Notes to financial statements
Delaware Investments Dividend and
Income Fund, Inc.
May 31, 2008
(Unaudited)
Delaware Investments Dividend and Income
Fund, Inc. (Fund) is organized as a Maryland corporation and is a diversified
closed-end management investment company under the Investment Company Act of
1940, as amended. The Funds shares trade on the New York Stock Exchange (NYSE)
under the symbol DDF.
The investment objective of the Fund is to
seek high current income. Capital appreciation is a secondary
objective.
1. Significant Accounting
Policies
The following accounting policies
are in accordance with U.S generally accepted accounting principles and are
consistently followed by the Fund.
Security Valuation
Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the NYSE on the valuation date. Securities traded on the
Nasdaq are valued in accordance with the Nasdaq Official Closing Price, which
may not be the last sales price. If on a particular day an equity security does
not trade, then the mean between the bid and asked prices will be used. U.S.
government and agency securities are valued at the mean between the bid and
asked prices. Other long-term debt securities, credit default swap (CDS)
contracts and interest rate swap contracts are valued by an independent pricing
service or broker and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Securities lending
collateral, which is invested in a collective investment vehicle (Collective
Trust), is valued at unit value per share. Generally, index swap contracts,
spread swap contracts and other securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Funds Board of Directors. In determining
whether market quotations are readily available or fair valuation will be used,
various factors will be taken into consideration, such as market closures, or
with respect to foreign securities, aftermarket trading or significant events
after local market trading (e.g., government actions or pronouncements, trading
volume or volatility on markets, exchanges among dealers, or news
events).
Federal Income Taxes
The Fund intends to continue to qualify for federal income
tax purposes as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended, and make the requisite distributions
to shareholders. Accordingly, no provision for federal income taxes has been
made in the financial statements.
Effective May 30, 2008, the Fund adopted
FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN
48). FIN 48 provides guidance for how uncertain tax positions should be
recognized, measured, presented, and disclosed in the financial statements. FIN
48 requires the evaluation of tax positions taken or expected to be taken in the
course of preparing the Funds tax returns to determine whether the tax
positions are more-likely-than-not of being sustained by the applicable tax
authority. Tax positions not deemed to meet the more-likely-than-not threshold
are recorded as a tax benefit or expense in the current year. The adoption of
FIN 48 did not result in the recording of any tax benefit or expense in the
current period.
Distributions
The Fund has a managed distribution policy. Under the
policy, the Fund declares and pays monthly distributions and is managed with a
goal of generating as much of the distribution as possible from
ordinary income (net investment income and short-term capital
gains). The balance of the distribution then comes from long-term capital gains
to the extent permitted and, if necessary, a return of capital. The current
annualized rate is $0.96 per share ($0.08 monthly). The Fund continues to
evaluate its monthly distribution in light of ongoing economic and market
conditions and may change the amount of the monthly distributions in the
future.
Repurchase Agreements
The Fund may invest in a pooled cash account along with
members of the Delaware Investments
®
Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. 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 Funds custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 102% collateralized. However,
in the event of default or bankruptcy by the counterparty to the agreement,
realization of the collateral may be subject to legal proceedings.
Use of Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that may 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 directly attributable to the Fund are charged directly to the
Fund. Other expenses common to various funds within the Delaware
Investments
®
Family of Funds are generally allocated amongst such
funds on the basis of average net assets. Management fees and some other
expenses are paid monthly. Security transactions are recorded on the date the
securities are purchased or sold (trade date) for financial reporting purposes.
Costs used in calculating realized gains and losses on the sale of investment
securities are those of the specific securities sold. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. Discounts and premiums on non-convertible bonds are amortized to interest
income over the lives of the respective securities. Distributions received from
investments in Real Estate Investment Trusts (REITs) are recorded as dividend
income on the ex-dividend date as an estimate, subject to reclassification upon
notice of the character of such distribution by the issuer.
Subject to seeking best execution, the
Fund may direct certain security trades to brokers who have agreed to rebate a
portion of the related brokerage commission to the Fund in cash. There were no
commission rebates during the six months ended May 31, 2008. In general, best
execution refers to many factors, including the price paid or received for a
security, the commission charged, the promptness and reliability of execution,
the confidentiality and placement accorded the order, and other factors
affecting the overall benefit obtained by the Fund on the transaction. DMC, as
defined below, and its affiliates have previously and may in the future act as
an investment advisor to mutual funds or separate accounts affiliated with the
administrator of the commission recapture program described above. In addition,
affiliates of the administrator act as consultants in helping institutional
clients choose investment advisors and may also participate in other types of
business and provide other services in the investment management
industry.
16
1. Significant Accounting Policies
(continued)
The Fund receives earnings
credits from its custodian when positive cash balances are maintained, which are
used to offset custody fees. The expense paid under this arrangement is included
in custodian fees on the statement of operations with the corresponding expense
offset shown as expense paid indirectly.
2. Investment Management,
Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of
its investment management agreement, the Fund pays Delaware Management Company
(DMC), a series of Delaware Management Business Trust and the investment
manager, an annual fee of 0.55%, which is calculated daily based on the adjusted
average weekly net assets.
