UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-2715
Exact name of registrant as specified in charter: Delaware Group State Tax-Free Income Trust
Address of principal executive offices: 2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service: Richelle S. Maestro, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: February 29
Date of reporting period: February 29, 2004
Item 1. Reports to Stockholders
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
FIXED INCOME
Annual Report FEBRUARY 29, 2004
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DELAWARE TAX-FREE PENNSYLVANIA FUND
[LOGO]
POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARY 3
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FINANCIAL STATEMENTS:
Statement of Net Assets 4
Statement of Operations 9
Statements of Changes in Net Assets 10
Financial Highlights 11
Notes to Financial Statements 14
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REPORT OF INDEPENDENT AUDITORS 16
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BOARD OF TRUSTEES/DIRECTORS AND OFFICERS 17
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Funds are not FDIC insured and are not guaranteed. It is possible to lose
the principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a
series of Delaware Management Business Trust, which is a registered
investment advisor.
(C) 2004 Delaware Distributors, L.P.
Portfolio Delaware Tax-Free Pennsylvania Fund
MANAGEMENT REVIEW March 10, 2004
Portfolio Management Review
Patrick P. Coyne
Executive Vice President, Managing Director, Head of Equities
Joseph R. Baxter
Portfolio Manager
Q: Please describe the overall bond market conditions during the fiscal year.
A: Bond fund performance occurred against a backdrop of lower short-term rates
throughout the markets, anchored by Federal Reserve interest rate cuts that left
the fed funds rate (the rate at which banks make short-term loans to other
banks) at one percent. One-year, AAA-rated municipal bonds began the fiscal year
yielding 1.04% and finished at 1.10% as of February 29, 2004 (Source: Municipal
Market Data). One-year municipal bonds witnessed little volatility as yields
tightened to 0.80% in the spring and increased to 1.10% in the summer of 2003.
Longer-term bonds were considerably more volatile, although they showed little
overall change for the fiscal year. 10-year AAA-rated general obligation bonds
started the period yielding 3.56% and went as low as 2.85% in June on the Fed's
suggestion that it might consider buying long bonds directly as a way of
stimulating the economy. These bonds ended the period at 3.54% -- nearly
identical to their initial position -- in part because the Fed moved away from
their suggestion about buying long bonds directly.
30-year AAA-rated general obligation bonds were also more volatile than
corresponding one-year debt. They began the year yielding 4.70%, dipped to 4.20%
in the spring, and rose to 5.10% in the summer. Despite this volatility, they
ended the period yielding 4.60%, changing little from the start of the reporting
period.
The yield curve experienced some mid-year volatility, with a springtime rally
followed by a summer fade. Overall, the yield curve mimicked long-term bond
performance by changing very little from the fiscal year's beginning and end.
Municipal bond market yields outperformed corresponding Treasury bond yields
during the fiscal year, an unusual trend in our opinion. As the fiscal year
began, the yield on 30-year general obligation municipal bonds was 102.0% that
of 30-year Treasury bonds. By period end, that ratio had declined to 92.8%.
The municipal bond market enjoyed a heavy supply of debt, as well as good demand
from both traditional and crossover (moving from stocks to bonds) buyers. As a
whole, the municipal debt market grew, fueled by municipalities refinancing
older, more expensive debt at lower current rates. Municipalities saw less tax
revenue during the economic downturn. While some municipalities are still
experiencing tightened budgets, they are likely to finance limited projects and
conserve their cash.
Q: What conditions prevailed in the Pennsylvania municipal debt market?
A: Credit quality in the early stages of recovery in Pennsylvania mirrored the
national trend. The state has diversified away from its traditional
manufacturing base, moving toward non-traditional manufacturing, including
increasing work for the pharmaceutical industry. We believe Pennsylvania is
recovering from the recent economic downturn, albeit at a slow pace due in part
to its lack of rapid job creation.
Pittsburgh saw its debt downgraded to junk bond status during the fiscal year.
This has little effect on bond funds, however, because Pittsburgh's debt is
insured -- as is about three-quarters of all Pennsylvania debt.
(Pennsylvania-based airline debt, which has shown volatility, is also insured.)
Other credit ratings stayed about the same, with a small move toward upgrades --
an improvement over the previous fiscal year.
Pennsylvania's municipal debt supply increased slightly, growing 4.9% during the
fiscal year. It slipped from being the sixth largest municipal debt issuer to
being the seventh largest such supplier, largely because the national municipal
debt market grew somewhat faster than did Pennsylvania-based issues.
Q: Against this backdrop, how did the Fund perform?
A: For the fiscal year ended February 29, 2004, Delaware Tax-Free Pennsylvania
Fund returned +6.00% (Class A shares at net asset value with distributions
reinvested). It outperformed the Lipper Pennsylvania Municipal Debt Funds
Average, which returned +5.79%, and slightly underperformed the Lehman Brothers
Municipal Bond Index, which appreciated +6.30% during the same period.
1
Q: What strategies affected Fund performance?
A: The market offered strong demand for securities that are more susceptible to
interest rate risk, allowing us to lessen duration (duration is a common measure
of a bond or bond fund's sensitivity to interest rate changes. The longer the
duration, the more sensitive the bond or bond fund is to changes in interest
rates). The Fund's duration was 6.73 years as the fiscal year began and closed
with an average duration of 5.86 years. Although the Fund held a low duration at
period end, this strategy was not implemented until midway through the fiscal
year. This caused the Fund to underperform its peer group last July when
interest rates rose sharply. We decided to wait for the market to stabilize and
then began the process of shortening the Fund's duration which may allow for
better performance in rising interest rate environments.
We shortened our duration largely by selling non-callable bonds and debt with
coupons beneath 5%. We then tried to reinvest at higher coupons and lower
durations, with the goal of keeping the income side of the portfolio healthy. We
sold $12 million (par value) in non-callable bonds from the University of
Pittsburgh Medical Center, and may consider selling our remaining holding of
$8.5 million in these bonds if and when conditions are right. We also sold our
entire $10 million holding of Delaware Valley Regional Finance Authority (Series
A) bonds, and sold $5.5 million in other debt with coupons under 5%. We also
bought $8.7 million in other bonds with coupons of 5.5% to 6.0%. All in all, we
reduced our interest rate risk exposure on nearly $30 million in bonds with very
little reduction in interest rates.
We also responded to concerns about financially unstable issuers. We sold nearly
$6 million in bonds issued by a rehabilitation hospital near Scranton due to
concerns about the facility's fiscal stability.
Despite market volatility, we were able to make favorable sales and purchases,
selling into higher prices when they presented themselves and alleviating
ourselves of higher coupons when they became available.
2
Delaware
TAX-FREE PENNSYLVANIA FUND
Fund Basics
As of February 29, 2004
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Fund Objective:
The Fund seeks a high level of current interest
income exempt from federal income tax and
certain Pennsylvania state and local taxes,
consistent with preservation of capital.
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Total Fund Net Assets:
$673.98 million
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Number of Holdings:
126
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Fund Start Date:
March 23, 1977
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Your Fund Managers:
Patrick P. Coyne is a graduate of Harvard
University with an MBA from the University of
Pennsylvania's Wharton School. Patrick Coyne
joined Delaware Investments' fixed-income
department in 1990. Prior to joining Delaware
Investments, he was a manager of Kidder, Peabody &
Co. Inc.'s trading desk, and specialized in
trading high-grade municipal bonds and municipal
futures contracts.
