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: 811-7742
Exact name of registrant as specified in charter: Voyageur Mutual Funds
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: August 31
Date of reporting period: August 31, 2004
Item 1. Reports to Stockholders
The Registrant's shareholder reports are combined with the shareholder
reports of other investment company registrants. This Form N-CSR pertains to the
Delaware Minnesota High-Yield Municipal Bond Fund, Delaware Tax-Free Arizona
Fund, Delaware Tax-Free California Fund, Delaware Tax-Free Idaho Fund and
Delaware Tax-Free New York Fund of the Registrant, information on which is
included in the following shareholder reports.
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
FIXED INCOME
ANNUAL REPORT AUGUST 31, 2004
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DELAWARE MINNESOTA
HIGH-YIELD MUNICIPAL BOND FUND
[LOGO]
POWERED BY RESEARCH.(SM)
PORTFOLIO DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
MANAGEMENT REVIEW September 10, 2004
FUND MANAGERS
Patrick P. Coyne
Managing Director/Head of Equity Investments
Joseph R. Baxter
Senior Vice President/Senior Portfolio Manager
Robert F. Collins
Vice President/Senior Portfolio Manager
Q: WHAT KIND OF ENVIRONMENT WAS IT FOR THE MUNICIPAL
MARKETS DURING THE PAST 12 MONTHS?
A: In all, the environment for municipal bonds was surprisingly favorable
considering volatile market conditions and generally negative fixed-income
investor sentiment at the start of the fiscal period. In September 2003, market
data indicated a rapidly strengthening economy and accelerating corporate
earnings. These results prompted investor fears of rising inflation and Federal
Reserve interest rate hikes. Unemployment levels trended higher than expected,
however, suggesting the growing economy was not yet operating at its full
potential. This enabled the Fed to maintain short-term interest rates at
historically low levels throughout the period.
It was not until spring 2004, when a substantial increase in hiring activity
became evident, that concern about rising rates returned. The expectation for
interest rate hikes weighed on the bond markets, as did continued worries about
terrorism, rising oil prices, and weakness in the U.S. dollar. The Fed
eventually raised short-term rates twice during the period, first in late June
and then again in August. During the final three months of the period, however,
job growth trailed off unexpectedly, surprising investors who had expected
faster economic growth. Against this backdrop, tax-free bonds, which had lost
ground in the prior few months, made up some of their recent losses.
For the 12-month period, yields on shorter-maturity bonds rose in line
with expectations for higher short-term interest rates. By contrast, yields on
longer-term bonds fell, while their prices rose accordingly (bond yields and
prices move in opposite directions). The difference in yield between two-year
and 30-year AAA-rated municipal bonds went from 3.6% to 2.9% during the 12
months, reflecting the better relative results of longer bonds.
Strong performance from lower-rated bonds was a second evident trend for the
fiscal year. As states' revenue collections have increased, their credit outlook
has improved as well. Investors have become increasingly willing to invest in
lower-rated investment-grade and non-rated securities to obtain a higher degree
of income.
For the first eight months of 2004, national municipal issuance was down about
nine percent nationwide when compared to the same period in 2003 (Source: The
Bond Buyer). This decline in new supply reflected the improved financial
position of states and municipalities. Greater tax collections limited the need
to rely on the debt markets for funds to support needed projects. Higher
interest rates also made it relatively less attractive to refinance outstanding
bonds.
Q: WHAT ECONOMIC AND MUNICIPAL ENVIRONMENT DID YOU
ENCOUNTER SPECIFICALLY IN MINNESOTA?
A: In the first eight months of 2004, new supply of Minnesota tax-free bonds
fell by 4% compared to the previous year --slightly below the 9% national
decline (Source: The Bond Buyer). As in the rest of the country, the fall-off in
issuance can partly be attributed to the state's improving economic fortunes.
During the first nine months of Minnesota's 2004 fiscal year, the state saw a
3.6% year-over-year rise in its revenue collections. Also, the state's
unemployment rate stood at just 4.4% as of July 2004, well below the national
rate of 5.5% (Source: Fiscal Studies Program, June 2004). Minnesota's improved
financial position led to a number of credit-quality upgrades in the state,
further supporting the performance of its lower-rated bonds.
Q: HOW DID THE FOUR FUNDS PERFORM DURING THEIR FISCAL YEAR,
AND WHAT MANAGEMENT STRATEGIES DID YOU PURSUE FOR EACH?
A: Delaware Tax-Free Minnesota Fund appreciated +7.72% (Class A shares at net
asset value with distributions reinvested) for the fiscal year, outpacing both
its peer group, as measured by the +6.42% return of the Lipper Minnesota
Municipal Debt Funds Average, and its performance benchmark, the Lehman Brothers
Municipal Bond Index, which returned +7.11% (Source: Lipper Inc.). The Fund's
dividend payments during the past 12 months were exempt from federal and
Minnesota state taxes.*
In part, we attribute the Fund's outperformance to strong security selection. To
choose investments for the portfolio, we use a bottom-up approach, meaning we
evaluate securities one-by-one and select those we believe offer the best
combination of reward potential and risk. We do not, by contrast, invest
according to our expectations for how interest rates may behave and,
consequently, influence municipal yields.
*A portion of the income from tax-exempt funds may be subject to the alternative
minimum tax.
1
For this bottom-up approach, we rely on the experience of our research staff to
help us identify securities that exhibit stable or improving credit trends. Our
confidence in the group allowed us to invest in selected lower-rated
investment-grade bonds that, in our opinion, offered attractive value. Such an
approach helped the Fund's results during an environment in which lower-rated
bonds were among the market's best performers.
Although trading activity in the portfolio was only moderate during the past 12
months, we established several significant new positions, especially in the
healthcare sector. For example, we purchased healthcare bonds issued by the
Benedictine Health System for the Duluth Economic Development Authority.
Although our existing bonds from this issuer were due to be called in full, our
trading staff was able to arrange a tender for these bonds and then sell our
existing holdings and negotiate a favorable purchase arrangement for the new
replacement securities. A second noteworthy purchase was of bonds issued by Park
Nicollet Health Services which performed well for the Fund as did the healthcare
sector.
Another strategy we employed was to keep a portion of the Fund's assets in
securities with very short maturities. We wished to keep liquid assets on hand
to take advantage of suitably structured tax-free investment opportunities
whenever they became available. We also increased our exposure to municipal
bonds with lower- and mid-investment-grade credit ratings. Finally, we modestly
reduced the Fund's interest-rate sensitivity by selling some of our
longest-duration holdings, thereby moderating volatility.
On the negative side, the Fund's allocation to Puerto Rico bonds detracted from
results. During the past 12 months, Puerto Rico was one of the top-performing
municipal markets in the United States. Maintaining an underweighted position in
these securities hurt performance, especially during the summer of 2004 when
Puerto Rico bonds did especially well.
The total return of DELAWARE TAX-FREE MINNESOTA INSURED FUND was +7.20% (Class A
shares at net asset value with distributions reinvested) for the fiscal year,
surpassing the Lipper Minnesota Municipal Debt Funds Average, which returned
+6.42%. The Fund also outperformed the +7.11% return of its benchmark Lehman
Brothers Municipal Bond Index (Source: Lipper Inc.). The Fund's dividend
payments during the past 12 months were exempt from federal and Minnesota state
taxes.*
The Fund's outperformance can partly be attributed to a commitment to the
healthcare sector. Hospital bonds generally have been strong performers in
recent years. Many issuers have improved their financial positions and
strengthened their balance sheets, adding to investors' confidence in the
sector. Among the healthcare bonds added to the portfolio which helped
performance were those issued by Benedictine Health System for Duluth Economic
Development Authority, Park Nicollet Health Services, and Fairview Health
Services.
Also adding to returns was an approximately 20 percent stake in bonds with
credit ratings below AAA. This included a 10 percent position in A-rated
investments that we believed offered solid credit quality and added to the
Fund's income stream. In an environment in which lower-rated securities
generally outperformed their higher-quality counterparts, taking advantage of
our ability to invest a portion of the portfolio in non-insured bonds helped
performance relative to other insured municipal bond funds.
Our management strategy continued to focus on bottom-up security selection and
finding securities that offered our shareholders an attractive income stream. In
our opinion, focusing on bonds' income potential minimizes volatility and
contributes greatly to total return.
On the negative side, the Fund's allocation to Puerto Rico bonds detracted from
results. During the past 12 months, Puerto Rico was one of the top-performing
municipal markets in the United States. Maintaining an underweighted position in
these securities hurt performance, especially during the summer of 2004 when
Puerto Rico bonds did especially well.
DELAWARE TAX-FREE MINNESOTA INTERMEDIATE FUND gained +6.73% (Class A shares at
net asset value with distributions reinvested) for the 12 months ended August
31, 2004. This result bettered that of the Fund's peer group, the Lipper Other
States Intermediate Municipal Debt Funds Average, which returned +4.81%, as well
as its benchmark, the Lehman Brothers Five-Year Municipal Bond Index, which
returned +4.49% (Source: Lipper Inc.). The Fund's dividend payments during the
past 12 months were exempt from federal and Minnesota state taxes.*
*A portion of the income from tax-exempt funds may be subject to the alternative
minimum tax.
2
We attributed the Fund's significant outperformance to several factors. First,
we continued to choose investments based on our assessment of their income
potential. Our focus on bonds' income stream -- as opposed to using a "top-down"
approach, choosing investments based on expectations for future moves in
interest rates -- helped the Fund during a time of tremendous volatility in the
municipal bond market. Second, the Fund's duration declined modestly during the
period, benefiting performance when rates rose. Duration is a common measure of
a bond's or bond fund's sensitivity to interest rate changes. Third, we added to
the portfolio's exposure to tax-free bonds with lower- and mid-investment-grade
credit ratings, many of which performed well as municipal investors became less
risk averse during the 12-month period. Finally, we also maintained positions in
very short-term securities to have liquid assets on hand to take advantage of
opportunities as they became available.
Some opportunities identified were in the healthcare sector, one of the market's
strongest-performing areas during the past 12 months. New bonds added included
those issued by Benedictine Health System for the Duluth Economic Development
Authority and by Park Nicollet Health Services. We also modestly increased our
stake in selected Puerto Rico bonds, as bonds issued by U.S. territories
generally are tax-exempt in all 50 states.
On the negative side, the Fund's allocation to Puerto Rico bonds detracted from
results. During the past 12 months, Puerto Rico was one of the top-performing
municipal markets in the United States. Maintaining an underweighted position in
these securities hurt performance, especially during the summer of 2004 when
Puerto Rico bonds did especially well.
Finally, we looked to reduce the Fund's longest-duration positions as a means to
moderate performance volatility caused by rising interest rates.
For the 12 months ended August 31, 2004, DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL
BOND FUND gained +8.65% (Class A shares at net asset value with distributions
reinvested), thereby outperforming the +6.42% return of its peer group, the
Lipper Minnesota Municipal Debt Funds Average, and the +7.11% return of its
benchmark, the Lehman Brothers Municipal Bond Index (Source: Lipper Inc.). The
Fund's dividend payments during the past 12 months were exempt from federal and
Minnesota state taxes.*
In part, the Fund's outperformance can be attributed to our focus on bonds with
strong income streams. As always, we continued to select bonds on a bottom-up
basis, meaning we conducted thorough research and bought those investments we
believed offered the best ratio of reward potential to risk. Our focus on yield
led us to establish large positions in sectors such as multi-family housing,
continuing care retirement communities, and hospitals. All three tend to
generate large amounts of income, helping to offset volatility from interest
rate swings. Our emphasis on income generation reduced performance volatility as
interest rates fluctuated.
The Fund also benefited from the especially strong performance environment for
lower-rated bonds. As the economy has improved, state and local municipal
issuers have become financially stronger -- enabling investors to invest more
confidently in issuers with weaker credit ratings. As high-yield bonds have
gained in value, however, their yields have fallen, making it more difficult to
identify attractive new investment opportunities. At those times, we
occasionally found ourselves unable to identify suitable lower- and non-rated
bonds with desirable structural characteristics, limiting total return potential
during the period. Accordingly, we held on to those securities that continued to
meet our investment criteria. We also periodically bought higher-rated bonds
while awaiting future opportunities that we believed would be in our
shareholders' best interests.
*A portion of the income from tax-exempt funds may be subject to the alternative
minimum tax.
High-yielding, non-investment-grade bonds ("junk bonds") involve higher risk
than investment-grade bonds. Adverse conditions may affect the issuer's ability
to pay interest and principal on these securities.
3
DELAWARE
MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Current performance may be lower or higher than the
performance data quoted. Please obtain the performance data for the most recent
month end by calling 800 523-1918 or visiting our Web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges, and expenses of the investment carefully before
investing. The Delaware Minnesota High-Yield Municipal Bond Fund prospectus
contains this and other important information about the investment company.
Please request a prospectus by calling 800 523-1918. Read it carefully before
you invest or send money. Performance includes reinvestment of all
distributions.
FUND PERFORMANCE
Average Annual Total Returns
Through August 31, 2004 Lifetime Five Years One Year
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Class A (Est. 6/4/96)
Excluding Sales Charge +6.21% +5.93% +8.65%
Including Sales Charge +5.62% +4.96% +3.73%
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Class B (Est. 6/12/96)
Excluding Sales Charge +5.73% +5.13% +7.71%
Including Sales Charge +5.73% +4.88% +3.71%
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Class C (Est. 6/7/96)
Excluding Sales Charge +5.43% +5.13% +7.71%
Including Sales Charge +5.43% +5.13% +6.71%
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Returns reflect the reinvestment of all 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 have an annual distribution and
service fee of up to 0.25%.
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%. Lifetime performance figures for Class B
shares reflect conversion to Class A shares after approximately eight years.
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 all classes of Delaware Minnesota
High-Yield Municipal Bond Fund during the period shown. Performance would have
been lower had the expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
A portion of the income from tax-exempt funds may be subject to the alternative
minimum tax.
High-yielding, non-investment-grade bonds ("junk bonds") involve greater risk
than investment-grade bonds. Adverse condition may affect the issuer's ability
to pay interest and principal on these securities.
4
DELAWARE
MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND
FUND BASICS
As of August 31, 2004
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FUND OBJECTIVE:
The Fund seeks as high a level of current income exempt from federal
income tax and from Minnesota state personal income tax, primarily
through investment in medium- and lower-grade municipal obligations.
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TOTAL FUND NET ASSETS:
$66.53 million
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NUMBER OF HOLDINGS:
63
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FUND START DATE:
June 4, 1996
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YOUR FUND MANAGERS:
Patrick P. Coyne
Joseph R. Baxter
Robert F. Collins
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NASDAQ SYMBOLS:
Class A DVMHX
Class B DVMYX
Class C DVMMX
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PERFORMANCE OF A $10,000 INVESTMENT
June 4, 1996 through August 31, 2004
Delaware Minnesota
High-Yield Municipal Lehman Brothers Municipal
Bond Fund Bond Index
Jun-96 $9,641 $10,000
Aug-96 $9,656 $10,088
Aug-97 $10,672 $11,021
Aug-98 $11,786 $11,974
Aug-99 $11,754 $12,039
Aug-00 $11,791 $12,849
Aug-01 $12,834 $14,161
Aug-02 $13,698 $15,045
Aug-03 $14,431 $15,517
Aug-04 $15,679 $16,620
Chart assumes $10,000 invested on June 4, 1996 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. The chart also assumes $10,000 invested in the Lehman Brothers
Municipal Bond Index at that months end, June 30, 1996. After June 30, 1996,
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.
An expense limitation was in effect for the period shown. Performance would have
been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of fund shares.
5
DISCLOSURE
OF FUND EXPENSES
As a shareholder of a fund, you incur two types of costs:
(1) transaction costs, including sales charges (loads) on purchase payments,
reinvested dividends, or other distributions; redemption fees; and exchange
fees; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other fund expenses. This Example is intended to help
you understand your ongoing costs (in dollars) of investing in a fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from March 1, 2004 to August 31, 2004.
ACTUAL EXPENSES
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
a Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table below assume reinvestment of all
dividends and distributions. In each case, "Expenses Paid During Period" are
equal to the Fund's annualized expense ratio, multiplied by the average account
value over the period, multiplied by 184/366 (to reflect the one-half year
period).
6
DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND(2)
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
3/1/04 8/31/04 3/1/04 to
8/31/04
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ACTUAL FUND RETURN
Class A $1,000.00 $1,013.60 0.75% $3.80
Class B 1,000.00 1,008.80 1.50% 7.57
Class C 1,000.00 1,008.80 1.50% 7.57
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HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,021.18 0.75% $3.82
Class B 1,000.00 1,017.36 1.50% 7.64
Class C 1,000.00 1,017.36 1.50% 7.64
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(2) Effective November 1, 2004, the Fund's manager decreased contractual expense
waivers in effect for the Fund, causing the expenses paid by the Fund to
increase. Had the new expense waivers been in effect during the period, the
Fund's expense analysis would be as follows:
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
3/1/04 8/31/04 3/1/04 to
8/31/04
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Actual Fund Return
Class A $1,000.00 $1,012.90 0.89% $4.50
Class B 1,000.00 1,008.09 1.64% 8.28
Class C 1,000.00 1,008.09 1.64% 8.28
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Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,020.47 0.89% $4.53
Class B 1,000.00 1,016.65 1.64% 8.35
Class C 1,000.00 1,016.65 1.64% 8.35
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7
SECTOR ALLOCATION AS OF AUGUST 31, 2004
DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND
The following chart list the Fund's categories of portfolio holdings as a
percent of total net assets, and are provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
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MUNICIPAL BONDS 93.30%
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Airline Revenue Bonds 1.25%
Airport Revenue Bonds 3.08%
City General Obligation Bonds 1.16%
Continuing Care/Retirement Revenue Bonds 17.01%
Corporate-Backed Revenue Bonds 5.04%
Higher Education Revenue Bonds 3.91%
Hospital Revenue Bonds 18.97%
Miscellaneous Revenue Bonds 1.56%
Multi Family Housing Revenue Bonds 21.91%
Municipal Lease Revenue Bonds 4.03%
Political Subdivision General Obligation Bonds 3.17%
Pre-Refunded Bonds 1.14%
Public Power Revenue Bonds 3.21%
Recreational Area Revenue Bonds 0.53%
Single Family Housing Revenue Bonds 1.75%
State General Obligation Bonds 1.75%
Tax Increment/Special Assessment Bonds 1.51%
Territorial Revenue Bonds 2.32%
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SHORT-TERM INVESTMENTS 4.61%
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TOTAL MARKET VALUE OF SECURITIES 97.91%
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RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 2.09%
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TOTAL NET ASSETS 100.00%
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8
STATEMENTS DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND
OF NET ASSETS August 31, 2004
Principal Market
Amount Value
MUNICIPAL BONDS - 93.30%
Airline Revenue Bonds - 1.25%
Minneapolis/St. Paul Metropolitan
Airports Commission Special
Facilities Revenue (Northwest
Airlines, Inc. Project) Series A
7.00% 4/1/25 (AMT) $1,000,000 $ 832,560
----------
832,560
----------
Airport Revenue Bonds - 3.08%
Minneapolis/St. Paul Metropolitan
Airports Commission Revenue
Series A 5.00% 1/1/28 (MBIA) 2,000,000 2,048,480
----------
2,048,480
----------
City General Obligation Bonds - 1.16%
Moorhead Series B 5.00% 2/1/33 (MBIA) 750,000 770,093
----------
770,093
----------
Continuing Care/Retirement Revenue Bonds - 17.01%
Buhl Nursing Home Revenue
(Forest Health Services Project)
Series A 6.75% 8/1/33 1,000,000 1,020,220
Mankato Health Facilities Revenue
(Mankato Lutheran Homes Project)
Series A 6.875% 10/1/26 300,000 298,794
Minneapolis Health Care Facility
Revenue (Jones-Harrison
Residence Project) 6.00% 10/1/27 1,000,000 953,540
Minnesota Agriculture & Economic
Development Board Revenue
(Benedictine Health Systems)
5.75% 2/1/29 1,000,000 976,240
Moorhead Economic Development
Authority Multifamily Revenue
(Eventide Lutheran Home Project)
Series B 6.00% 6/1/18 870,000 873,645
Northfield Health Care Facilities
Revenue (Northfield Retirement
Center Project) Series A 6.00% 5/1/28 1,000,000 982,180
Oakdale Elderly Housing Revenue
(PHM/Oakdale, Inc. Project)
6.00% 3/1/28 1,800,000 1,820,051
Perham Hospital District Senior
Congregate Housing Facilities
Revenue (Briarwood Project)
6.25% 11/1/22 620,000 618,934
Rochester Multifamily Revenue
(Wedum Shorewood Campus Project)
6.60% 6/1/36 990,000 981,803
Shoreview Elderly Housing Revenue
(PHM/Shoreview, Inc. Project)
6.15% 12/1/33 1,250,000 1,277,300
Twin Valley Congregate Housing Revenue
(Living Options, Inc. Project)
5.95% 11/1/28 1,825,000 1,516,539
----------
11,319,246
----------
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Corporate-Backed Revenue Bonds - 5.04%
Cloquet Pollution Control Revenue
(Potlatch Corp. Project) 5.90% 10/1/26 $1,700,000 $ 1,697,603
International Falls Solid Waste
Disposal Revenue
(Boise Cascade Corp. Project)
6.85% 12/1/29 (AMT) 500,000 508,625
Red Wing Industrial Development Revenue
(Kmart Corp. Project) 5.50% 7/1/08 250,000 175,625
Sartell Environmental Improvement
Revenue (International Paper)
Series A 5.20% 6/1/27 1,000,000 973,900
----------
3,355,753
----------
Higher Education Revenue Bonds - 3.91%
Minnesota State Higher Education
Facilities Authority Revenue
(College of Art & Design Project)
Series 5-D 6.75% 5/1/26 500,000 538,715
(St. Catherine College) Series 5-N1
5.375% 10/1/32 2,000,000 2,060,680
----------
2,599,395
----------
Hospital Revenue Bonds - 18.97%
Bermidji Health Care Facilities
First Meeting Revenue
(North County Health Services)
5.00% 9/1/31 (RADIAN) 2,500,000 2,531,224
Duluth Economic Development
Authority Health Care Facilities
Revenue Benedictine Health System
(St. Mary's Hospital) 5.25% 2/15/33 2,250,000 2,241,697
Minneapolis Health Care System
Revenue Series A
(Allina Health Systems)
5.75% 11/15/32 2,000,000 2,082,700
(Fairview Health Services)
5.625% 5/15/32 2,000,000 2,082,860
Minneapolis/St. Paul Housing &
Redevelopment Authority Health
Care System (Health Partners
Obligation Group) 6.00% 12/1/17 1,125,000 1,207,924
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health
Services) Series B 5.25% 7/1/30 1,000,000 1,010,640
St. Paul Housing & Redevelopment
Authority Hospital Revenue
(Health East Project)
Series A 5.70% 11/1/15 800,000 802,872
Series B 5.85% 11/1/17 250,000 251,658
Series B 6.625% 11/1/17 405,000 409,342
----------
12,620,917
----------
Miscellaneous Revenue Bonds - 1.56%
Minneapolis Community Development
Agency Supported Development
Revenue Series G-3 5.45% 12/1/31 1,000,000 1,035,120
----------
1,035,120
----------
9
STATEMENTS DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Multi Family Housing Revenue Bonds - 21.91%
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8)
6.20% 7/1/30 (FHA)(AMT) $ 300,000 $ 311,988
Chaska Multifamily Housing Revenue
(West Suburban Housing Partners
Project) 5.875% 3/1/31 (AMT) 1,000,000 923,270
Hutchinson Multifamily Housing
Revenue (Evergreen Apartments
Project-Section 8) 5.75% 11/1/28 2,125,000 1,913,987
Little Canada Multifamily Housing
Revenue (Housing Alternative
Development Co. Project) Series A
6.25% 12/1/27 1,250,000 1,244,538
Minneapolis Multifamily Housing Revenue
(Grant Street Apartments Project)
Series A 7.25% 11/1/29 2,085,000 1,993,259
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 1,675,000 1,646,123
(Trinity Apartments-Section 8)
Series A 6.75% 5/1/21 730,000 702,070
Minnesota State Housing Finance Agency
Series A 4.875% 8/1/24 (AMT) 585,000 590,879
St. Anthony Multifamily Housing
Revenue (Chandler Place Project)
Series A 6.05% 11/20/16 (FHA) (GNMA) 135,000 145,294
St. Cloud Housing & Redevelopment
Authority Revenue (Sterling Heights
Apartments Project) 7.55% 4/1/39 (AMT) 530,000 518,812
St. Paul Housing & Redevelopment
Authority Multifamily Housing
Revenue (Grotto Housing Project)
5.50% 9/20/44 (GNMA) 750,000 767,093
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project) Series A
6.75% 11/1/11 205,000 206,339
7.00% 11/1/16 (AMT) 680,000 673,608
7.00% 11/1/27 340,000 328,083
Washington County Housing &
Redevelopment Authority Governmental
Revenue (Briar Pond Project) Series B
7.125% 8/20/34 (GNMA) 860,000 802,423
(Woodland Park Apartments Project)
4.70% 10/1/32 1,825,000 1,806,385
-----------
14,574,151
-----------
Municipal Lease Revenue Bonds - 4.03%
Andover Economic Development
5.20% 2/1/34 1,000,000 1,004,390
Hibbing Economic Development
Authority Revenue (Hibbing Lease
Obligation Project) 6.40% 2/1/12 530,000 523,243
Rice County Certificates of Participation
Series A 6.00% 12/1/21 125,000 128,838
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 1,000,000 1,025,089
-----------
2,681,560
-----------
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Political Subdivision General Obligation Bonds - 3.17%
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 $ 500,000 $ 535,375
Perham Disposal System
6.00% 5/1/22 (AMT) 1,500,000 1,570,620
-----------
2,105,995
-----------
*Pre-Refunded Bonds - 1.14%
Beltrami County Housing & Redevelopment
Authority Revenue 6.10% 2/1/12-05 460,000 468,735
Glencoe Health Care Revenue
6.40% 12/1/15-05 275,000 290,032
-----------
758,767
-----------
Public Power Revenue Bonds - 3.21%
Minnesota State Municipal Power Agency
5.00% 10/1/34 1,000,000 1,001,760
Southern Minnesota Municipal Power
Agency Supply System Revenue
Series A 5.25% 1/1/16 (AMBAC) 1,000,000 1,136,910
-----------
2,138,670
-----------
Recreational Area Revenue Bonds - 0.53%
Woodbury Gross Revenue
(Golf Course Bonds) 6.75% 2/1/22 365,000 354,868
-----------
354,868
-----------
Single Family Housing Revenue Bonds - 1.75%
Minnesota State Housing Finance
Agency Single Family Mortgage
Series E 6.25% 1/1/23 (AMT) 30,000 31,059
Series J 5.90% 7/1/28 1,055,000 1,092,547
Series M 5.875% 1/1/17 40,000 41,476
-----------
1,165,082
-----------
State General Obligation Bonds - 1.75%
+Minnesota State, Inverse Floater ROLs
8.892% 11/1/17 1,000,000 1,166,150
-----------
1,166,150
-----------
Tax Increment/Special Assessment Bonds - 1.51%
St. Paul Housing & Redevelopment
Authority Tax Increment
(Upper Landing Project)
Series A 6.80% 3/1/29 1,000,000 1,006,420
-----------
1,006,420
-----------
Territorial Revenue Bonds - 2.32%
Puerto Rico Commonwealth Highway &
Transportation Authority Transportation
Revenue Series D 5.25% 7/1/38 500,000 512,215
Puerto Rico Electric Power Authority
Revenue Series II 5.25% 7/1/31 1,000,000 1,032,750
-----------
1,544,965
-----------
TOTAL MUNICIPAL BONDS
(cost $61,636,116) 62,078,192
-----------
10
STATEMENTS DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
SHORT-TERM INVESTMENT - 4.61%
Federated Minnesota Municipal
Cash Trust 3,066,738 $ 3,066,738
-----------
TOTAL SHORT-TERM INVESTMENT
(cost $3,066,738) 3,066,738
-----------
TOTAL MARKET VALUE OF SECURITIES - 97.91%
(cost $64,702,854) 65,144,930
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES - 2.09% 1,389,648
-----------
NET ASSETS APPLICABLE TO 6,496,652 SHARES
OUTSTANDING - 100.00% $66,534,578
===========
Net Asset Value - Delaware Minnesota High-Yield
Municipal Bond Fund Class A
($42,636,356 / 4,165,653 Shares) $10.24
------
Net Asset Value - Delaware Minnesota High-Yield
Municipal Bond Fund Class B
($12,463,329 / 1,215,630 Shares) $10.25
------
Net Asset Value - Delaware Minnesota High-Yield
Municipal Bond Fund Class C
($11,435,893 / 1,115,369 Shares) $10.25
------
COMPONENTS OF NET ASSETS AT AUGUST 31, 2004(++):
Shares of beneficial interest
(unlimited authorization - no par) $68,503,589
Undistributed net investment income 95
Accumulated net realized loss on investments (2,411,182)
Net unrealized appreciation of investments 442,076
-----------
Total net assets $66,534,578
===========
(*) 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 August 31, 2004.
