNMA II GPM
10.25% 3/20/18 to 5/20/19 .......................... $ 32,082 $ 34,789
10.75% 1/20/16 to 2/20/18 .......................... 195,609 213,336
12.00% 11/20/13 .................................... 16,279 18,655
-----------
Total Government National Mortgage
Association Obligations (cost $12,697,251) ......... 13,000,452
-----------
U.S. TREASURY OBLIGATIONS - 28.93%
U.S. Treasury Bond
7.625% 2/15/25 ..................................... 3,400,000 3,958,596
*10.375% 11/15/12 ................................... 20,445,000 25,815,859
U.S. Treasury Note
4.75% 11/15/08 ..................................... 950,000 866,312
5.25% 5/15/04 ...................................... 1,700,000 1,661,949
10.75% 8/15/05 ..................................... 13,230,000 16,334,795
-----------
Total U.S. Treasury Obligations
(cost $50,472,666) ................................. 48,637,511
-----------
REPURCHASE AGREEMENTS - 3.88%
With Chase Manhattan Bank 5.03% 8/2/99
(dated 7/30/99, collateralized by $2,269,000
U.S. Treasury Notes 5.625% due 10/31/99,
market value $2,303,710) ........................... 2,244,000 2,244,000
With JP Morgan Securities 5.00% 8/2/99
(dated 7/30/99, collateralized by $712,000
U.S. Treasury Notes 5.625% due 2/28/01,
market value $729,148 and $712,000 U.S.
Treasury Notes 6.50% due 5/31/01, market
value $730,094 and $691,000 U.S Treasury
Notes 6.625% due 3/31/02, market value
$720,304)........................................... 2,136,000 2,136,000
With PaineWebber 5.00% 8/2/99
(dated 7/30/99, collateralized by $690,000
U.S. Treasury Notes 5.625% due 12/31/99,
market value $694,757 and $1,424,000 U.S.
Treasury Notes 6.625% due 03/31/02, market
value $1,485,101) .................................. 2,136,000 2,136,000
-----------
Total Repurchase Agreements
(cost $6,516,000) .................................. 6,516,000
-----------
TOTAL MARKET VALUE OF SECURITIES
(cost $179,195,674) - 103.93% ............................... $ 174,742,234
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS - (3.93%) ..... (6,607,388)
-------------
NET ASSETS APPLICABLE TO 23,034,923 SHARES
($0.01 par value) OUTSTANDING - 100.00% ..................... $ 168,134,846
=============
NET ASSET VALUE - U.S. GOVERNMENT FUND
A CLASS ($114,027,321 / 15,622,069 SHARES) ........................ $7.30
=====
NET ASSET VALUE - U.S. GOVERNMENT FUND
B CLASS ($19,146,979 / 2,623,194 SHARES) .......................... $7.30
=====
NET ASSET VALUE - U.S. GOVERNMENT FUND
C CLASS ($4,077,458 / 558,619 SHARES) ............................. $7.30
=====
NET ASSET VALUE - U.S. GOVERNMENT FUND
INSTITUTIONAL CLASS ($30,883,088 / 4,231,041 SHARES) .............. $7.30
=====
COMPONENTS OF NET ASSETS AT JULY 31, 1999:
Common stock, $0.01 par value, 500,000,000 shares authorized to
the Fund with 80,000,000 shares allocated to the U.S. .......
Government Fund A Class, 80,000,000 shares allocated to the
U.S. Government Fund B Class, 50,000,000 shares allocated
to the U.S. Government Fund C Class, 20,000,000 shares
allocated to the U.S Government Fund Institutional Class .... $ 211,595,117
Distributions in excess of net investment income .............. (15,630)
Accumulated net realized loss on investments and futures contracts (38,972,891)
Net unrealized depreciation of investments and futures contracts (4,471,750)
-------------
Total net assets .............................................. $ 168,134,846
=============
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
U.S. GOVERNMENT FUND
Net asset value per share A class (A) $7.30
Sales charge (4.75% of offering price or 4.93% of amount invested
per share) (B) .................................................... 0.36
-----
Offering price ...................................................... $7.66
=====
- ----------------------
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See How to Buy Shares in the current prospectus for purchases of $100,000
or more.