Joseph R. Baxter is a graduate of LaSalle
University where he earned his undergraduate
degree in finance and marketing. Prior to joining
Delaware in 1999, he held investment positions
with First Union. Most recently, he served as a
municipal portfolio manager for the Evergreen
Funds.
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Nasdaq Symbols:
Class A DELIX
Class B DPTBX
Class C DPTCX
Fund Performance
Average Annual Total Returns
Through February 29, 2004 Lifetime 10 Years Five Years One Year
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Class A (Est. 3/23/77)
Excluding Sales Charge +6.29% +5.22% +4.93% +6.00%
Including Sales Charge +6.11% +4.73% +3.97% +1.27%
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Class B (Est. 5/2/94)
Excluding Sales Charge +4.74% +4.10% +5.17%
Including Sales Charge +4.74% +3.85% +1.17%
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Class C (Est. 11/29/95)
Excluding Sales Charge +4.35% +4.10% +5.17%
Including Sales Charge +4.35% +4.10% +4.17%
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Returns reflect the reinvestment of distributions and any applicable
sales charges as noted below. Returns and share values will fluctuate so that
shares, when redeemed, may be worth more or less than their original cost.
Performance for Class B and C shares, excluding sales charges, assumes either
that contingent deferred sales charges did not apply or the investment was not
redeemed. Past performance is not a guarantee of future results.
The Fund offers Class A, B, and C shares. Class A shares are sold with a
front-end sales charge of up to 4.50% and for periods after June 1, 1992, have
an annual distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1%, if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
An expense limitation was in effect for Class A shares of Delaware Tax-Free
Pennsylvania Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance table and graph do not reflect the deduction of taxes the
shareholder would pay on Fund distributions or redemptions of Fund shares.
Performance of a $10,000 Investment
February 28, 1994 through February 29, 2004
[Graphic Omitted]
Delaware Tax-Free Lehman Brothers
Pennsylvania Fund Municipal Bond Index
2/28/1994 $9,550 $10,000
2/28/1995 $9,636 $10,189
2/29/1996 $10,607 $11,314
2/28/1997 $11,069 $11,937
2/28/1998 $11,920 $13,028
2/28/1999 $12,473 $13,829
2/29/2000 $11,824 $13,542
2/28/2001 $13,065 $15,213
2/28/2002 $13,951 $16,247
2/28/2003 $14,968 $17,493
2/29/2004 $15,871 $18,595
Chart assumes $10,000 invested on February 28, 1994 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance for other Fund classes will vary due to differing charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The Lehman Brothers Municipal Bond Index is an unmanaged index that
generally tracks the performance of municipal bonds. An index is unmanaged and
does not reflect the costs of operating a mutual fund, such as the costs of
buying, selling, and holding securities. You cannot invest directly in an index.
Past performance is not a guarantee of future results.
3
Statement Delaware Tax-Free Pennsylvania Fund
OF NET ASSETS February 29, 2004
Principal Market
Amount Value
Municipal Bonds - 98.98%
Airport Revenue Bonds - 2.26%
Allegheny County Airport Revenue
(Pittsburgh International
Airport Project) Series A
5.75% 1/1/14 (MBIA) (AMT) $ 6,910,000 $ 7,906,837
Lehigh Northampton Airport
Authority Revenue (Lehigh
Valley Airport Project) Series A
6.00% 5/15/25 (MBIA) (AMT) 1,525,000 1,729,060
6.00% 5/15/30 (MBIA) (AMT) 2,700,000 3,060,639
Philadelphia Authority for Industrial
Development Revenue (Sub-Air
Cargo Project) Series A
7.50% 1/1/25 (AMT) 2,500,000 2,559,575
-----------
15,256,111
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Continuing Care/Retirement Revenue Bonds - 2.69%
Allegheny County Residential Finance
Authority Health Care Facilities
Revenue (Lemington Home for
Aged Project) Series A
5.75% 5/20/37 1,000,000 1,062,780
Bucks County Industrial Development
Authority Multi-Family County-
Guaranteed (New Hope Manor
Project) Series A
5.40% 3/1/22 1,265,000 1,332,728
5.50% 3/1/41 5,340,000 5,600,432
+Delaware County Authority Revenue
(Main Line & Haverford Nursing
and Rehabilitation Center Project)
9.00% 8/1/22 1,865,000 1,136,251
Lancaster County Hospital Authority
Revenue Health Center (Willow
Valley Retirement Community
Project) 5.875% 6/1/31 2,100,000 2,212,812
Lancaster Authority for Industrial
Development Revenue (Garden
Spot Village Project) Series A
7.625% 5/1/31 1,650,000 1,716,396
Philadelphia Authority for Industrial
Development Revenue (Stapeley
Hall Germantown Continuing Care
Community Project) 6.60% 1/1/16 5,250,000 5,102,685
-----------
18,164,084
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Corporate-Backed Revenue Bonds - 4.62%
Allegheny County Industrial
Development Authority
Environmental Improvement Revenue
Refunding (USX Corp. Project)
5.50% 12/1/29 13,000,000 13,132,860
Beaver County Industrial Development
Authority Pollution Control
Revenue Refunding
(Atlantic Richfield Co. Project)
5.95% 7/1/21 5,100,000 5,361,477
+++Bucks County Industrial Development
Authority Environmental
Improvement Revenue
(USX Corp. Project)
5.40% 11/1/17 2,250,000 2,522,498
Principal Market
Amount Value
Municipal Bonds (continued)
Corporate-Backed Revenue Bonds (continued)
Pennsylvania Economic Development
Financing Authority Solid
Waste Disposal Revenue
(Proctor & Gamble Co. Project)
5.375% 3/1/31 (AMT) $ 9,200,000 $ 10,089,180
-----------
31,106,015
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Escrowed to Maturity Bonds - 6.27%
Delaware County Authority Revenue
Health Facilities (Mercy Health
Corp. Project) 6.00% 12/15/26 3,500,000 3,939,705
Pennsylvania State Higher Educational
Facilities Authority College &
University Revenue
(University of the Arts Project)
5.20% 3/15/25 (RADIAN) 4,490,000 4,989,513
Philadelphia Authority for Industrial
Development Commercial Revenue
(Girard Estates Facilities Leasing
Project) 5.00% 5/15/27 4,500,000 4,569,750
Philadelphia Hospitals & Higher
Education Facilities Authority
Hospital Revenue (Presbyterian
Medical Center Project)
6.65% 12/1/19 13,000,000 16,725,929
Pittsburgh Water & Sewer Authority
Revenue Refunding
7.25% 9/1/14 (FGIC) 9,000,000 11,437,470
Pottsville School District
9.375% 5/1/06 (AMBAC) 540,000 581,413
-----------
42,243,780
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Higher Education Revenue Bonds - 13.61%
Allegheny County Higher Education
Building Authority Revenue
(Carnegie Mellon University Project)
5.25% 3/1/32 1,900,000 1,990,136
(Chatham College Project)
Series A 5.85% 3/1/22 650,000 681,421
Series A 5.95% 3/1/32 1,000,000 1,039,930
Series B 5.75% 11/15/35 5,000,000 5,194,250
Delaware County Authority College
Revenue (Eastern College Project)
Series B 5.50% 10/1/19 4,175,000 4,250,108
5.50% 10/1/24 2,850,000 2,864,136
(Haverford College Project)
5.75% 11/15/29 1,875,000 2,138,738
Indiana County Industrial Development
Authority Revenue (Indiana University
Student Co-op Association, Inc.