Delaware Service Company, Inc. (DSC), an
affiliate of DMC, provides accounting and financial administration oversight
services to the Fund. For these services, the Fund pays DSC fees based on the
aggregate daily net assets of the Delaware Investments
®
Family of
Funds at the following annual rate: 0.0050% of the first $30 billion; and
0.0045% of the next $10 billion; 0.0040% of the next $10 billion; and 0.0025% of
aggregate average daily net assets in excess of $50 billion. The fees payable to
DSC under the service agreement described above are allocated among all Funds in
the Delaware Investments
®
Family of Funds on a relative net asset
value basis. For the six months ended May 31, 2008, the Fund was charged $3,912
for these services.
For purposes of the calculation of
investment management fees and administration fees, adjusted average weekly net
assets does not include the line of credit liability.
At May 31, 2008, the Fund had liabilities
payable to affiliates as follows:
Investment management fee payable to DMC
|
|
$71,815
|
Fees and
expenses payable to DSC
|
|
3,096
|
Other expenses payable to DMC and affiliates*
|
|
6,034
|
*
DMC, as part
of its administrative services, pays operating expenses on behalf of the
Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, stock exchange fees, custodian fees and Directors
fees.
|
As provided in the investment management
agreement, the Fund bears the cost of certain legal and tax services, including
internal legal and tax services provided to the Fund by DMC and/or its
affiliates employees. For the six months ended May 31, 2008, the Fund was
charged $4,016 for internal legal and tax services provided by DMC and/or its
affiliates employees.
Directors fees include expenses accrued
by the Fund for each Directors retainer and per meeting fees. Certain officers
of DMC and DSC are officers and/or directors of the Fund. These officers and
directors are paid no compensation by the Fund.
During the six months ended May 31, 2008,
Roger A. Early was appointed co-portfolio manager of the Fund. Mr. Early serves
as co-manager with D. Tysen Nutt Jr., Anthony A. Lombardi, Robert A. Vogel Jr.,
Nikhil G. Lalvani, Nashira S. Wynn, Thomas H. Chow, Kevin P. Loome, Babak
Zenouzi, and Damon J. Andres.
3. Investments
For the six months ended May 31, 2008, the Fund made purchases
of $51,703,555 and sales of $58,847,999 of investment securities other than
short-term investments.
At May 31, 2008, the cost of investments
for federal income tax purposes has been estimated since final tax
characteristics cannot be determined until fiscal year end. At May 31, 2008, the
cost of investments was $164,095,286. At May 31, 2008, net unrealized
appreciation was $78,010, of which $13,221,479 related to unrealized
appreciation of investments and $13,143,469 related to unrealized depreciation
of investments.
Effective December 1, 2007, the Fund
adopted Financial Accounting Standards No. 157, Fair Value Measurements (FAS
157). FAS 157 defines fair value as the price that the Fund would receive to
sell an asset or pay to transfer a liability in an orderly transaction between
market participants at the measurement date. FAS 157 also establishes a
framework for measuring fair value, and a three level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an asset
or liability. Inputs may be observable or unobservable and refer broadly to the
assumptions that market participants would use in pricing the asset or
liability. Observable inputs reflect the assumptions market participants would
use in pricing the asset or liability based on market data obtained from sources
independent of the reporting entity. Unobservable inputs reflect the reporting
entitys own assumptions about the assumptions that market participants would
use in pricing the asset or liability developed based on the best information
available in the circumstances. The Funds investment in its entirety is
assigned a level based upon the observability of the inputs which are
significant to the overall valuation. The three-tier hierarchy of inputs is
summarized below.
Level 1 - inputs are quoted prices in
active markets
Level 2 - inputs that are observable,
directly or indirectly
Level 3 - inputs are unobservable and
reflect assumptions on the part of the reporting entity
The following table summarizes the
valuation of the Funds investments by the above FAS 157 fair value hierarchy
levels as of May 31, 2008:
Level
|
Securities
|
|
Derivatives
|
Level 1
|
$
|
109,030,575
|
|
$
|
|
Level
2
|
|
53,277,342
|
|
|
16,257
|
Level 3
|
|
1,865,379
|
|
|
|
Total
|
$
|
164,173,296
|
|
$
|
16,257
|
(continues)
17
Notes to financial
statements
Delaware Investments
Dividend and Income Fund, Inc.
3. Investments
(continued)
The following is a
reconciliation of investments in which significant unobservable inputs (Level 3)
were used in determining fair value:
|
Securities
|
|
Derivatives
|
Balance as of 11/30/07
|
$
|
218,725
|
|
|
$
|
|
Net change in
unrealized
|
|
|
|
|
|
|
appreciation/depreciation
|
|
(532,938
|
)
|
|
|
|
Net purchases, sales and settlements
|
|
2,179,592
|
|
|
|
|
Balance as of
5/31/08
|
$
|
1,865,379
|
|
|
$
|
|
Net change in unrealized
|
|
|
|
|
|
|
appreciation/depreciation from
|
|
|
|
|
|
|
investments still held as of 5/31/08
|
$
|
32
|
|
|
$
|
|
4. Dividend and Distribution
Information
Income and long-term capital
gain distributions are determined in accordance with federal income tax
regulations, which may differ from U.S. generally accepted accounting
principles. Additionally, distributions from net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the six
months ended May 31, 2008 and the year ended November 30, 2007 was as
follows:
|
Six
Months
|
|
Year
|
|
Ended
|
|
Ended
|
|
5/31/08*
|
|
11/30/07
|
|
(Unaudited)
|
|
|
|
Ordinary income
|
$
|
5,020,211
|
|
$
|
6,457,314
|
Long-term
capital gains
|
|
|
|
|
9,173,698
|
Return of capital
|
|
|
|
|
6,965,444
|
Total
|
$
|
5,020,211
|
|
$
|
22,596,456
|
*
Tax
information for the six months ended May 31, 2008 is an estimate and the
tax character of dividends and distributions may be redesignated at fiscal
year end.