- ----------------------
GPM - Graduate Payment Mortgage
* Principal amount of $2,000,000 pledged as collateral for futures.
See accompanying notes
<PAGE>
10 for current income
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest ............................................. $13,431,246
EXPENSE:
Management fees ...................................... $ 1,053,858
Distribution expense ................................. 630,166
Dividend disbursing and transfer agent fees
and expenses ......................................... 501,541
Accounting and administration fees ................... 72,260
Registration fees .................................... 50,600
Reports and statements to shareholders ............... 21,941
Professional fees .................................... 7,825
Directors' fees ...................................... 7,488
Custodian fees ....................................... 3,841
Other expenses ....................................... 12,927 2,362,447
----------- -----------
Less expenses paid indirectly ........................ (7,561)
Total expenses ....................................... 2,354,886
-----------
NET INVESTMENT INCOME ................................ 11,076,360
-----------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS AND FUTURES CONTRACTS:
Net realized loss on investments ..................... (2,482,071)
Net realized loss on futures contracts ............... (1,579,932)
-----------
Net realized loss .................................... (4,062,003)
Net change in unrealized appreciation/depreciation
of investments and futures contracts ................. (6,313,134)
-----------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS ..................................... (10,375,137)
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS .................................... $ 701,223
===========
See accompanying notes
<TABLE>
<CAPTION>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
7/31/99 7/31/98
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income .................................................. $ 11,076,360 $ 11,326,268
Net realized loss on investments and
futures contracts .................................................... (4,062,003) (58,287)
Net change in unrealized appreciation/depreciation
of investments and futures contracts ................................. (6,313,134) (889,791)
------------- -------------
Net increase in net assets resulting from operations ................... 701,223 10,378,190
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
A Class .............................................................. (8,128,424) (9,370,096)
B Class .............................................................. (1,119,015) (799,395)
C Class .............................................................. (197,044) (98,357)
Institutional Class .................................................. (1,648,132) (1,063,903)
------------- -------------
(11,092,615) (11,331,751)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
A Class .............................................................. 49,772,807 35,363,890
B Class .............................................................. 17,213,764 9,297,920
C Class .............................................................. 4,997,746 2,932,593
Institutional Class .................................................. 29,439,801 17,276,780
Net asset value of shares issued upon reinvestment of dividends
from net investment income:
A Class .............................................................. 4,966,969 5,430,259
B Class .............................................................. 623,214 380,595
C Class .............................................................. 169,744 86,512
Institutional Class .................................................. 1,618,880 983,847
------------- -------------
108,802,925 71,752,396
------------- -------------
Cost of shares repurchased:
A Class .............................................................. (60,641,715) (51,932,640)
B Class .............................................................. (11,031,865) (6,666,858)
C Class .............................................................. (2,889,881) (2,273,984)
Institutional Class .................................................. (16,269,146) (12,269,379)
------------- -------------
(90,832,607) (73,142,861)
------------- -------------
Increase (decrease) in net assets derived from
capital share transactions ........................................... 17,970,318 (1,390,465)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS .................................. 7,578,926 (2,344,026)
NET ASSETS:
Beginning of year ...................................................... 160,555,920 162,899,946
------------- -------------
End of year ............................................................ $ 168,134,846 $ 160,555,920
============= =============
</TABLE>
See accompanying notes
<PAGE>
for current income 11