Project) Series A
5.875% 11/1/24 (AMBAC) 1,000,000 1,089,240
5.875% 11/1/29 (AMBAC) 1,000,000 1,089,240
Lehigh County General Purpose
Authority Revenue
(Desales University Project)
5.125% 12/15/23 (RADIAN) 5,435,000 5,709,468
Lycoming County Authority College
Revenue (Pennsylvania College of
Technology Project)
5.375% 7/1/30 (AMBAC) 5,000,000 5,338,400
4
Statement Delaware Tax-Free Pennsylvania Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
Municipal Bonds (continued)
Higher Education Revenue Bonds (continued)
Montgomery County Higher Education &
Health Authority Revenue
(Arcadia University Project)
5.85% 4/1/21 (Connie Lee) $ 5,465,000 $ 5,998,930
Pennsylvania State Higher Educational
Facilities Authority College &
University Revenue (Drexel
University Project) 6.00% 5/1/29 3,000,000 3,252,360
Series A 5.20% 5/1/29 1,500,000 1,563,585
Series A 5.20% 5/1/32 1,000,000 1,041,450
(Lafayette College Project)
6.00% 5/1/30 2,500,000 2,907,700
(Philadelphia University Project)
6.00% 6/1/29 (RADIAN) 1,800,000 2,016,774
(Thomas Jefferson University Project)
5.00% 1/1/29 5,000,000 5,171,250
(University of Pennsylvania Project)
4.75% 7/15/33 750,000 755,423
Series B 5.90% 9/1/15 4,205,000 4,491,739
(Ursinus College Project)
5.125% 1/1/33 (RADIAN) 2,000,000 2,076,600
Pennsylvania State Public School
Authority (Lehigh Career &
Technical Institute Project)
5.125% 10/1/28 (FGIC) 2,800,000 2,981,132
Philadelphia Redevelopment
Authority Revenue (Beech Student
Housing Complex Project)
5.50% 7/1/35 (ACA) 1,500,000 1,555,725
5.625% 7/1/28 (ACA) 1,000,000 1,051,170
Philadelphia Hospitals & Higher
Educational Facilities Authority
College Revenue (Chestnut Hill
College Project) 6.00% 10/1/29 4,360,000 4,387,424
Swarthmore Borough Authority
College Revenue (Swarthmore
College Project) 5.00% 9/15/31 18,665,000 19,432,131
West Cornwall Township Municipal
Authority College Revenue
(Elizabethtown College Project)
6.00% 12/15/27 1,615,000 1,677,436
-----------
91,745,896
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Hospital Revenue Bonds - 15.58%
Allegheny County Hospital Development
Authority Revenue Health Center
(UPMC Health Systems Project)
Series B 6.00% 7/1/23 (MBIA) 5,745,000 6,963,112
6.00% 7/1/26 (MBIA) 2,750,000 3,360,500
Berks County Municipal Authority
Revenue (Health Care Reading
Hospital Pooled Financing Project)
5.00% 3/1/28 15,000,000 15,349,500
Chester County Health & Educational
Facilities Authority Health System
Revenue (Jefferson Health Systems
Project) Series B 5.375% 5/15/27 14,270,000 14,647,584
Principal Market
Amount Value
Municipal Bonds (continued)
Hospital Revenue Bonds (continued)
Lancaster County Hospital Revenue
(General Hospital Project)
5.50% 3/15/26 $ 3,000,000 $ 3,113,880
Monroe County Hospital Authority
Revenue (Pocono Medical Center
Project) 6.00% 1/1/43 5,460,000 5,740,371
Montgomery County Higher
Education & Health Authority
Hospital Revenue (Abington
Memorial Hospital Project)
Series A 5.125% 6/1/32 6,600,000 6,701,640
Mount Lebanon Hospital
Authority (St. Clair Memorial
Hospital Project) Series A
5.625% 7/1/32 4,500,000 4,681,845
Pennsylvania Economic Development
Financing Authority Revenue
(Dr. Gertrude A. Barber Center, Inc.
Project) 5.90% 12/1/30 (RADIAN) 2,250,000 2,465,055
Pennsylvania State Higher Educational
Facilities Authority Revenue
(UPMC Health Systems Project)
Series A 6.00% 1/15/31 10,000,000 10,722,300
Philadelphia Hospitals & Higher
Education Facilities Authority
Hospital Revenue (Jeanes Health
System Project) 6.85% 7/1/22 10,000,000 10,092,100
Southcentral General Authority
Revenue (Wellspan Health
Obligated Project)
5.625% 5/15/26 20,000,000 21,170,600
-----------
105,008,487
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Investor Owned Utilities Revenue Bonds - 13.25%
Beaver County Industrial Development
Authority Pollution Control Revenue
Refunding (Cleveland Electric
Illuminating Project)
7.625% 5/1/25 8,500,000 9,113,615
Series A 7.75% 7/15/25 10,000,000 10,828,200
Cambria County Industrial Development
Authority Pollution Control Revenue
(Pennsylvania Electric Co. Project)
Series A 5.80% 11/1/20 (MBIA) 4,000,000 4,334,920
Series B 6.05% 11/1/25 (MBIA) (AMT) 9,700,000 10,516,352
Carbon County Industrial Development
Authority Refunding (Panther Creek
Partners Project) 6.65% 5/1/10 (AMT) 9,395,000 10,318,059
+++Delaware County Industrial
Development Authority Pollution
Control Revenue Refunding
(PECO Energy Co. Project)
Series A 5.20% 4/1/21 15,500,000 15,791,090
Indiana County Industrial Development
Authority Pollution Control Revenue
Refunding (PSE&G Power Project)
5.85% 6/1/27 (AMT) 3,000,000 3,066,090
5
Statement Delaware Tax-Free Pennsylvania Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
Municipal Bonds (continued)
Investor Owned Utilities Revenue Bonds (continued)
Lehigh County Industrial Development
Authority Pollution Control Revenue
Refunding (Pennsylvania Power and
Light Co. Project) Series B
6.40% 9/1/29 (MBIA) $15,000,000 $15,674,550
+++Montgomery County Industrial
Development Authority Pollution
Control Revenue (PECO Energy Co.