(++) See Note 4 in "Notes to Financial Statements" for details of
reclassification of components of net assets.
SUMMARY OF ABBREVIATIONS:
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FHA - Insured by the Federal Housing Administration
GNMA - Insured by Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND
Net asset value Class A (A) $10.24
Sales charge (4.50% of offering price, or 4.69% of
amount invested per share) (B) 0.48
------
Offering price $10.72
======
(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
11
STATEMENTS DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
OF OPERATIONS YEAR ENDED AUGUST 31, 2004
Delaware
Minnesota High-Yield
Municipal Bond Fund
INVESTMENT INCOME:
Interest $3,664,754
----------
EXPENSES:
Management fees 348,064
Dividend disbursing and transfer agent fees and expenses 42,813
Distribution expenses -- Class A 98,544
Distribution expenses -- Class B 125,345
Distribution expenses -- Class C 113,441
Accounting and administration expenses 23,634
Registration fees 8,044
Reports and statements to shareholders 17,260
Legal and professional fees 25,815
Custodian fees 5,354
Trustees' fees 4,000
Other 1,364
----------
813,678
Less expenses absorbed or waived (158,900)
Less waived distribution expenses -- Class A --
Less expenses paid indirectly (578)
----------
Total expenses 654,200
----------
NET INVESTMENT INCOME 3,010,554
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (266,762)
Net change in unrealized appreciation/depreciation
of investments 2,240,817
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,974,055
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,984,609
==========
See accompanying notes
12
STATEMENTS DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
OF CHANGES IN NET ASSETS
Delaware Minnesota High-Yield
Municipal Bond Fund
Year Ended
8/31/04 8/31/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 3,010,554 $ 3,049,180
Net realized gain (loss) on investments (266,762) (441,678)
Net change in unrealized appreciation/depreciation of investments 2,240,817 259,426
------------ ------------
Net increase in net assets resulting from operations 4,984,609 2,866,928
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (1,977,528) (2,027,800)
Class B (533,890) (625,130)
Class C (483,072) (458,610)
------------ ------------
(2,994,490) (3,111,540)
------------ ------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 11,487,406 5,099,181
Class B 1,138,130 1,173,857
Class C 1,884,856 3,744,773
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 1,182,856 1,128,540
Class B 317,682 357,176
Class C 264,891 270,604
------------ ------------
16,275,821 11,774,131
------------ ------------
Cost of shares repurchased:
Class A (7,925,517) (4,314,157)
Class B (1,900,831) (2,339,040)
Class C (1,816,386) (1,049,878)
------------ ------------
(11,642,734) (7,703,075)
------------ ------------
Increase (decrease) in net assets derived from capital share transactions 4,633,087 4,071,056
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS 6,623,206 3,826,444
NET ASSETS:
Beginning of year 59,911,372 56,084,928
------------ ------------
End of year $ 66,534,578 $ 59,911,372
============ ============
Undistributed net investment income $ 95 --
See accompanying notes
13
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Delaware Minnesota High-Yield Municipal Bond Fund Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.910 $9.950 $9.900 $9.650 $10.210
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.512 0.550 0.586 0.581 0.576
Net realized and unrealized gain (loss) on investments 0.328 (0.030) 0.056 0.243 (0.564)
------- ------ ------ ------ ------
Total from investment operations 0.840 0.520 0.642 0.824 0.012
------- ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.510) (0.560) (0.592) (0.574) (0.572)
------- ------ ------ ------ ------
Total dividends and distributions (0.510) (0.560) (0.592) (0.574) (0.572)
------- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.240 $9.910 $9.950 $9.900 $9.650
======= ====== ====== ====== ======
TOTAL RETURN(2) 8.65% 5.33% 6.74% 8.84% 0.32%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $42,636 $36,644 $34,867 $34,615 $35,689
Ratio of expenses to average net assets 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of expenses to average net assets prior to expense limitation
and expenses paid indirectly 1.00% 1.04% 1.01% 0.94% 1.14%
Ratio of net investment income to average net assets 5.03% 5.48% 5.98% 6.01% 5.99%
Ratio of net investment income to average net assets prior to expense
limitation and expenses paid indirectly 4.78% 5.19% 5.72% 5.82% 5.60%
Portfolio turnover 24% 32% 33% 13% 8%
(1) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that required
amortization of all premiums and discounts on debt securities as an
adjustment to interest income. The effect of these changes for the year
ended August 31, 2002 was an increase in net investment income per share of
$0.001, a decrease in net realized and unrealized gain (loss) per share of
$0.001, and an increase in the ratio of net investment income to average net
assets of 0.01%. Per share data for periods prior to September 1, 2001 have
not been restated to reflect this change in accounting.
(2) 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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
14
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Delaware Minnesota High-Yield Municipal Bond Fund Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $9.930 $9.970 $9.910 $9.650 $10.210
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.435 0.475 0.513 0.509 0.504
Net realized and unrealized gain (loss) on investments 0.318 (0.030) 0.063 0.248 (0.570)
------- ------ ------ ------ ------
Total from investment operations 0.753 0.445 0.576 0.757 (0.066)
------- ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.433) (0.485) (0.516) (0.497) (0.494)
------- ------ ------ ------ ------
Total dividends and distributions (0.433) (0.485) (0.516) (0.497) (0.494)
------- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.250 $9.930 $9.970 $9.910 $9.650
======= ====== ====== ====== ======
TOTAL RETURN(2) 7.71% 4.55% 6.03% 8.09% (0.49%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $12,463 $12,513 $13,379 $12,932 $13,743
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of expenses to average net assets prior to expense limitation
and expenses paid indirectly 1.75% 1.79% 1.76% 1.69% 1.89%
Ratio of net investment income to average net assets 4.28% 4.73% 5.23% 5.26% 5.24%
Ratio of net investment income to average net assets prior to expense
limitation and expenses paid indirectly 4.03% 4.44% 4.97% 5.07% 4.85%
Portfolio turnover 24% 32% 33% 13% 8%
(1) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that required
amortization of all premiums and discounts on debt securities as an
adjustment to interest income. The effect of these changes for the year
ended August 31, 2002 was an increase in net investment income per share of
$0.001, a decrease in net realized and unrealized gain (loss) per share of
$0.001, and an increase in the ratio of net investment income to average net
assets of 0.01%. Per share data for periods prior to September 1, 2001 have
not been restated to reflect this change in accounting.
(2) 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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
15
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Delaware Minnesota High-Yield Municipal Bond Fund Class C
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $9.930 $9.970 $9.910 $9.650 $10.210
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.435 0.475 0.513 0.509 0.504
Net realized and unrealized gain (loss) on investments 0.318 (0.030) 0.063 0.248 (0.570)
------- ------ ------ ------ ------
Total from investment operations 0.753 0.445 0.576 0.757 (0.066)
------- ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.433) (0.485) (0.516) (0.497) (0.494)
------- ------ ------ ------ ------
Total dividends and distributions (0.433) (0.485) (0.516) (0.497) (0.494)
------- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.250 $9.930 $9.970 $9.910 $9.650
======= ====== ====== ====== ======
TOTAL RETURN(2) 7.71% 4.54% 6.03% 8.09% (0.49%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $11,435 $10,754 $7,840 $6,807 $6,599
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of expenses to average net assets prior to expense limitation
and expenses paid indirectly 1.75% 1.79% 1.76% 1.69% 1.89%
Ratio of net investment income to average net assets 4.28% 4.73% 5.23% 5.26% 5.24%
Ratio of net investment income to average net assets prior to expense
limitation and expenses paid indirectly 4.03% 4.44% 4.97% 5.07% 4.85%
Portfolio turnover 24% 32% 33% 13% 8%
(1) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that required
amortization of all premiums and discounts on debt securities as an
adjustment to interest income. The effect of these changes for the year
ended August 31, 2002 was an increase in net investment income per share of
$0.001, a decrease in net realized and unrealized gain (loss) per share of
$0.001, and an increase in the ratio of net investment income to average net
assets of 0.01%. Per share data for periods prior to September 1, 2001 have
not been restated to reflect this change in accounting.
(2) 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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
16
NOTES DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS AUGUST 31, 2004
Voyageur Mutual Funds (a "Trust") is organized as a Delaware statutory trust and
offers six series: Delaware Minnesota High-Yield Municipal Bond Fund, Delaware
National High-Yield Municipal Bond Fund, Delaware Tax-Free Arizona Fund,
Delaware Tax-Free California Fund, Delaware Tax-Free Idaho Fund, and Delaware
Tax-Free New York Fund. Voyageur Insured Funds (a "Trust") is organized as a
Delaware statutory trust and offers two series: Delaware Tax-Free Arizona
Insured Fund and Delaware Tax-Free Minnesota Insured Fund. Voyageur Tax Free
Funds (a "Trust") is organized as a Delaware business trust and offers the
Delaware Tax-Free Minnesota Fund. Voyageur Intermediate Tax Free Funds (a
"Trust") is organized as a Delaware statutory trust and offers the Delaware
Tax-Free Minnesota Intermediate Fund. These financial statements and related
notes pertain to Delaware Tax-Free Minnesota Fund, Delaware Tax-Free Minnesota
Insured Fund, Delaware Tax-Free Minnesota Intermediate Fund and Delaware
Minnesota High-Yield Municipal Bond 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% for Delaware Tax-Free Minnesota Fund,
Delaware Tax-Free Minnesota Insured Fund and Delaware Minnesota High-Yield
Municipal Bond Fund and with a front-end sales charge of up to 2.75% for
Delaware Tax-Free Minnesota Intermediate Fund. Class B shares are sold with a
contingent deferred sales charge that declines from 4% to zero for Delaware
Tax-Free Minnesota Fund, Delaware Tax-Free Minnesota Insured Fund and Delaware
Minnesota High-Yield Municipal Bond Fund and that declines from 2% to zero for
Delaware Tax-Free Minnesota Intermediate Fund, 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 for Delaware
Tax-Free Minnesota Fund, Delaware Tax-Free Minnesota Insured Fund and Delaware
Minnesota High-Yield Municipal Bond Fund and approximately five years after
purchase for Delaware Tax-Free Minnesota Intermediate Fund. 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 Minnesota Fund and Delaware
Tax-Free Minnesota Insured Fund is to seek as high a level of current income
exempt from federal income tax and from the Minnesota state personal income tax,
as is consistent with preservation of capital.
The investment objective of Delaware Tax-Free Minnesota Intermediate Fund is to
seek to provide investors with preservation of capital and, secondarily, current
income exempt from federal income tax and from the Minnesota state personal
income tax, by maintaining a dollar-weighted average effective portfolio
maturity of 10 years or less.
The investment objective of Delaware Minnesota High-Yield Municipal Bond Fund is
to seek as high a level of current income exempt from federal income tax and
from the Minnesota state personal income tax, primarily through investment in
medium- and lower-grade municipal obligations.
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. 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.
Federal Income Taxes -- Each 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 Funds on the basis of "settled shares" of each class in relation
to the net assets of the Funds. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Funds 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 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. 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.
Through December 31, 2003, certain expenses of the Funds were paid through
commission arrangements with brokers. In addition, the Funds may receive
earnings credits from their custodian when positive cash balances are
maintained, which are used to offset custody fees. The expenses paid under the
above arrangements are included in their respective expense captions on the
Statements of Operations with the corresponding expense offset shown as
"expenses paid indirectly". The amounts of these expenses for the year ended
August 31, 2004 were as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
--------------------
Commission reimbursements $497
Earnings credits 81
17
NOTES DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
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 based on
each Fund's average daily net assets as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
On the first $500 million 0.550%
On the next $500 million 0.500%
On the next $1.5 billion 0.450%
In excess of $2.5 billion 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 of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed specified percentages of average daily net assets as shown below:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
The operating expense limitation
as a percentage of average daily
net assets (per annum) 0.50%
Expiration date 10/31/04
Effective November 1, 2004 the
operating expense limitation as
a percentage of average daily
net assets (per annum) 0.64%
Expiration date 10/31/05
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Funds pay
DSC a monthly fee based on average net assets subject to certain minimums for
accounting and administration 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
Delaware Distributors, L.P. (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 for all Funds. DDLP has contracted to waive distribution
fees through October 31, 2005 in order to prevent distribution fees of Class A
shares from exceeding 0.15% of average daily net assets for the Delaware
Tax-Free Minnesota Intermediate Fund.
At August 31, 2004, each Fund had receivables from or liabilities payable to
affiliates as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
Investment management
fee payable to DMC $ --
Dividend disbursing,
transfer agent fees,
accounting and administration fees
and expenses payable to DSC 5,524
Other expenses payable to
DMC and affiliates*
Receivable from DMC under
expense limitation agreement (2,834)
*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.
18
NOTES DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
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 services expenses, including in-house legal services provided to
each Fund by DMC employees. For the year ended August 31, 2004, each Fund had
costs as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
$2,960
For the year ended August 31, 2004, DDLP earned commissions on sales of Class A
shares for each Fund as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
$34,085
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 Funds.
3. INVESTMENTS
For the year ended August 31, 2004, the Funds made purchases and sales of
investment securities as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
Purchases other than
short-term investments $15,881,498
Sales other than
short-term investments 14,483,758
At August 31, 2004, the cost of investments and unrealized appreciation
(depreciation) for federal income tax purposes for each Fund were as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
Cost of investments $64,654,208
===========
Aggregate unrealized appreciation $ 1,631,683
Aggregate unrealized depreciation (1,140,961)
-----------
Net unrealized appreciation $ 490,722
===========
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. The tax character of dividends and distributions
paid during the years ended August 31, 2004 and 2003 was as follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
YEAR ENDED 8/31/04
------------------
Tax-exempt income $2,994,490
Ordinary Income --
Long-term capital gain --
----------
Total $2,994,490
==========
YEAR ENDED 8/31/03
------------------
Tax-exempt income $3,111,540
Long-term capital gain --
----------
Total $3,111,540
==========
19
NOTES DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
As of August 31, 2004, the components of net assets on a tax basis were as
follows:
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
Shares of beneficial interest $68,503,589
Undistributed tax-exempt income 95
Undistributed long-term capital gain --
Capital loss carryforwards (2,459,828)
Unrealized appreciation of investments 490,722
-----------
Net assets $66,534,578
===========
For financial reporting purposes, capital accounts and distributions to
shareholders are adjusted to reflect the tax character of permanent book/tax
differences. For the year ended August 31, 2004, the following permanent
reclassifications were recorded. Reclassifications are primarily due to tax
treatment of market discount and premium on certain debt instruments. Results of
operations and net assets were not affected by these reclassifications.
Delaware Minnesota
High-Yield
Municipal Bond Fund
-------------------
Undistributed (accumulated) net
investment income (loss) ($15,969)
Accumulated realized gain (loss) 22,778
Paid-in capital (6,809)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss
carryforwards expire as follows:
Delaware Minnesota
High-Yield
Year of Expiration Municipal Bond Fund
- ------------------ -------------------
2005 4,334
2006 648
2007 369
2008 201,822
2009 1,267,552
2010 57,521
2011 243,334
2012 684,248
----------
Total $2,459,828
==========
For the year ended August 31, 2004, the Funds had capital loss carryforwards
that expired as follows:
Delaware High-Yield Municipal Bond Fund $6,809
20
NOTES DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Delaware Minnesota High-Yield
Municipal Bond Fund
-----------------------------
Year Ended
8/31/04 8/31/03
Shares sold:
Class A 1,135,220 508,021
Class B 112,103 116,993
Class C 186,090 374,028
Shares issued upon reinvestment
of dividends and distributions:
Class A 116,747 113,106
Class B 31,307 35,758
Class C 26,108 27,079
--------- ---------
1,607,576 1,174,985
--------- ---------
Shares repurchased:
Class A (783,364) (427,831)
Class B (188,078) (234,605)
Class C (179,941) (104,635)
--------- ---------
(1,151,383) (767,071)
--------- ---------
Net increase (decrease) 456,193 407,914
--------- ---------
For the years ended August 31, 2004 and August 31, 2003, the following shares
and values were converted from Class B to Class A. The respective amounts are
included in Class B redemptions and Class A subscriptions in the table above and
the Statements of Changes in Net Assets.
Year Ended Year Ended
8/31/04 8/31/03
-------------------------------- --------------------------------
Class B Class A Class B Class A
shares shares Amount shares shares Amount
------- ------- -------- ------- ------- --------
Delaware Minnesota High-Yield Municipal Fund 30,786 30,829 313,693 -- -- --
21
NOTES DELAWARE MINNESOTA MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
The Funds, 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 fund'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 August 31, 2004 or at any time during the
year.
7. CREDIT AND MARKET RISK
The Funds concentrate their investments in securities issued by municipalities,
mainly in Minnesota. The value of these investments may be adversely affected by
new legislation within the state, 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
market value 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 Statements of Net Assets.
The Funds may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Statement of Net Assets.
8. 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 each Fund's existing
contracts and expects the risk of loss to be remote.
9. TAX INFORMATION (UNAUDITED)
The information set forth below is for each 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 fiscal year ended August 31, 2004, each Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary (C) (D)
Capital Gains Income Tax Exempt Total
Distributions Distributions Distributions Distributions
(Tax Basis) (Tax Basis) (Tax Basis) (Tax Basis)
------------- -------------- ------------- -------------
Delaware Minnesota High-Yield Municipal Bond Fund -- -- 100% 100%
(A), (B), and (C) are based on a percentage of each Fund's total distributions.
22
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Voyageur Tax Free Funds - Delaware Tax-Free Minnesota Fund
Voyageur Insured Funds - Delaware Tax-Free Minnesota Insured Fund
Voyageur Intermediate Tax Free Funds - Delaware Tax-Free Minnesota
Intermediate Fund
Voyageur Mutual Funds - Delaware Minnesota High-Yield Municipal Bond Fund
We have audited the accompanying statements of net assets of Voyageur Tax Free
Funds (comprised of Delaware Tax-Free Minnesota Fund), Delaware Tax-Free
Minnesota Insured Fund (one of the series constituting Voyageur Insured Funds),
Voyageur Intermediate Tax Free Funds (comprised of Delaware Tax-Free Minnesota
Intermediate Fund) and Delaware Minnesota High-Yield Municipal Bond Fund (one of
the series constituting Voyageur Mutual Funds) (the "Funds") as of August 31,
2004, and the related statements 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 Funds' 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 the standards of the Public Company
Accounting Oversight Board (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 August 31, 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 the
Delaware Tax-Free Minnesota Fund of Voyageur Tax Free Funds, the Delaware
Tax-Free Minnesota Insured Fund of Voyageur Insured Funds, the Delaware Tax-Free
Minnesota Intermediate Fund of Voyageur Intermediate Tax Free Funds, and the
Delaware Minnesota High-Yield Municipal Bond Fund of Voyageur Mutual Funds at
August 31, 2004, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for each of the five years in the period then
ended in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 4, 2004
23
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, 77 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)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
WALTER P. BABICH Trustee 16 Years Board Chairman - 94 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 94 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103
August 7, 1937 President/Director -
22 WR Corporation
JOHN A. FRY Trustee(4) 3 Years President - 77 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 94 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
24
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 - 94 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
Director -
Systemax Inc.
November 1, 1940
THOMAS F. MADISON Trustee 10 Years President/Chief 94 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 & 94 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 94 None(5)
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 Executive Vice President, Chief Legal Ms. Maestro has served in 94 None(5)
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 at different times at
19103 Delaware Investments.
November 26, 1957
MICHAEL P. BISHOF Senior Vice President 8 Years Mr. Bishof has served in 94 None(5)
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.
(5 Mr. Hastings, Mr. Bishof and Ms. Maestro also serve in similar capacities
for the six portfolios of the Optimum Fund Trust, which have the same
investment advisor, principal underwriter, and transfer agent as the
registrant.
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.
25
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Tax-Free Minnesota Fund,
Delaware Tax-Free Minnesota Insured Fund, Delaware Tax-Free Minnesota
Intermediate Fund, and Delaware Minnesota High-Yield Municipal Bond Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Tax-Free Minnesota Fund,
Delaware Tax-Free Minnesota Insured Fund, Delaware Tax-Free Minnesota
Intermediate Fund, and Delaware Minnesota High-Yield Municipal Bond Fund and the
Delaware Investments Performance Update for the most recently completed calendar
quarter. The prospectus sets forth details about charges, expenses, investment
objectives, and operating policies for each 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 each 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
WALTER P. BABICH JUDE T. DRISCOLL INVESTMENT MANAGER
Board Chairman Chairman Delaware Management Company
Citadel Construction Corporation Delaware Investments Family of Funds Philadelphia, PA
King of Prussia, PA Philadelphia, PA
INTERNATIONAL AFFILIATE
JOHN H. DURHAM JOSEPH H. HASTINGS Delaware International Advisers Ltd.
Private Investor Executive Vice President and London, England
Gwynedd Valley, PA Chief Financial Officer
Delaware Investments Family of Funds NATIONAL DISTRIBUTOR
ANTHONY D. KNERR Philadelphia, PA Delaware Distributors, L.P.
Managing Director Philadelphia, PA
Anthony Knerr & Associates RICHELLE S. MAESTRO
New York, NY Executive Vice President, SHAREHOLDER SERVICING, DIVIDEND
Chief Legal Officer and Secretary DISBURSING AND TRANSFER AGENT
ANN R. LEVEN Delaware Investments Family of Funds Delaware Service Company, Inc.
Former Treasurer/Chief Fiscal Officer Philadelphia, PA 2005 Market Street
National Gallery of Art Philadelphia, PA 19103-7094
Washington, DC MICHAEL P. BISHOF
Senior Vice President and Treasurer FOR SHAREHOLDERS
THOMAS F. MADISON Delaware Investments Family of Funds 800 523-1918
President and Chief Executive Officer Philadelphia, PA
MLM Partners, Inc. FOR SECURITIES DEALERS AND FINANCIAL
Minneapolis, MN INSTITUTIONS REPRESENTATIVES ONLY
800 362-7500
JANET L. YEOMANS
Vice President/Mergers & Acquisitions WEB SITE
3M Corporation www.delawareinvestments.com
St. Paul, MN
- --------------------------------------------------------------------------------
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. The Fund 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 is available without charge (i) upon request,
by calling 800 523-1918; (ii) on each Fund Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. Each Fund Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-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 the Fund Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(8920) Printed in the USA
AR-MNALL [9/04] IVES 10/04 J9819
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
FIXED INCOME
ANNUAL REPORT AUGUST 31, 2004
- --------------------------------------------------------------------------------
DELAWARE TAX-FREE ARIZONA FUND
DELAWARE TAX-FREE CALIFORNIA FUND
[LOGO]
POWERED BY RESEARCH.(SM)
PORTFOLIO SEPTEMBER 10, 2004
MANAGEMENT REVIEW
FUND MANAGERS
Andrew M. McCullagh
Senior Portfolio Manager
Joseph R. Baxter
Senior Portfolio Manager
Robert F. Collins
Senior Portfolio Manager
Q: HOW DID THE FIXED-INCOME MARKETS AND THE DELAWARE WESTERN STATES TAX-FREE
FUNDS PERFORM DURING THE PAST YEAR?
A: For the 12-months ended August 31, 2004, the fixed-income markets produced
positive returns as ongoing uncertainties surrounding the domestic economy, a
"too-close-to-call" presidential campaign, and continued geo-political threats
highlighted the period. Such uncertain times often result in a
"flight-to-quality" as many investors seek the perceived safe-haven of
fixed-income securities. Despite a late shift in Federal Reserve policy
resulting in two short-term rate increases, bond prices generally rose across
most fixed-income markets. The benchmark 10-year U.S. Treasury note, which began
the period yielding around 4.50%, experienced some volatile price swings before
ending the fiscal year with a yield of roughly 4.15%. An inverse relationship
exists between bond prices and bond yields.