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
U.S. GOVERNMENT FUND A CLASS
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
7/31/99 7/31/98 7/31/97 7/31/96 7/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................................... $ 7.720 $ 7.760 $ 7.590 $ 7.860 $ 8.000
Income (loss) from investment operations:
Net investment income ................................................ 0.474 0.528 0.544 0.588 0.656
Net realized and unrealized gain (loss) on investments
and futures contracts (0.420) (0.040) 0.170 (0.270) (0.140)
-------- -------- -------- -------- --------
Total from investment operations ..................................... 0.054 0.488 0.714 0.318 0.516
-------- -------- -------- -------- --------
Less dividends:
Dividends from net investment income ................................. (0.474) (0.528) (0.544) (0.588) (0.656)
-------- -------- -------- -------- --------
Total dividends ...................................................... (0.474) (0.528) (0.544) (0.588) (0.656)
-------- -------- -------- -------- --------
Net asset value, end of period ......................................... $ 7.300 $ 7.720 $ 7.760 $ 7.590 $ 7.860
======== ======== ======== ======== ========
Total return(1) ........................................................ 0.59% 6.50% 9.77% 4.09% 6.82%
Ratios and supplemental data:
Net assets, end of period (000 omitted) .............................. $114,027 $127,001 $138,844 $164,156 $206,083
Ratio of expenses to average net assets .............................. 1.25% 1.20% 1.16% 1.20% 1.24%
Ratio of net investment income to average net assets ................. 6.16% 6.80% 7.13% 7.55% 8.40%
Portfolio turnover ................................................... 142% 119% 63% 81% 70%
</TABLE>
<TABLE>
U.S. GOVERNMENT FUND B CLASS
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
7/31/99 7/31/98 7/31/97 7/31/96 7/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................................... $ 7.720 $ 7.760 $ 7.590 $7.860 $ 8.000
Income (loss) from investment operations:
Net investment income ................................................ 0.421 0.474 0.490 0.533 0.601
Net realized and unrealized gain (loss) on
investments and futures contracts ................................... (0.421) (0.040) 0.170 (0.270) (0.140)
------- ------- ------- ------ -------
Total from investment operations ..................................... 0.000 0.434 0.660 0.263 0.461
------- ------- ------- ------ -------
Less dividends:
Dividends from net investment income ................................. (0.420) (0.474) (0.490) 0.533) (0.601)
------- ------- ------- ------ -------
Total dividends ...................................................... (0.420) (0.474) (0.490) 0.533) (0.601)
------- ------- ------- ------ -------
Net asset value, end of period ......................................... $ 7.300 $ 7.720 $ 7.760 $7.590 $ 7.860
======= ======= ======= ====== =======
Total return(1) ........................................................ (0.11%) 5.76% 9.01% 3.36% 6.08%
Ratios and supplemental data:
Net assets, end of period (000 omitted) .............................. $19,147 $13,642 $10,695 $9,754 $ 7,394
Ratio of expenses to average net assets .............................. 1.95% 1.90% 1.86% 1.90% 1.94%
Ratio of net investment income to average net assets ................. 5.46% 6.10% 6.43% 6.85% 7.66%
Portfolio turnover ................................................... 142% 119% 63% 81% 70%
- ----------
1 Total investment return is based on the change in net asset value of a
share for the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
</TABLE>
See accompanying notes
<PAGE>
12 for current income
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
U.S. GOVERNMENT FUND C CLASS
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED 11/29/95(1)
7/31/99 7/31/98 7/31/97 TO 7/31/96
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............................................. $ 7.720 $ 7.760 $ 7.590 $ 7.950
Income (loss) from investment operations:
Net investment income .......................................................... 0.422 0.474 0.491 0.348
Net realized and unrealized gain (loss) on investments
and futures contracts ........................................................ (0.422) (0.040) 0.170 (0.360)
------- ------- ------- -------
Total from investment operations ............................................... 0.000 0.434 0.661 (0.012)
------- ------- ------- -------
Less dividends:
Dividends from net investment income ........................................... (0.420) (0.474) (0.491) (0.348)
------- ------- ------- -------
Total dividends ................................................................ (0.420) (0.474) (0.491) (0.348)
------- ------- ------- -------
Net asset value, end of period ................................................... $ 7.300 $ 7.720 $ 7.760 $ 7.590
======= ======= ======= =======