Project) Series A 5.20% 10/1/30 9,500,000 9,678,410
-----------
89,321,286
-----------
Miscellaneous Revenue Bonds - 8.72%
**First Albany Corp. Municipal Trust
Inverse Floater
6.48% 12/15/14 (AMBAC) 46,500,000 56,890,425
++Philadelphia Gas Works Revenue
Capital Appreciation Series C
6.54% 1/1/12 (AMBAC) 2,500,000 1,914,600
-----------
58,805,025
-----------
Municipal Lease Revenue Bonds - 2.61%
Dauphin County General Authority
Office and Parking (Forum Place
Project) Series A 6.00% 1/15/25 9,210,000 4,328,700
Philadelphia Authority for Industrial
Development Lease Revenue
Series B 5.25% 10/1/30 (FSA) 4,510,000 4,823,310
State Public School Building Authority
(Daniel Boone School District Project)
5.00% 4/1/28 (MBIA) 3,000,000 3,162,570
(Philadelphia School District Project)
5.00% 6/1/33 (FSA) 5,000,000 5,258,900
-----------
17,573,480
-----------
Parking Revenue Bonds - 0.81%
Pennsylvania Economic Development
Financing Authority Revenue
(30th Street Station Garage Project)
5.875% 6/1/33 (ACA) 4,500,000 4,818,240
Philadelphia Parking Authority Revenue
5.00% 2/1/27 (AMBAC) 590,000 612,768
-----------
5,431,008
-----------
Political Subdivision General Obligation Bonds - 0.31%
Lancaster County Series A
5.00% 11/1/27 (FGIC) 2,000,000 2,093,160
-----------
2,093,160
-----------
Ports & Harbors Revenue Bonds - 1.98%
Allegheny County Port Authority
Special Revenue Refunding
5.00% 3/1/29 (FGIC) 2,000,000 2,089,200
Delaware River Port Authority
(Pennsylvania and New Jersey
Port District Project) Series B
5.70% 1/1/21 (FSA) 8,560,000 9,777,318
Erie Western Pennsylvania Port
Authority General Revenue
Refunding 6.25% 6/15/10 (AMT) 1,365,000 1,499,766
-----------
13,366,284
-----------
Principal Market
Amount Value
Municipal Bonds (continued)
*Pre-Refunded Bonds - 7.70%
Abington School District
6.00% 5/15/26-06 (FGIC) $ 6,000,000 $ 6,617,520
Chester Refunding (Guaranteed Host
Community Project)
7.25% 12/1/05-05 1,955,000 2,140,666
Dauphin County General Authority
College Revenue (Holy Family
College Project) 7.50% 12/1/19-04 3,025,000 3,160,157
Harrisburg Authority Office &
Parking Revenue Series A
6.00% 5/1/19-08 7,500,000 8,718,675
Norwin School District
6.00% 4/1/30-10 (FGIC) 2,000,000 2,400,260
Pennsylvania State Higher Education
Assistance Agency
Capital Acquisition
5.875% 12/15/30-10 (MBIA) 7,385,000 8,909,781
Pennsylvania State Higher Educational
Facilities Authority College &
University Revenue
(Ursinus College Project)
5.90% 1/1/27-07 1,000,000 1,138,650
Pennsylvania State Higher Educational
Facilities Authority Revenue Series M
5.75% 6/15/20-05 (AMBAC) 17,730,000 18,800,892
-----------
51,886,601
-----------
School District General Obligation Bonds - 3.60%
Canon McMillan School District Series B
5.25% 12/1/34 (FGIC) 3,580,000 3,839,085
East Allegheny School District
Refunding 5.00% 4/1/32 (FGIC) 2,000,000 2,093,660
Gateway School District Allegheny
County 5.00% 10/15/32 2,500,000 2,634,100
Greater Johnstown School District
Refunding Series C
5.125% 8/1/25 (MBIA) 7,500,000 7,935,974
McGuffey School District
5.125% 8/1/31 (FGIC) 2,000,000 2,132,840
Moshannon Valley School District
5.00% 12/1/22 (FGIC) 3,005,000 3,219,317
Pennridge School District
5.00% 2/15/29 (MBIA) 2,300,000 2,421,325
-----------
24,276,301
-----------
School District Revenue Bonds - 0.96%
Pennsylvania Economic Development
Financing Authority School Revenue
(Germantown Friends School Project)
5.35% 8/15/31 2,820,000 2,968,163
Pennsylvania State Public School
Building Authority (Lehigh Career &
Technical Institute Project)
5.00% 10/1/21 (FGIC) 1,110,000 1,192,573
5.25% 10/1/32 (FGIC) 2,140,000 2,302,961
-----------
6,463,697
-----------
6
Statement Delaware Tax-Free Pennsylvania Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
Municipal Bonds (continued)
Single Family Housing Revenue Bonds - 4.06%
Allegheny County Residential Finance
Authority Mortgage Revenue Single
Family Series II-2
5.90% 11/1/32 (AMT) $1,015,000 $ 1,079,737
Series KK-2
5.40% 5/1/26 (AMT) 2,775,000 2,902,789
Pennsylvania Housing Finance
Agency Single Family Mortgage
Series 57A 6.15% 4/1/27 (AMT) 5,000,000 5,246,450
Series 66A 5.65% 4/1/29 (AMT) 3,950,000 4,098,441
Series 70A 5.90% 4/1/31 (AMT) 8,250,000 8,681,144
Series 72A 5.35% 10/1/31 (AMT) 5,190,000 5,381,511
-----------
27,390,072
-----------
Tax Increment/Special Assessment Bonds - 0.58%
Allegheny County Redevelopment
Authority (Waterfront Project) Series B
6.00% 12/15/10 1,000,000 1,128,450
6.40% 12/15/18 2,500,000 2,759,100
-----------
3,887,550
-----------
Territorial Revenue Bonds - 1.75%
Puerto Rico Commonwealth Highway &
Transportation Authority Revenue
Series E 5.50% 7/1/19 (FSA) 1,450,000 1,733,606
Series G 5.00% 7/1/33 3,000,000 3,112,080
Series G 5.00% 7/1/42 6,700,000 6,934,768
-----------
11,780,454
-----------
Transportation Revenue Bonds - 0.76%
Pennsylvania Economic Development
Financing Authority Facilities
Revenue (Amtrak Project) Series A
6.375% 11/1/41 (AMT) 5,000,000 5,117,650
-----------
5,117,650
-----------
Turnpike/Toll Road Revenue Bonds - 1.26%
Delaware River Toll Bridge
5.00% 7/1/28 3,000,000 3,123,210
Pennsylvania State Turnpike Commission
Series F 5.00% 7/15/31 (AMBAC) 1,000,000 1,050,820
Series F 5.00% 7/15/41 (AMBAC) 1,600,000 1,663,584
Series R 5.00% 12/1/30 (AMBAC) 2,500,000 2,633,100
-----------
8,470,714
-----------
+++Variable Rate Demand Notes - 1.74%
Allentown Commercial & Industrial
Development (Diocese of Allentown
Project) 1.00% 12/1/29
(LOC First Union National Bank) 1,500,000 1,500,000
Chester County Industrial Development
Authority Revenue
1.00% 7/1/31 (LOC Wachovia Bank) 3,600,000 3,600,000
Delaware Valley Regional Finance
Authority Series B 0.95% 12/1/20 600,000 600,000
Lancaster County Refunding Series B
0.95% 11/1/16 (FSA) 1,000,000 1,000,000
Philadelphia Authority for Industrial
Development Revenue
(Newcourtland Elder Services Project)
1.00% 3/1/27 (LOC PNC Bank) 5,000,000 5,000,000
-----------
11,700,000
-----------
Principal Market
Amount Value
Municipal Bonds (continued)
Waste Disposal Revenue Bonds - 0.83%
Chester Resource Recovery (Guaranteed
Host Community Project)
7.25% 12/1/05 $ 2,805,000 $ 2,889,515
New Morgan Revenue Guaranteed
8.00% 11/1/05 2,590,000 2,732,424
------------
5,621,939
------------
Water & Sewer Revenue Bonds - 3.03%
Dauphin County Industrial Development
Authority Water Development
Revenue Refunding (Dauphin
Consolidated Water Supply General
Waterworks Corp. Project)
Series B 6.70% 6/1/17 1,750,000 2,221,450
Delaware County Industrial Development
Authority Water Facilities Revenue
(Philadelphia Suburban Water Project)
6.00% 6/1/29 (FGIC) (AMT) 3,000,000 3,402,300
Erie Water Authority Water Revenue
Series A 5.125% 12/1/25 (MBIA) 4,000,000 4,228,240
Pittsburgh Water & Sewer Authority
Revenue First Lien
5.125% 12/1/31 (AMBAC) 10,000,000 10,580,000
------------
20,431,990
------------
Total Municipal Bonds
(cost $612,460,255) 667,141,584
------------
Total Market Value of Securities - 98.98%
(cost $612,460,255) 667,141,584
Receivables and Other Assets
Net of Liabilities - 1.02% 6,842,615
------------
Net Assets Applicable to 81,700,271
Shares Outstanding - 100.00% $673,984,199
============
7
Statement Delaware Tax-Free Pennsylvania Fund
OF NET ASSETS (CONTINUED)
Net Asset Value - Delaware Tax-Free
Pennsylvania Fund Class A
($638,325,698 / 77,377,661 Shares) $8.25
-----
Net Asset Value - Delaware Tax-Free
Pennsylvania Fund Class B
($29,588,768 / 3,586,850 Shares) $8.25
-----
Net Asset Value - Delaware Tax-Free
Pennsylvania Fund Class C
($6,069,733 / 735,760 Shares) $8.25
-----
Components of Net Assets at February 29, 2004:
Shares of beneficial interest
(unlimited authorization - no par) $642,710,817
Accumulated net realized loss on investments (23,407,947)
Net unrealized appreciation of investments 54,681,329
------------
Total net assets $673,984,199
============
*For Pre-refunded Bonds, the stated maturity is followed by the year in which
the bond is pre-refunded.