Despite lagging its fixed-income counterparts in prior fiscal years, the
tax-free municipal bond market performed quite well for the 12-month period,
benefiting from both the overall lower interest rate environment and economic
recoveries within many states. The broad national average, as measured by the
Lehman Brothers Municipal Bond Index, returned +7.11% during the fiscal year,
while state-specific indexes produced similar results. Many states, including
Arizona, California and Colorado, experienced improved tax rolls and upgrades
among tax-free bond issues as their economies moved beyond the previous
recessionary environments.
Q: WHAT DEVELOPMENTS IMPACTED YOUR INVESTMENT DECISIONS DURING THE 12-MONTH
PERIOD?
A: First, as the state economies recovered, many lower-rated bonds that had been
negatively impacted by the recent period of recession and ensuing modest
economic recovery significantly appreciated in price. Early in the fiscal year,
we were able to catch the wave of this rebound as certain lower-quality holdings
in the Funds' portfolios contributed to solid return for the fiscal year.
As the 12-month period progressed, we took advantage of this "compression" of
yields by upgrading the quality of securities within the Funds. In some cases,
certain debt issues were upgraded by the credit rating services. In other cases,
this strategy involved a rebalancing out of lower-quality bonds into
higher-quality issues. As a result, we sought to reduce overall risk within the
Funds without forgoing much upside yield potential.
Second, the Federal Reserve finally raised short-term interest rates, with the
fed funds rate moving from 1.0% to 1.5%. Because of these anticipated moves to
higher rates, we reduced the overall durations (and risks) of the Funds by
shifting into less volatile shorter-term securities. Duration, which is
calculated in years, is a common measure of a bond's 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.
Q: PLEASE DISCUSS THE PERFORMANCES AND UNDERLYING INVESTMENT STRATEGIES IN EACH
OF THE FUNDS DURING THE FISCAL YEAR.
A: For the 12 months ended August 31, 2004, DELAWARE TAX-FREE ARIZONA FUND
appreciated +7.53% (Class A shares at net asset value with distributions
reinvested), outperforming the +6.33% return of the Lipper Arizona Municipal
Debt Funds Average, the Fund's peer group, and the +7.11% return of the Lehman
Brothers Municipal Bond Index, the Fund's benchmark (Source: Lipper Inc.).*
During the period, the state of Arizona reaped substantial benefit of strong
revenue growth from both state sales taxes and personal income taxes. These
increased receipts helped to remedy the serious budget issues that had plagued
the state in recent years. Further, the overall employment rate dropped
significantly during the 12-month period. The bond rating services took note of
these economic developments, as both Moody's and Standard & Poor's changed their
respective outlooks from "negative" to "stable" for the state.
Because the supply of tax-free debt is limited in Arizona, we used our stringent
fundamental analysis and bottom-up security selection process to seek out bonds
with the best relative value, regardless of sector. During the period, we
generated a competitive dividend stream while upgrading the Fund's credit
quality and shortening its duration. Duration, which is calculated in years, is
a common measure of a bond's 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.
*A portion of the income from tax-exempt Funds may be subject to the
alternative minimum tax.
1
At fiscal year-end, higher education-related bonds (including those issued for
public universities, which dominate the holdings in your Fund and are typically
of a higher credit quality) made up the largest sector allocation by net assets
within your Fund. Also notable, the Maricopa County Industrial Development
Authority multi-family housing revenue bonds that had been a drag on Fund
performance in the past were partially liquidated from the portfolio. On the
other hand, Winslow Memorial Hospital Revenue Bonds experienced internal
management challenges that hindered expected revenues. While we pared down our
exposure this year, the bonds negatively impacted the Fund's return and remain a
candidate for upcoming sale.
- --------------------------------------------------------------------------------
For the 12 months ended August 31, 2004, DELAWARE TAX-FREE ARIZONA INSURED FUND
appreciated +7.09% (Class A shares at net asset value with distributions
reinvested). During the same timeframe, the Lipper Arizona Muni Debt Funds
Average, which serves as the Fund's peer group, returned +6.33%. The Fund
slightly underperformed its benchmark, the Lehman Brothers Municipal Bond Index,
which returned +7.11% (Source: Lipper Inc.).*
During the 12-month period, your Fund benefited significantly from economic
strength experienced throughout the state. While our selection of bonds is
largely limited to insured status, we were able to enhance Fund return by
identifying selected higher yielding mid-investment-grade issues for up to 20
percent of the Fund's net assets. Despite its majority AAA-rated insured
holdings, your Fund generated a competitive stream of dividends. However,
because of our high-quality requirements and your Fund's insured profile, the
dividend yield is not as high as many other tax-free funds and its performance
does not rank in the top quartile.
At fiscal year-end, the main bond market sectors held within your Fund were
hospitals and institutions of higher education, representing 12.3% and 10.3% of
net assets, respectively. We avoided certain charter school issues because the
Arizona legislature, in our opinion, does not embrace these public education
entities as do the legislatures of other states.
- --------------------------------------------------------------------------------
For the 12 months ended August 31, 2004, DELAWARE TAX-FREE CALIFORNIA FUND
returned +8.34% (Class A shares at net asset value with distributions
reinvested). This performance surpassed the +7.04% return of the Lipper
California Muni Debt Funds Average, the Fund's peer group, and the +7.11% return
of the Lehman Brothers Municipal Bond Index, the Fund's benchmark (Source:
Lipper Inc.).*
During the fiscal year, a new governor was elected in California. Arnold
Schwarzenegger is considered pro-business and has repeatedly spoken of his goals
to create jobs and further improve an economy that generally expanded in line
with the rest of the country during the 12-month period. The state has moved to
overcome its significant budgetary issues, including the issuance of economic
recovery bonds to improve the liquidity and strive for a balanced budget. In
late August, Standard & Poor's upgraded its rating for the state from BBB+ to A,
a move that should reap significant benefits for California's debt. Likewise,
Moody's placed California's A3 rating on a "positive" track.
Still, we exercised caution, as we are not convinced that all of the state's
financial problems have been solved, there still being structural imbalances in
the State's forward budgets. Anticipating the rating moves and improving
economic outlook, we invested in state general obligation bonds that performed
well during the fiscal period.
Also benefiting from California's upward credit trend are the state
appropriation supported tobacco settlement bonds. While we have avoided the
stand-alone tobacco bonds, which have been highly volatile and are subject to
litigation risk, our bonds are double barreled, with State appropriations
backing up any shortfalls from the master settlement agreement.
One holding, San Diego County Museum Bonds, which are certificates of
participation for the Natural History Museum, under-performed during the year as
the museum suffered from lower than anticipated attendance. While we still owned
this issue at year-end, its status remains under review and is a candidate for
sale.
*A portion of the income from tax-exempt Funds may be subject to the
alternative minimum tax.
2
- --------------------------------------------------------------------------------
For the 12 months ended August 31, 2004, DELAWARE TAX-FREE CALIFORNIA INSURED
FUND gained +7.85% (Class A shares at net asset value with distributions
reinvested). The Fund outperformed its peer group, as measured by the Lipper
California Insured Muni Debt Funds Average, which returned +6.50%, and its
benchmark, the Lehman Brothers Municipal Bond Index, which returned +7.11%
(Source: Lipper Inc.).*
During the 12-month period, the state of California experienced an improved
employment situation and increased receipts from sales taxes and personal income
taxes. Likewise, the state's improved credit rating picture boded well for the
issues held by your Fund. We invested in select higher-yielding,
mid-investment-grade holdings to enhance Fund return, while avoiding some of the
hardest hit issues, such as development projects in the Silicon Valley region.
At fiscal year-end, multi-family housing issues represented the largest sector
allocation within your Fund at 15.1% of net assets. On a negative note, San
Diego School District general obligation bonds encountered some financial
challenges that negatively impacted performance. During the year, the school
district faced ongoing budgetary issues.
- --------------------------------------------------------------------------------
For the 12 months ended August 31, 2004, DELAWARE TAX-FREE COLORADO FUND
appreciated +7.04% (Class A shares at net asset value with distributions
reinvested). The Fund's performance bested the +6.49% return of its peer group,
the Lipper Colorado Municipal Debt Funds Average, and slightly trailed the
+7.11% return of its benchmark, the Lehman Brothers Municipal Bond Index
(Source: Lipper Inc.).*
The Colorado economy continued to lag much of the country during the 12-month
period as state employment and growth in personal income trailed national
averages. Voter initiatives such as TABOR (Colorado's Taxpayer's Bill of Rights)
and education funding also served to limit the state's financial flexibility.
Despite such ongoing economic issues, Moody's revised the outlook for the state
from "negative" to "stable."
Political subdivisions and higher education bonds are the top two sectors
represented in your fund. Political subdivisions have been among the largest
bond issuers in the state over the past few years and higher education bonds
issued for public universities are typically of high credit quality. However,
the Fund's return was affected by some challenges faced by one related issue,
Colorado Education and Cultural Facility Authority Revenue Bonds. The
beneficiary of this funding, The Renaissance School, experienced decreased
enrollment following a move from charter to magnet school status.
*A portion of the income from tax-exempt Funds may be subject to the
alternative minimum tax.
3
DELAWARE
TAX-FREE ARIZONA FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. Please obtain the performance data for the most recent month end by
calling 800 523-1918 or visiting our Web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges, and expenses of the investment carefully before
investing. The Delaware Tax-Free Arizona Fund prospectus contains this and other
important information about the investment company. Please request a prospectus
by calling 800 523-1918. Read it carefully before you invest or send money.
Performance includes reinvestment of all distributions.
FUND PERFORMANCE
Average Annual Total Returns
Through August 31, 2004 Lifetime Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 3/2/95)
Excluding Sales Charge +5.96% +4.89% +7.53%
Including Sales Charge +5.45% +3.93% +2.70%
- --------------------------------------------------------------------------------
Class B (Est. 6/29/95)
Excluding Sales Charge +4.99% +4.11% +6.73%
Including Sales Charge +4.99% +3.86% +2.73%
- --------------------------------------------------------------------------------
Class C (Est. 5/13/95)
Excluding Sales Charge +4.97% +4.10% +6.70%
Including Sales Charge +4.97% +4.10% +5.70%
- --------------------------------------------------------------------------------
Returns reflect the reinvestment of all 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 have an annual distribution and
service fee of up to 0.25%.
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%. Lifetime performance figures for class B
shares reflect conversion to Class A shares after approximately eight years.
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 all classes of Delaware Tax-Free Arizona
Fund during the periods shown. Performance would have been lower had the expense
limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
A portion of the income from tax-exempt funds may be subject to the alternative
minimum tax.
4
DELAWARE
TAX-FREE ARIZONA FUND
FUND BASICS
As of August 31, 2004
- --------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks as high a level of current interest income exempt from federal
income tax and the Arizona state personal income tax as is consistent with
preservation of capital.
- --------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$30.87 million
- --------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
36
- --------------------------------------------------------------------------------
FUND START DATE:
March 2, 1995
- --------------------------------------------------------------------------------
YOUR FUND MANAGERS:
Andrew M. McCullagh, Jr. is a graduate of Washington College and has a Graduate
Certificate in public finance from the University of Michigan. Prior to joining
Delaware Investments, he served as Senior Vice President and Senior Portfolio
Manager of Voyageur Asset Management. Mr. McCullagh has over 29 years'
experience in municipal bond trading, underwriting, and portfolio management.
Joseph R. Baxter is a graduate of LaSalle University where he earned his
undergraduate degree in finance and marketing. Prior to joining Delaware
Investments in 1999, he held investment positions with First Union.
Most recently, he served as a municipal portfolio manager for the Evergreen
Funds.
Robert F. Collins is a graduate of Ursinus College where he earned his Bachelor
of Arts degree in Economics. Prior to joining Delaware in 2004, he co-managed
the municipal portfolio management group within PNC Advisors, overseeing the
tax-exempt investments of high-net worth and institutional accounts. Previously,
Mr. Collins headed the municipal fixed income team at Wilmington Trust Company,
managing funds and high-net worth accounts. Mr. Collins is a CFA Charterholder
and a former president of the Financial Analysts of Wilmington.
- --------------------------------------------------------------------------------
NASDAQ SYMBOLS:
Class A DVAAX
Class B DVATX
Class C DVAZX
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
March 2, 1995 (Fund's inception) through August 31, 2004
DELAWARE TAX-FREE
ARIZONA FUND - CLASS A LEHMAN BROTHERS
SHARES MUNICIPAL BOND INDEX
2-MAR-95 $ 9,551 $10,000
31-AUG-95 $10,073 $10,589
31-AUG-96 $10,961 $11,143
31-AUG-97 $11,991 $12,173
31-AUG-98 $13,127 $13,226
31-AUG-99 $12,985 $13,292
31-AUG-00 $13,460 $14,192
31-AUG-01 $14,738 $15,638
31-AUG-02 $15,466 $16,613
31-AUG-03 $15,330 $17,135
31-AUG-04 $16,556 $18,354
Chart assumes $10,000 invested on March 2, 1995 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. The chart also assumes $10,000 invested in the Lehman Brothers
Municipal Bond Index at that month's end, March 31, 1995. After March 31, 1995,
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.
An expense limitation was in effect for the period shown. Performance would have
been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
5
DELAWARE
TAX-FREE CALIFORNIA FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. Please obtain the performance data for the most recent month end by
calling 800 523-1918 or visiting our Web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges, and expenses of the investment carefully before
investing. The Delaware Tax-Free California Fund prospectus contains this and
other important information about the investment company. Please request a
prospectus by calling 800 523-1918. Read it carefully before you invest or send
money. Performance includes reinvestment of all distributions.
FUND PERFORMANCE
Average Annual Total Returns
Through August 31, 2004 Lifetime Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 3/2/95)
Excluding Sales Charge +6.68% +6.37% +8.34%
Including Sales Charge +6.17% +5.40% +3.43%
- --------------------------------------------------------------------------------
Class B (Est. 8/23/95)
Excluding Sales Charge +6.18% +5.60% +7.60%
Including Sales Charge +6.18% +5.35% +3.60%
- --------------------------------------------------------------------------------
Class C (Est. 4/9/96)
Excluding Sales Charge +5.86% +5.59% +7.62%
Including Sales Charge +5.86% +5.59% +6.62%
- --------------------------------------------------------------------------------
Returns reflect the reinvestment of all 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 have an annual distribution and
service fee of up to 0.25%.
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%. Lifetime performance figures for class B
shares reflect conversion to Class A shares after approximately eight years.
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 all classes of Delaware Tax-Free
California Fund during the periods shown. Performance would have been lower had
the expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
A portion of the income from tax-exempt Funds may be subject to the alternative
minimum tax.
6
DELAWARE
TAX-FREE CALIFORNIA FUND
FUND BASICS
As of August 31, 2004
- --------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks as high a level of current interest income exempt from federal
income tax and the California state personal income tax as is consistent with
preservation of capital.
- --------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$44.92 million
- --------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
41
- --------------------------------------------------------------------------------
FUND START DATE:
March 2, 1995
- --------------------------------------------------------------------------------
YOUR FUND MANAGERS:
Andrew M. McCullagh, Jr.
Joseph R. Baxter
Robert F. Collins
- --------------------------------------------------------------------------------
NASDAQ SYMBOLS:
Class A DVTAX
Class B DVTFX
Class C DVFTX
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
March 2, 1995 (Fund's inception) through August 31, 2004
DELAWARE TAX-FREE
CALIFORNIA FUND - CLASS LEHMAN BROTHERS
A SHARES MUNICIPAL BOND INDEX
2-MAR-95 $ 9,551 $10,000
31-AUG-95 $ 9,913 $10,589
31-AUG-96 $10,629 $11,143
31-AUG-97 $11,830 $12,173
31-AUG-98 $13,086 $13,226
31-AUG-99 $12,885 $13,292
31-AUG-00 $13,529 $14,192
31-AUG-01 $14,940 $15,638
31-AUG-02 $15,801 $16,613
31-AUG-03 $16,197 $17,135
31-AUG-04 $17,655 $18,354
Chart assumes $10,000 invested on March 2, 1995 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. The chart also assumes $10,000 invested in the Lehman Brothers
Municipal Bond Index at that month's end, March 31, 1995. After March 31, 1995,
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.
An expense limitation was in effect for the period shown. Performance would have
been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
7
DISCLOSURE For the period March 1, 2004 to August 31, 2004
OF FUND EXPENSES
As a shareholder of a fund, you incur two types of costs (1) transaction costs,
including sales charges (loads) on purchase payments, reinvested dividends, or
other distributions; redemption fees; end exchange fees; and (2) ongoing costs,
including management fees; distribution, and/or service (12b-1) fees; and other
fund expenses. This example is intended to help you understand your ongoing
costs (in dollars) of investing in a fund and to compare these costs with the
ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period March 1, 2004 to August 31, 2004.
ACTUAL EXPENSES
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section together with the amount you invested, to estimate the expenses
that you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first section under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
a fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare the 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Funds' actual expenses shown in the tables reflect fee waivers in
effect. The expenses shown in the tables assume reinvestment of all dividends
and distributions.
In each case, "Expenses Paid During Period" are equal to the Fund's annualized
expense ratio, multiplied by the average account value over the period,
multiplied by 184/366 (to reflect the one-half year period).
DELAWARE TAX-FREE ARIZONA FUND(1)
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Expense
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 3/1/04 to
3/1/04 8/31/04 Ratio 8/31/04
- -------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,007.50 0.75% $3.78
Class B 1,000.00 1,004.60 1.50% 7.56
Class C 1,000.00 1,004.60 1.50% 7.56
- -------------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,021.18 0.75% $3.82
Class B 1,000.00 1,017.36 1.50% 7.64
Class C 1,000.00 1,017.36 1.50% 7.64
- -------------------------------------------------------------------------------------------------------------
(1) Effective November 1, 2004, the Fund's manager decreased contractual expense
waivers in effect for the Fund, causing the expenses paid by the Fund to
increase. Had the new expense waivers been in effect during the period, the
Fund's expense analysis would be as follows:
Expense
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 3/1/04 to
3/1/04 8/31/04 Ratio 8/31/04
- -------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,007.24 0.80% $4.04
Class B 1,000.00 1,004.35 1.55% 7.81
Class C 1,000.00 1,004.35 1.55% 7.81
- -------------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,020.93 0.80% $4.07
Class B 1,000.00 1,017.11 1.55% 7.89
Class C 1,000.00 1,017.11 1.55% 7.89
- -------------------------------------------------------------------------------------------------------------
8
DISCLOSURE For the period March 1, 2004 to August 31, 2004
OF FUND EXPENSES (CONTINUED)
DELAWARE TAX-FREE CALIFORNIA FUND(2)
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Expense
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 3/1/04 to
3/1/04 8/31/04 Ratio 8/31/04
- -------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,009.40 0.50% $2.53
Class B 1,000.00 1,006.50 1.25% 6.30
Class C 1,000.00 1,006.50 1.25% 6.30
- -------------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,022.45 0.50% $2.55
Class B 1,000.00 1,018.64 1.25% 6.36
Class C 1,000.00 1,018.64 1.25% 6.36
- -------------------------------------------------------------------------------------------------------------
(2) Effective November 1, 2004, the Fund's manager decreased contractual expense
waivers in effect for the Fund, causing the expenses paid by the Fund to
increase. Had the new expense waivers been in effect during the period, the
Fund's expense analysis would be as follows:
Expense
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 3/1/04 to
3/1/04 8/31/04 Ratio 8/31/04
- -------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,007.23 0.93% $4.70
Class B 1,000.00 1,004.33 1.68% 8.47
Class C 1,000.00 1,004.33 1.68% 8.47
- -------------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,020.27 0.93% $4.73
Class B 1,000.00 1,016.45 1.68% 8.55
Class C 1,000.00 1,016.45 1.68% 8.55
- -------------------------------------------------------------------------------------------------------------
9
SECTOR ALLOCATION DELAWARE TAX-FREE ARIZONA FUND
As of August 31, 2004
The SEC adopted a requirement that all funds present their categories of
portfolio holdings in a table, chart or graph format in their annual and
semiannual shareholder reports, whether or not a schedule of investments is
utilized. The following chart lists the Fund's categories of portfolio holdings
as a percent of total net assets, and is provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
- ------------------------------------------------------------------------
MUNICIPAL BONDS 95.48%
- ------------------------------------------------------------------------
Airport Revenue Bonds 6.64%
Charter School Revenue Bonds 5.78%
Convention Center/Auditorium/Hotel Revenue Bonds 2.48%
Higher Education Revenue Bonds 21.45%
Hospital Revenue Bonds 13.43%
Investor Owned Utilities Revenue Bonds 3.34%
Miscellaneous Revenue Bonds 1.90%
Multifamily Housing Revenue Bonds 4.12%
Municipal Lease Revenue Bonds 4.26%
Political Subdivision General Obligation Bonds 8.53%
Pre-Refunded Bonds 9.07%
Public Power Revenue Bonds 3.30%
Public Utility District Revenue Bonds 3.32%
Single Family Housing Revenue Bonds 0.50%
Territorial Revenue Bonds 7.36%
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 3.60%
- ------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 99.08%
- ------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 0.92%
- ------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
- ------------------------------------------------------------------------
10
SECTOR ALLOCATION DELAWARE TAX-FREE CALIFORNIA FUND
As of August 31, 2004
The following chart lists the Fund's categories of portfolio holdings as a
percent of total net assets, and is provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
- ------------------------------------------------------------------------
MUNICIPAL BONDS 96.60%
- ------------------------------------------------------------------------
Airport Revenue Bonds 2.25%
Continuing Care/Retirement Revenue Bonds 7.18%
Dedicated Tax & Fees Revenue Bonds 4.45%
Higher Education Revenue Bonds 13.86%
Hospital Revenue Bonds 8.56%
Miscellaneous Revenue Bonds 4.72%
Multifamily Housing Revenue Bonds 9.17%
Municipal Lease Revenue Bonds 8.06%
Parking Revenue Bonds 2.36%
Ports & Harbors Revenue Bonds 2.31%
Public Power Revenue Bonds 2.39%
School District General Obligation Bonds 3.48%
School District Revenue Bonds 2.16%
State General Obligation Bonds 7.30%
Tax Increment/Special Assessment Bonds 9.03%
Territorial Revenue Bonds 2.48%
Waste Disposal Revenue Bonds 4.57%
Water & Sewer Revenue Bonds 2.27%
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 0.88%
- ------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 97.48%
- ------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 2.52%
- ------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
- ------------------------------------------------------------------------
11
STATEMENTS DELAWARE TAX-FREE ARIZONA FUND
OF NET ASSETS August 31, 2004
Principal Market
Amount Value
MUNICIPAL BONDS - 95.48%
Airport Revenue Bonds - 6.64%
Phoenix Civic Improvement Corporation
Airport Revenue Series B
5.25% 7/1/27 (FGIC)(AMT) $1,000,000 $1,026,920
5.25% 7/1/32 (FGIC)(AMT) 1,000,000 1,022,470
----------
2,049,390
----------
Charter School Revenue Bonds - 5.78%
Pima County Industrial Development
Authority (Life School College Project)
Series A 7.875% 7/1/21 2,000,000 1,785,080
----------
1,785,080
----------
Convention Center Auditorium/Hotel Revenue Bonds - 2.48%
Arizona Tourism & Sports Authority Tax
Revenue Multipurpose Stadium Facilities
Series A 5.00% 7/1/31 (MBIA) 750,000 765,248
----------
765,248
----------
Higher Education Revenue Bonds - 21.45%
Arizona Board of Regents
(Northern Arizona University)
5.00% 6/1/34 (FGIC) 1,000,000 1,017,210
5.50% 6/1/34 (FGIC) 1,250,000 1,352,812
Arizona State University Certificates of
Participation 5.00% 9/1/30 (AMBAC) 500,000 510,860
Glendale Industrial Development Authority
(Midwestern University)
Series A 5.875% 5/15/31 1,000,000 1,053,670
Southern Arizona Capital Facilities Finance
(University of Arizona Project)
5.10% 9/1/33 (MBIA) 600,000 615,852
Tucson Industrial Development Authority
(University of Arizona-Marshall
Foundation) Series A
5.00% 7/15/27 (AMBAC) 1,000,000 1,023,060
University of Arizona
Certificates of Participation
(University of Arizona Project)
Series B 5.125% 6/1/22 (AMBAC) 1,000,000 1,052,270
----------
6,625,734
----------
Hospital Revenue Bonds - 13.43%
Mesa Industrial Development Authority
(Discovery Health Systems)
Series A 5.625% 1/1/29 (MBIA) 750,000 804,143
Mohave County Industrial Development
Authority (Chris/Silver Ridge)
6.375% 11/1/31 (GNMA) 185,000 194,742
Scottsdale Industrial Development
Authority Hospital Revenue
(Scottsdale Healthcare) 5.70% 12/1/21 500,000 520,160
University Medical Center Hospital
5.00% 7/1/24 800,000 796,456
Winslow Industrial Development Authority
Hospital Revenue (Winslow Memorial
Hospital Project) 5.50% 6/1/22 1,000,000 781,620
Yavapai County Industrial Development
Authority (Yavapai Regional
Medical Center) 5.25% 8/1/21 (RADIAN) 1,000,000 1,047,809
----------
4,144,930
----------
Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
Investor Owned Utilities Revenue Bonds - 3.34%
Maricopa County Pollution Control
Corporation Revenue
(El Paso Electric Co. Project)
Series A 6.375% 8/1/15 $1,000,000 $1,030,350
----------
1,030,350
----------
Miscellaneous Revenue Bonds - 1.90%
Marana Municipal Property Corporation
5.00% 7/1/28 (AMBAC) 575,000 587,110
----------
587,110
----------
Multifamily Housing Revenue Bonds - 4.12%
Maricopa County Industrial Development
Authority Multifamily Housing Revenue
(Sly-Mar Apartments Project)
6.10% 4/20/36 (GNMA)(AMT) 700,000 752,122
Peoria Industrial Development Authority
Multifamily Housing Revenue
(Casa Del Rio) Series A
7.30% 2/20/28 (GNMA) 500,000 518,440
----------
1,270,562
----------
Municipal Lease Revenue Bonds - 4.26%
Maricopa County Industrial Development
Authority Correctional Facilities
(Phoenix West Prison)
5.375% 7/1/22 (ACA) 750,000 768,480
Sedona Partner Certificates of Participation
Series 1999 5.75% 7/1/16 500,000 545,315
----------
1,313,795
----------
Political Subdivision General Obligation Bonds - 8.53%
Eagle Mountain Community Facility
District 6.50% 7/1/21 1,010,000 1,093,487
Phoenix Variable Purpose
Series B 5.00% 7/1/27 1,500,000 1,540,980
----------
2,634,467
----------
*Pre-Refunded Bonds - 9.07%
Puerto Rico Commonwealth Public
Improvement Series A 5.125% 7/1/31-11 500,000 562,065
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities
Revenue Series D 5.25% 7/1/36-12 730,000 828,331
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 550,000 624,085
Yuma Industrial Development Authority
Hospital Revenue (Yuma Regional
Medical Center) 5.00% 8/1/31-11 (FSA) 700,000 784,525
----------
2,799,006
----------
Public Power Revenue Bonds - 3.30%
Salt River Project Arizona Agricultural
Improvement & Power District Electric
System Revenue (Salt River Project)
Series A 5.00% 1/1/31 1,000,000 1,019,390
----------
1,019,390
----------
Public Utility District Revenue Bonds - 3.32%
Maricopa County Pollution Control
(Palo Verde Project) Series A
5.05% 5/1/29 (AMBAC) 1,000,000 1,024,540
----------
1,024,540
----------
12
STATEMENTS DELAWARE TAX-FREE ARIZONA FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
Single Family Housing Revenue Bonds - 0.50%
Pima County Industrial Development
Authority Single Family Mortgage
Revenue Series A 6.125% 11/1/33
(GNMA)(FNMA)(FHLMC)(AMT) $ 145,000 $ 153,005
-----------
153,005
-----------
Territorial Revenue Bonds - 7.36%
Puerto Rico Commonwealth Public
Improvement Series A 5.125% 7/1/31 1,000,000 1,016,930
Puerto Rico Electric Power Authority Power
Revenue Series NN 5.00% 7/1/32 (MBIA) 750,000 771,255
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities
Revenue Series D (Unrefunded Portion)
5.25% 7/1/36 270,000 277,393
Puerto Rico Public Buildings Authority
Revenue (Unrefunded Balance)
5.25% 7/1/27 200,000 206,900
-----------
2,272,478
-----------
TOTAL MUNICIPAL BONDS (cost $28,779,828) 29,475,085
-----------
Number
of Shares
SHORT-TERM INVESTMENTS - 3.60%
Federated Arizona Municipal Cash Trust 1,111,745 1,111,745
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,111,745) 1,111,745
-----------
TOTAL MARKET VALUE OF SECURITIES - 99.08%
(cost $29,891,573) 30,586,830
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 0.92% 284,847
-----------
NET ASSETS APPLICABLE TO 2,998,285
SHARES OUTSTANDING - 100.00% $30,871,677
===========
Net Asset Value - Delaware Tax-Free Arizona Fund
Class A ($20,249,266 / 1,966,975 Shares) $10.29
------
Net Asset Value - Delaware Tax-Free Arizona Fund
Class B ($7,456,662 / 724,610 Shares) $10.29
------
Net Asset Value - Delaware Tax-Free Arizona Fund
Class C ($3,165,749 / 306,700 Shares) $10.32
------
COMPONENTS OF NET ASSETS AT AUGUST 31, 2004:
Shares of beneficial interest
(unlimited authorization - no par) $32,745,720
Distributions in excess of net investment income (1,681)
Accumulated net realized loss on investments (2,567,619)
Net unrealized appreciation of investments 695,257
-----------
Total net assets $30,871,677
===========
*For Pre-Refunded Bonds, the stated maturity is followed by the year in which
the bond is pre-refunded.