Total return(2) .................................................................. (0.11%) 5.76% 9.01% (0.17%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) ........................................ $ 4,077 $ 2,047 $ 1,308 $ 1,029
Ratio of expenses to average net assets ........................................ 1.95% 1.90% 1.86% 1.90%
Ratio of net investment income to average net assets ........................... 5.46% 6.01% 6.43% 6.85%
Portfolio turnover ............................................................. 142% 119% 63% 81%
</TABLE>
<TABLE>
U.S. GOVERNMENT FUND INSTITUTIONAL CLASS
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
7/31/99 7/31/98 7/31/97 7/31/96 7/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................................... $ 7.720 $ 7.760 $ 7.590 $ 7.860 $ 8.000
Income (loss) from investment operations:
Net investment income ................................................ 0.495 0.550 0.567 0.611 0.679
Net realized and unrealized gain (loss) on investments
and futures contracts ................................................ (0.418) (0.040) 0.170 (0.270) (0.140)
------- -------- -------- ------- -------
Total from investment operations ..................................... 0.077 0.510 0.737 0.341 0.539
------- -------- -------- ------- -------
Less dividends:
Dividends from net investment income ................................. (0.497) (0.550) (0.567) (0.611) (0.679)
------- -------- -------- ------- -------
Total dividends ...................................................... (0.497) (0.550) (0.567) (0.611) (0.679)
------- -------- -------- ------- -------
Net asset value, end of period ......................................... $ 7.300 $ 7.720 $ 7.760 $ 7.590 $ 7.860
======= ======== ======== ======== =======
Total return(2) ........................................................ 0.89% 6.80% 10.10% 4.39% 7.14%
Ratios and supplemental data:
Net assets, end of period (000 omitted) .............................. $30,883 $ 17,865 $12,053 $10,780 $ 8,316
Ratio of expenses to average net assets .............................. 0.95% 0.90% 0.86% 0.90% 0.94%
Ratio of net investment income to average net assets ................. 6.46% 7.10% 7.43% 7.85% 8.66%
Portfolio turnover ................................................... 142% 119% 63% 81% 70%
- ----------
1 Date of initial public offering; ratios have been annualized and total
return has not been annualized.
2 Total investment return is based on the change in net asset value of a
share for the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
</TABLE>
See accompanying notes
<PAGE>
for current income 13
DELAWARE GROUP GOVERNMENT FUND, INC.-
GOVERNMENT INCOME SERIES
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
- --------------------------------------------------------------------------------
Delaware Group Government Fund, Inc. (the "Fund") is registered as a
diversified open-end investment company under the Investment Company Act of
1940, as amended. The Fund is organized as a Maryland corporation. The fund
offers four classes of shares. The U.S. Government Fund A Class carries a
front-end sales charge of 4.75%. The U.S. Government Fund B Class carries a
back-end deferred sales charge. The U.S. Government Fund C Class carries a
level load deferred sales charge and U.S. Government Fund Institutional Class
has no sales charge. 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.
Security Valuation - Securities listed on an exchange are valued at the last
quoted sales price as of the close of the NYSE on the valuation date.
Securities not traded or securities not listed on an exchange are valued at
the mean of the last quoted bid and asked prices. Long-term debt securities
are valued by an independent pricing service and such prices are believed to
reflect the fair value of such securities. Money market instruments having
less than 60 days to maturity are valued at amortized cost, which approximates
market value. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Fund's Board of Directors.
Federal Income Taxes - The Fund intends to continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes has been made in the
financial statements. Income and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
Class Accounting - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements - The Fund may invest in a pooled cash account along
with other members of the Delaware Investments Family of Funds. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is
held by the custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 100% collateralized.
However, in the event of default or bankruptcy by the counterparty to the
agreement, realization of the collateral may be subject to legal proceedings.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Other - Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). Costs used in calculating realized gains and losses on the
sale of investment securities are those of the specific securities sold.