|
5. Components of Net Assets on a Tax
Basis
The components of net assets are
estimated since final tax characteristics cannot be determined until fiscal year
end. As of May 31, 2008, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest
|
$
|
110,080,020
|
|
Undistributed
long-term capital gain
|
|
2,191,586
|
|
Unrealized appreciation of investments
|
|
78,470
|
|
Other temporary
differences
|
|
(146,091
|
)
|
Net assets
|
$
|
112,203,985
|
|
The differences between book basis and tax
basis components of net assets are primarily attributable to tax deferral of
losses on wash sales, contingent payment debt instruments, interest accrued on
bonds in default, tax treatment of CDS contracts and market discount and premium
on debt instruments.
For financial reporting purposes, capital
accounts are adjusted to reflect the tax character of permanent book/tax
differences. Reclassifications are primarily due to tax treatment of market
discount and premium on certain debt instruments and CDS contracts. Results of
operations and net assets were not affected by these reclassifications. For the
six months ended May 31, 2008, the Fund recorded an estimate of these
differences since the final tax characteristics cannot be determined until
fiscal year end.
Undistributed net investment income
|
$
|
2,417,907
|
|
Accumulated net
realized gain
|
|
(105,293
|
)
|
Paid-in capital
|
|
(2,312,614
|
)
|
6. Capital Stock
Shares obtained under the Funds dividend reinvestment plan
are purchased by the Funds transfer agent, BNY Mellon Shareowner Services, in
the open market. There were no shares issued under the Funds dividend
reinvestment plan for the six months ended May 31, 2008 and year ended November
30, 2007.
On May 22, 2008, the Funds Board of
Directors approved a tender offer for shares of the Funds common stock. The
tender offer authorized the Fund to purchase up to 5% of its issued and
outstanding shares at a price equal to the Funds net asset value at the close
of business on the NYSE on June 30, 2008, the first business day following the
expiration of the offer. The tender offer commenced on May 30, 2008 and expired
on June 27, 2008. In connection with the tender offer, the Fund purchased
522,939 shares of capital stock at a total cost of approximately $5,004,526. The
tender offer was oversubscribed, and all tenders of the shares were subject to
pro-ration (at a ratio of approximately 0.744305528) in accordance with the
terms of the tender offer.
On May 21, 2007, the Funds Board of
Directors approved a tender offer for shares of the Funds common stock. The
tender offer authorized the Fund to purchase up to 5% of its issued and
outstanding shares at a price equal to the Funds net asset value at the close
of business on the NYSE on July 2, 2007, the first business day following the
expiration of the offer. The tender offer commenced on June 1, 2007 and expired
on June 29, 2007. In connection with the tender offer, the Fund purchased
550,462 shares of capital stock at a total cost of $7,943,167. The tender offer
was oversubscribed, and all tenders of the shares were subject to pro-ration (at
a ratio of approximately 0.529105872) in accordance with the terms of the tender
offer.
The Fund did not purchase any shares under
the Share Repurchase Program during the period ended May 31, 2008 and the year
ended November 30, 2007.
18
7. Commercial Paper
During the period December 1, 2007 to December 20, 2007,
$24,000,000 (par value) of commercial paper was outstanding. The average daily
balance of commercial paper outstanding during the period December 1, 2007 to
December 20, 2007 was $23,974,750 at a weighted discount rate of 5.05%. The
maximum amount of commercial paper outstanding at any time during period was
$24,000,000.
In conjunction with issuance of the
commercial paper, the Fund entered into a Liquidity Agreement with JPMorgan
Chase for $30,000,000. Interest on borrowings was based on market rates in
effect at the time of borrowing. The commitment fee was computed at the rate of
0.10% per annum on the unused balance. During the period December 1, 2007 to
December 20, 2007, there were no borrowings under this arrangement.
The Fund terminated the commercial paper
program and related liquidity Agreement with JPMorgan Chase on December 20,
2007.
8. Line of Credit
For the six months ended May 31, 2008, the Fund borrowed money
pursuant to a $44,000,000 Line of Credit Agreement with The Bank of New York
Mellon (BNY Mellon). At May 31, 2008, the par value of loans outstanding was
$44,000,000 at the Fed Funds rate of 2.23% plus 0.25%. During the six months
ended May 31, 2008, the average daily balance of loans outstanding was
$41,639,344 at a weighted average Fed Funds rate of approximately 3.27% plus
0.25%. The maximum amount of borrowings outstanding at any time during the
period was $44,000,000. Interest on borrowings is based on market rates in
effect at the time of borrowing. The commitment fee is computed at a rate of
0.10% per annum on the unused balance. The loan is collateralized by the Funds
portfolio.
