UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-2715
Exact name of registrant as specified in charter: Delaware Group State Tax Free Income Trust
Address of principal executive offices: 2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service: David F. Connor, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: February 28
Date of reporting period: October 31, 2005
Item 1. Reports to Stockholders
Delaware
Investments(R)
-----------------------------------
A member of Lincoln Financial Group
FIXED INCOME
SEMIANNUAL REPORT AUGUST 31, 2005
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DELAWARE TAX-FREE PENNSYLVANIA FUND
[LOGO]
POWERED BY RESEARCH(R)
TABLE
OF CONTENTS
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DISCLOSURE OF FUND EXPENSES 1
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SECTOR ALLOCATION 2
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FINANCIAL STATEMENTS:
Statement of Net Assets 3
Statement of Operations 7
Statements of Changes in Net Assets 8
Financial Highlights 9
Notes to Financial Statements 12
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OTHER FUND INFORMATION 15
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Funds are not FDIC insured and are not guaranteed. It is possible to lose
the principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a
series of Delaware Management Business Trust, which is a registered
investment advisor.
(C) 2005 Delaware Distributors, L.P.
DISCLOSURE For the Period March 1, 2005 to August 31, 2005
of fund expenses
As a shareholder of the Fund, you may 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 March 1, 2005 to August 31, 2005.
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
the 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 expenses shown in the table assume reinvestment of all dividends and
distributions.
DELAWARE TAX-FREE PENNSYLVANIA FUND
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 3/1/05 to
3/1/05 8/31/05 Ratio 8/31/05*
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ACTUAL FUND RETURN
Class A $1,000.00 $1,031.90 0.91% $4.66
Class B 1,000.00 1,027.90 1.69% 8.64
Class C 1,000.00 1,027.90 1.69% 8.64
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HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,020.62 0.91% $4.63
Class B 1,000.00 1,016.69 1.69% 8.59
Class C 1,000.00 1,016.69 1.69% 8.59
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* "Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
1
SECTOR ALLOCATION As of August 31, 2005
DELAWARE TAX-FREE PENNSYLVANIA FUND
Sector designations may be different than the sector designations presented in
other Fund materials.
PERCENTAGE
SECTOR OF NET ASSETS
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MUNICIPAL BONDS 98.27%
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Airport Revenue Bonds 2.42%
Continuing Care/Retirement Revenue Bonds 2.42%
Corporate-Backed Revenue Bonds 7.83%
Escrowed to Maturity Bonds 7.17%
Higher Education Revenue Bonds 16.61%
Hospital Revenue Bonds 11.25%
Investor Owned Utilities Revenue Bonds 5.01%
Municipal Lease Revenue Bonds 1.47%
Parking Revenue Bonds 0.78%
Political Subdivision General Obligation Bonds 0.34%
Ports & Harbors Revenue Bonds 1.74%
Pre-Refunded Bonds 11.02%
Public Utility District Revenue Bonds 0.32%
School District General Obligation Bonds 2.27%
School District Revenue Bonds 0.85%
Single Family Housing Revenue Bonds 3.51%
Tax Increment/Special Assessment Bonds 0.96%
Territorial Revenue Bonds 5.93%
Transportation Revenue Bonds 0.88%
Turnpike/Toll Road Revenue Bonds 2.31%
Waste Disposal Revenue Bonds 0.11%
Water & Sewer Revenue Bonds 13.07%
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SHORT-TERM INVESTMENTS 0.24%
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TOTAL MARKET VALUE OF SECURITIES 98.51%
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RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 1.49%
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TOTAL NET ASSETS 100.00%
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2
STATEMENT DELAWARE TAX-FREE PENNSYLVANIA FUND
OF NET ASSETS August 31, 2005 (Unaudited)
Principal Market
Amount Value
MUNICIPAL BONDS - 98.27%
Airport Revenue Bonds - 2.42%
Allegheny County Airport Revenue
(Pittsburgh International Airport Project)
Series A 5.75% 1/1/14 (MBIA) (AMT) $ 6,910,000 $ 7,741,204
Lehigh Northampton Airport
Authority Revenue
(Lehigh Valley Airport Project) Series A
6.00% 5/15/25 (MBIA) (AMT) 1,525,000 1,670,622
6.00% 5/15/30 (MBIA) (AMT) 2,700,000 2,957,823
Philadelphia Authority for Industrial
Development Revenue
