Notes to financial statements | |
| Delaware Multi-state Funds | February 29, 2008 (Unaudited) |
Voyageur Mutual Funds is organized as a Delaware statutory trust and offers five series: Delaware Minnesota High-Yield Municipal Bond Fund, Delaware National High-Yield Municipal Bond Fund, Delaware Tax-Free California Fund, Delaware Tax-Free Idaho Fund and Delaware Tax-Free New York Fund. Voyageur Mutual Funds II is organized as a Delaware statutory trust and offers one series: Delaware Tax-Free Colorado Fund. Voyageur Insured Funds is organized as a Delaware statutory trust and offers one series: Delaware Tax-Free Arizona Fund. Voyageur Mutual Funds, Voyageur Mutual Funds II, and Voyageur Insured Funds are individually referred to as a Trust and collectively as the Trusts. These financial statements and related notes pertain to Delaware Tax-Free Arizona Fund, Delaware Tax-Free California Fund, Delaware Tax-Free Colorado Fund, Delaware Tax-Free Idaho Fund and Delaware Tax-Free New York Fund (each, a Fund, or, collectively, the Funds). The above Trusts are open-end investment companies. The Funds are considered non-diversified under the Investment Company Act of 1940, as amended, and offer Class A, Class B, and Class C shares. Class A shares are sold with a front-end sales charge of up to 4.50%. Class A share purchases of $1,000,000 or more will incur a contingent deferred sales charge (CDSC) of 1% if redeemed during the first year and 0.50% during the second year, provided that Delaware Distributors, L.P. (DDLP) paid a financial advisor a commission on the purchase of those shares. Effective June 1, 2007, Class B shares may only be purchased through dividend reinvestment and certain permitted exchanges. Prior to June 1, 2007, Class B shares were sold with a CDSC that declined from 4% to zero depending upon the period of time the shares were held. Class B shares will automatically convert to Class A shares on a quarterly basis approximately eight years after purchase. Class C shares are sold with a CDSC of 1%, if redeemed during the first 12 months.
The investment objective of the Funds is to seek as high a level of current income exempt from federal income tax and personal income tax in their respective states, as is consistent with preservation of capital.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles and are consistently followed by the Funds.
Security Valuation — Long-term debt securities are valued by an independent pricing service 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. Open-end investment companies are valued at their published net asset value. 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 each Fund’s Board of Trustees. 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, 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).
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 “Fair Value Measurements” (Statement 157). Statement 157 establishes a framework for measuring fair value in U.S. generally accepted accounting principles, clarifies the definition
88
1. Significant Accounting Policies (continued)
of fair value within that framework, and expands disclosures about the use of fair value measurements. Statement 157 is intended to increase consistency and comparability among fair value estimates used in financial reporting. Statement 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of Statement 157 to have a material impact on the amounts reported in the financial statements.
Federal Income Taxes — Each 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 February 29, 2008, each 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 Fund’s 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.
Class Accounting — Investment income and common expenses are allocated to the various classes of each Fund on the basis of “settled shares” of each class in relation to the net assets of each Fund. Realized and unrealized gain (loss) on investments are allocated to the various classes of each Fund on the basis of daily net assets of each class. Distribution expenses relating to a specific class are charged directly to that class.
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 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 Funds are charged directly to the Funds. 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. Interest income is recorded on the accrual basis. Discounts and premiums are amortized to interest income over the lives of the respective securities. Each 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.
89
Notes to financial statements
Delaware Multi-state Funds
1. Significant Accounting Policies (continued)
The Funds receive earnings credits from their 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 statements 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 respective investment management agreement, each Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee, which is calculated based on each Fund’s average daily net assets as follows:
| | | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| On the first $500 million | | | 0.500% | | | | 0.550% | | | | 0.550% | | | | 0.550% | | | | 0.550% | |
| On the next $500 million | | | 0.475% | | | | 0.500% | | | | 0.500% | | | | 0.500% | | | | 0.500% | |
| On the next $1.5 billion | | | 0.450% | | | | 0.450% | | | | 0.450% | | | | 0.450% | | | | 0.450% | |
| In excess of $2.5 billion | | | 0.425% | | | | 0.425% | | | | 0.425% | | | | 0.425% | | | | 0.425% | |
DMC has contractually agreed to waive that portion, if any, of its management fee and reimburse each Fund to the extent necessary to ensure that annual operating expenses, exclusive any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, brokerage fees, certain insurance costs, and non-routine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings, and liquidations (collectively, “non-routine expenses”), do not exceed specified percentages of average daily net assets as shown below. For purposes of these waivers and reimbursements, non-routine expenses may also involve such additional costs and expenses, as may be agreed upon from time to time by each Fund’s Board of Trustees and DMC.
| | | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| Operating expense | | | | | | | | | | | | | | | | | | | | |
| limitation as a | | | | | | | | | | | | | | | | | | | | |
| percentage of average | | | | | | | | | | | | | | | | | | | | |
| daily net assets | | | | | | | | | | | | | | | | | | | | |
| (per annum) | | | 0.50% | | | | 0.63% | | | | 0.68% | | | | 0.60% | | | | 0.60% | |
| Expiration date | | | 12/31/08 | | | | 12/31/08 | | | | 12/31/08 | | | | 12/31/08 | | | | 12/31/08 | |
Effective October 1, 2007, Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to each Fund. For these services, each Fund pays DSC fees based on the aggregate daily net assets of the Delaware Investments®
90
2. Investment Management, Administration Agreements and Other Transactions with Affiliates (continued)
Family of Funds at the following annual rate: 0.0050% of the first $30 billion; 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. Prior to October 1, 2007, DSC provided fund accounting and administrative services to each Fund and received a fee at an annual rate of 0.04% of average daily net assets. For the six months ended February 29, 2008, each Fund was charged for these services as follows:
| Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| $7,774 | | $5,300 | | $14,133 | | $4,716 | | $1,027 |
DSC also provides dividend disbursing and transfer agency services. Each Fund pays DSC a monthly fee based on the number of shareholder accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, each Fund pays DDLP, the distributor and an affiliate of DMC, an annual distribution and service fee not to exceed 0.25% of the average daily net assets of the Class A shares and 1.00% of the average daily net assets of the Class B and C shares.
At February 29, 2008, each Fund had liabilities payable to affiliates as follows:
| | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| Investment management | | | | | | | | | | | | | | | | | | | | |
| fee payable to DMC | | | $37,419 | | | | $35,754 | | | | $109,867 | | | | $30,694 | | | | $4,504 | |
| Dividend disbursing, | | | | | | | | | | | | | | | | | | | | |
| transfer agent fees | | | | | | | | | | | | | | | | | | | | |
| and other expenses | | | | | | | | | | | | | | | | | | | | |
| payable to DSC | | | 5,562 | | | | 3,896 | | | | 11,782 | | | | 3,675 | | | | 1,264 | |
| Distribution fees | | | | | | | | | | | | | | | | | | | | |
| payable to DDLP | | | 39,285 | | | | 31,929 | | | | 59,587 | | | | 27,311 | | | | 6,086 | |
| Other expenses payable | | | | | | | | | | | | | | | | | | | | |
| to DMC and affiliates* | | | 13,318 | | | | 8,301 | | | | 22,435 | | | | 7,705 | | | | 2,121 | |
*DMC, as part of its administrative services, pays operating expenses on behalf of each 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, registration fees and trustees’ fees.