**An inverse floater bond is a type of bond with variable or floating interest
rates that move in the opposite direction of short-term interest rates.
Interest rate disclosed is in effect as of February 29, 2004.
+Non-income producing security. Security is currently in default.
++Zero coupon bond. The interest rate shown is the yield at the time of
purchase.
+++Variable rate notes. The interest rate shown is the rate as of February 29,
2004.
Summary of Abbreviations:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
Connie Lee - Insured by the College Construction Insurance Association
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by the Radian Asset Assurance
Net Asset Value and Offering Price per Share -
Delaware Tax-Free Pennsylvania Fund
Net asset value Class A (A) $8.25
Sales charge (4.50% of offering price,
or 4.73% of amount invested per share) (B) 0.39
-----
Offering price $8.64
=====
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
8
Statement Delaware Tax-Free Pennsylvania Fund
OF OPERATIONS Year Ended February 29, 2004
Investment Income:
Interest $36,995,517
-----------
Expenses:
Management fees 3,695,975
Distribution expenses -- Class A 1,695,282
Distribution expenses -- Class B 317,417
Distribution expenses -- Class C 57,569
Dividend disbursing and transfer agent fees and expenses 421,137
Accounting and administration expenses 282,633
Legal and professional fees 119,721
Reports and statements to shareholders 75,528
Custodian fees 28,835
Trustees' fees 28,447
Registration fees 15,334
Other 56,356
-----------
6,794,234
Less waived distribution expenses-- Class A (265,536)
Less expenses paid indirectly (33,841)
-----------
Total expenses 6,494,857
-----------
Net Investment Income 30,500,660
-----------
Net Realized and Unrealized Gain on Investments:
Net realized gain on investments 2,688,989
Net change in unrealized appreciation/depreciation of investments 5,759,399
-----------
Net Realized and Unrealized Gain on Investments 8,448,388
-----------
Net Increase in Net Assets Resulting from Operations $38,949,048
===========
See accompanying notes
9
Statements Delaware Tax-Free Pennsylvania Fund
OF CHANGES IN NET ASSETS
Year Ended
2/29/04 2/28/03
Increase in Net Assets from Operations:
Net investment income $ 30,500,660 $ 32,924,902
Net realized gain on investments 2,688,989 3,685,273
Net change in unrealized appreciation/depreciation of investments 5,759,399 13,192,645
------------ ------------
Net increase in net assets resulting from operations 38,949,048 49,802,820
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (29,176,006) (31,268,301)
Class B (1,173,099) (1,405,335)
Class C (212,714) (190,107)
------------ ------------
(30,561,819) (32,863,743)
------------ ------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 22,693,886 22,550,093
Class B 1,716,243 2,879,696
Class C 1,517,470 1,135,289
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 16,900,046 18,247,357
Class B 596,011 776,667
Class C 146,911 124,928
------------ ------------
43,570,567 45,714,030
------------ ------------
Cost of shares repurchased:
Class A (78,240,248) (69,727,930)
Class B (8,024,352) (7,146,477)
Class C (862,142) (701,092)
------------ ------------
(87,126,742) (77,575,499)
------------ ------------
Decrease in net assets derived from capital share transactions (43,556,175) (31,861,469)
------------ ------------
Net Decrease in Net Assets (35,168,946) (14,922,392)
Net Assets:
Beginning of year 709,153,145 724,075,537
------------ ------------
End of year (including undistributed net investment income of $0 and $61,159, respectively) $673,984,199 $709,153,145
============ ============
See accompanying notes
10
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
-------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund Class A
-------------------------------------------------------
Year Ended
2/29/04 2/28/03 2/28/02 2/28/01 2/29/00
Net asset value, beginning of period $8.140 $7.950 $7.820 $7.460 $8.290
Income (loss) from investment operations:
Net investment income 0.365 0.374 0.387 0.402 0.410
Net realized and unrealized gain (loss) on investments 0.110 0.189 0.130 0.360 (0.830)
------ ------ ------ ------ ------
Total from investment operations 0.475 0.563 0.517 0.762 (0.420)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.365) (0.373) (0.387) (0.402) (0.410)
------ ------ ------ ------ ------
Total dividends and distributions (0.365) (0.373) (0.387) (0.402) (0.410)
------ ------ ------ ------ ------
Net asset value, end of period $8.250 $8.140 $7.950 $7.820 $7.460
====== ====== ====== ====== ======
Total return(1) 6.00% 7.29% 6.78% 10.47% (5.18%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $638,325 $669,042 $682,030 $695,329 $716,646
Ratio of expenses to average net assets 0.90% 0.92% 0.89% 0.92% 0.92%
Ratio of expenses to average net assets prior to expense limitation
and expenses paid indirectly 0.94% 0.92% 0.89% 0.92% 0.92%
Ratio of net investment income to average net assets 4.47% 4.69% 4.92% 5.26% 5.21%
Ratio of net investment income to average net assets prior to expense
limitation and expenses paid indirectly 4.43% 4.69% 4.92% 5.26% 5.21%
Portfolio turnover 12% 18% 38% 23% 38%
(1) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects a waiver of fees by the distributor, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
11
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
--------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund Class B
--------------------------------------------------------
Year Ended
2/29/04 2/28/03 2/28/02 2/28/01 2/29/00
Net asset value, beginning of period $8.140 $7.950 $7.820 $7.460 $8.290
Income (loss) from investment operations:
Net investment income 0.301 0.312 0.324 0.341 0.347
Net realized and unrealized gain (loss) on investments 0.110 0.189 0.130 0.360 (0.830)
------ ------ ------ ------ ------
Total from investment operations 0.411 0.501 0.454 0.701 (0.483)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.301) (0.311) (0.324) (0.341) (0.347)
------ ------ ------ ------ ------
Total dividends and distributions (0.301) (0.311) (0.324) (0.341) (0.347)
------ ------ ------ ------ ------
Net asset value, end of period $8.250 $8.140 $7.950 $7.820 $7.460
====== ====== ====== ====== ======
Total return(1) 5.17% 6.46% 5.93% 9.59% (5.94%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $29,589 $34,914 $37,533 $36,350 $37,390
Ratio of expenses to average net assets 1.68% 1.70% 1.69% 1.72% 1.72%
Ratio of net investment income to average net assets 3.69% 3.91% 4.12% 4.46% 4.41%
Portfolio turnover 12% 18% 38% 23% 38%
(1) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge.