9. Swap Contracts
The Fund may enter into interest rate swap contracts, index
swap contracts and CDS contracts in accordance with its investment objectives.
The Fund may use interest rate swaps to adjust the Funds sensitivity to
interest rates or to hedge against changes in interest rates. Index swaps may be
used to gain exposure to markets that the Fund invests in, such as the corporate
bond market. The Fund may also use index swaps as a substitute for futures or
options contracts if such contracts are not directly available to the Fund on
favorable terms. The Fund may enter into CDS contracts in order to hedge against
a credit event, to enhance total return or to gain exposure to certain
securities or markets.
An interest rate swap involves payments
received by the Fund from another party based on a variable or floating interest
rate, in return for making payments based on a fixed interest rate. An interest
rate swap can also work in reverse with the Fund receiving payments based on a
fixed interest rate and making payments based on a variable or floating interest
rate. Interest rate swaps may be used to adjust the Funds sensitivity to
interest rates or to hedge against changes in interest rates. Periodic payments
on such contracts are accrued daily and recorded as unrealized
appreciation/depreciation on swap contracts. Upon periodic payment/ receipt or
termination of the contract, such amounts are recorded as realized gains or
losses on swap contracts.
Index swaps involve commitments to pay
interest in exchange for a market linked return based on a notional amount. To
the extent the total return of the security, instrument or basket of instruments
underlying the transaction exceeds the offsetting interest obligation, the Fund
will receive a payment from the counterparty. To the extent the total return of
the security, instrument or basket of instruments underlying the transaction
falls short of the offsetting interest obligation, the Fund will make a payment
to the counterparty. The change in value of swap contracts outstanding, if any,
is recorded as unrealized appreciation or depreciation daily. A realized gain or
loss is recorded on maturity or termination of the swap contract.
A CDS contract is a risk-transfer
instrument through which one party (purchaser of protection) transfers to
another party (seller of protection) the financial risk of a credit event (as
defined in the CDS agreement), as it relates to a particular reference security
or basket of securities (such as an index). In exchange for the protection
offered by the seller of protection, the purchaser of protection agrees to pay
the seller of protection a periodic amount at a stated rate that is applied to
the notional amount of the CDS contract. In addition, an upfront payment may be
made or received by the Fund in connection with an unwinding or assignment of a
CDS contract. Upon the occurrence of a credit event, the seller of protection
would pay the par (or other agreed-upon) value of the referenced security (or
basket of securities) to the counterparty.
During the six months ended May 31, 2008,
the Fund entered into CDS contracts as a purchaser and seller of protection.
Periodic payments (receipts) on such contracts are accrued daily and recorded as
unrealized losses (gains) on swap contracts. Upon payment (receipt), such
amounts are recorded as realized losses (gains) on swap contracts. Upfront
payments made or received in connection with CDS contracts are amortized over
the expected life of the CDS contracts as realized losses (gains) on swap
contracts. The change in value of CDS contracts is recorded as unrealized
appreciation or depreciation daily. A realized gain or loss is recorded upon a
credit event (as defined in the CDS agreement) or the maturity or termination of
the agreement.
CDS may involve greater risks than if the
Fund had invested in the referenced obligation directly. CDS are subject to
general market risk, liquidity risk, counterparty risk and credit risk. If the
Fund enters into a CDS contract as a purchaser of protection and no credit event
occurs, its exposure is limited to the periodic payments previously made to the
counterparty.
Because there is no organized market for
swap contracts, the value of open swaps may differ from that which would be
realized in the event the Fund terminated its position in the agreement. Risks
of entering into these contracts include the potential inability of the
counterparty to meet the terms of the contracts. This type of risk is generally
limited to the amount of favorable movement in the value of the underlying
security, instrument or basket of instruments, if any, at the day of default.
Risks also arise from potential losses from adverse market movements and such
losses could exceed the unrealized amounts shown on the statement of net
assets.
(continues)
19
Notes to financial
statements
Delaware Investments Dividend
and Income Fund, Inc.
10. Securities Lending
The Fund, along with other funds in the
Delaware Investments
®
Family of Funds, may lend its securities
pursuant to a security lending agreement (Lending Agreement) with BNY Mellon.
With respect to each loan, if the aggregate market value of the collateral held
on any business day is less than the aggregate market value of the securities
which are the subject of such loan, the borrower will be notified to provide
additional collateral not less than the applicable collateral requirements. Cash
collateral received is invested in a Collective Trust established by BNY Mellon
for the purpose of investment on behalf of clients participating in its
securities lending programs. The Collective Trust invests in fixed income
securities, with a weighted average maturity not to exceed 90 days, rated in one
of the top three tiers by Standard & Poors Ratings Group or Moodys
Investors Service, Inc. or repurchase agreements collateralized by such
securities. The Fund can also accept U.S. government securities and letters of
credit (noncash collateral) in connection with securities loans. In the event
of default or bankruptcy by the lending agent, realization and/or retention of
the collateral may be subject to legal proceedings. In the event the borrower
fails to return loaned securities and the collateral received is insufficient to
cover the value of the loaned securities and provided such collateral shortfall
is not the result of investment losses, the lending agent has agreed to pay the
amount of the shortfall to the Fund, or at the discretion of the lending agent,
replace the loaned securities. The Fund continues to record dividends or
interest, as applicable, on the securities loaned and is subject to change in
value of the securities loaned that may occur during the term of the loan. The
Fund has the right under the Lending Agreement to recover the securities from
the borrower on demand. With respect to security loans collateralized by
non-cash collateral, the Fund receives loan premiums paid by the borrower. With
respect to security loans collateralized by cash collateral, the earnings from
the collateral investments are shared among the Fund, the security lending agent
and the borrower. The Fund records securities lending income net of allocations
to the security lending agent and the borrower.