Summary of Abbreviations:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHLMC - Insured by the Federal Home Loan Mortgage Corporation
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE TAX-FREE ARIZONA FUND
Net asset value Class A (A) $10.29
Sales charge (4.50% of offering price,
or 4.66% of amount invested per share) (B) 0.48
------
Offering price $10.77
======
(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
13
STATEMENTS DELAWARE TAX-FREE CALIFORNIA FUND
OF NET ASSETS (CONTINUED) August 31, 2004
Principal Market
Amount Value
MUNICIPAL BONDS - 96.60%
Airport Revenue Bonds - 2.25%
San Jose Airport Revenue Series A
5.00% 3/1/31 (FGIC) $1,000,000 $1,011,330
----------
1,011,330
----------
Continuing Care/Retirement Revenue Bonds - 7.18%
Abag Finance Authority of California
(Nonprofit Corporations-Lincoln Glen
Manor) 6.10% 2/15/25 (RADIAN) 2,000,000 2,202,080
California Health Facilities Financing
(The Episcopal Home)
5.30% 2/1/32 (RADIAN) 1,000,000 1,021,280
----------
3,223,360
----------
Dedicated Tax & Fees Revenue Bonds - 4.45%
Poway Unified School District
5.60% 9/1/33 1,000,000 1,000,290
San Bernardino County Special Tax
Community Facilities 5.90% 9/1/33 1,000,000 1,000,370
----------
2,000,660
----------
Higher Education Revenue Bonds - 13.86%
California Educational Facilities Authority
Revenue (Pepperdine University)
Series A 5.50% 8/1/32 1,000,000 1,038,220
California Educational Facilities Authority
Revenue (University of the Pacific)
5.25% 5/1/34 1,000,000 1,023,910
California State University Systemwide
Revenue Series A 5.25% 11/1/20 (FSA) 1,000,000 1,094,729
California Statewide Communities
Development Authority Revenue
(Bentley School) 6.75% 7/1/32 1,000,000 1,024,910
California Statewide Communities Revenue
Authority East Campus Apartments LLC
Series A 5.625% 8/1/34 (ACA) 1,000,000 1,019,710
San Diego County Certificates of
Participation (University of San Diego)
5.375% 10/1/41 1,000,000 1,025,270
----------
6,226,749
----------
Hospital Revenue Bonds - 8.56%
Abag Finance Authority of California
(Nonprofit Corporations-San Diego
Hospital Association) Series A
6.125% 8/15/20 1,250,000 1,333,188
California Health Facilities Financing
Authority (Adventist Health Systems)
Series A 5.00% 3/1/33 1,000,000 990,250
California Health Facilities Financing
Authority (Catholic Healthcare West)
Series G 5.25% 7/1/23 500,000 490,875
California Infrastructure & Economic
Development Bank Revenue
(Kaiser Hospital Associates I, LLC)
Series A 5.55% 8/1/31 1,000,000 1,029,560
----------
3,843,873
----------
Miscellaneous Revenue Bonds - 4.72%
San Diego County Certificates of
Participation 5.70% 2/1/28 1,200,000 1,086,588
Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
Miscellaneous Revenue Bonds (continued)
San Diego County Certificates of
Participation (The Burnham Institute)
6.25% 9/1/29 $1,000,000 $1,034,050
----------
2,120,638
----------
Multifamily Housing Revenue Bonds - 9.17%
California Statewide Communities
Development Authority
Multifamily Housing Revenue
(Citrus Gardens Apartments Project)
Series D1 5.375% 7/1/32 1,000,000 1,011,730
California Statewide Communities
Development Authority
Multifamily Housing Revenue
(Silver Ridge Apartments)
5.80% 8/1/33 (AMT) 1,000,000 1,077,150
Palm Springs Mobile Home Park Revenue
(Sahara Mobile Home Park)
5.75% 5/15/37 1,000,000 1,016,630
Santa Clara County Housing Authority
(Rivertown Apartments Project)
Series A 5.85% 8/1/31 (AMT) 1,000,000 1,013,660
----------
4,119,170
----------
Municipal Lease Revenue Bonds - 8.06%
California State Public Works Board
(Department of Corrections)
Series C 5.25% 6/1/28 1,500,000 1,539,000
Golden State Tobacco Securitization
5.50% 6/1/43 (RADIAN) 1,000,000 1,044,010
5.625% 6/1/33 1,000,000 1,036,960
----------
3,619,970
----------
Parking Revenue Bonds - 2.36%
San Diego Redevelopment Agency
6.40% 9/1/25 1,000,000 1,061,650
----------
1,061,650
----------
Ports & Harbors Revenue Bonds - 2.31%
Port of Oakland 5.375% 11/1/27 (FGIC)(AMT) 1,000,000 1,039,360
----------
1,039,360
----------
Public Power Revenue Bonds - 2.39%
California State Department Water
Reserve Power Supply Revenue
Series A 5.375% 5/1/21 1,000,000 1,073,290
----------
1,073,290
----------
School District General Obligation Bonds - 3.48%
Fairfield-Suisun Unified School District
5.50% 8/1/28 (MBIA) 500,000 542,330
San Diego Unified School District
5.00% 7/1/28 (FSA) 1,000,000 1,022,510
----------
1,564,840
----------
School District Revenue Bonds - 2.16%
California Statewide Community
Development (Viewpoint School Project)
5.00% 10/1/28 (ACA) 1,000,000 972,130
----------
972,130
----------
14
STATEMENTS DELAWARE TAX-FREE CALIFORNIA FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
State General Obligation Bonds - 7.30%
California State
5.00% 2/1/33 $ 1,000,000 $ 1,007,800
5.50% 11/1/33 1,000,000 1,058,570
California State Economic Recovery
Series A 5.25% 1/1/10 500,000 558,310
California State Veterans
Series B 5.70% 12/1/32 (AMT) 640,000 652,877
-----------
3,277,557
-----------
Tax Increment/Special Assessment Bonds - 9.03%
Commerce California Joint Powers Financing
Authority (Redevelopment Projects)
Series A 5.00% 8/1/28 (RADIAN) 1,000,000 1,006,040
La Quinta Redevelopment Agency Tax
Allocation 5.10% 9/1/31 (AMBAC) 1,000,000 1,023,260
Lake Elisnore Public Financing Authority
5.50% 9/1/30 1,000,000 1,008,890
Southern California Logistics Airport
Authority (Southern California Logistics
Airport Project) 6.50% 12/1/31 1,000,000 1,018,290
-----------
4,056,480
-----------
Territorial Revenue Bonds - 2.48%
Puerto Rico Electric Power Authority Power
Revenue Series OO 5.00% 7/1/13 (CIFG) 1,000,000 1,112,680
-----------
1,112,680
-----------
Waste Disposal Revenue Bonds - 4.57%
Salinas Valley Solid Waste Authority
Revenue 5.25% 8/1/31 (AMBAC)(AMT) 2,000,000 2,051,320
-----------
2,051,320
-----------
Water & Sewer Revenue Bonds - 2.27%
Metropolitan Water District Southern
California Waterworks Revenue Authority
Series B-1 5.00% 10/1/36 (FGIC) 1,000,000 1,018,670
-----------
1,018,670
-----------
TOTAL MUNICIPAL BONDS (cost $42,247,189) 43,393,727
-----------
Number
of Shares
SHORT-TERM INVESTMENTS - 0.88%
Federated California Municipal Trust 394,990 394,990
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $394,990) 394,990
-----------
TOTAL MARKET VALUE OF SECURITIES - 97.48%
(cost $42,642,179) $43,788,717
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 2.52% 1,132,877
-----------
NET ASSETS APPLICABLE TO 4,037,071
SHARES OUTSTANDING - 100.00% $44,921,594
===========
Net Asset Value - Delaware Tax-Free California Fund
Class A ($24,797,519 / 2,231,830 Shares) $11.11
------
Net Asset Value - Delaware Tax-Free California Fund
Class B ($14,529,884 / 1,302,406 Shares) $11.16
------
Net Asset Value - Delaware Tax-Free California Fund
Class C ($5,594,191 / 502,835 Shares) $11.13
------
COMPONENTS OF NET ASSETS AT AUGUST 31, 2004:
Shares of beneficial interest
(unlimited authorization - no par) $44,623,907
Undistributed net investment income 1,300
Accumulated net realized loss on investments (850,151)
Net unrealized appreciation of investments 1,146,538
-----------
Total net assets $44,921,594
===========
SUMMARY OF ABBREVIATIONS:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
CIFG - Insured by CDC IXIS Financial Guaranty
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE TAX-FREE CALIFORNIA FUND
Net asset value Class A (A) $11.11
Sales charge (4.50% of offering price,
or 4.68% of amount invested per share) (B) 0.52
------
Offering price $11.63
======
(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
15
STATEMENTS Year Ended August 31, 2004
OF OPERATIONS
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
INVESTMENT INCOME:
Interest $1,728,598 $2,390,211
---------- ----------
EXPENSES:
Management fees 180,872 251,894
Distribution expenses -- Class A 53,200 60,003
Distribution expenses -- Class B 80,980 154,009
Distribution expenses -- Class C 35,909 64,643
Dividend disbursing and transfer agent fees and expenses 15,423 22,982
Accounting and administration expenses 12,330 17,119
Registration fees 14,353 2,900
Reports and statements to shareholders 2,760 3,100
Legal and professional fees 10,269 18,565
Custodian fees 2,868 4,205
Trustees' fees 1,976 2,658
Other 2,199 1,799
---------- ----------
413,139 603,877
Less expenses absorbed or waived (77,954) (209,994)
Less expenses paid indirectly (310) (520)
---------- ----------
Total expenses 334,875 393,363
---------- ----------
NET INVESTMENT INCOME 1,393,723 1,996,848
---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (1,274,013) 457,665
Net change in unrealized appreciation/depreciation of investments 2,176,285 985,791
---------- ----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 902,272 1,443,456
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,295,995 $3,440,304
========== ==========
See accompanying notes
16
STATEMENTS
OF CHANGES IN NET ASSETS
Delaware Tax-Free
Arizona Fund
Year Ended
8/31/04 8/31/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,393,723 $ 1,754,421
Net realized gain (loss) on investments (1,274,013) 140,622
Net change in unrealized appreciation/depreciation of investments 2,176,285 (2,328,563)
----------- -----------
Net increase (decrease) in net assets resulting from operations 2,295,995 (433,520)
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (956,279) (1,170,970)
Class B (303,525) (401,931)
Class C (133,940) (181,499)
Net realized gain on investments:
Class A -- --
Class B -- --
Class C -- --
----------- -----------
(1,393,744) (1,754,400)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 3,914,788 3,550,052
Class B 192,836 833,181
Class C 352,026 573,736
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 431,903 502,292
Class B 105,687 159,824
Class C 84,932 132,415
----------- -----------
5,082,172 5,751,500
----------- -----------
Cost of shares repurchased:
Class A (7,070,787) (6,928,421)
Class B (2,025,418) (2,123,309)
Class C (1,797,499) (579,367)
----------- -----------
(10,893,704) (9,631,097)
----------- -----------
Decrease in net assets derived from capital share transactions (5,811,532) (3,879,597)
----------- -----------
NET DECREASE IN NET ASSETS (4,909,281) (6,067,517)
NET ASSETS:
Beginning of year 35,780,958 41,848,475
----------- -----------
End of year(1) $30,871,677 $35,780,958
=========== ===========
(1) Including undistributed (distributions in excess of) net investment income $ (1,681) $ (1,660)
=========== ===========
See accompanying notes
17
STATEMENTS
OF CHANGES IN NET ASSETS (CONTINUED)
Delaware Tax-Free
California Fund
Year Ended
8/31/04 8/31/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,996,848 $ 2,141,192
Net realized gain on investments 457,665 216,651
Net change in unrealized appreciation/depreciation of investments 985,791 (1,294,988)
----------- -----------
Net increase in net assets resulting from operations 3,440,304 1,062,855
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (1,132,294) (1,198,163)
Class B (608,331) (658,337)
Class C (256,223) (284,692)
Net realized gain on investments:
Class A -- --
Class B -- --
Class C -- --
----------- -----------
(1,996,848) (2,141,192)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 3,951,903 6,900,365
Class B 595,981 3,123,917
Class C 1,119,322 2,400,582
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 415,131 420,231
Class B 218,687 225,516
Class C 146,059 190,408
----------- -----------
6,447,083 13,261,019
----------- -----------
Cost of shares repurchased:
Class A (2,503,623) (8,123,457)
Class B (2,947,439) (1,891,459)
Class C (2,864,956) (2,745,126)
----------- -----------
(8,316,018) (12,760,042)
----------- -----------
Increase (decrease) in net assets derived from capital share transactions (1,868,935) 500,977
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS (425,479) (577,360)
NET ASSETS:
Beginning of year 45,347,073 45,924,433
----------- -----------
End of year(1) $44,921,594 $45,347,073
=========== ===========
(1) Including undistributed net investment income $ 1,300 $ 1,300
=========== ===========
See accompanying notes
18
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Arizona Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(2) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.010 $10.590 $10.620 $10.250 $10.450
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.458 0.491 0.532 0.572 0.555
Net realized and unrealized gain (loss) on investments 0.280 (0.580) (0.030) 0.370 (0.200)
------- ------- ------- ------- -------
Total from investment operations 0.738 (0.089) 0.502 0.942 0.355
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.458) (0.491) (0.532) (0.572) (0.555)
------- ------- ------- ------- -------
Total dividends and distributions (0.458) (0.491) (0.532) (0.572) (0.555)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.290 $10.010 $10.590 $10.620 $10.250
======= ======= ======= ======= =======
TOTAL RETURN(1) 7.53% (0.88%) 4.93% 9.48% 3.68%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $20,249 $22,401 $26,664 $18,809 $13,873
Ratio of expenses to average net assets 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.99% 0.99% 0.98% 1.01% 1.06%
Ratio of net investment income to average net assets 4.51% 4.73% 5.09% 5.50% 5.53%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.27% 4.49% 4.86% 5.24% 5.22%
Portfolio turnover 24% 70% 111% 108% 115%
(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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(2) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities. This change
in accounting had no impact for the year ended August 31, 2002. Per share
data and ratios for periods prior to September 1, 2001 have not been
restated to reflect this change in accounting.
See accompanying notes
19
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Arizona Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(2) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.010 $10.590 $10.620 $10.240 $10.450
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.382 0.413 0.454 0.495 0.481
Net realized and unrealized gain (loss) on investments 0.280 (0.580) (0.030) 0.380 (0.210)
------- ------- ------- ------- -------
Total from investment operations 0.662 (0.167) 0.424 0.875 0.271
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.382) (0.413) (0.454) (0.495) (0.481)
------- ------- ------- ------- -------
Total dividends and distributions (0.382) (0.413) (0.454) (0.495) (0.481)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.290 $10.010 $10.590 $10.620 $10.240
======= ======= ======= ======= =======
TOTAL RETURN(1) 6.73% (1.62%) 4.16% 8.78% 2.82%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $7,457 $8,956 $10,629 $8,681 $4,911
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.74% 1.74% 1.73% 1.76% 1.81%
Ratio of net investment income to average net assets 3.76% 3.98% 4.34% 4.75% 4.78%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.52% 3.74% 4.11% 4.49% 4.47%
Portfolio turnover 24% 70% 111% 108% 115%
(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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(2) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities. This change
in accounting had no impact for the year ended August 31, 2002. Per share
data and ratios for periods prior to September 1, 2001 have not been
restated to reflect this change in accounting.
See accompanying notes
20
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Arizona Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(2) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.040 $10.610 $10.640 $10.270 $10.470
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.382 0.413 0.454 0.492 0.478
Net realized and unrealized gain (loss) on investments 0.280 (0.570) (0.030) 0.370 (0.200)
------- ------- ------- ------- -------
Total from investment operations 0.662 (0.157) 0.424 0.862 0.278
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.382) (0.413) (0.454) (0.492) (0.478)
------- ------- ------- ------- -------
Total dividends and distributions (0.382) (0.413) (0.454) (0.492) (0.478)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.320 $10.040 $10.610 $10.640 $10.270
======= ======= ======= ======= =======
TOTAL RETURN(1) 6.70% (1.53%) 4.14% 8.62% 2.88%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $3,166 $4,424 $4,555 $2,632 $1,880
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.74% 1.74% 1.73% 1.76% 1.81%
Ratio of net investment income to average net assets 3.76% 3.98% 4.34% 4.75% 4.78%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.52% 3.74% 4.11% 4.49% 4.47%
Portfolio turnover 24% 70% 111% 108% 115%
(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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(2) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities. This change
in accounting had no impact for the year ended August 31, 2002. Per share
data and ratios for periods prior to September 1, 2001 have not been
restated to reflect this change in accounting.
See accompanying notes
21
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free California Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(2) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.750 $11.010 $10.950 $10.430 $10.490
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.518 0.537 0.546 0.538 0.547
Net realized and unrealized gain (loss) on investments 0.360 (0.260) 0.060 0.520 (0.060)
------- ------- ------- ------- -------
Total from investment operations 0.878 0.277 0.606 1.058 0.487
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.518) (0.537) (0.546) (0.538) (0.547)
------- ------- ------- ------- -------
Total dividends and distributions (0.518) (0.537) (0.546) (0.538) (0.547)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.110 $10.750 $11.010 $10.950 $10.430
======= ======= ======= ======= =======
TOTAL RETURN(1) 8.34% 2.51% 5.77% 10.43% 5.00%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $24,797 $22,169 $23,462 $24,925 $24,794
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.96% 0.93% 0.97% 0.99% 1.04%
Ratio of net investment income to average net assets 4.72% 4.84% 5.05% 5.07% 5.46%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.26% 4.41% 4.58% 4.58% 4.92%
Portfolio turnover 48% 56% 93% 130% 82%
(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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(2) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities. This change
in accounting had no impact for the year ended August 31, 2002. Per share
data and ratios for periods prior to September 1, 2001 have not been
restated to reflect this change in accounting.
See accompanying notes
22
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free California Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(2) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.790 $11.050 $10.990 $10.460 $10.520
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.436 0.453 0.465 0.459 0.473
Net realized and unrealized gain (loss) on investments 0.370 (0.260) 0.060 0.530 (0.060)
------- ------- ------- ------- -------
Total from investment operations 0.806 0.193 0.525 0.989 0.413
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.436) (0.453) (0.465) (0.459) (0.473)
------- ------- ------- ------- -------
Total dividends and distributions (0.436) (0.453) (0.465) (0.459) (0.473)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.160 $10.790 $11.050 $10.990 $10.460
======= ======= ======= ======= =======
TOTAL RETURN(1) 7.60% 1.73% 4.95% 9.58% 4.31%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $14,530 $16,165 $15,105 $14,792 $14,449
Ratio of expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.71% 1.68% 1.72% 1.74% 1.79%
Ratio of net investment income to average net assets 3.97% 4.09% 4.30% 4.32% 4.71%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.51% 3.66% 3.83% 3.83% 4.17%
Portfolio turnover 48% 56% 93% 130% 82%
(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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(2) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities. This change
in accounting had no impact for the year ended August 31, 2002. Per share
data and ratios for periods prior to September 1, 2001 have not been
restated to reflect this change in accounting.
See accompanying notes
23
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free California Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(2) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.760 $11.020 $10.970 $10.440 $10.500
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.436 0.454 0.465 0.459 0.472
Net realized and unrealized gain (loss) on investments 0.370 (0.260) 0.050 0.530 (0.060)
------- ------- ------- ------- -------
Total from investment operations 0.806 0.194 0.515 0.989 0.412
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.436) (0.454) (0.465) (0.459) (0.472)
------- ------- ------- ------- -------
Total dividends and distributions (0.436) (0.454) (0.465) (0.459) (0.472)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.130 $10.760 $11.020 $10.970 $10.440
======= ======= ======= ======= =======
TOTAL RETURN(1) 7.62% 1.74% 4.86% 9.70% 4.22%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $5,595 $7,013 $7,357 $6,227 $4,179
Ratio of expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.71% 1.68% 1.72% 1.74% 1.79%
Ratio of net investment income to average net assets 3.97% 4.09% 4.30% 4.32% 4.71%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.51% 3.66% 3.83% 3.83% 4.17%
Portfolio turnover 48% 56% 93% 130% 82%
(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 waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(2) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities. This change
in accounting had no impact for the year ended August 31, 2002. Per share
data and ratios for periods prior to September 1, 2001 have not been
restated to reflect this change in accounting.
See accompanying notes
24
NOTES August 31, 2004
TO FINANCIAL STATEMENTS
Voyageur Mutual Funds (the "Trust") is organized as a Delaware statutory trust
and offers six series: Delaware Tax-Free Arizona Fund, Delaware Tax-Free
California Fund, Delaware Tax-Free Idaho Fund, Delaware Minnesota High-Yield
Municipal Bond Fund, Delaware National High-Yield Municipal Bond Fund and
Delaware Tax-Free New York Fund. Voyageur Insured Funds (the "Trust") is
organized as a Delaware statutory trust and offers two series: Delaware Tax-Free
Arizona Insured Fund and Delaware Tax-Free Minnesota Insured Fund. Voyageur
Investment Trust (the "Trust") is organized as a Massachusetts statutory trust
and offers five series: Delaware Tax-Free California Insured Fund, Delaware
Tax-Free Florida Fund, Delaware Tax-Free Florida Insured Fund, Delaware Tax-Free
Missouri Insured Fund and Delaware Tax-Free Oregon Insured Fund. Voyageur Mutual
Funds II (the "Trust") is organized as a Delaware statutory trust and offers one
series: Delaware Tax-Free Colorado Fund. These financial statements and related
notes pertain to Delaware Tax-Free Arizona Fund, Delaware Tax-Free Arizona
Insured Fund, Delaware Tax-Free California Fund, Delaware Tax-Free California
Insured Fund and Delaware Tax-Free Colorado Fund (each a "Fund" and,
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. The Funds 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 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. 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 Arizona Fund, Delaware Tax-Free
Arizona Insured Fund, Delaware Tax-Free California Fund, Delaware Tax-Free
California Insured Fund and Delaware Tax-Free Colorado Fund 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. 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.
Federal Income Taxes - Each 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 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 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. 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.
Through December 31, 2003, certain expenses of the Funds were paid through
commission arrangements with brokers. In addition, the Funds may receive
earnings credits from their custodian when positive balances are maintained,
which are used to offset custody fees. The expenses paid under the above
arrangements are included in their respective expense captions on the Statements
of Operations with the corresponding expense offset shown as "expenses paid
indirectly". The amount of these expenses for the year ended August 31, 2004
were as follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
Commission reimbursements $283 $365
Earnings credits 27 155
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 based on
each Fund's average daily net assets as follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
On the first $500 million 0.550% 0.550%
On the next $500 million 0.500% 0.500%
On the next $1.5 billion 0.450% 0.450%
In excess of $2.5 billion 0.425% 0.425%
25
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburses each Fund to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs, and extraordinary expenses do not
exceed specified percentages of average daily net assets, as shown below.