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 dividends daily from net investment income and pays such
dividends monthly and declares and pays distributions from net realized gain
on investments if any, annually.
Certain expenses of the Fund are paid through "soft dollar" arrangements with
brokers. These transactions are done subject to best price and execution. The
amount of these expenses was approximately $4,170 for the year ended July 31,
1999. In addition, the Fund receives earnings credits from its custodian when
positive cash balances are maintained, which are used to offset custody fees.
These credits were $3,391 for the year ended July 31, 1999. The expenses paid
under the above arrangements are included in their respective expense captions
on the Statement of Operations with the corresponding expense offset shown as
"expenses paid indirectly".
2. Investment Management and Other Transactions with Affiliates
Commencing April 1, 1999, and in accordance with the terms of the Investment
Management Agreement, the Fund pays Delaware Management Company (DMC), the
Investment Manager of the Fund, an annual fee which is calculated daily at the
rate of 0.55% on the first $500 million of average daily net assets of the
Fund, 0.50% on the next $500 million, 0.45% on the next $1,500 million, and
0.425% on net assets over $2,500 million, less the fees paid to the
unaffiliated directors. Prior to April 1, 1999, the Fund paid DMC an annual
fee which was calculated at the rate of 0.60% of average daily net assets,
less the fees paid to the unaffiliated directors. At July 31, 1999, the Fund
had a liability for investment management fees and other expenses payable to
DMC of $66,655.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of
DMC, to provide dividend disbursing, transfer agent and accounting services.
The Fund pays DSC a monthly fee based on the number of shareholder accounts,
shareholder transactions and average net assets, subject to certain minimums.
At July 31, 1999, the Fund had a liability for such fees and other expenses
payable to DSC of $653.
Pursuant to the Distribution Agreement, the Fund pays Delaware Distributors,
L.P. (DDLP), the Distributor and an affiliate of DMC, an annual fee not to
exceed 0.30% of the average daily net assets of the A Class and 1.00% of the
average daily net assets of the B and C Class.
For the year ended July 31, 1999, DDLP earned $40,177 for commissions on sales
of the U.S. Government Fund A Class shares.
Certain officers of DMC, DSC and DDLP are officers, directors and/or employees
of the Fund. These officers, directors and employees are paid no compensation by
the Fund.
3. Investments
For the year ended July 31, 1999, the Fund made purchases of $138,560,409 and
sales of $121,152,345 of investment securities other than U.S. government
securities and temporary cash investments.
At July 31, 1999, the aggregate cost of securities for federal income tax
purposes was $179,197,315. At July 31, 1999, net unrealized depreciation for
federal income tax purposes aggregated $4,455,081 of which $869,666 related to
unrealized appreciation of securities and $5,324,747 related to unrealized
depreciation of securities.
For federal income tax purposes, the Fund had accumulated capital losses of
$35,015,459 at July 31, 1999, which may be carried forwards and applied
against future capital gains. The capital loss carry forwards expire as
follows: 2001 - $1,341,943, 2002 - $17,400,711, 2003 - $9,205,797, 2004 -
$4,166,601, 2005 - $2,371,574 and 2007 - $528,833.
<PAGE>
14 for current income
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Futures Contracts
The Fund enters into financial futures contracts for the purpose of hedging
its existing portfolio securities against fluctuations in fair value caused by
changes in prevailing market rates. Upon entering into a futures contract, the
fund deposits cash or pledges U.S.government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the
contract is traded. Subsequent payments are received from or paid to the
broker each day, based on the daily fluctuation in the market value of the
contract. These receipts or payments are known as "variation margin" and are
recorded daily by the fund as unrealized gains or losses until the contracts
are closed. When the contracts are closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. Risk may arise upon
entering into futures contracts from potential imperfect correlation between
the futures contracts and the underlying securities and from the possibility
of an illiquid secondary market for these instruments.
