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 August 31, 2008:
|
Securities
|
|
Derivatives
|
Level
1
|
$
|
96,298,013
|
|
$
|
-
|
Level 2
|
|
50,280,053
|
|
|
33,791
|
Level
3
|
|
1,805,838
|
|
|
-
|
Total
|
$
|
148,383,904
|
|
$
|
33,791
|
The following is a reconciliation of
investments in which significant unobservable inputs (Level 3) were used in
determining fair value:
|
Securities
|
Balance as of 11/30/2007
|
$
|
218,725
|
|
Net change in
unrealized
|
|
|
|
appreciation/(depreciation)
|
|
(1,442,479
|
)
|
Net
purchases, sales and settlements
|
|
3,029,592
|
|
Balance as of
8/31/08
|
$
|
1,805,838
|
|
|
Net
change in unrealized
|
|
|
|
appreciation/depreciation from
|
|
|
|
investments still held as of
8/31/08
|
$
|
(218,722
|
)
|
3. Commercial
Paper
The Fund terminated the
commercial paper program and related Liquidity Agreement with JPMorgan Chase on
December 20, 2007.
4. Line of
Credit
For the period ended August
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 August 31, 2008, the
par value of loans outstanding was $44,000,000 at the Fed Funds rate of 2.24%
plus 0.25%. During the period ended August 31, 2008, the average daily balance
of loans outstanding was $42,429,091 at a weighted average Fed Funds rate of
approximately 2.928% 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 unusual balance. The loan is
collateralized by the Funds portfolio.
5. 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 Fund's 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 Fund's 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 period ended August 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 unrealized 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 schedule of
investments.
6. 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 & Poor's 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 (non-cash 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 security lending income net of allocations to
the security lending agent and the borrower.
At August 31, 2008, the value of
securities on loan was $12,057,155, for which cash collateral was received and
invested in accordance with the Lending Agreement. Such investments are
presented on the schedule of investments under the caption "Securities Lending
Collateral".
7. Credit and Market
Risk
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 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 period
ended August 31, 2008. The Fund's 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 the
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
has delegated to Delaware Management Company, a series of Delaware Management
Business Trust, 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 schedule of investments.
8. Subsequent
Events
Lehman
Bankruptcy
At August 31, 2008,
Delaware Investments Dividend and Income Fund, Inc. had direct and indirect
exposure to investments with Lehman Brothers Holdings Inc. (Lehman) or
Lehmans affiliates, including bonds and derivatives for which Lehman or
Lehmans affiliates was the issuer or counterparty. On September 15, 2008,
Lehman filed for Chapter 11 bankruptcy protection.
With respect to direct exposure to
Lehman, the Fund held bonds valued at approximately 0.39% of net assets as of
August 31, 2008. With respect to indirect exposure, the Funds exposure through
credit default swaps where Lehman or Lehmans affiliate was counterparty was
approximately 0.04% of net assets (which represents the net unrealized
appreciation/depreciation on the Funds books) as of August 31, 2008.
As of September 15, 2008, approximately
0.00% and 0.04% of the Funds net assets were subject to direct and indirect
exposure of Lehman or Lehmans affiliates (before collateral), respectively.
Credit
Agreement
In October 2008, Delaware
Investments Dividend and Income Fund, Inc. reduced the amount borrowed pursuant
to a Credit Agreement with BNY Mellon to approximately $28.2 million as of
October 27, 2008. The reduction in the amount borrowed was made so that the Fund
could meet the asset coverage requirements set forth in the Credit Agreement.
Item 2. 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 registrants last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the registrants internal control over
financial reporting.
Item 3. Exhibits.
File as
exhibits as part of this Form a separate certification for each principal
executive officer and principal financial officer of the registrant as required
by Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)), exactly as set forth
below:
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