See accompanying notes
12
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
--------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund Class C
--------------------------------------------------------
Year Ended
2/29/04 2/28/03 2/28/02 2/28/01 2/29/00
Net asset value, beginning of period $8.140 $7.950 $7.820 $7.460 $8.290
Income (loss) from investment operations:
Net investment income 0.301 0.312 0.324 0.340 0.347
Net realized and unrealized gain (loss) on investments 0.110 0.189 0.130 0.360 (0.830)
------ ------ ------ ------ ------
Total from investment operations 0.411 0.501 0.454 0.700 (0.483)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.301) (0.311) (0.324) (0.340) (0.347)
------ ------ ------ ------ ------
Total dividends and distributions (0.301) (0.311) (0.324) (0.340) (0.347)
------ ------ ------ ------ ------
Net asset value, end of period $8.250 $8.140 $7.950 $7.820 $7.460
====== ====== ====== ====== ======
Total return(1) 5.17% 6.46% 5.93% 9.58% (5.94%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $6,070 $5,197 $4,512 $3,898 $3,909
Ratio of expenses to average net assets 1.68% 1.70% 1.69% 1.72% 1.72%
Ratio of net investment income to average net assets 3.69% 3.91% 4.12% 4.46% 4.41%
Portfolio turnover 12% 18% 38% 23% 38%
(1) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge.
See accompanying notes
13
Notes Delaware Tax-Free Pennsylvania Fund
TO FINANCIAL STATEMENTS February 29, 2004
Delaware Group State Tax-Free Income Trust (the "Trust") is organized as a
Delaware statutory trust and offers one series: Delaware Tax-Free Pennsylvania
Fund (the "Fund"). The Trust is an open-end investment company. The Fund is
considered non-diversified under the Investment Company Act of 1940, as amended,
and offers 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 B shares are sold with a contingent
deferred sales charge that declines from 4% to zero depending upon the period of
time the shares are held. Class B shares will automatically convert to Class A
shares on a quarterly basis approximately 8 years after purchase. Class C shares
are sold with a contingent deferred sales charge of 1%, if redeemed during the
first 12 months.
The investment objective of Delaware Tax-Free Pennsylvania Fund is to seek a
high level of current interest income exempt from federal income tax and certain
Pennsylvania state and local taxes, consistent with the preservation of capital.
1. Significant Accounting Policies
The following accounting policies are in accordance with accounting principles
generally accepted in the United States and are consistently followed by the
Fund.
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. 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 Fund's Board of
Trustees.
Federal Income Taxes -- The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting -- Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund on the basis of
daily net assets of each class. Distribution expenses relating to a specific
class are charged directly to that class.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Other -- Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and other expenses are paid monthly. Security transactions are
recorded on the date the securities are purchased or sold (trade date). Costs
used in calculating realized gains and losses on the sale of investment
securities are those of the specific securities sold. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. The Fund declares dividends
daily from net investment income and pays such dividends monthly and declares
and pays distributions from net realized gain on investments, if any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. The amount of these expenses was approximately $16,500 for the year
ended February 29, 2004. In addition, the Fund receives earnings credits from
its custodian when positive cash balances are maintained, which are used to
offset custody fees. The earnings credits for the year ended February 29, 2004
were approximately $17,341. The expenses paid under the above arrangements are
included in their respective expense captions on the Statement of Operations
with the corresponding expense offset shown as "expenses paid indirectly."
2. Investment Management, 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 which is calculated
daily at the rate of 0.55% on the first $500 million of average daily net assets
of the Fund, 0.50% on the next $500 million, 0.45% on the next $1.5 billion, and
0.425% on average daily net assets in excess of $2.5 billion.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Fund pays
DSC a monthly fee based on the average net assets subject to certain minimums
for accounting and administration services. The 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, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% 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. DDLP has contracted to waive distribution and service fees
through April 30, 2005 in order to prevent distribution and service fees of
Class A shares from exceeding 0.25% of average daily net assets.
At February 29, 2004, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $21,478
Dividend disbursing, transfer agent fees,
accounting and other expenses payable to DSC $9,522
Other expenses payable to DMC and affiliates* $10,766
*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, professional fees, registration fees
and trustees' fees.
Certain internal legal expenses are allocated to the Fund. For the year ended
February 29, 2004, the Delaware Tax-Free Pennsylvania Fund had costs of $83,746.
For the year ended February 29, 2004, DDLP earned $61,552 for commissions on
sales of the Fund's Class A shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. Investments
For the year ended February 29, 2004, the Fund made purchases of $82,902,808 and
sales of $129,520,791 of investment securities other than short-term
investments.
At February 29, 2004, the cost of investments for federal income tax purposes
was $617,156,065. At February 29, 2004, the net unrealized appreciation was
$49,985,519, of which $55,074,300 related to unrealized appreciation of
investments and $5,088,781 related to unrealized depreciation of investments.
14
Notes Delaware Tax-Free Pennsylvania Fund
TO FINANCIAL STATEMENTS (CONTINUED)
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 accounting principles
generally accepted in the United States. The tax character of dividends and
distributions paid during the years ended February 29, 2004 and February 28,
2003 was as follows:
2/29/04 2/28/03
----------- -----------
Tax-exempt income $30,561,819 $32,863,743
As of February 29, 2004, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $642,710,817
Capital loss carryforwards (18,712,137)
Unrealized appreciation of investments 49,985,519
------------
Net assets $673,984,199
============
The difference between book basis and tax basis components of net assets is
primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. $2,688,989 was utilized in
2003. Such capital loss carryforwards expire as follows: $9,227,179 expires in
2008, $8,323,306 expires in 2009, and $1,161,652 expires in 2010.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
2/29/04 2/28/03
Shares sold:
Class A 2,782,740 2,826,359
Class B 211,221 360,790
Class C 186,731 142,613
Shares issued upon reinvestment of
dividends and distributions:
Class A 2,080,106 2,292,826
Class B 73,362 97,638
Class C 18,079 15,684
----------- ----------
5,352,239 5,735,910
----------- ----------
Shares repurchased:
Class A (9,648,248) (8,759,159)
Class B (985,491) (892,520)
Class C (107,300) (87,684)
----------- ----------
(10,741,039) (9,739,363)
----------- ----------
Net decrease (5,388,800) (4,003,453)
=========== ==========
For the years ended February 29, 2004 and February 28, 2003, 238,898 Class B
shares were converted to 238,898 Class A shares valued at $1,933,320 and 333,203
Class B shares were converted to 333,203 Class A shares valued at $2,687,259,
respectively. The respective amounts are included in Class B redemptions and
Class A subscriptions in the table above and the Statement of Changes in Net
Assets.