(Sub-Air Cargo Project) Series A
7.50% 1/1/25 (AMT) 2,500,000 2,619,650
-----------
14,989,299
-----------
Continuing Care/Retirement Revenue Bonds - 2.42%
Bucks County Industrial Development
Authority Multi-Family County-Guaranteed
(New Hope Manor Project) Series A
5.40% 3/1/22 (AMT) 1,265,000 1,320,432
5.50% 3/1/41 (AMT) 5,340,000 5,542,866
Delaware County Industrial Development
Authority Revenue Care Institute
(Main Line Care Institute Project)
9.00% 8/1/31 1,782,389 1,723,338
Lancaster County Hospital Authority
Revenue Health Center
(Willow Valley Retirement Project)
5.875% 6/1/31 2,100,000 2,239,146
Lancaster Industrial Development
Authority Revenue
(Garden Spot Village Project) Series A
7.625% 5/1/31 1,650,000 1,820,165
Philadelphia Authority for Industrial
Development Revenue
(Germantown Senior Living Presbyterian
Homes Project) Series A
5.625% 7/1/35 2,295,000 2,351,687
-----------
14,997,634
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Corporate-Backed Revenue Bonds - 7.83%
Allegheny County Industrial Development
Authority Revenue Environmental
Improvement Revenue
(USX Corporation Project)
5.50% 12/1/29 13,000,000 13,526,500
Beaver County Industrial Development
Authority Pollution Control Revenue
(Atlantic Richfield Company Project)
5.95% 7/1/21 5,100,000 5,310,681
Bucks County Industrial Development
Authority Environmental Improvement
Revenue (USX Corporation Project)
5.40% 11/1/17 2,250,000 2,459,925
Luzerne County Industrial
Development Authority
(American Water Co. Project) Series A
5.10% 9/1/34 (AMBAC) (AMT) 15,000,000 15,808,800
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Corporate-Backed Revenue Bonds (continued)
Pennsylvania Economic Development
Financing Authority Solid Waste
Disposal Revenue
(Proctor & Gamble Paper Project)
5.375% 3/1/31 (AMT) $10,000,000 $11,410,300
-----------
48,516,206
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Escrowed to Maturity Bonds - 7.17%
Delaware County Authority Revenue
Health Facilities
(Mercy Health Corporation Project)
6.00% 12/15/26 3,500,000 3,673,460
New Morgan Guaranteed Revenue
8.00% 11/1/05 1,315,000 1,325,402
Pennsylvania State Higher Educational
Facilities Authority College &
University Revenues
(University of the Arts Project)
5.20% 3/15/25 (RADIAN) 4,490,000 4,721,774
Philadelphia Authority for Industrial
Development Commercial Revenue
(Girard Estates Facilities Leasing Project)
5.00% 5/15/27 4,500,000 4,616,640
Philadelphia Hospitals & Higher Education
Facilities Authority Hospital Revenue
(Presbyterian Medical Center Project)
6.65% 12/1/19 13,000,000 16,181,229
Pittsburgh Water & Sewer Authority Revenue
(Crossover Refunding Projects)
7.25% 9/1/14 (FGIC) 8,355,000 9,837,428
Pottsville School District
9.375% 5/1/06 (AMBAC) 105,000 109,099
Southcentral General Authority Revenue
(Wellspan Health Obligated Project)
5.625% 5/15/26 3,610,000 4,002,732
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44,467,764
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Higher Education Revenue Bonds - 16.61%
Allegheny County Higher Education
Building Authority Revenue
(Carnegie Mellon University Project)
5.25% 3/1/32 1,900,000 2,028,592
(Chatham College Project)
Series A 5.85% 3/1/22 650,000 687,538
Series A 5.95% 3/1/32 1,000,000 1,049,060
Series B 5.75% 11/15/35 4,000,000 4,261,440
Delaware County Authority College Revenue
(Eastern College Project) Series B
5.50% 10/1/19 4,175,000 4,310,896
5.50% 10/1/24 2,850,000 2,927,834
(Haverford College Project)
5.75% 11/15/29 1,875,000 2,090,663
Erie County Higher Education Building
Authority College Revenue
(Mercyhurst College Project) Series B
5.00% 3/15/23 750,000 765,135
3
STATEMENT DELAWARE TAX-FREE PENNSYLVANIA FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Higher Education Revenue Bonds (continued)
Lehigh County General Purpose
Authority Revenue
(Desales University Project)
5.125% 12/15/23 (RADIAN) $ 5,000,000 $ 5,274,650
Lycoming County Authority
College Revenue (Pennsylvania College
of Technology Project)
5.375% 7/1/30 (AMBAC) 5,000,000 5,406,750
Montgomery County Higher Education
and Health Authority College Revenue
(Arcadia University Project)
5.85% 4/1/21 (Connie Lee) 5,465,000 5,662,123
Pennsylvania State Higher Educational
Facilities Authority College &
University Revenue
(Drexel University Project)
Series A 5.20% 5/1/29 1,500,000 1,579,575
Series A 5.20% 5/1/32 1,000,000 1,052,110
(Lafayette College Project)
6.00% 5/1/30 2,500,000 2,777,025
(Philadelphia University Project)
6.00% 6/1/29 (RADIAN) 1,800,000 1,970,082
(Slippery Rock University Foundation)
Series A 5.00% 7/1/37 (XLCA) 11,155,000 11,752,238