91
Notes to financial statements
Delaware Multi-state Funds
2. Investment Management, Administration Agreements and Other Transactions with Affiliates (continued)
As provided in the investment management agreement, each Fund bears the cost of certain legal and tax services, including internal legal and tax services provided to each Fund by DMC and/or its affiliates’ employees. For the six months ended February 29, 2008, each Fund was charged for internal legal and tax services provided by DMC and/or its affiliates’ employees as follows:
| | | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| | | | $5,065 | | | | $3,428 | | | | $9,256 | | | | $3,101 | | | | $673 | |
| |
| For the six months ended February 29, 2008, DDLP earned commissions on sales of Class A shares for each Fund as follows: |
| |
| | | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| | | | $8,181 | | | | $5,232 | | | | $13,719 | | | | $5,997 | | | | $1,063 | |
| |
| For the six months ended February 29, 2008, DDLP received gross CDSC commissions on redemption of each Fund’s Class A, Class B and Class C shares, and these commissions were entirely used to offset up-front commissions previously paid by DDLP to broker-dealers on sales of those shares. The amounts received were as follows: |
| |
| | | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| Class A | | | $ 563 | | | | $17,262 | | | | $ — | | | | $ — | | | | $ — | |
| Class B | | | 6,632 | | | | 3,904 | | | | 735 | | | | 504 | | | | 19 | |
| Class C | | | 999 | | | | — | | | | — | | | | 500 | | | | — | |
Trustees’ fees include expenses accrued by each Fund for each Trustee’s retainer and per meeting fees. Certain officers of DMC, DSC and DDLP are officers and/or Trustees of the Trust. These officers and Trustees are paid no compensation by each Fund.
3. Investments
For the six months ended February 29, 2008, the Funds made purchases and sales of investment securities other than short-term investments as follows:
| | | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| Purchases | | $23,942,932 | | $19,346,030 | | $19,953,822 | | $6,953,444 | | $4,322,113 |
| Sales | | 29,325,590 | | 24,093,237 | | 31,598,630 | | 6,690,255 | | 4,204,410 |
92
3. Investments (continued)
At February 29, 2008, the cost of investments for federal income tax purposes has been estimated since the final tax characteristics cannot be determined until fiscal year end. At February 29, 2008, the cost of investments and unrealized appreciation (depreciation) for each Fund were as follows:
| | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| Cost of | | | | | | | | | | | | | | | | | | | | | | | | | |
| investments | | $ | 136,485,417 | | | | $ | 90,750,366 | | | | | $ | 239,861,838 | | | $ | 83,053,623 | | | | $ | 17,968,126 | | |
| Aggregate | | | | | | | | | | | | | | | | | | | | | | | | | |
| unrealized | | | | | | | | | | | | | | | | | | | | | | | | | |
| appeciation | | $ | 2,830,569 | | | | $ | 1,595,912 | | | | | $ | 8,632,713 | | | $ | 1,340,505 | | | | $ | 458,846 | | |
| Aggregate | | | | | | | | | | | | | | | | | | | | | | | | | |
| unrealized | | | | | | | | | | | | | | | | | | | | | | | | | |
| depreciation | | | (5,203,380 | ) | | | | (5,150,645 | ) | | | | | (9,206,862 | ) | | | (2,767,650 | ) | | | | (456,076 | ) | |
| Net unrealized | | | | | | | | | | | | | | | | | | | | | | | | | |
| appreciation | | | | | | | | | | | | | | | | | | | | | | | | | |
| (depreciation) | | $ | (2,372,811 | ) | | | $ | (3,554,733 | ) | | | | $ | (574,149 | ) | | $ | (1,427,145 | ) | | | $ | 2,770 | | |
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, 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 February 29, 2008 and the year ended August 31, 2007 was as follows:
| | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| Six Months Ended 2/29/08* | | | | | | | | | | | | | | | | | | | | | |
| Tax-exempt | | | | | | | | | | | | | | | | | | | | |
| income | | | $2,860,312 | | | | $1,924,302 | | | | $ | 5,387,477 | | | | $1,616,120 | | | | $360,825 | |
| Ordinary income | | | — | | | | — | | | | 27,144 | | | | — | | | | — | |
| Total | | | $2,860,312 | | | | $1,924,302 | | | | $ | 5,414,621 | | | | $1,616,120 | | | | $360,825 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended 8/31/07 | | | | | | | | | | | | | | | | | | | | |
| Tax-exempt | | | | | | | | | | | | | | | | | | | | |
| income | | | $6,056,305 | | | | $4,052,743 | | | | $ | 11,438,978 | | | | $3,149,577 | | | | $743,181 | |
*Tax information for the period ended February 29, 2008 is an estimate and the tax character of dividends and distributions may be redesignated at fiscal year end.