At May 31, 2008, the value of the
securities on loan was $14,361,777, for which the Fund received collateral,
comprised of non-cash collateral valued at $2,657,243, and cash collateral of
$12,213,155. Investments purchased with cash collateral are presented on the
statement of net assets under the caption Securities Lending Collateral.
11. Credit and Market
Risks
The Fund invests a portion of its
assets in high yield fixed income securities, which carry ratings of BB or lower
by Standard & Poors Ratings Group and/or Ba or lower by Moodys Investors
Service, Inc. Investments in these higher yielding securities are generally
accompanied by a greater degree of credit risk than higher rated securities.
Additionally, lower rated securities may be more susceptible to adverse economic
and competitive industry conditions than investment grade securities.
The Fund invests in real estate investment
trusts (REITs) and is subject to some of the risks associated with that
industry. If the Fund holds real estate directly as a result of defaults or
receives rental income directly from real estate holdings, its tax status as a
regulated investment company may be jeopardized. There were no direct real
estate holdings during the six months ended May 31, 2008. The Funds REIT
holdings are also affected by interest rate changes, particularly if the REITs
it holds use floating rate debt to finance their ongoing operations.
The Fund may invest up to 10% of its net
assets in illiquid securities, which may include securities with contractual
restrictions on resale, securities exempt from registration under Rule 144A of
the Securities Act of 1933, as amended, and other securities which may not be
readily marketable. The relative illiquidity of these securities may impair each
Fund from disposing of them in a timely manner and at a fair price when it is
necessary or desirable to do so. While maintaining oversight, the Funds Board
of Trustees has delegated to DMC the day-to-day functions of determining whether
individual securities are liquid for purposes of the Funds limitation on
investments in illiquid assets. Securities eligible for resale pursuant to Rule
144A, which are determined to be liquid, are not subject to the Funds 10% limit
on investments in illiquid securities. Rule 144A and illiquid securities have
been identified on the statement of net assets.
12. Contractual
Obligations
The Fund enters into contracts
in the normal course of business that contain a variety of indemnifications. The
Funds maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts. Management has
reviewed the Funds existing contracts and expects the risk of loss to be
remote.
20
Other Fund information
(unaudited)
Delaware Investments Dividend and Income Fund,
Inc.
Board Consideration of Delaware
Investments Dividend and Income Fund, Inc. Advisory
Agreement
At a meeting held on May 20-22,
2008 (the Annual Meeting), the Board of Directors, including a majority of
disinterested or independent Directors, approved the renewal of the Investment
Advisory Agreement for the Delaware Investments Dividend and Income Fund, Inc.
(the Fund). In making its decision, the Board considered information furnished
at regular quarterly Board meetings, including reports detailing Fund
performance, investment strategies and expenses, as well as information prepared
specifically in connection with the renewal of the investment advisory contract.
Information furnished specifically in connection with the renewal of the
Investment Advisory Agreement with Delaware Management Company (DMC) included
materials provided by DMC and its affiliates (Delaware Investments)
concerning, among other things, the nature, extent and quality of services
provided to the Fund, the costs of such services to the Fund, economies of scale
and the financial condition and profitability of Delaware Investments. In
addition, in connection with the Annual Meeting, the Board separately received
and reviewed in February 2008 independent historical and comparative reports
prepared by Lipper Inc. (Lipper), an independent statistical compilation
organization. The Lipper reports compared the Funds investment performance and
expenses with those of other comparable mutual funds. The independent Directors
reviewed Lipper reports with Counsel to the Independent Directors at the
February 2008 Board meeting and discussed such reports further with counsel
earlier in the Annual Meeting. The Board requested and received certain
information regarding Managements policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; the investment managers profitability; and any
constraints or limitations on the availability of securities in certain
investment styles which might inhibit DMCs ability to invest fully in
accordance with Fund policies.
In considering information relating to the
approval of the Funds advisory agreement, the independent Directors received
assistance and advice from and met separately with independent counsel. Although
the Directors gave attention to all information furnished, the following
discussion identifies, under separate headings, the primary factors taken into
account by the Board in its contract renewal considerations.
Nature, Extent And Quality of Service.
The Board considered the services provided by
Delaware Investments to the Fund and its shareholders. In reviewing the nature,
extent and quality of services, the Board emphasized reports furnished to it
throughout the year at regular Board meetings covering matters such as the
compliance of portfolio managers with the investment policies, strategies and
restrictions for the Fund, the compliance of management personnel with the Code
of Ethics adopted throughout the Delaware Investments Family of Funds complex
and the adherence to fair value pricing procedures as established by the Board.