Financial futures contracts open at July 31, 1999 were as follows:
NOTIONAL UNREALIZED
CONTRACTS COST AMOUNT EXPIRATION DATE LOSS
- --------------------------------------------------------------------------------
72 U.S. Treasury 10 Yr. Notes $7,977,109 09/99 ($34,609)
5. Capital Stock
Transactions in capital stock shares were as follows:
YEAR ENDED YEAR ENDED
7/31/99 7/31/98
----------- -----------
Shares sold:
A Class ............................................ 6,431,871 4,571,770
B Class ............................................ 2,215,523 1,201,317
C Class ............................................ 646,059 379,435
Institutional Class ................................ 3,835,531 2,226,903
Shares issued upon reinvestment of
dividends from net investment income:
A Class ............................................ 647,354 701,989
B Class ............................................ 81,329 49,177
C Class ............................................ 22,214 11,182
Institutional Class ................................ 212,315 127,146
----------- -----------
14,092,196 9,268,919
----------- -----------
Shares repurchased:
A Class ............................................ (7,906,839) (6,712,206)
B Class ............................................ (1,440,634) (861,381)
C Class ............................................ (374,803) (294,043)
Institutional Class ................................ (2,130,765) (1,592,884)
----------- -----------
(11,853,041) (9,460,514)
----------- -----------
Net increase (decrease) .............................. 2,239,155 (191,595)
=========== ===========
6. Credit and Market 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 July 31,
1999 the Fund had no holdings in interest-only CMOs.
<PAGE>
for current income 15
DELAWARE GROUP GOVERNMENT FUND, INC.-
GOVERNMENT INCOME SERIES
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
DELAWARE GROUP GOVERNMENT FUND, INC. - GOVERNMENT INCOME SERIES
We have audited the accompanying statement of net assets of Delaware Group
Government Fund, Inc. - Government Income Series (the "Fund") as of July 31,
1999, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 1999, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Government Fund, Inc. - Government Income Series at July 31,
1999, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and its
financial highlights for each of the periods indicated therein, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
September 6, 1999
<PAGE>
16 for current income
PROXY RESULTS
(UNAUDITED)
The Delaware Group Government Fund, Inc. shareholders voted on the following
proposals at the annual meeting of shareholders on March 17, 1999 or as
adjourned. The description of each proposal and number of shares voted are as
follows:
1. To elect the Delaware Group Government Fund, Inc. Board of Directors.
SHARES SHARES VOTED
VOTED WITHHELD
FOR AUTHORITY
------------------------------
Jeffrey J. Nick ......................... 15,371,361 1,134,674
Walter P. Babich ........................ 15,377,303 1,128,732
John H. Durham .......................... 15,390,059 1,115,976
Anthony D. Knerr ........................ 15,388,752 1,117,283
Ann R. Leven ............................ 15,388,752 1,117,283
Thomas F. Madison ....................... 15,388,509 1,117,526
Charles E. Peck ......................... 15,394,218 1,111,817
Wayne A. Stork .......................... 15,394,237 1,111,798
Jan L. Yeomans .......................... 15,394,237 1,111,798
2. To approve the reclassification of the U.S. Government Fund investment
objective from fundamental to non-fundamental.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,636,712 706,345 948,345
3. To approve standardized fundamental investment restrictions for the U.S.
Government Fund (proposal involves separate votes on seven sub-proposals 3A-3G).
3A.To adopt a new fundamental investment restriction concerning concentration
of the investments in the same industry.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,949,645 385,495 956,021
3B.To adopt a new fundamental investment restriction concerning borrowing
money and issuing senior securities.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,932,246 417,869 941,046
3C.To adopt a new fundamental investment restriction concerning underwriting.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,929,665 417,549 943,946
3D.To adopt a new fundamental investment restriction concerning investments in
real estate.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,975,984 397,451 917,727
3E.To adopt a new fundamental investment restriction concerning investments in
commodities.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,840,028 501,336 949,798
3F.To adopt a new fundamental investment restriction concerning lending by the
Fund.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,949,726 429,736 911,699
3G.To reclassify all current fundamental investment restrictions as
non-fundamental.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,027,424 1,223,211 1,040,526
4. To approve a new investment management agreement with Delaware Management
Company for the U.S. Government Fund.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,971,345 441,063 878,753
5. To ratify the selection of Ernst & Young LLP, as the independent auditors
for Delaware Group Government Fund, Inc.