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
Operating expense limitation as a percentage
of average daily net assets (per annum) 0.50% 0.25%
Expiration date 10/31/04 until revoked
Effective November 1, 2004, operating
expense limitation as a percentage of
average daily net assets (per annum) 0.55% 0.68%
Expiration date 3/31/06 3/31/06
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Funds pay
DSC a monthly fee based on average net assets subject to certain minimums for
accounting and administration services. Each Fund pays DSC a monthly fee based
on the number of shareholder accounts for dividend and disbursing and transfer
agent services.
Pursuant to a distribution agreement and distribution plan, each Fund pays
Delaware Distributors, L.P. (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 August 31, 2004, each Fund had liabilities payable to affiliates as follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
Investment management fee payable
to (receivable from) DMC $(3,775) $136
Dividend disbursing, transfer agent fees,
accounting and administration fees
and other expenses payable to DSC 2,145 3,178
Other expenses payable to DMC and affiliates* 12,636 1,010
*DMC, as a part of its administrative services, pays operating expenses on
behalf of the Funds 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.
As provided in the investment management agreement, the Funds bear the cost of
certain legal services expenses, including in-house legal services provided to
the Funds by DMC employees. For the year ended August 31, 2004, Delaware
Tax-Free Arizona Fund, Delaware Tax-Free Arizona Insured Fund, Delaware Tax-Free
California Fund, Delaware Tax-Free California Insured Fund, and Delaware
Tax-Free Colorado Fund had costs of $1,744, $13,646, $3,664, $1,867, and
$20,562, respectively.
For the year ended August 31, 2004, DDLP earned commissions on sales of Class A
shares for each Fund as follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
$5,258 $13,959
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the
Trusts. These officers and/or trustees are paid no compensation by the Funds.
3. Investments
For the year ended August 31, 2004, the Funds made purchases and sales of
investment securities as follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
Purchases other than short-term investments $7,589,223 $21,609,071
Sales other than short-term investments 15,005,293 24,426,203
26
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
At August 31, 2004, the cost of investments and unrealized appreciation
(depreciation) for federal income tax purposes for each Fund were as follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
Cost of investments $29,891,573 $42,642,179
----------- -----------
Aggregate unrealized appreciation $ 1,121,504 $ 1,283,594
Aggregate unrealized depreciation (426,247) (137,056)
----------- -----------
Net unrealized appreciation $ 695,257 $ 1,146,538
=========== ===========
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. The tax character of dividends and distributions
paid during the years ended August 31, 2004 and 2003 was as follows:
Delaware Tax-Free
Arizona Fund
2004 2003
----------------------
Tax-exempt income $1,393,744 $1,754,400
Ordinary income -- --
Long-term capital gain -- --
---------- ----------
Total $1,393,744 $1,754,400
========== ==========
Delaware Tax-Free
California Fund
2004 2003
----------------------
Tax-exempt income $1,996,848 $2,141,192
Long-term capital gain -- --
---------- ----------
Total $1,996,848 $2,141,192
========== ==========
As of August 31, 2004, the components of net assets on a tax basis was as
follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
Shares of beneficial interest $32,745,720 $44,623,907
Undistributed ordinary income -- --
Undistributed tax-exempt income (1,681) 1,300
Undistributed long-term capital gains -- --
Post-October losses (1,195,254) --
Capital loss carryforwards (1,372,365) (850,151)
Unrealized appreciation of investments 695,257 1,146,538
----------- -----------
Net assets $30,871,677 $44,921,594
=========== ===========
Post-October losses represent losses realized on investment transactions from
November 1, 2003, through August 31, 2004 that, in accordance with federal
income tax regulations, the Funds have elected to defer and treat as having
arisen in the following fiscal year.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss
carryforwards expire as follows:
Delaware Delaware
Tax-Free Tax-Free
Arizona Fund California Fund
------------ ---------------
2008 $ 178,280 $ --
2009 1,115,326 844,112
2011 -- 6,039
2012 78,759 --
---------- --------
Total $1,372,365 $850,151
========== ========
For the year ended August 31, 2004, the Funds had capital loss carryforward that
were utilized as follows:
Delaware Tax-Free California Fund $457,665
27
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Delaware Tax-Free
Arizona Fund
----------------------
Year Ended
8/31/04 8/31/03
Shares sold:
Class A 386,293 337,393
Class B 19,229 80,252
Class C 34,656 54,996
Shares issued upon reinvestments
of dividends and distributions:
Class A 42,501 48,516
Class B 10,402 15,446
Class C 8,331 12,766
---------- --------
501,412 549,369
---------- --------
Shares repurchased:
Class A (699,389) (666,442)
Class B (200,009) (204,908)
Class C (177,070) (56,113)
---------- --------
(1,076,468) (927,463)
---------- --------
Net decrease (575,056) (378,094)
========== ========
Delaware Tax-Free
California Fund
----------------------
Year Ended
8/31/04 8/31/03
Shares sold:
Class A 360,300 621,318
Class B 53,736 281,164
Class C 101,425 215,978
Shares issued upon reinvestments
of dividends and distributions:
Class A 37,827 38,142
Class B 19,846 20,392
Class C 13,289 17,256
-------- ----------
586,423 1,194,250
-------- ----------
Shares repurchased:
Class A (229,121) (728,137)
Class B (269,400) (170,371)
Class C (263,562) (248,969)
-------- ----------
(762,083) (1,147,477)
-------- ----------
Net increase (decrease) (175,660) 46,773
======== ==========
28
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARES (CONTINUED)
For the years ended August 31, 2004 and 2003, the following shares and value
were converted from Class B to Class A. The respective amounts are included in
Class B redemptions and Class A subscriptions in the table on the prior page and
the Statements of Changes in Net Assets.
Year Ended Year Ended
8/31/04 8/31/03
------------------------------- ------------------------------
Class B Class A Class B Class A
shares shares Amount shares shares Amount
Delaware Tax-Free Arizona Fund 82,416 82,350 $836,827 1,366 1,366 $14,383
Delaware Tax-Free California Fund 1,386 1,392 15,425 -- -- --
6. LINE OF CREDIT
The Funds, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participate 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
Funds had no amounts outstanding as of August 31, 2004, or at any time during
the fiscal year.
7. 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 market value
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
Statements of Net Assets.
8. 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.
9. TAX INFORMATION (UNAUDITED)
The information set forth below is for each 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 fiscal year ended August 31, 2004, each Fund designates distributions
paid during the year as follows:
(A) (B) (C)
Long Term Ordinary Tax-
Capital Gains Income Exempt Total
Distributions Distributions Distributions Distributions
(Tax Basis) (Tax Basis) (Tax Basis) (Tax Basis)
------------- ------------- ------------- -------------
Delaware Tax-Free Arizona Fund -- -- 100% 100%
Delaware Tax-Free California Fund -- -- 100% 100%
(A), (B), and (C) are based on a percentage of each Fund's total distributions.
29
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Voyageur Mutual Funds - Delaware Tax-Free Arizona Fund
and Delaware Tax-Free California Fund
Voyageur Insured Funds - Delaware Tax-Free Arizona
Insured Fund
Voyageur Investment Trust - Delaware Tax-Free California
Insured Fund
Voyageur Mutual Funds II - Delaware Tax-Free Colorado Fund
We have audited the accompanying statements of net assets of Delaware Tax-Free
Arizona Fund and Delaware Tax-Free California Fund (two of the series
constituting Voyageur Mutual Funds), Delaware Tax-Free Arizona Insured Fund (one
of the series constituting Voyageur Insured Funds), Delaware Tax-Free California
Insured Fund (one of the series constituting Voyageur Investment Trust) and
Voyageur Mutual Funds II (comprised of Delaware Tax-Free Colorado Fund) (the
"Funds") as of August 31, 2004, and the related statements 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 Funds' 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 the standards of the Public Company
Accounting Oversight Board (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 August 31, 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 the
Delaware Tax-Free Arizona Fund and Delaware Tax-Free California Fund of Voyageur
Mutual Funds, the Delaware Tax-Free Arizona Insured Fund of Voyageur Insured
Funds, the Delaware Tax-Free California Insured Fund of Voyageur Investment
Trust, and the Delaware Tax-Free Colorado Fund of Voyageur Mutual Funds II at
August 31, 2004, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for each of the five years in the period then
ended, in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
October 4, 2004
30
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, 77 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)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
WALTER P. BABICH Trustee 16 Years Board Chairman - 94 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 94 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103
August 7, 1937 President/Director -
22 WR Corporation
JOHN A. FRY Trustee(4) 3 Years President - 77 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 94 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
31
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 - 94 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
Director -
Systemax Inc.
November 1, 1940
THOMAS F. MADISON Trustee 10 Years President/Chief 94 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 & 94 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 94 None(5)
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 Executive Vice President, Chief Legal Ms. Maestro has served in 94 None(5)
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 at different times at
19103 Delaware Investments.
November 26, 1957
MICHAEL P. BISHOF Senior Vice President 8 Years Mr. Bishof has served in 94 None(5)
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.
(5) Mr. Hastings, Mr. Bishof and Ms. Maestro also serve in similar capacities
for the six portfolios of the Optimum Fund Trust, which have the same
investment advisor, principal underwriter, and transfer agent as the
registrant.
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.
32
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Tax-Free Arizona Fund,
Delaware Tax-Free Arizona Insured Fund, Delaware Tax-Free California Fund,
Tax-Free California Insured Fund, and Delaware Tax-Free Colorado Fund, but may
be used with a prospective investors when preceded or accompanied by a current
prospectus for Delaware Tax-Free Arizona Fund, Delaware Tax-Free Arizona Insured
Fund, Delaware Tax-Free California Fund, Tax-Free California Insured Fund, and
Delaware Tax-Free Colorado 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 each Fund. You should read 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 each 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
WALTER P. BABICH JUDE T. DRISCOLL INVESTMENT MANAGER
Board Chairman Chairman Delaware Management Company
Citadel Construction Corporation Delaware Investments Family of Funds Philadelphia, PA
King of Prussia, PA Philadelphia, PA
INTERNATIONAL AFFILIATE
JOHN H. DURHAM JOSEPH H. HASTINGS Delaware International Advisers Ltd.
Private Investor Executive Vice President and London, England
Gwynedd Valley, PA Chief Financial Officer
Delaware Investments Family of Funds NATIONAL DISTRIBUTOR
ANTHONY D. KNERR Philadelphia, PA Delaware Distributors, L.P.
Managing Director Philadelphia, PA
Anthony Knerr & Associates RICHELLE S. MAESTRO
New York, NY Executive Vice President, SHAREHOLDER SERVICING, DIVIDEND
Chief Legal Officer and Secretary DISBURSING AND TRANSFER AGENT
ANN R. LEVEN Delaware Investments Family of Funds Delaware Service Company, Inc.
Former Treasurer/Chief Fiscal Officer Philadelphia, PA 2005 Market Street
National Gallery of Art Philadelphia, PA 19103-7094
Washington, DC MICHAEL P. BISHOF
Senior Vice President and Treasurer FOR SHAREHOLDERS
THOMAS F. MADISON Delaware Investments Family of Funds 800 523-1918
President and Chief Executive Officer Philadelphia, PA
MLM Partners, Inc. FOR SECURITIES DEALERS AND FINANCIAL
Minneapolis, MN INSTITUTIONS REPRESENTATIVES ONLY
800 362-7500
JANET L. YEOMANS
Vice President/Mergers & Acquisitions WEB SITE
3M Corporation www.delawareinvestments.com
St. Paul, MN
- --------------------------------------------------------------------------------
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 is available without charge (i) upon request,
by calling 800 523-1918; (ii) on each Fund's Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. Each Fund's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-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
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(8919) Printed in the USA
AR-WEST [8/04] IVES 10/04 J9813
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
FIXED INCOME
ANNUAL REPORT AUGUST 31, 2004
- --------------------------------------------------------------------------------
DELAWARE TAX-FREE IDAHO FUND
[LOGO]
POWERED BY RESEARCH.(SM)
PORTFOLIO September 10, 2004
MANAGEMENT REVIEW
Fund Managers
Patrick P. Coyne
Executive Vice President/Chief Investment Officer -
Fixed Income/Head of Equity Investments
Joseph R. Baxter
Senior Vice President/Senior Portfolio Manager
Robert F. Collins
Vice President/Senior Portfolio Manager
Q: WHAT KIND OF ECONOMIC ENVIRONMENT WAS IT FOR THE MUNICIPAL MARKETS DURING THE
PAST 12 MONTHS?
A: In all, the environment for municipal bonds was surprisingly favorable
considering volatile market conditions and generally negative fixed-income
investor sentiment at the start of the period. In September 2003, market data
indicated a rapidly strengthening economy and accelerating corporate earnings.
These results prompted investor fears of rising inflation and Federal Reserve
Board interest rate hikes. Unemployment levels trended higher than expected,
however, suggesting the growing economy was not yet operating at its full
potential. This enabled the Fed to maintain short-term interest rates at
historically low levels throughout the period.
It was not until spring 2004, when a substantial increase in hiring activity
became evident, that concern about rising rates returned. The expectation for
interest rate hikes weighed on the bond markets, as did continued worries about
terrorism, rising oil prices, and weakness in the U.S. dollar. In fact, the Fed
did raise short-term rates twice during the period, first in late June and then
again in August. During the final three months of the period, however, job
growth trailed off unexpectedly, surprising investors who were expecting faster
economic growth. Against this backdrop, tax-free bonds, which had lost ground in
the prior few months, made up some of their recent losses.
For the full 12-month period, yields on shorter-maturity bonds rose in line with
expectations for higher short-term interest rates. By contrast, yields on longer
bonds fell, while their prices rose accordingly (bond yields and prices move in
opposite directions). The difference in yields offered by two-year and 30-year
AAA-rated municipal bonds went from 3.61% to 2.98% during the past 12 months,
reflecting the better relative results of longer bonds. (Source: The Bond Buyer)
Strong performance from lower-rated bonds was a second evident trend. As states'
revenue collections have increased, their credit outlook has improved as well.
Investors have become increasingly willing to invest in lower-rated
investment-grade and non-rated securities to obtain a higher degree of income.
For the first eight months of 2004, national municipal issuance was down about
nine percent nationwide when compared to the same period in 2003. (Source: The
Bond Buyer) This decline in new supply reflected the improved financial position
of states and municipalities. Greater tax collections limited the need to rely
on the debt markets for funds to support needed projects. Higher interest rates
also made it relatively less attractive to refinance outstanding bonds.
Q: WHAT ECONOMIC AND MUNICIPAL ENVIRONMENT DID YOU ENCOUNTER SPECIFICALLY IN THE
THREE STATES PROFILED IN THIS REPORT?
A: Idaho's economy improved steadily throughout the past 12 months, reflecting
national trends. The jobless rate in the state was just 4.9% at the end of July
2004, down from the previous year and significantly below the national average
of 5.5%. Idaho's stronger economy led to significantly increased revenue
collections, with tax income increasing by 12% for the first nine months of the
current fiscal year. Also, revenue for the full 2004 fiscal year was projected
to meet estimates, a significant improvement over the prior year's shortfall.
(Source: Fiscal Studies Program, June 2004) The stronger economy, however,
helped lead to a significant decline in Idaho municipal issuance from already
modest levels. For the first eight months of 2004, supply was down 40 percent on
a year-over-year basis. (Source: The Bond Buyer)
Thanks to strong fiscal management, the State of Missouri has maintained
positive balances in its general fund during recent years, despite facing
declines in tax collections during fiscal 2002 and 2003. For the first eight
months of the 2004 fiscal year, however, Missouri's revenues were 3.3% higher
than the previous year. As of July 2004, the state saw a modest 0.9% increase in
employment, although manufacturing employment -- representing more than 13% of
the state's jobs -- more than doubled that pace. The state's unemployment rate
stood at 5.5% in July, matching the national average. (Source: Fiscal Studies
Program, June 2004) Municipal issuance in Missouri declined by just four percent
for the first eight months of 2004. (Source: The Bond Buyer)
In recent years, Oregon's economy was hit by weakness in the technology market
and in Asian economies. Between 2001 and 2003, the state suffered substantial
job losses. During the past year, however, Oregon's employment picture
brightened considerably. While its July 2004 jobless rate of 6.8% was
considerably higher than average, it represented a substantial improvement over
Oregon's July 2003 rate of 8.7%. The state's
1
recent economic challenges generated significant revenue shortfalls, but those
shortfalls began to ease during the current fiscal year. During the first eight
months of 2004, the state's municipal issuance rose by approximately 15% when
compared to the first eight months of 2003.
Q: HOW DID THE THREE FUNDS PERFORM DURING THE FISCAL YEAR, AND WHAT MANAGEMENT
STRATEGIES DID YOU PURSUE FOR EACH?
A: Delaware Tax-Free Idaho Fund gained +7.58% (Class A shares at net asset value
with distributions reinvested) during the past 12 months, outpacing the +5.66%
return of the Lipper Other States Municipal Debt Funds Average. As an additional
point of comparison, the Lehman Brothers Municipal Bond Index returned +7.11%.
The Fund's dividend payments during the past 12 months were exempt from federal
and Idaho state taxes.*
During the period, we continued to choose investments based on our assessment of
their income potential. Our focus on bonds' income stream helped the Fund during
a time of tremendous volatility in the municipal market. Also, while the Fund's
duration was somewhat longer than ideal at the beginning of the period, having
this added sensitivity to interest rate movements helped performance in late
2003 and early 2004 when rates generally were falling. The longer duration did
detract from performance when rates rose during the spring and we have since
taken measures to shorten it, thus reducing the Fund's sensitivity to interest
rate movements.
Trading activity remained modest during the period. Idaho's minimal supply of
tax-free bonds creates a continual challenge to find new securities for the
portfolio. This challenge limited total return potential during theis period. We
continued to make extensive use of Puerto Rico bonds; securities issued by U.S.
territories generally are tax-exempt for residents of all 50 states. Whenever
possible, however, we sought to buy suitable in-state credits, generating
proceeds for the purchases by selling Puerto Rico bonds as needed. During the
period, we established new positions in bonds issued by Boise State University,
as well as those from three Idaho school districts. Another strategy employed
during the period was to reduce volatility by selling some of the Fund's
longest-duration holdings -- a strategy we believed made sense in a climate of
rising interest rates.
- --------------------------------------------------------------------------------
The total return of DELAWARE TAX-FREE MISSOURI INSURED FUND was +5.06% (Class A
shares at net asset value with distributions reinvested) for the 12 months
ending August 31, 2004. This result fell short of the Lipper Missouri Municipal
Debt Funds Average, which returned +5.96% during the same time period. As an
additional point of comparison, the Lehman Brothers Municipal Bond Index
returned +7.11%. The Fund's dividend payments during the past 12 months were
exempt from federal and Missouri state taxes.*
The Fund's underperformance can be attributed in large part to having a
relatively short duration. Duration measures sensitivity to changes in interest
rates; an investment with a shorter-than-average duration will tend to
underperform a longer-duration investment when rates are falling, as was the
case for much of the period. Later in the period, as rates began rising, we
intended to extend the Fund's duration. This became difficult to achieve,
however, because we did not have sufficient cash flows at opportune times. At
period end, we were awaiting a future window of opportunity to bring duration
more in line with our peer group.
To choose investments for the portfolio, we continued to use a bottom-up
approach, evaluating securities one by one and selecting those we believed
offered the best ratio of reward potential to risk. For this bottom-up approach,
we relied on the experience of our research and trading staffs to help us
identify securities that displayed stable or improving credit trends.
New purchases were limited during the reporting period. When possible, we sought
to take advantage of the Fund's ability to invest a portion of its assets in
noninsured bonds to add to the income stream for our shareholders. For example,
we identified value in certain Puerto Rico bonds; bonds issued by U.S.
territories carry the same tax advantages as do in-state securities. In
addition, we purchased a handful of multifamily housing and hospital bonds that
we believed provided attractive yields.
* A portion of the income from tax-exempt funds may be subject to the
alternative minimum tax.
2
- --------------------------------------------------------------------------------
DELAWARE TAX-FREE OREGON INSURED FUND had a total return of +6.04% (Class A
shares at net asset value with distributions reinvested) for the 12 months ended
August 31, 2004. The Fund's performance outpaced that of its peer group, the
Lipper Oregon Municipal Debt Funds Average, which returned +5.72%. As an
additional point of comparison, the Lehman Brothers Municipal Bond Index
returned +7.11%. The Fund's dividend payments during the past 12 months were
exempt from federal and Oregon state taxes.*
The Fund's slight underperformance relative to its Lipper peer group average
stemmed from having a shorter-than-average duration when rates were falling
during much of the period. However, as the period progressed, we were able to
lengthen the Fund's duration and, consequently, increase its sensitivity to
changes in interest rates. Such positioning helped the Fund close much of the
performance gap late in the period as yields fell from their summertime highs.
In particular, we purchased a handful of Puerto Rico bonds -- bonds issued by
U.S. territories generally are fully tax-exempt in all 50 states -- as well as
bonds issued by Southwest Oregon Community College.
Also adding to Fund returns was an approximately 20 percent stake in bonds with
credit ratings below AAA. During a market environment in which lower-rated
securities generally outperformed their higher-quality counterparts, taking
advantage of the Fund's ability to invest a portion of its assets in noninsured
bonds helped relative performance.
* A portion of the income from tax-exempt funds may be subject to the
alternative minimum tax.
3
DELAWARE
TAX-FREE IDAHO FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Current performance may be lower or higher than the
performance data quoted. Please obtain the performance data for the most recent
month end by calling 800 523-1918 or visiting our Web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges, and expenses of the investment carefully before
investing. The Delaware Tax-Free Idaho Fund prospectus contains this and other
important information about the investment company. Please request a prospectus
by calling 800 523-1918. Read it carefully before you invest or send money.
Performance includes reinvestment of all distributions.
FUND PERFORMANCE
Average Annual Total Returns
Through August 31, 2004 Lifetime Five Years One Year
- --------------------------------------------------------------------------------------------------
Class A (Est. 1/4/95)
Excluding Sales Charge +6.59% +5.81% +7.58%
Including Sales Charge +6.08% +4.83% +2.78%
- --------------------------------------------------------------------------------------------------
Class B (Est. 3/16/95)
Excluding Sales Charge +5.38% +5.05% +6.79%
Including Sales Charge +5.38% +4.80% +2.79%
- --------------------------------------------------------------------------------------------------
Class C (Est. 1/11/95)
Excluding Sales Charge +5.73% +5.06% +6.87%
Including Sales Charge +5.73% +5.06% +5.87%
- --------------------------------------------------------------------------------------------------
Returns reflect the reinvestment of all 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 have an annual distribution and
service fee of up to 0.25%.
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%. Lifetime performance figures for Class B
shares reflect conversion to Class A shares after approximately eight years.
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 all classes of Delaware Tax-Free Idaho
Fund during the period shown. Performance would have been lower had the expense
limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
A portion of the income from tax-exempt funds may be subject to the alternative
minimum tax.
4
DELAWARE
TAX-FREE IDAHO FUND
FUND BASICS
As of August 31, 2004
- --------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks as high a level of current income exempt from federal income tax
and from Idaho state personal income tax, as is consistent with preservation of
capital.
- --------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$83.66 million
- --------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
77
- --------------------------------------------------------------------------------
FUND START DATE:
January 4, 1995
- --------------------------------------------------------------------------------
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
Investments in 1999, he held investment positions with First Union. Most
recently, he served as a municipal portfolio manager for the Evergreen Funds.
Robert F. Collins is a graduate of Ursinus College where he earned his Bachelor
of Arts degree in Economics. Prior to joining Delaware Investments in 2004, he
co-managed the municipal portfolio management group within PNC Advisors,
overseeing the tax-exempt investments of high-net worth and institutional
accounts. Previously, Mr. Collins headed the municipal fixed income team at
Wilmington Trust Company, managing funds and high-net worth accounts. Mr.
Collins is a CFA charterholder and a former president of the Financial Analysts
of Wilmington.
- --------------------------------------------------------------------------------
NASDAQ SYMBOLS:
Class A VIDAX
Class B DVTIX
Class C DVICX
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
January 4, 1995 (Fund's inception) through August 31, 2004
[GRAPHIC OMITTED]
DELAWARE TAX-FREE IDAHO FUND GROWTH OF $10,000 INVESTMENT CHART
DELAWARE TAX-FREE LEHMAN BROTHERS
IDAHO FUND MUNICIPAL BOND INDEX
JAN-95 $ 9,810 $10,000
AUG-95 $10,594 $10,897
AUG-96 $11,227 $11,468
AUG-97 $12,341 $12,528
AUG-98 $13,456 $13,612
AUG-99 $13,322 $13,686
AUG-00 $13,754 $14,607
AUG-01 $15,164 $16,099
AUG-02 $15,978 $17,104
AUG-03 $16,426 $17,641
AUG-04 $17,671 $18,866
Chart assumes $10,000 invested on January 4, 1995 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. The chart also assumes $10,000 invested in the Lehman Brothers
Municipal Bond Index at that month's end, January 31, 1995. After January 31,
1995, 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 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.
An expense limitation was in effect during the period shown. Performance would
have been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
5
DISCLOSURE For the period March 1, 2004 to August 31, 2004
OF FUND EXPENSES
As a shareholder of a fund, you incur two types of costs,
(1) transaction costs, including sales charges (loads) on purchase or redemption
payments; end exchange fees; and (2) ongoing costs, including management fees;
distribution, and/or service (12b-1) fees; and other fund expenses. This Example
is intended to help you understand your ongoing costs (in dollars) of investing
in a fund and to compare these costs with the ongoing costs of investing in
other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from March 1, 2004 to August 31, 2004.
ACTUAL EXPENSES
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return", provides
information about hypothetical account values and hypothetical expenses based on
a Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare the 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) redemption fees, or exchange fees. Therefore, the second section
of the table is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been higher. The
Funds' actual expenses shown in the table reflect fee waivers in effect. The
expenses shown in the tables assume reinvestment of all dividends and
distributions.
In each case, "Expenses Paid During Period" are equal to the Fund's annualized
expense ratio, multiplied by the average account value over the period,
multiplied by 184/366 (to reflect the one-half year period).