93
Notes to financial statements
Delaware Multi-state Funds
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 February 29, 2008, the estimated components of net assets on a tax basis were as follows:
| | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| Shares of beneficial | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| interest | | $ | 140,397,883 | | | | $ | 94,575,736 | | | | | $ | 255,312,421 | | | | $ | 85,773,213 | | | | $ | 18,470,970 | | |
| Distributions | | | | | | | | | | | | | | | | | | | | | | | | | | |
| payable | | | (106,273 | ) | | | | (72,054 | ) | | | | | (204,099 | ) | | | | (62,734 | ) | | | | (13,953 | ) | |
| Undistributed | | | | | | | | | | | | | | | | | | | | | | | | | | |
| tax-exempt | | | | | | | | | | | | | | | | | | | | | | | | | | |
| income | | | 106,273 | | | | | 73,354 | | | | | | 205,748 | | | | | 51,433 | | | | | 12,201 | | |
| Realized gains | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (losses) (9/1/07 – | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2/29/08) | | | 193,914 | | | | | (221,655 | ) | | | | | (40,554 | ) | | | | 73,639 | | | | | (14,929 | ) | |
| Post-October | | | | | | | | | | | | | | | | | | | | | | | | | | |
| losses | | | (132,836 | ) | | | | (388,963 | ) | | | | | — | | | | | (9,487 | ) | | | | (17,752 | ) | |
| Capital loss | | | | | | | | | | | | | | | | | | | | | | | | | | |
| carryforwards as | | | | | | | | | | | | | | | | | | | | | | | | | | |
| of 8/31/07 | | | (2,255,113 | )* | | | | (668,280 | ) | | | | | (7,877,153 | ) | | | | (398,737 | ) | | | | (165,428 | ) | |
| Unrealized appreciation | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (depreciation) of | | | | | | | | | | | | | | | | | | | | | | | | | | |
| investments | | | (2,372,811 | ) | | | | (3,554,733 | ) | | | | | (574,149 | ) | | | | (1,427,145 | ) | | | | 2,770 | | |
| Net assets | | $ | 135,831,037 | | | | $ | 89,743,405 | | | | | $ | 246,822,214 | | | | $ | 84,000,182 | | | | $ | 18,273,879 | | |
*The amount of this loss which can be utilized in subsequent years is subject to an annual limitation in accordance with the Internal Revenue Code due to a Fund merger in 2005.
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales and tax treatment of market discount and premium on debt instruments.
Post-October losses represent losses realized on investment transactions from November 1, 2007 through February 29, 2008 that, in accordance with federal income tax regulations, each Fund has elected to defer and treat as having arisen in the following fiscal year.
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 on certain debt instruments. Results of operations and net assets were not affected by these reclassifications. For the six months ended February 29, 2008, the Funds recorded an estimate of these differences since the final tax characteristics cannot be determined until fiscal year end.
94
5. Components of Net Assets on a Tax Basis (continued)
| | | Delaware | | Delaware |
| | | Tax-Free | | Tax-Free |
| | Colorado Fund | | Idaho Fund |
| Undistributed (distributions in excess of) net | | | | | | | | | | | | |
| investment income | | | $ | 30,842 | | | | | $ | (1,391 | ) | |
| Accumulated net realized gain (loss) | | | | (30,842 | ) | | | | | 1,391 | | |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carryforwards remaining at August 31, 2007 will expire as follows:
| | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| Year of | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| Expiration | | | Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| 2008 | | | $ | 494,969 | | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | |
| 2009 | | | | — | | | | | 662,241 | | | | | 1,044,895 | | | | | 151,477 | | | | | 165,428 | |
| 2010 | | | | — | | | | | — | | | | | — | | | | | 166,949 | | | | | — | |
| 2011 | | | | 78,759 | | | | | 6,039 | | | | | — | | | | | — | | | | | — | |
| 2012 | | | | 1,681,385 | | | | | — | | | | | 4,571,043 | | | | | — | | | | | — | |
| 2013 | | | | — | | | | | — | | | | | 57,695 | | | | | — | | | | | — | |