The Board was pleased with the current staffing of the Funds investment advisor
and the emphasis placed on research in the investment process. Favorable
consideration was given to DMCs efforts to maintain expenditures and, in some
instances, increase financial and human resources committed to Fund matters.
During 2007 Management commenced the outsourcing of certain investment
accounting functions that are expected to improve the quality and the cost of
delivering investment accounting services to the Fund. The Board was satisfied
with the nature, extent and quality of the overall services provided by Delaware
Investments.
Investment Performance.
The Board considered the investment performance of DMC and
the Fund. The Board placed significant emphasis on the investment performance of
the Fund in view of its importance to shareholders. Although the Board gave
appropriate consideration to performance reports and discussions with portfolio
managers at Board meetings throughout the year, the Board gave particular weight
to the Lipper reports furnished for the Annual Meeting. The Lipper reports
prepared for the Fund showed the investment performance of its shares in
comparison to a group of similar funds as selected by Lipper (the Performance
Universe). A fund with the highest performance ranked first, and a fund with
the lowest ranked last. The highest/best performing 25% of funds in the
Performance Universe make up the first quartile; the next 25% the second
quartile; the next 25% the third quartile; and the lowest/worst performing 25%
of funds in the Performance Universe make up the fourth quartile. Comparative
annualized performance for the Fund was shown for the past one-, three-, five-,
and ten-year periods ended December 31, 2007. The Boards objective is that the
Funds performance for the periods considered be at or above the median of its
Performance Universe. The following paragraph summarizes the performance results
for the Fund and the Boards view of such performance.
The Performance Universe for the Fund
consisted of the Fund and all leveraged closed-end income and preferred stock
funds as selected by Lipper. The Lipper report comparison showed that the Funds
total return for the one- and ten-year periods was in the second quartile. The
report further showed that the Funds total return for the three- and five-year
periods was in the first quartile. The Board considered the perceived advantages
of personnel changes that took place in 2006 and 2007, including the hiring of a
new head of the equity department in 2007. The Board commended Managements
efforts to enhance Fund performance and expressed confidence in the team, its
philosophy and processes. The Board was satisfied that Management was taking
effective action to improve Fund performance and meet the Boards performance
objective.
Comparative Expenses.
The Board considered expense comparison data for the Delaware
Investments Family of Funds. Management provided the Board with information on
pricing levels and fee structures for the Fund as of October 31, 2007 and the
most recent fiscal year end for each comparative fund as of August 31, 2007 or
earlier. For any fund with a fiscal year end after August 31, 2007, such funds
expense data were measured as of its fiscal year end for 2006. The Board focused
particularly on the comparative analysis of the management fees and total
expense ratios of the Fund and the effective management fees and expense ratios
of a group of similar leveraged closed-end funds as selected by Lipper (the
Expense Group). In reviewing comparative costs, the Funds contractual
management fee and the actual management fee incurred by the Fund were compared
with the contractual management fees (assuming all funds in the Expense Group
were similar in size to the Fund) and actual management fees (as reported by
each fund) of other funds within the Expense Group, taking into account any
applicable breakpoints and fee waivers. The Funds total expenses were also
compared with those of its Expense Group. The Board also considered fees paid to
Delaware Investments for non-management services. The Board noted its objective
to limit the Funds total expense ratio to be competitive with that of the
Expense Group. The following paragraph summarizes the expense results for the
Fund and the Boards view of such expenses.
(continues)
21
Other Fund information
(unaudited)
Delaware Investments Dividend
and Income Fund, Inc.
Board Consideration of Delaware
Investments Dividend and Income Fund, Inc. Advisory Agreement
(continued)
The expense comparisons for
the Fund showed that its actual management fee was in the quartile with the
lowest expenses of its Expense Group and its total expenses were in the quartile
with the second lowest expenses of its Expense Group. The Board was satisfied
with the management fees and total expenses of the Fund in comparison to its
Expense Group.
Management
Profitability.
The Board considered the level
of profits, if any, realized by Delaware Investments in connection with the
operation of the Fund. In this respect, the Board reviewed the Investment
Management Profitability Analysis that addressed the overall profitability of
Delaware Investments business in providing management and other services to
each of the individual funds and the Delaware Investments Family of Funds as a
whole. Specific attention was given to the methodology followed in allocating
costs for the purpose of determining profitability. Management stated that the
level of profits of Delaware Investments, to a certain extent, reflected
operational cost savings and efficiencies initiated by Delaware Investments. The
Board considered Delaware Investments efforts to improve services provided to
fund shareholders and to meet additional regulatory and compliance requirements
resulting from recent industry-wide SEC initiatives. The Board also considered
the extent to which Delaware Investments might derive ancillary benefits from
fund operations, including the potential for procuring additional business as a
result of the prestige and visibility associated with its role as service
provider to the Delaware Investments Family of Funds and the benefits from
allocation of fund brokerage to improve trading efficiencies. The Board found
that the level of management fees was reasonable in light of the services
rendered and the profitability of Delaware Investments.
Economies of Scale.
As a closed-end fund, the Fund does not issue shares on a
continuous basis. Fund assets increase only to the extent that the values of the
underlying securities in the Fund increase. Accordingly, the Board determined
that the Fund was not likely to experience significant economies of scale due to
asset growth and, therefore, a fee schedule with breakpoints to pass the benefit
of economies of scale on to shareholders was not likely to provide the intended
effect.