DELAWARE TAX-FREE IDAHO FUND(1)
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
3/1/04 8/31/04 3/1/04 to
8/31/04
- ---------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,004.20 0.97% $4.89
Class B 1,000.00 1,001.40 1.72% 8.65
Class C 1,000.00 1,001.40 1.72% 8.65
- ---------------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,020.06 0.97% $4.94
Class B 1,000.00 1,016.24 1.72% 8.76
Class C 1,000.00 1,016.24 1.72% 8.76
- ---------------------------------------------------------------------------------------------------------------
(1) Effective November 1, 2004, the Fund's manager increased contractual expense
waivers in effect for the Fund, causing the expenses paid by the Fund to
decrease. Had the new expense waivers been in effect during the period, the
Fund's expense analysis would be as follows:
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
3/1/04 8/31/04 3/1/04 to
8/31/04
- ---------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,004.81 0.85% $4.28
Class B 1,000.00 1,002.00 1.60% 8.05
Class C 1,000.00 1,002.00 1.60% 8.05
- ---------------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,020.67 0.85% $4.33
Class B 1,000.00 1,016.86 1.60% 8.14
Class C 1,000.00 1,016.86 1.60% 8.14
- ---------------------------------------------------------------------------------------------------------------
6
SECTOR ALLOCATION As of August 31, 2004
DELAWARE TAX-FREE IDAHO FUND
The SEC adopted a requirement that all Funds present their categories of
portfolio holdings in a table, chart, or graph format in their annual and
semiannual shareholder reports, whether or not a schedule of investments is
utilized. The following chart lists the Fund's categories of portfolio holdings
as a percent of total net assets, and is provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
- ------------------------------------------------------------------------
MUNICIPAL BONDS 93.77%
- ------------------------------------------------------------------------
Continuing Care/Retirement Revenue Bonds 3.53%
Corporate-Backed Revenue Bonds 7.54%
Escrowed to Maturity Bonds 2.27%
Higher Education Revenue Bonds 13.76%
Hospital Revenue Bonds 6.12%
Miscellaneous Revenue Bonds 0.63%
Multi Family Housing Revenue Bonds 1.18%
Municipal Lease Revenue Bonds 6.35%
Political Subdivision General Obligation Bonds 2.68%
Pre-Refunded Bonds 6.61%
School District General Obligation Bonds 11.42%
Single Family Housing Revenue Bonds 6.13%
Tax Increment/Special Assessment Bonds 6.29%
Territorial General Obligation Bonds 1.35%
Territorial Revenue Bonds 14.87%
Water & Sewer Revenue Bonds 3.04%
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 5.18%
- ------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 98.95%
- ------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 1.05%
- ------------------------------------------------------------------------
NET ASSETS 100.00%
- ------------------------------------------------------------------------
7
STATEMENTS DELAWARE TAX-FREE IDAHO FUND
OF NET ASSETS August 31, 2004
Principal Market
Amount Value
MUNICIPAL BONDS - 93.77%
Continuing Care/Retirement Revenue Bonds - 3.53%
Idaho Health Facilities Authority Revenue
Refunding (Valley Vista Care Project)
Series A 7.875% 11/15/22 $ 3,000,000 $ 2,956,740
-----------
2,956,740
-----------
Corporate-Backed Revenue Bonds - 7.54%
Meridan Economic Development
Corporation Revenue Refunding
Industrial Development (Hi-Micro Project)
5.85% 8/15/11 (AMT) 1,250,000 1,293,125
Nez Perce County Pollution Control
Revenue Refunding (Potlatch
Corporation Project) 6.00% 10/1/24 2,535,000 2,524,302
Power County Pollution Control Revenue
Refunding (FMC Corporation Project)
5.625% 10/1/14 2,475,000 2,492,350
-----------
6,309,777
-----------
Escrowed to Maturity Bonds - 2.27%
Puerto Rico Commonwealth Infrastructure
Financing Authority Special
Series A 5.375% 10/1/24 1,750,000 1,898,908
-----------
1,898,908
-----------
Higher Education Revenue Bonds - 13.76%
Boise State University Revenue
5.00% 4/1/17 (AMBAC) 500,000 542,625
5.00% 4/1/18 (FGIC) 1,645,000 1,794,679
5.125% 4/1/31 (FGIC) 1,000,000 1,030,600
Idaho State University Revenue
Refunding and Improvement
5.00% 4/1/20 (FSA) 1,130,000 1,204,185
5.00% 4/1/23 (FSA) 2,115,000 2,211,761
North Idaho College Dormitory Housing
Certificate of Participation
6.45% 10/1/16 1,000,000 1,056,780
University of Idaho University Revenue
(Student Fee Housing Improvements
Project) 5.25% 4/1/31 (FGIC) 2,195,000 2,278,322
University of Idaho University Revenue
(Student Fee Telecommunications
Project) 5.85% 4/1/11 (FSA) 1,300,000 1,391,988
-----------
11,510,940
-----------
Hospital Revenue Bonds - 6.12%
Idaho Health Facilities Authority
Hospital Revenue
(Bannock Regional Medical
Center Project)
6.375% 5/1/17 1,445,000 1,512,178
(Bingham Memorial Hospital Project)
6.00% 3/1/29 1,000,000 969,710
(Idaho Elks Rehabilitation
Hospital Project)
5.30% 7/15/18 625,000 631,550
5.45% 7/15/23 2,000,000 2,008,820
-----------
5,122,258
-----------
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Miscellaneous Revenue Bonds - 0.63%
Boise City Revenue Refunding
Series A 5.375% 12/1/31 (MBIA) $ 500,000 $ 527,565
----------
527,565
----------
Multi Family Housing Revenue Bonds - 1.18%
Idaho State Housing Agency Housing
Revenue (Park Place Project)
Series A 6.50% 12/1/36 (AMT) 965,000 989,636
----------
989,636
----------
Municipal Lease Revenue Bonds - 6.35%
Blaine School District #61 Certificate of
Participation 5.00% 7/30/10 (AMBAC) 1,000,000 1,108,060
Boise City Certificate of Participation
5.375% 9/1/20 (FGIC) (AMT) 2,100,000 2,207,289
Idaho State Building Authority Revenue
Series A 5.00% 9/1/21 (MBIA) 1,150,000 1,210,272
Series B 5.00% 9/1/21 (MBIA) 750,000 782,595
----------
5,308,216
----------
Political Subdivision General Obligation Bonds - 2.68%
Lemhi County 5.20% 8/1/27 (FSA) 2,145,000 2,242,876
----------
2,242,876
----------
*Pre-Refunded Bonds - 6.61%
Ada & Canyon Counties Joint School
District #2 Meridian
5.60% 7/30/12-05 1,125,000 1,178,471
Ammon Urban Renewal Agency
Revenue Sub Lien Tax Increment
Series B 6.25% 8/1/18-06 445,000 482,442
Boise City Independent School District
5.50% 7/30/16-05 400,000 422,596
Idaho Health Facilities Authority Revenue
(Bonner General Hospital Project)
6.50% 10/1/28-07 1,500,000 1,717,561
Pocatello Development Authority
Revenue Allocation Tax Increment
Series B 7.25% 12/1/08-04 135,000 136,968
Puerto Rico Commonwealth Public
Improvement Series A 5.125% 7/1/31-11 1,010,000 1,135,371
Puerto Rico Public Buildings Authority
Guaranteed Public Education & Health
Facilities Series M 5.50% 7/1/21-05 445,000 459,921
----------
5,533,330
----------
School District General Obligation Bonds - 11.42%
Ada & Canyon Counties
Joint School District #2 Meridan
5.00% 7/30/20 2,155,000 2,287,166
5.125% 7/30/19 1,005,000 1,082,948
5.50% 7/30/16 1,305,000 1,533,114
Bannock County School District #025
(Pocatello School Board Guaranteed
Program) 5.00% 8/15/15 1,040,000 1,149,439
Canyon County School District #132
5.00% 7/30/15 (FGIC) 2,000,000 2,238,380
Power & Cassia Counties Joint School
District #381 (American Falls Project)
5.00% 8/1/17 1,155,000 1,254,665
----------
9,545,712
----------
8
STATEMENTS
OF NET ASSETS (CONTINUED) DELAWARE TAX-FREE IDAHO FUND
Principal Market
Amount Value
Municipal Bonds (continued)
Single Family Housing Revenue Bonds - 6.13%
Idaho Housing & Finance Association
Single Family Mortgage
Series A Class I 5.55% 1/1/33 (AMT) $ 520,000 $ 537,051
Series A-2 Class I 5.20% 1/1/34 (AMT) 500,000 508,655
Series C Class I 5.55% 1/1/33 (AMT) 595,000 614,510
Series C Class III 5.35% 1/1/25 (AMT) 360,000 366,113
Series D Class III 5.45% 7/1/23 (AMT) 1,500,000 1,553,144
Series E Class I
5.35% 1/1/33 (AMT) 250,000 255,808
5.45% 1/1/31 (AMT) 130,000 133,804
Idaho State Housing Agency
Single Family Mortgage
Series A
6.05% 7/1/13 (AMBAC) (AMT) 105,000 106,095
6.10% 7/1/16 (AMT) 140,000 141,547
Series A-1 6.85% 7/1/12 (AMT) 15,000 15,033
Series B 6.45% 7/1/15 (AMT) 60,000 61,503
Series C-2 6.35% 7/1/15 (AMT) 75,000 76,870
Series E 6.35% 7/1/15 (AMT) 135,000 139,448
Series E-1 6.60% 7/1/11 25,000 25,163
Series G-2 6.15% 7/1/15 (AMT) 580,000 597,325
----------
5,132,069
----------
Tax Increment/Special Assessment Bonds - 6.29%
Boise Urban Renewal Agency Parking
Revenue Refunding Tax Increment
Series A 6.125% 9/1/15 2,235,000 2,348,135
Series B 6.125% 9/1/15 1,815,000 1,906,875
Bonner County Local Improvement
District #93-1
6.20% 4/30/05 150,000 151,721
6.35% 4/30/06 185,000 187,115
6.40% 4/30/07 195,000 197,126
6.50% 4/30/08 110,000 111,148
6.50% 4/30/10 100,000 100,948
Coeur D'Alene Local
Improvement District #6
Series 1995 6.00% 7/1/09 85,000 85,692
Series 1996 6.05% 7/1/10 90,000 90,693
Series 1997 6.10% 7/1/12 40,000 40,261
Series 1998 6.10% 7/1/14 45,000 45,258
----------
5,264,972
----------
Territorial General Obligation Bonds - 1.35%
++Puerto Rico Public Finance Corporation
Commonwealth Appropriation Series A
5.75% 8/1/27 (LOC Puerto Rico
Government Development Bank) 1,000,000 1,128,340
----------
1,128,340
----------
Territorial Revenue Bonds - 14.87%
Puerto Rico Commonwealth
Highway & Transportation Authority
Highway Revenue
Series D 5.25% 7/1/38 1,000,000 1,024,430
Series G 5.00% 7/1/33 4,000,000 4,042,439
Series W 5.50% 7/1/15 175,000 199,455
Series Y 5.00% 7/1/36 2,000,000 2,022,680
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Territorial Revenue Bonds (continued)
Puerto Rico Commonwealth Public
Improvement Series A 5.125% 7/1/31 $1,990,000 $ 2,023,690
Puerto Rico Electric Power Authority
Power Revenue
Series NN 5.125% 7/1/29 500,000 511,195
+Puerto Rico Electric Power Authority
Power Revenue Inverse Floater ROLs
7.512% 7/1/19 (FSA) 1,500,000 1,576,425
Puerto Rico Electric Power Authority
Revenue Series II 5.25% 7/1/31 1,000,000 1,032,750
----------
12,433,064
----------
Water & Sewer Revenue Bonds - 3.04%
Chubbuck Water Revenue
Certificate of Participation
6.35% 4/1/08 125,000 127,366
6.40% 4/1/10 135,000 137,167
Moscow Sewer Revenue
5.00% 11/1/22 (FSA) 2,175,000 2,278,030
----------
2,542,563
----------
TOTAL MUNICIPAL BONDS (cost $75,188,431) 78,446,966
----------
Number/ Principal
of Shares / Amount
SHORT-TERM INVESTMENTS - 5.18%
Money Market Funds - 3.09%
Dreyfus Tax-Exempt
Cash Management Fund 2,580,689 2,580,689
-----------
2,580,689
-----------
++Variable Rate Demand Notes - 2.09%
Idaho Health Facilities Authority Revenue
(Pooled Financing Program)
1.30% 10/1/10 (LOC U.S. Bank of Idaho) 1,000,000 1,000,000
Idaho State University Foundation
Income Revenue (L.E. & Thelma
Stephens Project) 1.32% 5/1/21
(LOC Wells Fargo Bank) 750,000 750,000
-----------
1,750,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $4,330,689) 4,330,689
-----------
TOTAL MARKET VALUE OF SECURITIES - 98.95%
(cost $79,519,120) 82,777,655
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 1.05% 879,495
-----------
NET ASSETS APPLICABLE TO 7,279,886
SHARES OUTSTANDING - 100.00% $83,657,150
===========
Net Asset Value - Delaware Tax-Free Idaho Fund
Class A ($55,572,677 / 4,834,606 Shares) $11.49
-----------
Net Asset Value - Delaware Tax-Free Idaho Fund
Class B ($13,043,849 / 1,136,197 Shares) $11.48
-----------
Net Asset Value - Delaware Tax-Free Idaho Fund
Class C ($15,040,624 / 1,309,083 Shares) $11.49
-----------
9
STATEMENTS DELAWARE TAX-FREE IDAHO FUND
OF NET ASSETS (CONTINUED)
COMPONENTS OF NET ASSETS AT AUGUST 31, 2004:***
Shares of beneficial interest
(unlimited authorization - no par) $81,134,590
Distributions in excess of net investment income (11,301)
Accumulated net realized loss on investments (724,674)
Net unrealized appreciation of investments 3,258,535
-----------
Total net assets $83,657,150
===========
*For Pre-Refunded Bonds, the stated maturity is followed by the year in which
the bond is pre-refunded.
***See Note #4 in "Notes to Financial Statements" for
details of reclassification of components of net assets.
+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 August 31, 2004.
++Variable rate notes. The interest rate shown is the rate as of August 31,
2004.
SUMMARY OF ABBREVIATIONS:
AMBAC - Insured by the AMBAC Indemnity Corporation
AMT - Subject to Alternative Minimum Tax
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
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE TAX-FREE IDAHO FUND
Net asset value Class A (A) $11.49
Sales charge (4.50% of offering price,
or 4.70% of amount invested per share) (B) 0.54
---------
Offering price $12.03
=========
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See current prospectus for purchases of $100,000 or more.
See accompanying notes
10
STATEMENTS Year Ended August 31, 2004
OF OPERATIONS
Delaware
Tax-Free
Idaho
Fund
INVESTMENT INCOME:
Interest $ 4,418,411
------------
EXPENSES:
Management fees 470,303
Distribution expenses -- Class A 133,636
Distribution expenses -- Class B 149,335
Distribution expenses -- Class C 172,144
Dividend disbursing and transfer agent fees and expenses 53,356
Accounting and administration expenses 31,977
Legal and professional fees 24,481
Reports and statements to shareholders 13,959
Registration fees 4,460
Custodian fees 5,053
Trustees' fees 3,662
Other 5,425
------------
1,067,791
Less expenses absorbed or waived --
Less expenses paid indirectly (699)
------------
Total expenses 1,067,092
------------
NET INVESTMENT INCOME 3,351,319
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments 90,044
Net change in unrealized appreciation/depreciation
of investments 2,586,497
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,676,541
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,027,860
============
See accompanying notes
11
STATEMENTS
OF CHANGES IN NET ASSETS
Delaware Tax-Free
Idaho Fund
Year Ended
8/31/04 8/31/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 3,351,319 $ 3,302,370
Net realized gain on investments 90,044 355,852
Net change in unrealized
appreciation/depreciation of investments 2,586,497 (1,839,181)
------------ -----------
Net increase in net assets resulting from
operations 6,027,860 1,819,041
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (2,251,688) (2,218,414)
Class B (517,449) (582,004)
Class C (595,401) (495,347)
------------ -----------
(3,364,538) (3,295,765)
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 10,915,660 16,371,596
Class B 568,680 3,331,668
Class C 5,705,800 8,793,031
Net asset value of shares issued upon
reinvestment of dividends and distributions:
Class A 1,441,777 1,505,826
Class B 296,540 345,692
Class C 353,346 296,266
------------ -----------
19,281,803 30,644,079
------------ -----------
Cost of shares repurchased:
Class A (10,140,886) (10,420,017)
Class B (5,132,398) (1,409,479)
Class C (7,793,040) (2,304,901)
------------ -----------
(23,066,324) (14,134,397)
------------ -----------
Increase (decrease) in net assets derived
from capital share transactions (3,784,521) 16,509,682
------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS (1,121,199) 15,032,958
NET ASSETS:
Beginning of period 84,778,349 69,745,391
------------ -----------
End of period(1) $83,657,150 $84,778,349
============ ===========
(1)Including distributions in excess of
net investment income $ (11,301) $ (11,301)
============ ===========
See accompanying notes
12
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Idaho Fund Class A
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $11.140 $11.320 $11.260 $10.730 $10.940
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.478 0.497 0.522 0.541 0.541
Net realized and unrealized gain (loss) on investments 0.353 (0.181) 0.059 0.530 (0.210)
-------- -------- -------- -------- --------
Total from investment operations 0.831 0.316 0.581 1.071 0.331
-------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.481) (0.496) (0.521) (0.541) (0.541)
-------- -------- -------- -------- --------
Total Dividends and Distributions (0.481) (0.496) (0.521) (0.541) (0.541)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $11.490 $11.140 $11.320 $11.260 $10.730
======== ======= ======= ======== ========
TOTAL RETURN(2) 7.58% 2.81% 5.36% 10.24% 3.25%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $55,572 $51,682 $45,108 $38,228 $34,674
Ratio of expenses to average net assets 0.97% 0.93% 1.00% 1.00% 1.00%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.97% 1.00% 1.03% 1.03% 1.09%
Ratio of net investment income to average net assets 4.21% 4.36% 4.69% 4.94% 5.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.21% 4.29% 4.66% 4.91% 5.04%
Portfolio turnover 13% 18% 11% 14% 10%
(1) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the year ended August 31, 2002 was an increase in net
investment income per share of $0.001, a decrease in net realized and
unrealized gain (loss) per share of $0.001, and an increase in the ratio of
net investment income to average net assets of 0.01%. Per share data and
ratios for periods prior to September 1, 2001 have not been restated to
reflect this change in accounting.
(2) 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 waivers and payment of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
13
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Idaho Fund Class B
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $11.130 $11.310 $11.250 $10.720 $10.920
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.393 0.412 0.439 0.460 0.462
Net realized and unrealized gain (loss) on investments 0.353 (0.181) 0.059 0.530 (0.200)
-------- -------- -------- -------- --------
Total from investment operations 0.746 0.231 0.498 0.990 0.262
-------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.396) (0.411) (0.438) (0.460) (0.462)
-------- -------- -------- -------- --------
Total dividends and distributions (0.396) (0.411) (0.438) (0.460) (0.462)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $11.480 $11.130 $11.310 $11.250 $10.720
======== ======= ======= ======== ========
TOTAL RETURN(2) 6.79% 2.05% 4.58% 9.43% 2.58%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $13,044 $16,801 $14,809 $12,366 $10,320
Ratio of expenses to average net assets 1.72% 1.68% 1.75% 1.75% 1.75%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.72% 1.75% 1.78% 1.78% 1.84%
Ratio of net investment income to average net assets 3.46% 3.61% 3.94% 4.19% 4.38%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.46% 3.54% 3.91% 4.16% 4.29%
Portfolio turnover 13% 18% 11% 14% 10%
(1) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the year ended August 31, 2002 was an increase in net
investment income per share of $0.001, a decrease in net realized and
unrealized gain (loss) per share of $0.001, and an increase in the ratio of
net investment income to average net assets of 0.01%. Per share data and
ratios for periods prior to September 1, 2001 have not been restated to
reflect this change in accounting.
(2) 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 waivers and payment of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
14
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Delaware Tax-Free Idaho Fund Class C
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $11.130 $11.310 $11.250 $10.720 $10.920
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.393 0.413 0.439 0.460 0.462
Net realized and unrealized gain (loss) on investments 0.362 (0.181) 0.059 0.530 (0.200)
-------- -------- -------- -------- --------
Total from investment operations 0.755 0.232 0.498 0.990 0.262
-------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.395) (0.412) (0.438) (0.460) (0.462)
-------- -------- -------- -------- --------
Total dividends and distributions (0.395) (0.412) (0.438) (0.460) (0.462)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $11.490 $11.130 $11.310 $11.250 $10.720
======== ======= ======= ======== ========
TOTAL RETURN(2) 6.87% 2.05% 4.57% 9.43% 2.58%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $15,041 $16,296 $9,829 $4,931 $3,621
Ratio of expenses to average net assets 1.72% 1.68% 1.75% 1.75% 1.75%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.72% 1.75% 1.78% 1.78% 1.84%
Ratio of net investment income to average net assets 3.46% 3.61% 3.94% 4.19% 4.38%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 3.46% 3.54% 3.91% 4.16% 4.29%
Portfolio turnover 13% 18% 11% 14% 10%
(1) As required, effective September 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the year ended August 31, 2002 was an increase in net
investment income per share of $0.001, a decrease in net realized and
unrealized gain (loss) per share of $0.001, and an increase in the ratio of
net investment income to average net assets of 0.01%. Per share data and
ratios for periods prior to September 1, 2001 have not been restated to
reflect this change in accounting.
(2) 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 waivers and payment of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
15
NOTES August 31, 2004
TO FINANCIAL STATEMENTS
Voyageur Mutual Funds (the "Trust") is organized as a Delaware statutory trust
and offers six series: Delaware Minnesota High-Yield Municipal Bond Fund,
Delaware National High-Yield Municipal Bond Fund, Delaware Tax-Free Arizona
Fund, Delaware Tax-Free California Fund, Delaware Tax-Free Idaho Fund, and
Delaware Tax-Free New York Fund. Voyageur Investment Trust (the "Trust") is
organized as a Massachusetts business trust and offers five series: Delaware
Tax-Free California Insured Fund, Delaware Tax-Free Florida Fund, Delaware
Tax-Free Florida Insured Fund, Delaware Tax-Free Missouri Insured Fund and
Delaware Tax-Free Oregon Insured Fund. These financial statements and the
related notes pertain to Delaware Tax-Free Idaho Fund, Delaware Tax-Free
Missouri Insured Fund, and Delaware Tax-Free Oregon Insured Fund (the "Fund" or
collectively as 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. The Funds 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 B
shares are sold with a contingent deferred sales charge that declines from 4.00%
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. 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 Idaho Fund, Delaware Tax-Free
Missouri Insured Fund, and Delaware Tax-Free Oregon Insured Fund 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. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Funds' Board of
Trustees.
Federal Income Taxes - Each 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 Funds on the basis of "settled shares" of each class in relation
to the net assets of the Funds. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Funds 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 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. 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.
Through December 31, 2003, certain expenses of the Funds were paid through
commission arrangements with brokers. In addition, the Funds may receive
earnings credits from their custodian when positive cash balances are
maintained, which are used to offset custody fees. The expenses paid under the
above arrangements are included in their respective expense captions on the
Statements of Operations with the corresponding expense offset shown as
"expenses paid indirectly." The amount of these expenses for the year ended
August 31, 2004 were as follows:
Delaware Tax-Free
Idaho Fund
------------------
Commission reimbursements $691
Earnings credits 8
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 based on
each Fund's average daily net assets as follows:
Delaware Tax-Free
Idaho Fund
------------------
On the first $500 million 0.55%
On the next $500 million 0.50%
On the next $1.5 billion 0.45%
In excess of $2.5 billion 0.425%
16
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
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 of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs, and extraordinary expenses, do not
exceed specified percentages of average daily net assets through October 31,
2004, as shown below.
Delaware Tax-Free
Idaho Fund
------------------
The operating expense limitation as a percentage
of average daily net assets (per annum) 0.75%
Expiration date 10/31/04
Effective November 1, 2004, operating expense
limitation as a percentage of average daily net
assets (per annum) 0.60%
Expiration date 10/31/05
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Funds pay
DSC a monthly fee based on average net assets subject to certain minimums for
accounting and administration 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
Delaware Distributors, L.P. (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 August 31, 2004, each Fund had liabilities payable to affiliates as follows:
Delaware Tax-Free
Idaho Fund
------------------
Investment management fee payable to DMC $39,323
Dividend disbursing, transfer agent,
accounting and administration fees
and other expenses payable to DSC 6,875
Other expenses payable to DMC and affiliates* 37,356
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax services,
registration fees and trustees' fees.
As provided in the investment management agreement, the Funds bear the cost of
certain legal services expenses, including in-house legal services provided to
the Funds by DMC employees. For the year ended August 31, 2004, the Funds had
costs as follows:
Delaware Tax-Free
Idaho Fund
------------------
$4,171
For the year ended August 31,2004, DDLP earned commissions on sales of Class A
shares for each Fund as follows:
Delaware Tax-Free
Idaho Fund
------------------
$35,034
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 Funds.
3. INVESTMENTS
For the year ended August 31, 2004, the Funds made purchases and sales of
investment securities other than short-term investments as follows:
Delaware Tax-Free
Idaho Fund
------------------
Purchases $10,644,023
Sales 16,801,293
17
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
At August 31, 2004, the cost of investments and unrealized
appreciation/(depreciation) for federal income tax purposes for each Fund were
as follows:
Delaware Tax-Free
Idaho Fund
------------------
Cost of investments $79,508,995
===========
Aggregate unrealized appreciation $ 3,289,719
Aggregate unrealized depreciation (21,059)
-----------
Net unrealized appreciation $ 3,268,660
===========
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. The tax character of dividends and distributions
paid during the years ended August 31, 2004 and 2003 was as follows:
Delaware Tax-Free
Idaho Fund
------------------
Year Ended
8/31/04 8/31/03
Tax-exempt income $3,364,538 $3,295,765
As of August 31, 2004, the components of net assets on a tax basis were as
follows:
Delaware Tax-Free
Idaho Fund
------------------
Shares of beneficial interest $ 81,134,590
Distribution in excess of tax-exempt income (11,301)
Capital loss carryforwards (734,799)
Net unrealized appreciation of investments 3,268,660
------------
Net assets $83,657,150
============
For financial reporting purposes, capital accounts and distributions to
shareholders are adjusted to reflect the tax character of book/tax differences.
For the year ended August 31, 2004, the Funds recorded the following permanent
reclassifications. Reclassifications are primarily due to tax treatment of
market discount and premium on certain debt instruments and expiration of
capital loss carry forwards. Results of operations and net assets were not
affected by these reclassifications.