| 2014 | | | | — | | | | | — | | | | | 2,203,520 | | | | | 23,435 | | | | | — | |
| 2015 | | | | — | | | | | — | | | | | — | | | | | 56,876 | | | | | — | |
| Total | | | $ | 2,255,113 | | | | $ | 668,280 | | | | $ | 7,877,153 | | | | $ | 398,737 | | | | $ | 165,428 | |
For the six months ended February 29, 2008, the Funds had capital gains (losses) which may reduce (increase) the capital loss carryforwards as follows:
| | Delaware | | Delaware | | Delaware | | Delaware | | Delaware |
| Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free | | Tax-Free |
| Arizona Fund | | California Fund | | Colorado Fund | | Idaho Fund | | New York Fund |
| $193,914 | | $(221,655) | | $(40,554) | | $73,639 | | $(14,929) |
95
Notes to financial statements
Delaware Multi-state Funds
6. Capital Shares
Transactions in capital shares were as follows:
| | Delaware Tax-Free | | Delaware Tax-Free | | Delaware Tax-Free |
| | Arizona Fund | | California Fund | | Colorado Fund |
| | Six Months | | Year | | Six Months | | Year | | Six Months | | Year |
| | Ended | | Ended | | Ended | | Ended | | Ended | | Ended |
| | 2/29/08 | | 8/31/07 | | 2/29/08 | | 8/31/07 | | 2/29/08 | | 8/31/07 |
| Shares sold: | | | | | | | | | | | | | | | | | | |
| Class A | | 556,771 | | | 1,310,222 | | | 684,868 | | | 1,994,358 | | | 498,435 | | | 1,137,342 | |
| Class B | | 10 | | | 3,752 | | | 3,593 | | | 13,600 | | | — | | | 1,966 | |
| Class C | | 88,175 | | | 117,465 | | | 204,468 | | | 311,172 | | | 20,940 | | | 171,332 | |
| |
| Shares issued upon reinvestment of dividends and distributions: |
| Class A | | 112,390 | | | 237,386 | | | 81,671 | | | 158,530 | | | 301,558 | | | 624,637 | |
| Class B | | 9,224 | | | 22,522 | | | 9,298 | | | 21,767 | | | 3,755 | | | 11,169 | |
| Class C | | 7,318 | | | 13,407 | | | 15,662 | | | 26,532 | | | 11,097 | | | 22,616 | |
| | 773,888 | | | 1,704,754 | | | 999,560 | | | 2,525,959 | | | 835,785 | | | 1,969,062 | |
| |
| Shares repurchased: | | | | | | | | | | | | | | | | | | |
| Class A | | (948,318 | ) | | (1,775,471 | ) | | (1,127,237 | ) | | (1,870,154 | ) | | (1,425,462 | ) | | (2,190,306 | ) |
| Class B | | (145,466 | ) | | (350,624 | ) | | (131,904 | ) | | (490,356 | ) | | (69,867 | ) | | (260,676 | ) |
| Class C | | (55,720 | ) | | (158,370 | ) | | (165,901 | ) | | (236,524 | ) | | (66,360 | ) | | (150,438 | ) |
| | (1,149,504 | ) | | (2,284,465 | ) | | (1,425,042 | ) | | (2,597,034 | ) | | (1,561,689 | ) | | (2,601,420 | ) |
| Net decrease | | (375,616 | ) | | (579,711 | ) | | (425,482 | ) | | (71,075 | ) | | (725,904 | ) | | (632,358 | ) |
| | Delaware Tax-Free | | Delaware Tax-Free |
| | Idaho Fund | | New York Fund |
| | Six Months | | Year | | Six Months | | Year |
| | Ended | | Ended | | Ended | | Ended |
| | 2/29/08 | | 8/31/07 | | 2/29/08 | | 8/31/07 |
| Shares sold: | | | | | | | | | | | | |
| Class A | | 246,483 | | | 1,316,463 | | | 62,689 | | | 239,258 | |
| Class B | | — | | | 49,968 | | | 1,495 | | | 3,253 | |
| Class C | | 64,653 | | | 78,260 | | | 38,396 | | | 47,036 | |
| |
| Shares issued upon reinvestment of dividends and distributions: |
| Class A | | 77,469 | | | 142,848 | | | 16,520 | | | 39,485 | |
| Class B | | 5,250 | | | 12,137 | | | 1,667 | | | 3,399 | |
| Class C | | 9,389 | | | 21,162 | | | 1,386 | | | 2,551 | |
| | 403,244 | | | 1,620,838 | | | 122,153 | | | 334,982 | |
| |
| Shares repurchased: | | | | | | | | | | | | |
| Class A | | (344,088 | ) | | (736,545 | ) | | (81,276 | ) | | (121,595 | ) |
| Class B | | (51,972 | ) | | (218,716 | ) | | (47,933 | ) | | (67,503 | ) |
| Class C | | (99,042 | ) | | (248,413 | ) | | (33,088 | ) | | (38,590 | ) |
| | (495,102 | ) | | (1,203,674 | ) | | (162,297 | ) | | (227,688 | ) |
| Net increase (decrease) | | (91,858 | ) | | 417,164 | | | (40,144 | ) | | 107,294 | |
96
6. Capital Shares (continued)
For the six months ended February 29, 2008 and the year ended August 31, 2007, the following shares and value were converted from Class B to Class A shares. The amounts are included in Class B redemptions and Class A subscriptions in the tables on the previous page and the statements of changes in net assets.