Dividend Reinvestment
Plan
The Fund offers an automatic dividend
reinvestment program (Plan). Shareholders who have shares registered in their
own names are automatically considered participants in the Plan, unless they
elect to withdraw from the Plan. Shareholders who hold their shares through a
bank, broker or other nominee should request the bank, broker or nominee to
participate in the Plan on their behalf. This can be done as long as the bank,
broker or nominee provides a dividend reinvestment service for the Fund. If the
bank, broker or nominee does not provide this service, such shareholders must
have their shares taken out of street or nominee name and re-registered in
their own name in order to participate in the Plan.
BNY Mellon Shareowner Services will apply
all cash dividends, capital gains and other distributions (collectively,
Distributions) on the Funds shares of common stock which become payable to
each Plan participant to the purchase of outstanding shares of the Funds common
stock for such participant. These purchases may be made on a securities exchange
or in the over-the-counter market, and may be subject to such terms of price,
delivery and related matters to which BNY Mellon Shareowner Services may agree.
The Fund will not issue new shares in connection with the Plan.
Distributions reinvested for participants
are subject to income taxes just as if they had been paid directly to the
shareholder in cash. Participants will receive a year-end statement showing
distributions reinvested, and any brokerage commissions paid on such
participants behalf.
Shareholders holding shares of the Fund in
their own names who wish to terminate their participation in the Plan may do so
by sending written instruction to BNY Mellon Shareowner Services so that BNY
Mellon Shareowner Services receives such instructions at least 10 days prior to
the Distribution record date. Shareholders with shares held in account by a
bank, broker or other nominee should contact such bank, broker or other nominee
to determine the procedure for withdrawal from the Plan.
If written instructions are not received
by BNY Mellon Shareowner Services at least 10 days prior to the record date for
a particular Distribution, that Distribution may be reinvested at the sole
discretion of BNY Mellon Shareowner Services. After a shareholders instructions
to terminate participation in the Plan become effective, Distributions will be
paid to shareholders in cash. Upon termination, a shareholder may elect to
receive either stock or cash for all the full shares in the account. If cash is
elected, BNY Mellon Shareowner Services will sell such shares at the then
current market value and then send the net proceeds to the shareholder, after
deducting brokerage commissions and related expenses. Any fractional shares at
the time of termination will be paid in cash at the current market price, less
brokerage commissions and related expenses, if any. Shareholders may at any time
request a full or partial withdrawal of shares from the Plan, without
terminating participation in the Plan. When shares outside of the Plan are
liquidated, Distributions on shares held under the Plan will continue to be
reinvested unless BNY Mellon Shareowner Services is notified of the
shareholders withdrawal from the Plan.
22
Dividend Reinvestment Plan
(continued)
An investor holding shares
that participate in the Plan in a brokerage account may not be able to transfer
the shares to another broker and continue to participate in the Plan. Please
contact your broker/dealer for additional details.
BNY Mellon Shareowner Services will charge
participants their proportional share of brokerage commissions on market
purchases. Participants may obtain a certificate or certificates for all or part
of the full shares credited to their accounts at any time by making a request in
writing to BNY Mellon Shareowner Services. A fee may be charged to the
participant for each certificate issuance.
If you have any questions and shares are
registered in your name, contact BNY Mellon Shareowner Services at 800 851-9677.
If you have any questions and shares are registered in street name, contact
the broker/dealer holding the shares or your financial advisor.
Effective August 1, 2008, the Dividend
Reinvestment Plan may be amended by the Fund upon twenty days written notice to
the Plans participants.
Notice Filing with the National Futures
Association
In the future, the Fund may
invest in futures contracts. It should be noted that the Fund has filed with the
National Futures Association a notice claiming an exclusion from the definition
of the term commodity pool operator (CPO) under the Commodity Exchange Act,
as amended, and the rules of the Commodity Futures Trading Commission
promulgated thereunder, with respect to the Funds operation. Accordingly, the
Fund is not subject to registration or regulation as a CPO.
23
About the organization
This semiannual report is for the
information of Delaware Investments
Dividend and Income Fund, Inc. shareholders.
The figures in this report represent past results that are not a guarantee of
future results. The return and principal value of an investment in the
investment company will fluctuate so that shares, when sold, may be worth more
or less than their original cost.
Notice is hereby given in accordance with
Section 23(c) of the Investment Company Act of 1940 that the Fund may, from time
to time, purchase shares of its common stock on the open market at market
prices.
Board of
directors
Patrick P.
Coyne
Chairman, President,
and
Chief Executive Officer
Delaware
Investments
®
Family of Funds
Philadelphia, PA
Thomas L.
Bennett
Private Investor
Rosemont, PA
John A. Fry
President
Franklin
& Marshall College
Lancaster, PA
Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY
Lucinda S.
Landreth
Former Chief Investment
Officer
Assurant Inc.
Philadelphia,
PA
Ann R. Leven
Consultant
ARL Associates
New York,
NY
Thomas F.
Madison
President and Chief Executive Officer
MLM Partners
Inc.
Minneapolis, MN
Janet L.
Yeomans
Vice President and Treasurer
3M Corporation
St.