Delaware Tax-Free
Idaho Fund
------------------
Undistributed net investment income $13,219
Accumulated realized gain (loss) (13,219)
Paid-in capital --
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss carryforward
amounts will expire as follows:
Delaware Tax-Free
Year of expiration Idaho Fund
------------------ ------------------
2008 $ --
2009 567,850
2010 166,949
---------
Total $ 734,799
--------- =========
For the year ended August 31, 2004, each Fund had capital loss carryforwards
that were utilized as follows:
Delaware Tax-Free
Idaho Fund
------------------
$89,711
For the year ended August 31, 2004, the Delaware Tax-Free Oregon Insured Fund
had capital loss carryforwards that expired of $47,043.
18
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Delaware Tax-Free
Idaho Fund
----------------------------
Year Year
Ended Ended
8/31/04 8/31/03
Shares sold:
Class A 959,480 1,441,194
Class B 49,989 293,778
Class C 500,928 773,442
Shares issued upon reinvestment
of dividends and distributions:
Class A 126,438 132,956
Class B 26,030 30,561
Class C 30,983 26,162
---------- ---------
1,693,848 2,698,093
---------- ---------
Shares repurchased:
Class A (891,158) (919,781)
Class B (449,807) (124,210)
Class C (686,432) (204,972)
---------- ---------
(2,027,397) (1,248,963)
---------- ---------
Net increase (decrease) (333,549) 1,449,130
========== =========
For the years ended August 31, 2004 and 2003, the following shares and value
were converted from Class B to Class A. The respective amounts are included in
Class B redemptions and Class A subscriptions in the table above and the
Statements of Changes in Net Assets.
Year Ended Year Ended
8/31/04 8/31/03
Class B Shares Class A Shares Value Class B Shares Class A Shares Value
-------------- -------------- ------ -------------- -------------- ------
Delaware Tax-Free Idaho Fund 98,429 98,324 $1,112,227 8,678 8,671 $100,845
6. LINE OF CREDIT
Each 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 fund'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 August 31, 2004 or at any time during the
period.
7. CREDIT AND MARKET RISKS
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 market value
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
Statements of Net Assets.
The Funds may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Statements of Net Assets.
19
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
8. TAX INFORMATION (UNAUDITED)
The information set forth below is for each 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 fiscal year ended August 31, 2004, each Fund designates distributions
paid during the year as follows:
(A) (B) (C)
Long Term Ordinary Tax-
Capital Gains Income Exempt Total
Distributions Distributions Distributions Distributions
(Tax Basis) (Tax Basis) (Tax Basis) (Tax Basis)
------------- ------------- -------------- --------------
Delaware Tax-Free Idaho Fund -- -- 100% 100%
(A), (B), and (C) are based on a percentage of each Fund's total distributions.
20
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Voyageur Mutual Funds - Delaware Tax-Free Idaho Fund
Voyageur Investment Trust - Delaware Tax-Free Missouri
Insured Fund and Delaware Tax-Free Oregon
Insured Fund
We have audited the accompanying statements of net assets of Delaware Tax-Free
Idaho Fund (one of the series constituting Voyageur Mutual Funds) and Delaware
Tax-Free Missouri Insured Fund and Delaware Tax-Free Oregon Insured Fund (two of
the series constituting Voyageur Investment Trust) (the "Funds") as of August
31, 2004, and the related statements 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 Funds' 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 the standards of the Public Company
Accounting Oversight Board (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 August 31, 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 the
Delaware Tax-Free Idaho Fund of Voyageur Mutual Funds and the Delaware Tax-Free
Missouri Insured Fund and Delaware Tax-Free Oregon Insured Fund of Voyageur
Investment Trust at August 31, 2004, the results of their operations for the
year then ended, the changes in their net assets for each of the two years in
the period then ended, and their financial highlights for each of the five years
in the period then ended in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 4, 2004
20
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, 77 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)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
WALTER P. BABICH Trustee 16 Years Board Chairman - 94 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 94 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103
August 7, 1937 President/Director -
22 WR Corporation
JOHN A. FRY Trustee(4) 3 Years President - 77 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 94 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
24
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 - 94 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
Director -
Systemax Inc.
November 1, 1940
THOMAS F. MADISON Trustee 10 Years President/Chief 94 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 & 94 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 94 None(5)
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 Executive Vice President, Chief Legal Ms. Maestro has served in 94 None(5)
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 at different times at
19103 Delaware Investments.
November 26, 1957
MICHAEL P. BISHOF Senior Vice President 8 Years Mr. Bishof has served in 94 None(5)
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.
(5) Mr. Hastings, Mr. Bishof and Ms. Maestro also serve in similar capacities
for the six portfolios of the Optimum Fund Trust, which have the same
investment advisor, principal underwriter, and transfer agent as the
registrant.
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.
25
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Tax-Free Idaho Fund,
Delaware Tax-Free Missouri Insured Fund, and Delaware Tax-Free Oregon Insured
Fund shareholders, but it may be used with prospective investors when preceded
or accompanied by a current prospectus for Delaware Tax-Free Idaho Fund,
Delaware Tax-Free Missouri Insured Fund, and Delaware Tax-Free Oregon Insured
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 each 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 each 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
WALTER P. BABICH JUDE T. DRISCOLL INVESTMENT MANAGER
Board Chairman Chairman Delaware Management Company
Citadel Construction Corporation Delaware Investments Family of Funds Philadelphia, PA
King of Prussia, PA Philadelphia, PA
INTERNATIONAL AFFILIATE
JOHN H. DURHAM JOSEPH H. HASTINGS Delaware International Advisers Ltd.
Private Investor Executive Vice President and London, England
Gwynedd Valley, PA Chief Financial Officer
Delaware Investments Family of Funds NATIONAL DISTRIBUTOR
ANTHONY D. KNERR Philadelphia, PA Delaware Distributors, L.P.
Managing Director Philadelphia, PA
Anthony Knerr & Associates RICHELLE S. MAESTRO
New York, NY Executive Vice President, SHAREHOLDER SERVICING, DIVIDEND
Chief Legal Officer and Secretary DISBURSING AND TRANSFER AGENT
ANN R. LEVEN Delaware Investments Family of Funds Delaware Service Company, Inc.
Former Treasurer/Chief Fiscal Officer Philadelphia, PA 2005 Market Street
National Gallery of Art Philadelphia, PA 19103-7094
Washington, DC MICHAEL P. BISHOF
Senior Vice President and Treasurer FOR SHAREHOLDERS
THOMAS F. MADISON Delaware Investments Family of Funds 800 523-1918
President and Chief Executive Officer Philadelphia, PA
MLM Partners, Inc. FOR SECURITIES DEALERS AND FINANCIAL
Minneapolis, MN INSTITUTIONS REPRESENTATIVES ONLY
800 362-7500
JANET L. YEOMANS
Vice President/Mergers & Acquisitions WEB SITE
3M Corporation www.delawareinvestments.com
St. Paul, MN
- --------------------------------------------------------------------------------
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. The Funds' 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 is available without charge (i) upon request,
by calling 800 523-1918; (ii) on each Fund Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. Each Funds' Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-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
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(8924) Printed in the USA
AR-CORN [8/04] IVES 10/04 J9814
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
FIXED INCOME
ANNUAL REPORT AUGUST 31, 2004
- --------------------------------------------------------------------------------
DELAWARE TAX-FREE NEW YORK FUND
[LOGO]
POWERED BY RESEARCH.(SM)
PORTFOLIO September 10, 2004
MANAGEMENT REVIEW
FUND MANAGERS
Patrick Coyne
Managing Director/Head of Equity Investments
Joseph R. Baxter
Senior Portfolio Manager
Robert F. Collins
Senior Portfolio Manager
Q: PLEASE DESCRIBE OVERALL BOND MARKET CONDITIONS DURING THE FISCAL YEAR.
A: During the fiscal year ended August 31, 2004, economic recovery continued,
though not without uncertainty and volatility that resulted from rising oil
prices, events in the Middle East and the dollar's weakness versus other major
world currencies. Also troubling the markets, the twin deficits (U.S. budget and
trade) grew and are at or close to record levels. Job creation, often a spur for
sustained growth, never quite reached the levels that economists expected to see
well into an economic recovery.
The Federal Reserve elected to raise the fed funds target rate (the rate at
which banks make short-term loans to other banks) from 1.0% as the fiscal year
began to 1.5% at year's end, reflecting their conviction that economic growth is
sustainable and that the current inflationary pressures are temporary.
For the municipal bond market, two-year, AAA-rated securities began the 12-month
period at 1.41% and ended at 1.72% (Source: Municipal Market Data). Though
short-term rates rose, those of longer-term bonds fell. For AAA-rated bonds
during the fiscal-year period, those of 10-year maturities began at 3.9% and
ended at 3.5% while 30-year issues started at 5.0% and concluded at 4.7%.
In 2004 the yield curve flattened. The difference in yield between two-year and
30-year, AAA-rated municipal bonds began the year at 3.6% and ended the year at
2.9%. Interestingly, this was a "bull-flattening." Short rates rose in sympathy
with the Federal Reserve tightening, but rates for bonds in the intermediate and
long maturities fell (recall that bond yields and prices are inversely related -
prices rise as yields fall). The markets seem to be indicating that the Federal
Reserve is correct in ascertaining that the inflation pressures were transitory.
Normally, in a Federal Reserve tightening, long rates would rise, but less than
those of short rates, resulting in what is termed a "bear-flattening".
The difference in yield between municipal and Treasury bonds saw little change.
Among two-year issues, the AAA-rated, general obligation municipal bond yield
began the 12-month period at 72.7% of like-maturity Treasuries and ended the
period at 71.7%. Among 30-year issues, the yield difference began the fiscal
year at 96.4% and ended at 95.1%.
10-year bonds, however, showed more significant relative yield movement, with
the municipal-to-Treasury bond yield difference moving from 88.8% at the
period's beginning to 84.8% at its end. The change was likely driven by
non-traditional buyers - including hedge funds, arbitrage accounts, and taxable
accounts - purchasing municipal bonds, which are typically less sensitive to
interest rate changes, as a hedge against the expectation that rates would rise.
Credit quality, which deteriorated in the prior fiscal year, showed signs of
recovery. Many states have experienced increased revenues, although low
employment numbers could impede that progress. Improving credit conditions
contributed to the narrowing yield difference of bonds with different credit
ratings; the "spread" between AAA- and BBB-rated municipal bonds shrank by 0.2%
between January 1 and August 31, 2004. Also contributing to the narrowing spread
was investors desire to "reach" for yield. With overall market yields as such
low levels, investors seek ways to maintain income levels. One way to add yield
is to add credit risk. This increased demand for lower-quality bonds lowered the
yield of these securities relative to higher-grade bonds.
Debt supply was good during the fiscal year, though trending down from the
record paces of 2002 and 2003 when new issue bonds in the amounts of $359 and
$383 billion, respectively, came to market. Between January 1 and August 31,
2004, about $265 billion in new debt was issued, a decrease of approximately
nine percent from 2003's rate. The drop was likely due to healthier state
balance sheets - states issue less debt when they have more cash - and to a 24
percent drop in refinancing, as most states have already restructured debt where
it made sense to do so.
1
Q: WHAT ECONOMIC CONDITIONS EXISTED IN FLORIDA DURING THE FISCAL YEAR?
A: Florida enjoys good fiscal management, healthy revenues, and an economy that
outperformed those of many other states during the recent economic downturn.
Florida created more jobs - 163,200 - than any other state during the fiscal
year, and has a low unemployment rate at 4.4%. State tax revenues increased
10.0% over last year's figures in the first nine months of the fiscal year.
Also, the state's fiscal reserves may likely go on to be the nation's
healthiest, with revenue forecasts suggesting continued improvement. Beginning
in 2005, Florida will begin a 14 percent increase in education and human
services spending.
Florida, however, is in the path of many hurricanes and tropical storms, and
that can adversely impact both the state's overall budget and local economies.
As of this writing, four hurricanes have hit the state and total cost of
cleanup, repair, and rebuilding is not yet clear. While the initial impact of
the storms is devastation and destruction, our duty to be forward looking
provides a glimpse of better days a head. The rebuilding effort will provide a
needed burst to Florida's economy in the year ahead.
New issuance of state municipal bonds dropped by 42 percent during the fiscal
year. Last year experienced higher supply, which was due in part to several
large refinancing deals. Supply for the 12-month period also dropped because the
state has experienced better revenue flows and therefore less need to issue debt
(Source: The Bond Buyer).
Q: HOW DID DELAWARE TAX-FREE FLORIDA FUND PERFORM DURING THE FISCAL YEAR?
DELAWARE TAX-FREE FLORIDA FUND appreciated +5.72% (Class A shares at net asset
value with distributions reinvested) for the fiscal year ended August 31, 2004.
The Fund trailed the +5.76% return of its peer group, as represented by the 62
funds of the Lipper Florida Municipal Debt Funds Average. The Fund also
underperformed its benchmark, the Lehman Brothers Municipal Bond Index, which
returned +7.11% (Source: Lipper Inc.).*
Q: WHAT STRATEGIES CONTRIBUTED TO FUND PERFORMANCE?
A: Positions in hospital, multi-family housing, and pre-refunded bonds
contributed to the Fund's performance during the 12-month period. We doubled the
Fund's position in Puerto Rico bonds in May, when we saw heavy supply at
attractive prices. Prices for these bonds have increased as supply has gone
down; we continue to hold the Puerto Rico securities.
Q: WHAT DETRACTED FROM FUND PERFORMANCE?
A: The Fund might have performed better by owning longer-term bonds. As a result
of market forces, the Fund's duration shortened to 4.6 years, considerably less
than our starting point of 6.5 years. Duration, which is calculated in years, is
a common measure of a bond's 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. Moving forward, we will examine opportunities to
lengthen Fund duration when prices appear attractive to us.
Q: HOW DID DELAWARE TAX-FREE FLORIDA INSURED FUND PERFORM DURING THE FISCAL
YEAR?
DELAWARE TAX-FREE FLORIDA INSURED FUND gained +6.15% (Class A shares at net
asset value with distributions reinvested) for the fiscal year ended August 31,
2004. The Fund bested the +5.49% return of its peer group, as represented by the
Lipper Florida Insured Municipal Debt Funds Average. However, it underperformed
its benchmark, the Lehman Brothers Municipal Bond Index, which returned +7.11%
(Source: Lipper Inc.).*
Q: WHAT STRATEGIES CONTRIBUTED TO FUND PERFORMANCE?
A: While we continue to invest in the sector as a whole, relative value
considerations during the 12-month period led us to reduce the Fund's exposure
in one hospital bond and eliminate our holdings in another. Also consistent with
our income-first strategy, we held on to our high-coupon, short-duration bonds
during the period. While the shorter call provisions on these securities result
in limited price appreciation potential, the high coupons provide an
above-market income stream that cannot be replaced by comparable securities in
this current environment. Income-producing bonds would also result in avoiding
passing on capital gains taxes to our investors.
The above strategy combined with the drop in duration of the overall market, led
to a shorter duration for this Fund versus its peer group. Duration, which is
calculated in years, is a common measure of a bond's 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.
*A portion of the income from tax-exempt funds may be subject to the
alternative minimum tax.
2
Q: WHAT DETRACTED FROM FUND PERFORMANCE?
A: A slightly longer duration might have benefited Fund performance for the
12-month period. Moving forward, once the less accommodative monetary policy
stance of the Federal Reserve takes hold in the market, we think there will be
opportunities to lengthen duration at more attractive yields than were available
during the just concluded fiscal year.
Q: WHAT ECONOMIC CONDITIONS EXISTED IN NEW YORK DURING THE FISCAL YEAR?
A: New York's economy is slowly improving due to stronger financial markets and
recovery from the events of September 11. Employment, which had declined between
2001 and 2003, grew by 0.7% during the fiscal year. State tax revenues increased
by 10.1% in the first nine months of the fiscal year, driven by an 11.3%
increase in personal income taxes.
Even so, we believe the state tends to have relatively weak fiscal management,
as shown by the failure to pass its most recent budget on time. New York faces
such key challenges as a high social services burden, an expensive and ongoing
public school system overhaul, and high debt levels. The state projects a
2005-2006 budget deficit of $6.1 billion and a 2006-2007 deficit of $7.7
billion.
New York's new debt issuance was down about 20% this fiscal year versus the
last, due in large part to a significant amount of refinancing and restructuring
carried out last year.
Q: HOW DID DELAWARE TAX-FREE NEW YORK FUND PERFORM DURING THE FISCAL YEAR?
DELAWARE TAX-FREE NEW YORK FUND gained +7.26% (Class A shares at net asset value
with distributions reinvested) for the fiscal year ended August 31, 2004,
outperforming both its peer group, as represented by the 110 funds of the Lipper
New York Municipal Debt Funds Average, which returned +6.31% and the +7.11%
return of its benchmark, the Lehman Brothers Municipal Bond Index (Source:
Lipper Inc.).*
Q: WHAT STRATEGIES CONTRIBUTED TO FUND PERFORMANCE?
A: The Fund's duration declined from 8.2 years to 6.2 years during the 12-month
period. Duration, which is calculated in years, is a common measure of a bond's
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. This
was the result of a collapse of duration in the overall market as lower interest
rates led older bonds to trade to their shorter call provisions rather than
their longer stated maturities. Additionally, we took a more conservative
approach by holding more short-term securities after the Federal Reserve began
hiking interest rates. The Fund had somewhat greater liquidity as a result of
this strategy, as it positioned well for further Fed actions.
We reduced the Fund's hospital sector holdings by about eight percent of net
assets on relative value trades, and reduced a specific hospital position by
half in order to further diversify the portfolio.
Q: WHAT DETRACTED FROM THE FUND'S PERFORMANCE?
A: We purchased bonds that were backed by a combination of the tobacco
settlement and the New York state appropriations. We then reduced that position
by half during the 12-month period, only to see the remaining bonds continue to
perform well. Even so, we appreciated the added diversification attributed to
the bonds' liquidations.
*A portion of the income from tax-exempt funds may be subject to the
alternative minimum tax.
3
DELAWARE
TAX-FREE NEW YORK FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. Please obtain the performance data for the most recent month end by
calling 800 523-1918 or visiting our Web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges, and expenses of the investment carefully before
investing. The Delaware Tax-Free New York Fund prospectus contains this and
other important information about the investment company. Please request a
prospectus by calling 800 523-1918. Read it carefully before you invest or send
money. Performance includes reinvestment of all distributions.
FUND PERFORMANCE
Average Annual Total Returns
Through August 31, 2004 Lifetime 10 Years Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 11/6/87)
Excluding Sales Charge +6.49% +5.16% +6.35% +7.26%
Including Sales Charge +6.20% +4.68% +5.37% +2.45%
- --------------------------------------------------------------------------------
Class B (Est. 11/14/94)
Excluding Sales Charge +5.00% +5.57% +6.47%
Including Sales Charge +5.00% +5.32% +2.47%
- --------------------------------------------------------------------------------
Class C (Est. 4/26/95)
Excluding Sales Charge +4.36% +5.57% +6.47%
Including Sales Charge +4.36% +5.57% +5.47%
- --------------------------------------------------------------------------------
Returns reflect the reinvestment of all 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 have an annual distribution and
service fee of up to 0.25%.
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%. Lifetime performance figures for Class B
shares reflect conversion to Class A shares after approximately eight years.
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 all classes of Delaware Tax-Free New
York Fund for the periods shown. Performance would have been lower had the
expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
A portion of the income from tax-exempt funds may be subject to the alternative
minimum tax.
4
DELAWARE
TAX-FREE NEW YORK FUND
FUND BASICS
As of August 31, 2004
- --------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks as high a level of current interest income exempt from federal
income tax as is available from municipal obligations as is consistent with
prudent investment management and preservation of capital.
- --------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$16.71 million
- --------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
32
- --------------------------------------------------------------------------------
FUND START DATE:
November 6, 1987
- --------------------------------------------------------------------------------
YOUR FUND MANAGER:
Patrick P. Coyne
Joseph R. Baxter
Robert F. Collins
- --------------------------------------------------------------------------------
NASDAQ SYMBOLS:
Class A FTNYX
Class B DVTNX
Class C DVFNX
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
August 31, 1994 through August 31, 2004
DELAWARE FLORIDA LEHMAN BROTHERS
INSURED FUND - MUNICIPAL BOND
CLASS A SHARES INDEX
31-AUG-94 $9,553 $10,000
31-AUG-95 $10,111 $10,886
31-AUG-96 $10,466 $11,456
31-AUG-97 $11,081 $12,514
31-AUG-98 $11,883 $13,597
31-AUG-99 $11,592 $13,665
31-AUG-00 $12,180 $14,590
31-AUG-01 $13,525 $16,077
31-AUG-02 $14,200 $17,080
31-AUG-03 $14,704 $17,617
31-AUG-04 $15,794 $18,869
Chart assumes $10,000 invested on August 31, 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.
An expense limitation was in effect for the period shown. Performance would have
been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
5
DISCLOSURE For the period March 1, 2004 to August 31, 2004
OF FUND EXPENSES
As a shareholder of a fund, you incur two types of costs: (1) transaction costs,
including sales charges (loads) on purchase payments, reinvested dividends, or
other distributions; redemption fees; and exchange fees; and (2) ongoing costs,
including management fees; distribution and/or service (12b-1) fees; and other
fund expenses. This Example is intended to help you understand your ongoing
costs (in dollars) of investing in the fund and to compare these costs with the
ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from March 1, 2004 to August 31, 2004.
ACTUAL EXPENSES
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section together with the amount you invested, to estimate the expenses
that you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first section under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
a fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare the 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions.
In each case, "Expenses Paid During Period" are equal to the Fund's annualized
expense ratio, multiplied by the average account value over the period,
multiplied by 184/366 (to reflect the one-half year period).
6
DELAWARE TAX-FREE NEW YORK FUND(2)
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
3/1/04 8/31/04 3/1/04 to
8/31/04
- -----------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,002.60 0.50% $2.52
Class B 1,000.00 998.80 1.25% 6.28
Class C 1,000.00 998.80 1.25% 6.28
- -----------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,022.45 0.50% $2.55
Class B 1,000.00 1,018.64 1.25% 6.36
Class C 1,000.00 1,018.64 1.25% 6.36
- -----------------------------------------------------------------------------------------------------------
(2) Effective November 1, 2004, the Fund's manager decreased contractual expense
waivers in effect for the Fund, causing the expenses paid by the Fund to
increase. Had the new expense waiver been in effect during the period, the
Fund's expense analysis would be as follows:
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
3/1/04 8/31/04 3/1/04 to
8/31/04
- -----------------------------------------------------------------------------------------------------------
Actual Fund Return
Class A $1,000.00 $1,001.85 0.65% $3.27
Class B 1,000.00 998.05 1.40% 7.03
Class C 1,000.00 998.05 1.40% 7.03
- -----------------------------------------------------------------------------------------------------------
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,021.69 0.65% $3.31
Class B 1,000.00 1,017.87 1.40% 7.13
Class C 1,000.00 1,017.87 1.40% 7.13
- -----------------------------------------------------------------------------------------------------------
7
SECTOR ALLOCATIONS As of August 31, 2004
The SEC adopted a requirement that all funds present their categories of
portfolio holdings in a table, chart, or graph format in their annual and
semiannual shareholder reports, whether or not a schedule of investments is
utilized. The following chart which presents portfolio holdings as a percent of
total net assets, and is provided in compliance with such requirements.