| | Six Months Ended | | Year Ended |
| | 2/29/08 | | 8/31/07 |
| | Class B | | Class A | | | | | Class B | | Class A | | | |
| | Shares | | Shares | | Value | | Shares | | Shares | | Value |
| Delaware Tax-Free | | | | | | | | | | | | | | |
| Arizona Fund | | 23,509 | | 23,509 | | $ | 262,598 | | 90,057 | | 90,103 | | $ | 1,014,108 |
| Delaware Tax-Free | | | | | | | | | | | | | | |
| California Fund | | 69,832 | | 70,083 | | | 776,571 | | 190,729 | | 191,399 | | | 2,178,747 |
| Delaware Tax-Free | | | | | | | | | | | | | | |
| Colorado Fund | | 55,515 | | 55,565 | | | 603,024 | | 100,172 | | 100,189 | | | 1,109,632 |
| Delaware Tax-Free | | | | | | | | | | | | | | |
| Idaho Fund | | 35,308 | | 35,245 | | | 401,090 | | 96,877 | | 96,752 | | | 1,103,521 |
| Delaware Tax-Free | | | | | | | | | | | | | | |
| New York Fund | | 9,667 | | 9,640 | | | 100,392 | | 16,346 | | 16,311 | | | 172,008 |
7. Line of Credit
Each Fund, along with certain other funds in the Delaware Investments® Family of Funds (Participants), participates in a $225,000,000 revolving line of credit facility to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of investor shares. The Participants are charged an annual commitment fee, which is allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants may borrow up to a maximum of one third of their net assets under the agreement. The Funds had no amounts outstanding as of February 29, 2008, or at any time during the period the ended.
8. Credit and Market Risk
The Funds concentrate their investments in securities issued by municipalities. The value of these investments may be adversely affected by new legislation within the states, regional or local economic conditions, and differing levels of supply and demand for municipal bonds. Many municipalities insure repayment for their obligations. Although bond insurance reduces the risk of loss due to default by an issuer, such bonds remain subject to the risk that value may fluctuate for other reasons and there is no assurance that the insurance company will meet its obligations. These securities have been identified on the statements of net assets.
The Funds may invest in advanced refunded bonds, escrow secured bonds or defeased bonds. Under current federal tax laws and regulations, state and local government borrowers are permitted to refinance outstanding bonds by issuing new bonds. The issuer refinances the outstanding debt to either reduce interest costs or to remove or alter restrictive covenants imposed
97
Notes to financial statements
Delaware Multi-state Funds
8. Credit and Market Risk (continued)
by the bonds being refinanced. A refunding transaction where the municipal securities are being refunded within 90 days from the issuance of the refunding issue is known as a “current refunding”. Advance refunded bonds are bonds in which the refunded bond issue remains outstanding for more than 90 days following the issuance of the refunding issue. In an advance refunding, the issuer will use the proceeds of a new bond issue to purchase high grade interest bearing debt securities which are then deposited in an irrevocable escrow account held by an escrow agent to secure all future payments of principal and interest and bond premium of the advance refunded bond. Bonds are “escrowed to maturity” when the proceeds of the refunding issue are deposited in an escrow account for investment sufficient to pay all of the principal and interest on the original interest payment and maturity dates.