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participates in a $177,300,000 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 funds' allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Fund had no amounts outstanding as of February 29, 2004, or at any time during
the year.
7. Credit and Market Risks
The Fund concentrates its investments in
securities issued by Pennsylvania municipalities. The value of these investments
may be adversely affected by new legislation within Pennsylvania, 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 the market may fluctuate for other
reasons and there is no assurance that the insurance company will meet its
obligations. These securities have been identified in the Statement of Net
Assets.
8. Contractual Obligations
The Fund enters into contracts that contain a variety of indemnifications. The
Fund's maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
9. Tax Information (Unaudited)
The information set forth below is for the Fund's fiscal year as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the year ended February 29, 2004, the Fund designated distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary (C)
Capital Gains Income Tax-Exempt Total
Distributions Distributions Distributions Distributions
(Tax-Basis) (Tax-Basis) (Tax-Basis) (Tax-Basis)
------------- ------------- ------------- -------------
0% 0% 100% 100%
Items (A), (B) and (C) are based on a percentage of the Fund's total
distributions.
15
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
Delaware Group State Tax-Free Income Trust -
Delaware Tax-Free Pennsylvania Fund
We have audited the accompanying statement of net assets of Delaware Tax-Free
Pennsylvania Fund (the "Fund") as of February 29, 2004, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of February 29, 2004, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Tax-Free Pennsylvania Fund at February 29, 2004, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Philadelphia, Pennsylvania
April 2, 2004
16
Delaware Investments Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors which has oversight
responsibility for the management of a fund's business affairs.
Trustees/Directors establish procedures and oversee and review the performance
of the investment manager, the distributor and others that perform services for
the fund. The independent fund trustees, in particular, are advocates for
shareholder interests. The following is a list of the Trustees/Directors and
Officers with certain background and related information.
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jude T. Driscoll(2) Chairman and 4 Years - Since August 2000, 80 None
2005 Market Street Trustee(4) Executive Officer Mr. Driscoll has served in
Philadelphia, PA various executive capacities
19103 Trustee since at different times at
May 15, 2003 Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
Managing Director -
NationsBanc Capital Markets
(February 1996 - June 1998)
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INDEPENDENT TRUSTEES
Walter P. Babich Trustee 16 Years Board Chairman - 98 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
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John H. Durham Trustee 25 Years(3) Private Investor 98 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103 President/Director -
22 WR Corporation
August 7, 1937
- ------------------------------------------------------------------------------------------------------------------------------------
John A. Fry Trustee(4) 3 Years President - 80 None
2005 Market Street Franklin & Marshall College
Philadelphia, PA (June 2002 - Present)
19103
Executive Vice President -
May 28, 1960 University of Pennsylvania
(April 1995 - June 2002)
- ------------------------------------------------------------------------------------------------------------------------------------
Anthony D. Knerr Trustee 11 Years Founder/Managing Director - 98 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
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17
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Ann R. Leven Trustee 15 Years Treasurer/Chief Fiscal Officer - 98 Director - Andy
2005 Market Street National Gallery of Art Warhol Foundation
Philadelphia, PA (1994 - 1999)
19103 Director -
Systemax Inc.
November 1, 1940
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas F. Madison Trustee 10 Years President/Chief 98 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director -
and Consulting) CenterPoint Energy
February 25, 1936 (January 1993 - Present)
Director -
Digital River Inc.
Director -
Rimage Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans Trustee 5 Years Vice President/Mergers & 98 None
2005 Market Street Acquisitions - 3M Corporation
Philadelphia, PA (January 2003 - Present)
19103
Ms. Yeomans has held
July 31, 1948 various management positions
at 3M Corporation since 1983.
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS
Joseph H. Hastings Executive Executive Mr. Hastings has served in 98 None
2005 Market Street Vice President Vice President various executive capacities
Philadelphia, PA and and at different times at
19103 Chief Financial Chief Financial Delaware Investments.
Officer Officer since
December 19, 1949 August 21, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Richelle S. Maestro Senior Vice Chief Legal Officer Ms. Maestro has served in 98 None
2005 Market Street President, since various executive capacities
Philadelphia, PA Chief Legal Officer March 17, 2003 at different times at
19103 and Secretary Delaware Investments.
November 26, 1957
- ------------------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof Senior Vice President 8 Years Mr. Bishof has served in 98 None
2005 Market Street and Treasurer various executive capacities
Philadelphia, PA at different times at
19103 Delaware Investments.
August 18, 1962
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the Registrant's investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the portfolios of Voyageur
Insured Funds, Voyageur Intermediate Tax Free Funds, Voyageur Investment
Trust, Voyageur Mutual Funds, Voyageur Mutual Funds II, Voyageur Mutual
Funds III and Voyageur Tax Free Funds.
The Statement of Additional Information for the Fund(s) includes additional
information about the Trustees/Directors and Officers and is available, without
charge, upon request by calling 800 523-1918.
18
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Tax-Free Pennsylvania Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Tax-Free Pennsylvania Fund and
the Delaware Investments Performance Update for the most recently completed
calendar quarter. The prospectus sets forth details about charges, expenses,
investment objectives, and operating policies of the Fund. You should read the
prospectus carefully before you invest. The figures in this report represent
past results which are not a guarantee of future results. The return and
principal value of an investment in the Fund will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Board of Trustees Affiliated Officers Contact Information
Jude T. Driscoll Joseph H. Hastings Investment Manager
Chairman Executive Vice President and Delaware Management Company
Delaware Investments Family of Funds Chief Financial Officer Philadelphia, PA
Philadelphia, PA Delaware Investments Family of Funds
Philadelphia, PA International Affiliate
Walter P. Babich Delaware International Advisers Ltd.
Board Chairman Richelle S. Maestro London, England
Citadel Construction Corporation Senior Vice President,
King of Prussia, PA Chief Legal Officer and Secretary National Distributor
Delaware Investments Family of Funds Delaware Distributors, L.P.
John H. Durham Philadelphia, PA Philadelphia, PA
Private Investor
Gwynedd Valley, PA Michael P. Bishof Shareholder Servicing, Dividend
Senior Vice President and Treasurer Disbursing and Transfer Agent
John A. Fry Delaware Investments Family of Funds Delaware Service Company, Inc.
President Philadelphia, PA 2005 Market Street
Franklin & Marshall College Philadelphia, PA 19103-7094
Lancaster, PA
For Shareholders
Anthony D. Knerr 800 523-1918
Managing Director
Anthony Knerr & Associates For Securities Dealers and Financial
New York, NY Institutions Representatives Only
800 362-7500
Ann R. Leven
Former Treasurer/Chief Fiscal Officer Web site
National Gallery of Art www.delawareinvestments.com
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President/Mergers & Acquisitions
3M Corporation
St. Paul, MN
- --------------------------------------------------------------------------------
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 Fund's website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov.; and beginning no later than August 31, 2004, information
(if any) regarding how the Fund voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available without charge
(i) through the Fund's website at http://www.delawareinvestments.com; and (ii)
on the Commission's website at http://www.sec.gov.
- --------------------------------------------------------------------------------
(8625) Printed in the USA
AR-007 [2/04] IVES 4/04 J9628
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party. A copy of the registrant's Code of Business
Ethics has been posted on Delaware Investments' internet website at
www.delawareinvestments.com. Any amendments to the Code of Business
Ethics, and information on any waiver from its provisions granted by the
registrant, will also be posted on this website within five business days
of such amendment or waiver and will remain on the website for at least 12
months.