FOR AGAINST ABSTAIN
-----------------------------------------------
15,634,016 156,056 715,962
6. To approve the restructuring of the Delaware Group Government Fund, Inc.
from a Maryland Corporation into a Delaware Business Trust.
FOR AGAINST ABSTAIN
-----------------------------------------------
12,965,960 379,850 945,351
<PAGE>
THIS ANNUAL REPORT IS FOR THE INFORMATION OF DELAWARE AMERICAN GOVERNMENT BOND
FUND shareholders, but it may be used with prospective investors when preceded
or accompanied by a current Prospectus for Delaware American Government Bond
Fund and the Delaware Investments Performance Update for the most recently
completed calendar quarter. The Prospectus sets forth details about charges,
expenses, investment objectives and operating policies of the Fund. You should
read the prospectus carefully before you invest or send money. The figures in
this report represent past results which are not a guarantee of future results.
The return and principal value of an investment in the Fund will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Board of Trustees
WAYNE A. STORK
Chairman
Delaware Investments Family of Funds
Philadelphia, PA
WALTER P. BABICH
Board Chairman, Citadel Constructors, Inc.
King of Prussia, PA
DAVID K. DOWNES
President and Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
JOHN H. DURHAM
Partner, Complete Care Services
Horsham, PA
ANTHONY D. KNERR
Consultant, Anthony Knerr & Associates
New York, NY
ANN R. LEVEN
Treasurer, National Gallery of Art
Washington, DC
THOMAS F. MADISON
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
CHARLES E. PECK
Secretary/Treasurer, Enterprise Homes, Inc.
Fredericksburg, VA
JAN L. YEOMANS
Vice President and Treasurer
3M Corporation
St. Paul, Minnesota
Affiliated Officers
RICHARD J. FLANNERY
Executive Vice President and General Counsel
Delaware Investments Family of Funds
Philadelphia, PA
BRUCE D. BARTON
President and Chief Executive Officer
Delaware Distributors, L.P.
Philadelphia, PA
ERIC E. MILLER
Senior Vice President, Secretary
and Deputy General Counsel
Delaware Investments Family of Funds
Philadelphia, PA
directors
& officers
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
Delaware Management Company
Philadelphia, Pennsylvania
INTERNATIONAL AFFILIATE
Delaware International Advisers Ltd.
London, England
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
Philadelphia, Pennsylvania
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
Philadelphia, Pennsylvania
1818 Market Street
Philadelphia, PA 19103-3682
<PAGE>
When used with prospective investors, this report must be preceded or
accompanied by a current Delaware American Government Bond Fund Prospectus and
the Delaware Investments Performance Update for the most recently completed
calendar quarter. For a prospectus of any other mutual fund from Delaware
Investments, contact your financial adviser or Delaware Investments.
For Shareholders
1.800.523.1918
For Securities Dealers
1.800.362.7500
For Financial Institutions
Representatives Only
1.800.659.2265
www.delawareinvestments.com
DELAWARE INVESMENTS
- -------------------
Philadelphia o London
Be sure to consult your financial adviser when making investments. Mutual funds
can be a valuable part of your financial plan; however, shares of the Fund are
not FDIC or NCUSIF insured, are not guaranteed by any bank or any credit union,
and involve investment risk, including the possible loss of the principal amount
invested. Shares of the Fund are not bank or credit union deposits.
(C) Delaware Distributors, L.P.
Printed in the USA
on recycled paper
(2069)
AR-023[7/99]PPL9/99