DELAWARE TAX-FREE NEW YORK FUND
- -------------------------------------------------------------------------
PERCENTAGE
SECTOR OF NET ASSETS
- -------------------------------------------------------------------------
MUNICIPAL BONDS 96.01%
- -------------------------------------------------------------------------
Airport Revenue Bonds 5.98%
City General Obligation Bonds 5.86%
Continuing Care/Retirement Revenue Bonds 2.79%
Dedicated Tax & Fees Revenue Bonds 3.16%
Higher Education Revenue Bonds 16.04%
Hospital Revenue Bonds 10.62%
Investor Owned Utilities Revenue Bonds 8.71%
Miscellaneous Revenue Bonds 6.25%
Municipal Lease Revenue Bonds 9.51%
Parking Revenue Bonds 3.15%
Pre-Refunded Bonds 11.09%
Territorial Revenue Bonds 9.80%
Water & Sewer Revenue Bonds 3.05%
- -------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 96.01%
- -------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 3.99%
- -------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
- -------------------------------------------------------------------------
8
STATEMENT DELAWARE TAX-FREE NEW YORK FUND
OF NET ASSETS (CONTINUED) August 31, 2004
Principal Market
Amount Value
MUNICIPAL BONDS - 96.01%
Airport Revenue Bonds - 5.98%
New York City, New York Industrial
Development (JFK Airis Project)
5.50% 7/1/28 (AMT) $500,000 $ 488,920
Onondaga County, New York Industrial
Development Authority Revenue
Subordinated (Air Cargo Project)
7.25% 1/1/32 (AMT) 500,000 510,250
---------
999,170
---------
City General Obligation Bonds - 5.86%
New York City Series C
5.375% 11/15/27 450,000 462,771
New York City, New York Series J
5.25% 6/1/28 500,000 517,075
---------
979,846
---------
Continuing Care/Retirement Revenue Bonds - 2.79%
New York State Dormitory Authority
Revenue (Chapel Oaks) LOC Allied
Irish Bank 5.45% 7/1/26 450,000 465,737
---------
465,737
---------
Dedicated Tax & Fees Revenue Bonds - 3.16%
Schenectady, New York Metroplex
Development Authority Revenue
Series A 5.375% 12/15/21 500,000 527,655
---------
527,655
---------
Higher Education Revenue Bonds - 16.04%
Amherst, New York Industrial Agency
Civic Facilities Revenue
(UBF Faculty Student Housing)
Series A 5.75% 8/1/30 (AMBAC) 200,000 221,558
Dutchess County Industrial Development
Agency (Marist College) 5.00% 7/1/20 500,000 514,535
New York State Dormitory Authority
Revenue (Columbia University)
Series A 5.00% 7/1/23 500,000 526,410
New York State Dormitory Authority
Revenue (Pratt Institute)
6.00% 7/1/20 (RADIAN) 500,000 565,479
New York State Dormitory Authority
Revenue (State University) Series B
7.50% 5/15/11 270,000 317,901
Onondaga County Industrial
Development Agency
(Le Moyne College) Series A
5.625% 12/1/21 500,000 533,225
---------
2,679,108
---------
Hospital Revenue Bonds - 10.62%
New York State Dormitory Authority
Revenue (Mental Health) Series D
5.90% 2/15/12 250,000 274,223
New York State Dormitory Authority
Revenue (Millard Fillmore Hospital)
5.375% 2/1/32 (AMBAC) (FHA) 450,000 464,274
New York State Dormitory Authority
Revenue (North Shore Long Island
Jewish Group Project) 5.50% 5/1/33 500,000 517,195
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Hospital Revenue Bonds (continued)
New York State Dormitory Authority
Revenue (Winthrop South Nassau
Hospital) Series B 5.50% 7/1/23 $500,000 $ 518,905
----------
1,774,597
----------
Investor Owned Utilities Revenue Bonds - 8.71%
New York City Industrial Development
Agency (Brooklyn Navy Yard Cogen
Partners) 5.75% 10/1/36 (AMT) 450,000 411,746
New York State Energy Research &
Development Authority Pollution
Control Revenue (Central Hudson Gas)
Series A 5.45% 8/1/27 (AMBAC) 500,000 536,050
Suffolk County, New York Industrial
Agency Development Revenue
(Keyspan-Port Jefferson Project)
5.25% 6/1/27 (AMT) 500,000 507,705
----------
1,455,501
----------
Miscellaneous Revenue Bonds - 6.25%
Battery Park City Authority New York
Revenue Series A 5.00% 11/1/26 500,000 514,980
New York State Municipal Bond Bank
Agency Special School Purpose
Revenue Series C 5.25% 6/1/22
(State Aid Withholding) 500,000 529,435
----------
1,044,415
----------
Municipal Lease Revenue Bonds - 9.51%
Albany, New York Industrial Development
Agency Civic Facility Revenue
(Charitable Leadership Project)
Series A 5.75% 7/1/26 500,000 510,890
New York State Dormitory Authority Lease
5.375% 5/15/21 500,000 534,350
Tobacco Settlement Financing Series B-1C
5.50% 6/1/21 500,000 543,905
----------
1,589,145
----------
Parking Revenue Bonds - 3.15%
Albany, New York Parking Authority
Revenue Series A 5.625% 7/15/25 500,000 526,580
----------
526,580
----------
*Pre-Refunded Bonds - 11.09%
Metropolitan Transportation Authority
New York Dedicated Tax Series A
6.125% 4/1/17-10 (FGIC) 1,000,000 1,169,889
New York State Dormitory Authority
Revenue (State University) Series B
7.50% 5/15/11-09 130,000 159,184
New York State Thruway Authority Service
Contract Revenue Local Highway & Bridge
6.25% 4/1/14-05 500,000 524,025
----------
1,853,098
----------
9
STATEMENT DELAWARE TAX-FREE NEW YORK FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Territorial Revenue Bonds - 9.80%
Puerto Rico Commonwealth
Highway & Transportation Authority
Highway Revenue Series Y
5.50% 7/1/36 $475,000 $ 507,642
Puerto Rico Electric Power Authority
Power Revenue Series NN
5.125% 7/1/29 600,000 613,434
Puerto Rico Electric Power Authority
Revenue Series II 5.25% 7/1/31 500,000 516,375
-----------
1,637,451
-----------
Water & Sewer Revenue Bonds - 3.05%
New York City, New York Municipal
Water Finance Authority Water &
Sewer System Revenue Series A
5.125% 6/15/34 500,000 510,420
-----------
510,420
-----------
TOTAL MUNICIPAL BONDS
(cost $15,192,163) 16,042,723
-----------
TOTAL MARKET VALUE OF SECURITIES - 96.01%
(cost $15,192,163) 16,042,723
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 3.99% 667,109
-----------
NET ASSETS APPLICABLE TO 1,596,583
SHARES OUTSTANDING - 100.00% $16,709,832
===========
Net Asset Value - Delaware Tax-Free New York Fund
Class A ($11,523,002 / 1,100,378 Shares) $10.47
------
Net Asset Value - Delaware Tax-Free New York Fund
Class B ($2,857,702 / 273,383 Shares) $10.45
------
Net Asset Value - Delaware Tax-Free New York Fund
Class C ($2,329,128 / 222,822 Shares) $10.45
------
COMPONENTS OF NET ASSETS AT AUGUST 31, 2004:
Shares of beneficial interest
(unlimited authorization - no par) $16,156,182
Distributions in excess of net investment income (655)
Accumulated net realized loss on investments (296,255)
Net unrealized appreciation of investments 850,560
-----------
Total net assets $16,709,832
===========
Summary of Abbreviations:
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Authority
LOC - Letter of Credit
RADIAN - Insured by Radian Asset Assurance
*For Pre-Refunded Bonds, the stated maturity is followed by the year in which
the bond is pre-refunded.
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE TAX-FREE NEW YORK FUND
Net asset value Class A (A) $10.47
Sales charge (4.50% of offering price,
or 4.68% of amount invested per share)(B) 0.49
------
Offering price $10.96
======
(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
10
STATEMENTS Year Ended August 31, 2004
OF OPERATIONS
Delaware
Tax-Free
New York Fund
INVESTMENT INCOME:
Interest $ 889,766
----------
EXPENSES:
Management fees 95,935
Distribution expenses -- Class A 29,208
Distribution expenses -- Class B 29,979
Distribution expenses -- Class C 27,915
Dividend disbursing and transfer agent fees and expenses 13,530
Accounting and administration expenses 6,525
Legal and professional fees 5,989
Registration fees 6,250
Reports and statements to shareholders 3,100
Custodian fees 1,514
Trustees' fees 1,443
Other 859
----------
222,247
Less expenses absorbed or waived (90,056)
Less expenses paid indirectly (1,406)
----------
Total expenses 130,785
----------
NET INVESTMENT INCOME 758,981
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 23,833
Net change in unrealized appreciation/depreciation of investments 384,949
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 408,782
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,167,763
==========
See accompanying notes
11
STATEMENTS
OF CHANGES IN NET ASSETS
Delaware Tax-Free
New York Fund
Year Ended
8/31/04 8/31/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 758,981 $ 716,813
Net realized gain on investments 23,833 157,510
Net change in unrealized
appreciation/depreciation of investments 384,949 (376,165)
----------- -----------
Net increase in net assets resulting from operations 1,167,763 498,158
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (536,326) (516,808)
Class B (115,354) (132,026)
Class C (107,301) (67,979)
----------- -----------
(758,981) (716,813)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 663,736 2,864,348
Class B 261,706 207,630
Class C 339,030 1,959,112
Net asset value of shares issued upon
reinvestment of dividends and distributions:
Class A 390,134 374,830
Class B 55,477 56,078
Class C 41,443 59,428
----------- -----------
1,751,526 5,521,426
----------- -----------
Cost of shares repurchased:
Class A (1,250,287) (1,168,843)
Class B (780,069) (337,967)
Class C (922,249) (250,079)
----------- -----------
(2,952,605) (1,756,889)
----------- -----------
Increase (decrease) in net assets derived
from capital share transactions (1,201,079) 3,764,537
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS (792,297) 3,545,882
NET ASSETS:
Beginning of year 17,502,129 13,956,247
----------- -----------
End of year $16,709,832 $17,502,129
=========== ===========
(Distributions in excess of net investment income) $ (655) $ (655)
----------- -----------
See accompanying notes
12
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free New York Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.220 $10.340 $10.350 $ 9.820 $9.880
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.479 0.484 0.503 0.523 0.535
Net realized and unrealized gain (loss) on investments 0.250 (0.120) (0.010) 0.530 (0.060)
------- ------- ------- ------- ------
Total from investment operations 0.729 0.364 0.493 1.053 0.475
------- ------- ------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.479) (0.484) (0.503) (0.523) (0.535)
------- ------- ------- ------- ------
Total dividends and distributions (0.479) (0.484) (0.503) (0.523) (0.535)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $10.470 $10.220 $10.340 $10.350 $9.820
======= ======= ======= ======= ======
TOTAL RETURN(2) 7.26% 3.56% 4.98% 11.03% 5.09%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $11,523 $11,436 $9,490 $10,169 $10,082
Ratio of expenses to average net assets(3) 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.02% 1.05% 1.15% 1.02% 1.25%
Ratio of net investment income to average net assets 4.60% 4.65% 4.98% 5.23% 5.58%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 4.08% 4.10% 4.33% 4.71% 4.83%
Portfolio turnover 26% 64% 43% 27% 34%
(1) As required, effective September 1, 2001, the Fund adopted provisions of the
AICPA Audit & Accounting Guide for Investment Companies that requires
amoritization of all premiums and discounts on debt securities. This change
had no impact for the year ended August 31, 2002. Per share data and ratios
for periods prior to September 1, 2001 have not been restated to reflect
this change in accounting.
(2) 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 and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) Ratio for the year ended August 31, 2003 and 2002, including fees paid
indirectly in accordance with Securities and Exchange Commission rules, were
0.51%.
See accompanying notes
13
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free New York Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.200 $10.330 $10.330 $ 9.810 $9.860
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.401 0.406 0.426 0.448 0.462
Net realized and unrealized gain (loss) on investments 0.250 (0.130) -- 0.520 (0.050)
------- ------- ------- ------- ------
Total from investment operations 0.651 0.276 0.426 0.968 0.412
------- ------- ------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.401) (0.406) (0.426) (0.448) (0.462)
------- ------- ------- ------- ------
Total dividends and distributions (0.401) (0.406) (0.426) (0.448) (0.462)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $10.450 $10.200 $10.330 $10.330 $9.810
======= ======= ======= ======= ======
TOTAL RETURN(2) 6.47% 2.69% 4.30% 10.12% 4.41%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $2,858 $3,238 $3,352 $2,507 $1,297
Ratio of expenses to average net assets(3) 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.77% 1.80% 1.90% 1.77% 2.00%
Ratio of net investment income to average net assets 3.85% 3.90% 4.23% 4.48% 4.83%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 3.33% 3.35% 3.58% 3.96% 4.08%
Portfolio turnover 26% 64% 43% 27% 34%
(1) As required, effective September 1, 2001, the Fund adopted provisions of the
AICPA Audit & Accounting Guide for Investment Companies that requires
amoritization of all premiums and discounts on debt securities. This change
had no impact for the year ended August 31, 2002. Per share data and ratios
for periods prior to September 1, 2001 have not been restated to reflect
this change in accounting.
(2) 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 and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) Ratio for the year ended August 31, 2003 and 2002, including fees paid
indirectly in accordance with Securities and Exchange Commission rules, were
1.26%.
See accompanying notes
14
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free New York Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/04 8/31/03 8/31/02(1) 8/31/01 8/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $10.200 $10.320 $10.330 $ 9.800 $9.860
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.401 0.406 0.426 0.449 0.462
Net realized and unrealized gain (loss) on investments 0.250 (0.120) (0.010) 0.530 (0.060)
------- ------- ------- ------- ------
Total from investment operations 0.651 0.286 0.416 0.979 0.402
------- ------- ------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.401) (0.406) (0.426) (0.449) (0.462)
------- ------- ------- ------- ------
Total dividends and distributions (0.401) (0.406) (0.426) (0.449) (0.462)
------- ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $10.450 $10.200 $10.320 $10.330 $9.800
======= ======= ======= ======= ======
TOTAL RETURN(2) 6.47% 2.79% 4.20% 10.23% 4.31%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $2,329 $2,828 $1,115 $1,206 $66
Ratio of expenses to average net assets(3) 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.77% 1.80% 1.90% 1.77% 2.00%
Ratio of net investment income to average net assets 3.85% 3.90% 4.23% 4.48% 4.83%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 3.33% 3.35% 3.58% 3.96% 4.08%
Portfolio turnover 26% 64% 43% 27% 34%
(1) As required, effective September 1, 2001, the Fund adopted provisions of the
AICPA Audit & Accounting Guide for Investment Companies that requires
amoritization of all premiums and discounts on debt securities. This change
had no impact for the year ended August 31, 2002. Per share data and ratios
for periods prior to September 1, 2001 have not been restated to reflect
this change in accounting.
(2) 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 and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) Ratio for the year ended August 31, 2003 and 2002, including fees paid
indirectly in accordance with Securities and Exchange Commission rules, were
1.26%.
See accompanying notes
15
NOTES August 31, 2004
TO FINANCIAL STATEMENTS
Voyageur Mutual Funds (the "Trust") is organized as a Delaware statutory trust
and offers six series: Delaware Tax-Free Arizona Fund, Delaware Tax-Free
California Fund, Delaware Tax-Free Idaho Fund, Delaware Minnesota High-Yield
Municipal Bond Fund, Delaware National High-Yield Municipal Bond Fund, and
Delaware Tax-Free New York Fund. Voyageur Investment Trust (the "Trust") is
organized as a Massachusetts business trust and offers five series: Delaware
Tax-Free California Insured Fund, Delaware Tax-Free Florida Fund, Delaware
Tax-Free Florida Insured Fund, Delaware Tax-Free Missouri Insured Fund, and
Delaware Tax-Free Oregon Insured Fund. These financial statements and the
related notes pertain to Delaware Tax-Free Florida Fund, Delaware Tax-Free
Florida Insured Fund, and Delaware Tax-Free New York Fund (each a "Fund" or,
collectively, as the "Funds"). The Trusts are open-end investment companies. The
Funds are considered non-diversified under the Investment Company Act of 1940,
as amended. The Funds 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 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. Class C shares are sold with a contingent deferred sales charge of 1%,
if redeemed during the first twelve months.
The investment objective of Delaware Tax-Free Florida Fund and Delaware Tax-Free
Florida Insured Fund is to seek as high a level of current income exempt from
federal income tax and the Florida state intangibles tax, as is consistent with
preservation of capital. The investment objective of Delaware Tax-Free New York
Fund is to seek as high a level of current income exempt from federal income tax
and from New York state personal income tax, 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. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Funds' Board of
Trustees.
Federal Income Taxes -- Each 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 Funds on the basis of "settled shares" of each class in relation
to the net assets of the Funds. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Funds 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 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. 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.
Through December 31, 2003, certain expenses of the Funds were paid through
commission arrangements with brokers. In addition, the Funds may receive
earnings credits from their custodian when positive cash balances are
maintained, which are used to offset custody fees. The expenses paid under the
above arrangements are included in their respective expense captions on the
Statements of Operations with the corresponding expense offset shown as
"expenses paid indirectly". The amount of these expenses for the year ended
August 31, 2004 were as follows:
Delaware
Tax-Free
New York
Fund
--------
Commission reimbursements $143
Earnings credits 1,263
16
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
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 based on
each Fund's average daily net assets as follows:
Delaware Tax-Free
New York Fund
-----------------
On the first $500 million 0.55%
On the next $500 million 0.50%
On the next $1.5 billion 0.45%
In excess of $2.5 billion 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 of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed specified percentages of average daily net assets as shown below.
Delaware Tax-Free
New York Fund
-----------------
The operating expense limitation
as a percentage of average daily
net assets (per annum) 0.25%
Expiration date Until revoked
Effective November 1, 2004,
the operating expense limitation
as a percentage of average daily
net assets (per annum) 0.40%
Expiration date October 31, 2005
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing, and transfer agent services. The Funds pay
DSC a monthly fee based on average net assets subject to certain minimums for
accounting and administration 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
Delaware Distributors, L.P. (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 August 31, 2004, the Funds had receivables from or liabilities payable to
affiliates as follows:
Delaware Tax-Free
New York Fund
-----------------
Receivable from DMC under expense
limitation agreement $2,766
Investment Management fee payable to DMC --
Dividend disbursing, transfer agent fees,
accounting and administration fees
and other expenses payable to DSC (1,605)
Other expenses payable to DMC and affiliates* (499)
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services expenses, including in-house legal services provided to
the Funds by DMC employees. For the year ended August 31, 2004, the Funds costs
were as follows:
Delaware Tax-Free
New York Fund
-----------------
$859
For the year ended August 31, 2004, DDLP earned commissions on sales of Class A
shares for each Fund as follows:
Delaware Tax-Free
New York Fund
-----------------
$1,240
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the
Trusts. These officers and trustees are paid no compensation by the Funds.
17
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
For the year ended August 31, 2004, the Funds made purchases and sales of
investment securities other than short-term investments as follows:
Delaware Tax-Free
New York Fund
-----------------
Purchases $4,427,041
Sales 5,892,937
At August 31, 2004, the cost of investments and unrealized appreciation
(depreciation) for federal income tax purposes for each Fund were as follows:
Delaware Tax-Free
New York Fund
-----------------
Cost of investments $15,192,163
-----------
Aggregate unrealized appreciation $886,113
Aggregate unrealized depreciation (35,553)
-----------
Net unrealized appreciation $ 850,560
===========
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. The tax character of dividends and distributions
paid during the years ended August 31, 2004 and 2003 was as follows:
Delaware Tax-Free
New York Fund
-----------------
Year Ended
8/31/04 8/31/03
-------- --------
Tax-exempt Income $758,981 $716,813
As of August 31, 2004, the components of net assets on a tax basis were as
follows:
Delaware Tax-Free
New York Fund
-----------------
Shares of beneficial interest $16,156,182
Distributions in excess of net investment income (655)
Post-October loss (1,206)
Capital loss carryforwards (295,049)
Unrealized appreciation of investments 850,560
-----------
Net Assets $16,709,832
===========
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss carryforward
expire as follows:
Delaware Tax-Free
New York Fund
-----------------
2008 $ --
2009 295,049
--------
Total $295,049
========
During the year ended August 31, 2004, the Delaware Tax-Free Florida Insured
Fund had $557,659 of capital loss carryforward expire. The Delaware Tax-Free
Florida Fund and the Delaware Tax-Free New York Fund utilized capital loss
carryforward of $32,818 and $25,039, respectively.
Post-October losses represent losses realized on investment transactions from
November 1, 2003 through August 31, 2004 that, in accordance with federal income
tax regulations, the Delaware Tax-Free New York Fund has elected to defer and
treat as having arisen in the following fiscal year.
For financial reporting purposes, capital accounts and distributions to
shareholders are adjusted to reflect the tax character of permanent book/tax
differences. For the year ended August 31, 2004, the Delaware Tax-Free Florida
Insured Fund recorded the following permanent reclassifications.
Reclassifications are primarily due to tax treatment of expiration of capital
loss carryforward. Results of operations and net assets were not affected by
these reclassifications.
Accumulated realized loss Paid-in capital
------------------------- ---------------
$557,659 ($557,659)
18
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Delaware Tax-Free
New York Fund
-----------------
Year Ended
8/31/04 8/31/03
Shares sold:
Class A 63,547 278,394
Class B 25,411 19,961
Class C 32,641 187,110
Shares issued upon reinvestment of
dividends and distributions:
Class A 37,462 36,152
Class B 5,333 5,417
Class C 3,978 5,722
-------- --------
168,372 532,756
-------- --------
Shares repurchased:
Class A (119,945) (112,653)
Class B (74,808) (32,493)
Class C (91,010) (23,563)
-------- --------
(285,763) (168,709)
-------- --------
Net increase (decrease) (117,391) 364,047
======== ========
For the year ended August 31, 2004 and 2003, the following shares and value were
converted from Class B to Class A shares. The respective amounts are included in
Class B redemptions and Class A subscriptions in the table above and the
Statements of Changes in Net Assets.
Year Ended Year Ended
8/31/04 8/31/03
------------------------------------------ -------------------------------------------
Class B Shares Class A Shares Amount Class B Shares Class A Shares Amount
Delaware Tax-Free New York Fund 10,006 9,994 $105,620 -- -- $ --
6. LINE OF CREDIT
The Funds, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participate 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
Funds had no amounts outstanding as of August 31, 2004, or at any time during
the year.
7. CREDIT AND MARKET RISK
The Funds concentrate their investments in securities issued by each
corresponding state's 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 market value 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 Statements of Net Assets.
The Funds may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Statement of Net Assets.
8. 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.
19
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
9. TAX INFORMATION (UNAUDITED)
The information set forth below is for each Fund's fiscal year as required by
federal laws. Shareholders, however, must report distribution 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 fiscal year ended August 31, 2004, each Fund designates distributions
paid during the year as follows:
Delaware Tax-Free
New York Fund
-----------------
(A) Long Term Capital Gains Distributions (Tax Basis) --
(B) Ordinary Income Distributions (Tax Basis) --
(C) Tax-Exempt Distributions (Tax Basis) 100%
----
Total Distributions (Tax Basis) 100%
====
(A), (B) and (C) are based on a percentage of each Fund's total distributions.
20
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Voyageur Investment Trust - Delaware Tax-Free Florida Fund
and Delaware Tax-Free Florida Insured Fund
Voyageur Mutual Funds - Delaware Tax-Free New York Fund
We have audited the accompanying statements of net assets of Delaware Tax-Free
Florida Fund and Delaware Tax-Free Florida Insured Fund (two of the series
constituting Voyageur Investment Trust) and Delaware Tax-Free New York Fund (one
of the series constituting Voyageur Mutual Funds) (the "Funds") as of August 31,
2004, and the related statements 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 Funds' 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 the standards of the Public Company
Accounting Oversight Board (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 August 31, 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 the
Delaware Tax-Free Florida Fund and Delaware Tax-Free Florida Insured Fund of
Voyageur Investment Trust and the Delaware Tax-Free New York Fund of Voyageur
Mutual Funds at August 31, 2004, the results of their operations for the year
then ended, the changes in their net assets for each of the two years in the
period then ended, and their financial highlights for each of the five years in
the period then ended, in conformity with U.S. generally accepted accounting
principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
October 4, 2004
21
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, 77 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)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
WALTER P. BABICH Trustee 16 Years Board Chairman - 94 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 94 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103
August 7, 1937 President/Director -
22 WR Corporation
JOHN A. FRY Trustee(4) 3 Years President - 77 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 94 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
22
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 - 94 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
Director -
Systemax Inc.
November 1, 1940
THOMAS F. MADISON Trustee 10 Years President/Chief 94 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 & 94 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 94 None(5)
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 Executive Vice President, Chief Legal Ms. Maestro has served in 94 None(5)
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 at different times at
19103 Delaware Investments.
November 26, 1957
MICHAEL P. BISHOF Senior Vice President 8 Years Mr. Bishof has served in 94 None(5)
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.
(5) Mr. Hastings, Mr. Bishof and Ms. Maestro also serve in similar capacities
for the six portfolios of the Optimum Fund Trust, which have the same
investment advisor, principal underwriter, and transfer agent as the
registrant.
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.
23
Delaware
Investments(SM)
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A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Tax-Free Florida Fund,
Delaware Tax-Free Florida Insured Fund, and Delaware Tax-Free New York Fund, but
may be used with a prospective investors when preceded or accompanied by a
current prospectus for Delaware Tax-Free Florida Fund, Delaware Tax-Free Florida
Insured Fund, and Delaware Tax-Free New York 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 each Fund. You should read 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
each 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
WALTER P. BABICH JUDE T. DRISCOLL INVESTMENT MANAGER
Board Chairman Chairman Delaware Management Company
Citadel Construction Corporation Delaware Investments Family of Funds Philadelphia, PA
King of Prussia, PA Philadelphia, PA
INTERNATIONAL AFFILIATE
JOHN H. DURHAM JOSEPH H. HASTINGS Delaware International Advisers Ltd.
Private Investor Executive Vice President and London, England
Gwynedd Valley, PA Chief Financial Officer
Delaware Investments Family of Funds NATIONAL DISTRIBUTOR
ANTHONY D. KNERR Philadelphia, PA Delaware Distributors, L.P.
Managing Director Philadelphia, PA
Anthony Knerr & Associates RICHELLE S. MAESTRO
New York, NY Executive Vice President, SHAREHOLDER SERVICING, DIVIDEND
Chief Legal Officer and Secretary DISBURSING AND TRANSFER AGENT
ANN R. LEVEN Delaware Investments Family of Funds Delaware Service Company, Inc.
Former Treasurer/Chief Fiscal Officer Philadelphia, PA 2005 Market Street
National Gallery of Art Philadelphia, PA 19103-7094
Washington, DC MICHAEL P. BISHOF
Senior Vice President and Treasurer FOR SHAREHOLDERS
THOMAS F. MADISON Delaware Investments Family of Funds 800 523-1918
President and Chief Executive Officer Philadelphia, PA
MLM Partners, Inc. FOR SECURITIES DEALERS AND FINANCIAL
Minneapolis, MN INSTITUTIONS REPRESENTATIVES ONLY
800 362-7500
JANET L. YEOMANS
Vice President/Mergers & Acquisitions WEB SITE
3M Corporation www.delawareinvestments.com
St. Paul, MN
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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 is available without charge (i) upon request,
by calling 800 523-1918; (ii) on each Fund's Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. Each Fund's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC; information on the
operation of the Public Reference Room may be obtained by calling
1-800-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 the Fund's Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
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(8928) Printed in the USA
AR-FLNY [8/04] IVES 10/04 J9823
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 $78,080 for
the fiscal year ended August 31, 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 $68,930 for
the fiscal year ended August 31, 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 August 31, 2004.
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 $37,575 for the Registrant's fiscal
year ended August 31, 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: issuance of
reports concerning transfer agent's system of internal accounting control
pursuant to Rule 17Ad-13 of the Securities Exchange Act; and issuance of agreed
upon procedures reports to the Fund's Board in connection with the annual
transfer agent and fund accounting service agent contract renewals and the
pass-through of internal legal cost relating to the operations of the Funds.
- --------
(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 Registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended August 31, 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 $39,600 for the Registrant's fiscal
year ended August 31, 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: issuance of
reports concerning transfer agent's system of internal accounting control
pursuant to Rule 17Ad-13 of the Securities Exchange Act; and issuance of agreed
upon procedures reports to the Fund's Board in connection with the annual
transfer agent and fund accounting service agent contract renewals and the
pass-through of internal legal cost 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 $10,500 for the fiscal year
ended August 31, 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 annual excise distribution calculations.
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 August 31, 2004.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant were $7,500 for the fiscal year
ended August 31, 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 annual excise distribution calculations.
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 August 31, 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 August 31, 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 Registrant's fiscal year
ended August 31, 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 August 31, 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 Registrant's fiscal year
ended August 31, 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 $223,315 and $179,00 for the Registrant's fiscal years ended August 31,
2004 and August 31, 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. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this
Form N-CSR.
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.
VOYAGEUR MUTUAL FUNDS
Jude T. Driscoll
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By: Jude T. Driscoll
Title: Chairman
Date: November 4, 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: November 4, 2004
Joseph H. Hastings
- ------------------------------------
By: Joseph H. Hastings
Title: Chief Financial Officer
Date: November 4, 2004