Bonds are considered “pre-refunded” when the refunding issue’s proceeds are escrowed only until a permitted call date or dates on the refunded issue with the refunded issue being redeemed at the time, including any required premium. Bonds become “defeased” when the rights and interests of the bondholders and of their lien on the pledged revenues or other security under the terms of the bond contract and are substituted with an alternative source of revenues (the escrow securities) sufficient to meet payments of principal and interest to maturity or to the first call dates. Escrowed secured bonds will often receive a rating of AAA from Moody’s Investors Service, Inc., Standard & Poor’s Ratings Group, and/or Fitch Ratings due to the strong credit quality of the escrow securities and the irrevocable nature of the escrow deposit agreement.
Each Fund may invest up to 15% 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, each Fund’s Board of Trustees has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of each Fund’s limitation on investments in illiquid assets. As of February 29, 2008, there were no Rule 144A securities. Illiquid securities have been identified on the statements of net assets.
9. Contractual Obligations
The Funds enter 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 Funds have 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.
98
About the organization
This semiannual report is for the information of Delaware Tax-Free Arizona Fund, Delaware Tax-Free California Fund, Delaware Tax-Free Colorado Fund, Delaware Tax-Free Idaho Fund, and Delaware Tax-Free New York Fund shareholders, but it may be used with prospective investors when preceded or accompanied by a current prospectus for Delaware Tax-Free Arizona Fund, Delaware Tax-Free California Fund, Delaware Tax-Free Colorado Fund, Delaware Tax-Free Idaho Fund, and Delaware Tax-Free New York Fund and the Delaware Investments® Fund Profiles for the most recently completed calendar quarter. These documents are available at www.delawareinvestments.com. The prospectus sets forth details about charges, expenses, investment objectives, and operating policies of the investment company. You should read the prospectus carefully before you invest. 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 redeemed, may be worth more or less than their original cost.
Board of trustees | | |
| | | |
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 |
100
Affiliated officers | | Contact information |
| | | |
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. O’Connor
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 | | Investment manager
Delaware Management Company, a series of
Delaware Management Business Trust
Philadelphia, PA National distributor
Delaware Distributors, L.P.
Philadelphia, PA Shareholder servicing, dividend disbursing,
and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094 For shareholders
800 523-1918 For securities dealers and financial
institutions representatives only
800 362-7500 Web site
www.delawareinvestments.com |
| |
|
Delaware Investments is the marketing name of Delaware Management Holdings, Inc. and its subsidiaries. Each 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. Each Fund’s Forms N-Q, as well as a description of the policies and procedures that each Fund uses to determine how to vote proxies (if any) relating to portfolio securities are available without charge (i) upon request, by calling 800 523-1918; and (ii) on the Commission’s Web site at www.sec.gov. In addition, a description of the policies and procedures that each Fund uses to determine how to vote proxies (if any) relating to portfolio securities and each Fund’s Schedule of Investments are available without charge on each Fund’s Web site at www.delawareinvestments.com. Each Fund’s Forms N-Q may be reviewed and copied at the Commission’s 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 each Fund voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through each Fund’s Web site at www.delawareinvestments.com; and (ii) on the Commission’s Web site at www.sec.gov. |
101
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SA-WEST [2/08] DG3 4/08 MF-08-03-024 PO 12796 (2928) |  |
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 registrant’s principal executive officer and principal financial officer have evaluated the registrant’s 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 registrant’s 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 registrant’s second fiscal quarter) that have materially affected, or are reasonably likely to materially affect, the registrant’s 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: VOYAGEUR MUTUAL FUNDS II
| PATRICK P. COYNE |
| By: | Patrick P. Coyne |
| Title: | Chief Executive Officer |
| Date: | May 5, 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: | May 5, 2008 |
| |
| |
| RICHARD SALUS |
| By: | Richard Salus |
| Title: | Chief Financial Officer |
| Date: | May 5, 2008 |