Paul, MN
J. Richard
Zecher
Founder
Investor
Analytics
Scottsdale, AZ
|
Affiliated
officers
David F.
Connor
Vice President, Deputy
General Counsel,
and Secretary
Delaware Investments Family of
Funds
Philadelphia, PA
Daniel V.
Geatens
Vice President and
Treasurer
Delaware Investments Family of
Funds
Philadelphia, PA
David P.
OConnor
Senior Vice President,
General Counsel,
and Chief Legal Officer
Delaware Investments
Family of Funds
Philadelphia, PA
Richard Salus
Senior Vice President and
Chief Financial
Officer
Delaware Investments Family of
Funds
Philadelphia, PA
The Fund
files its complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year
on Form N-Q. The Funds Forms N-Q, as well as a description of the
policies and procedures that the Fund uses to determine how to vote
proxies (if any) relating to portfolio securities is available without
charge (i) upon request, by calling 800 523-1918; (ii) on the Funds Web
site at http://www.delawareinvestments.com; and (iii) on the Commissions
Web site at http://www.sec.gov. The Funds Forms N-Q may be reviewed and
copied at the Commissions Public Reference Room in Washington, D.C.;
information on the operation of the Public Reference Room may be obtained
by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating
to portfolio securities during the most recently disclosed 12-month period
ended June 30 is available without charge (i) through the Funds Web site
at http://www.delawareinvestments.com; and (ii) on the Commissions Web
site at http://www.sec.gov.
|
Contact
information
Investment
manager
Delaware Management Company,
a series of Delaware Management
Business Trust
Philadelphia,
PA
Principal office of the
Fund
2005 Market
Street
Philadelphia, PA
19103-7057
Independent registered public
accounting firm
Ernst &
Young LLP
2001 Market Street
Philadelphia, PA 19103
Registrar and stock transfer
agent
BNY Mellon Shareowner
Services
480 Washington Blvd.
Jersey
City, NJ 07310
800 851-9677
For securities dealers
and
financial institutions
representatives
800 362-7500
Web site
www.delawareinvestments.com
Delaware Investments is the
marketing name of Delaware Management Holdings, Inc. and its
subsidiaries.
Your reinvestment
options
Delaware Investments
Dividend and Income Fund, Inc. offers an automatic dividend reinvestment
program. If you would like to reinvest dividends, and shares are
registered in your name, contact BNY Mellon Shareowner
Services
at 800 851-9677. You will be asked to put your request in writing.
If you have shares registered in street name, contact the broker/dealer
holding the shares or your financial
advisor.
|
Audit committee member
24
(3248)
|
|
Printed in the
USA
|
SA-DDF [5/08]
DG3 7/08
|
|
MF-08-06-033 PO13048
|
Item 2. Code of Ethics
Not
applicable.
Item 3. Audit Committee Financial
Expert
Not applicable.
Item 4. Principal Accountant Fees and
Services
Not applicable.
Item 5. Audit Committee of Listed
Registrants
Not applicable.
Item 6. Investments
(a) Included as part of report to
shareholders filed under Item 1 of this Form N-CSR.
(b) Divestment of securities in
accordance with Section 13(c) of the Investment Company Act of 1940.
Not applicable.
Item 7. Disclosure of Proxy Voting
Policies and Procedures for Closed-End Management Investment
Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End
Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by
Closed-End Management Investment Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote
of Security Holders
Not applicable.
Item 11. Controls and
Procedures
The
registrants principal executive officer and principal financial officer have
evaluated the registrants disclosure controls and procedures within 90 days of
the filing of this report and have concluded that they are effective in
providing reasonable assurance that the information required to be disclosed by
the registrant in its reports or statements filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.
There were no significant changes in
the registrants internal control over financial reporting that occurred during
the second fiscal quarter of the period covered by the report to stockholders
included herein (i.e., the registrants second fiscal quarter) that have
materially affected, or are reasonably likely to materially affect, the
registrants internal control over financial reporting.
Item 12. Exhibits
(a)
(1) Code of Ethics
Not
applicable.
(2)
Certifications of Principal Executive Officer and Principal Financial Officer
pursuant to Rule 30a-2 under the Investment Company Act of 1940 are attached
hereto as Exhibit 99.CERT.
(3) Written
solicitations to purchase securities pursuant to Rule 23c-1 under the Securities
Exchange Act of 1934.
Not
applicable.
(b) Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 are furnished herewith as Exhibit
99.906CERT.
SIGNATURES
Pursuant to
the requirements of the Securities Exchange Act of 1934 and the Investment
Company Act of 1940, the registrant has duly caused this report to be signed on
its behalf, by the undersigned, thereunto duly authorized.
Name of Registrant
:
Delaware Investments Dividend and Income Fund,
Inc.
PATRICK P.
COYNE
|
By:
|
Patrick P.
Coyne
|
Title:
|
Chief Executive
Officer
|
Date:
|
July 28,
2008
|
Pursuant to the requirements of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
PATRICK P.
COYNE
|
By:
|
Patrick P.
Coyne
|
Title:
|
Chief Executive
Officer
|
Date:
|
July 28,
2008
|
|
RICHARD
SALUS
|
By:
|
Richard
Salus
|
Title:
|
Chief Financial
Officer
|
Date:
|
July 28,
2008
|
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