Item 3. Audit Committee Financial Expert
The registrant's Board of Trustees/Directors has determined that each
member of the registrant's Audit Committee is an audit committee financial
expert, as defined below. For purposes of this item, an "audit committee
financial expert" is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial
statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the registrant's financial statements, or experience actively
supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
An "audit committee financial expert" shall have acquired such attributes
through:
a. Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant, or auditor or
experience in one or more positions that involve the performance of
similar functions;
b. Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor,
or person performing similar functions;
c. Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing, or
evaluation of financial statements; or
d. Other relevant experience.
The registrant's Board of Trustees/Directors has also determined that
each member of the registrant's Audit Committee is independent. In
order to be "independent" for purposes of this item, the Audit
Committee member may not: (i) other than in his or her capacity as a
member of the Board of Trustees/Directors or any committee thereof,
accept directly or indirectly any consulting, advisory or other
compensatory fee from the issuer; or (ii) be an "interested person"
of the registrant as defined in Section 2(a)(19) of the Investment
Company Act of 1940.
The names of the audit committee financial experts on the registrant's
Audit Committee are set forth below:
Ann R. Leven
Thomas F. Madison
Janet L. Yeomans (1)
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
The aggregate fees billed for services provided to the Registrant by
its independent auditors for the audit of the Registrant's annual
financial statements and for services normally provided by the independent
auditors in connection with statutory and regulatory filings or
engagements were $22,550 for the fiscal year ended February 29, 2004.
The aggregate fees billed for services provided to the Registrant by
its independent auditors for the audit of the Registrant's annual
financial statements and for services normally provided by the independent
auditors in connection with statutory and regulatory filings or
engagements were $21,350 for the fiscal year ended February 28, 2003.
(b) Audit-related fees.
The aggregate fees billed by the Registrant's independent auditors
for services relating to the performance of the audit of the Registrant's
financial statements and not reported under paragraph (a) of this Item
were $0 for the fiscal year ended February 29, 2004.
- ----------------------
(1) The instructions to Form N-CSR require disclosure on the relevant experience
of persons who qualify as audit committee financial experts based on "other
relevant experience." The Board of Trustees/ Directors has determined that Ms.
Yeomans qualifies as an audit committee financial expert by virtue of her
education and experience as the Treasurer of a large global corporation.
The aggregate fees billed by the Registrant's independent auditors
for services relating to the performance of the audit of the financial
statements of the Registrant's investment adviser(s) and other service
providers under common control with the adviser(s) and that relate
directly to the operations or financial reporting of the Registrant were
$31,000 for the Registrant's fiscal year ended February 29, 2004. The
percentage of these fees relating to services approved by the Registrant's
Audit Committee pursuant to the de minimis exception from the pre-approval
requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These
audit-related services were as follows: preparation of report concerning
transfer agents' system of internal accounting control and related
procedures; and preparation of procedures report to the Funds' Board in
connection with the annual transfer agent contract renewals and in
connection with the pass-through of internal legal costs relating to the
operations of the Funds.
The aggregate fees billed by the Registrant's independent auditors
for services relating to the performance of the audit of the Registrant's
financial statements and not reported under paragraph (a) of this Item
were $0 for the fiscal year ended February 28, 2003.
The aggregate fees billed by the Registrant's independent auditors
for services relating to the performance of the audit of the financial
statements of the Registrant's investment adviser(s) and other service
providers under common control with the adviser(s) and that relate
directly to the operations or financial reporting of the Registrant were
$36,400 for the Registrant's fiscal year ended February 28, 2003. The
percentage of these fees relating to services approved by the Registrant's
Audit Committee pursuant to the de minimis exception from the pre-approval
requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These
audit-related services were as follows: preparation of report concerning
transfer agents' system of internal accounting control and related
procedures; and preparation of procedures report to the Funds' Board in
connection with the annual transfer agent contract renewals and in
connection with the pass-through of internal legal costs relating to the
operations of the Funds.
(c) Tax fees.
The aggregate fees billed by the Registrant's independent auditors
for tax-related services provided to the Registrant were $1,250 for the
fiscal year ended February 29, 2004. The percentage of these fees relating
to services approved by the Registrant's Audit Committee pursuant to the
de minimis exception from the pre-approval requirement in Rule
2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were
as follows: review of income tax returns and excise tax returns.
The aggregate fees billed by the Registrant's independent auditors
for tax-related services provided to the Registrant's investment
adviser(s) and other service providers under common control with the
adviser(s) and that relate directly to the operations or financial
reporting of the Registrant were $0 for the Registrant's fiscal year ended
February 29, 2004.
The aggregate fees billed by the Registrant's independent auditors
for tax-related services provided to the Registrant were $1,150 for the
fiscal year ended February 28, 2003. The percentage of these fees relating
to services approved by the Registrant's Audit Committee pursuant to the
de minimis exception from the pre-approval requirement in Rule
2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were
as follows: review of income tax returns and excise tax returns.
The aggregate fees billed by the Registrant's independent auditors
for tax-related services provided to the Registrant's adviser(s) and other
service providers under common control with the adviser(s) and that relate
directly to the operations or financial reporting of the Registrant were
$0 for the Registrant's fiscal year ended February 28, 2003.
(d) All other fees.
The aggregate fees billed for all services provided by the
independent auditors to the Registrant other than those set forth in
paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended
February 29, 2004.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the Registrant's
independent auditors to the Registrant's adviser(s) and other service
providers under common control with the adviser(s) and that relate
directly to the operations or financial reporting of the Registrant were
$0 for the fiscal year ended February 29, 2004.
The aggregate fees billed for all services provided by the
independent auditors to the Registrant other than those set forth in
paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended
February 29, 2003.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the Registrant's
independent auditors to the Registrant's adviser(s) and other service
providers under common control with the adviser(s) and that relate
directly to the operations or financial reporting of the Registrant were
$0 for the fiscal year ended February 29, 2003.
(e) The Registrant's Audit Committee has not established pre-approval
policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of
Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the Registrant's independent
auditors for services rendered to the Registrant and to its
investment adviser(s) and other service providers under common
control with the adviser(s) were $155,150 and $173,900 for the
Registrant's fiscal years ended February 29, 2004, and February 28,
2003, respectively.
(h) In connection with its selection of the independent auditors, the
Registrant's Audit Committee has considered the independent auditors'
provision of non-audit services to the Registrant's investment
adviser(s) and other service providers under common control with the
adviser(s) that were not required to be pre-approved pursuant to Rule
2-01(c)(7)(ii) of Regulation S-X. The Audit Committee has determined
that the independent auditors' provision of these services is
compatible with maintaining the auditors' independence.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10. 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 registrant's
last fiscal half-year (the registrant's second fiscal half-year in the
case of an annual report) that have materially affected, or are reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
Item 11. 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.
Delaware Group State Tax-Free Income Trust
Jude T. Driscoll
- --------------------------------
By: Jude T. Driscoll
Title: Chairman
Date: April 27, 2004
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.
Jude T. Driscoll
- --------------------------------
By: Jude T. Driscoll
Title: Chairman
Date: April 27, 2004
Joseph H. Hastings
- --------------------------------
By: Joseph H. Hastings
Title: Chief Financial Officer
Date: April 27, 2004