(Thomas Jefferson University Project)
5.00% 1/1/29 5,000,000 5,237,100
(Trustees University) Series C
5.00% 7/15/38 6,000,000 6,361,920
(Ursinus College)
5.125% 1/1/33 (RADIAN) 2,000,000 2,095,080
(Widener University)
5.00% 7/15/39 7,915,000 8,178,095
Pennsylvania State Public School Authority
(Lehigh Career & Technical
Institute Project)
5.125% 10/1/28 (FGIC) 2,800,000 2,990,792
Philadelphia Hospitals & Higher
Educational Facilities Authority
College Revenue
(Chestnut Hill College Project)
6.00% 10/1/29 4,360,000 4,499,564
Philadelphia Redevelopment
Authority Revenue
(Beech Student Housing Complex Project)
5.50% 7/1/35 (ACA) 1,500,000 1,579,185
5.625% 7/1/28 (ACA) 1,000,000 1,067,660
Swarthmore Borough Authority
College Revenue
(Swarthmore College Project)
5.00% 9/15/31 15,000,000 15,646,199
West Cornwall Township Municipal
Authority College Revenue
(Elizabethtown College Project)
6.00% 12/15/27 1,615,000 1,733,024
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102,984,330
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Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Hospital Revenue Bonds - 11.25%
Allegheny County Hospital
Development Authority
(Ohio Valley General Hospital Project)
Series A 5.125% 4/1/35 $ 1,750,000 $ 1,804,880
Berks County Municipal Authority Revenue
(Health Care Reading Hospital
Pooled Financing Project)
5.00% 3/1/28 11,750,000 12,065,958
Chester County Health & Educational
Facilities Authority Health
System Revenue
(Jefferson Health Systems Project)
Series B 5.375% 5/15/27 14,270,000 14,953,817
Lancaster County Hospital Revenue
(General Hospital Project)
5.50% 3/15/26 3,000,000 3,201,480
Monroe County Hospital Authority Revenue
(Pocono Medical Center Project)
6.00% 1/1/43 6,710,000 7,262,904
Montgomery County Higher Education and
Health Authority Hospital Revenue
(Abington Memorial Hospital)
Series A 5.125% 6/1/32 4,600,000 4,748,028
(Catholic Health Systems East)
Series C 5.50% 11/15/24 1,150,000 1,248,003
Mount Lebanon Hospital Authority
(St. Clair Memorial Hospital Project)
Series A 5.625% 7/1/32 4,500,000 4,790,565
Pennsylvania Economic Development
Financing Authority Revenue
(Dr. Gertrude A. Barber Center, Inc. Project)
5.90% 12/1/30 (RADIAN) 2,250,000 2,467,778
Pennsylvania State Higher Education
Facilities Authority Revenue
(UPMC Health Systems Project)
Series A 6.00% 1/15/31 10,000,000 11,051,300
St. Mary Hospital Authority Health
System Revenue
(Catholic Health East) Series B
5.375% 11/15/34 5,750,000 6,141,460
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69,736,173
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Investor Owned Utilities Revenue Bonds - 5.01%
Cambria County Industrial Development
Authority Pollution Control Revenue
(Pennsylvania Electric Co. Project)
Series A 5.80% 11/1/20 (MBIA) 4,000,000 4,098,120
Series B 6.05% 11/1/25 (MBIA) (AMT) 9,700,000 9,937,359
Carbon County Industrial Development
Authority Resource Recovery
(Panther Creek Partners Project)
6.65% 5/1/10 (AMT) 7,790,000 8,471,236
Indiana County Industrial Development
Authority Pollution Control Revenue
(PSE&G Power Project)
5.85% 6/1/27 (AMT) 3,000,000 3,170,910
Pennsylvania Economic Development
Financing Authority Exempt
Facilities Revenue
6.75% 12/1/36 (AMT) 5,000,000 5,397,400
-----------
31,075,025
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4
STATEMENT DELAWARE TAX-FREE PENNSYLVANIA FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Municipal Lease Revenue Bonds - 1.47%
Philadelphia Authority for Industrial
Development Lease Revenue Series B
5.25% 10/1/30 (FSA) $ 4,510,000 $ 4,833,142
Philadelphia Redevelopment Authority
Revenue (Neighborhood Transformation)
Series C 5.00% 4/15/31 (FGIC) 4,000,000 4,252,600
-----------
9,085,742
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Parking Revenue Bonds - 0.78%
Pennsylvania Economic Development
Financing Authority Revenue
(30th Street Station Garage Project)
5.875% 6/1/33 (ACA) (AMT) 4,500,000 4,862,790
-----------
4,862,790
-----------
Political Subdivision General Obligation Bonds - 0.34%
Lancaster County Series A
5.00% 11/1/27 (FGIC) 2,000,000 2,106,940
-----------
2,106,940
-----------
Ports & Harbors Revenue Bonds - 1.74%
Delaware River Port Authority
(Pennsylvania and New Jersey Port
District Project) Series B
5.70% 1/1/21 (FSA) 8,560,000 9,350,259
Erie Western Pennsylvania Port Authority
General Revenue 6.25% 6/15/10 (AMT) 1,365,000 1,441,795
-----------
10,792,054
-----------
!Pre-Refunded Bonds - 11.02%
Abington School District
6.00% 5/15/26-06 (FGIC) 6,000,000 6,134,040
Chester (Guaranteed Host Community
Project) 7.25% 12/1/05-05 1,785,000 1,803,992
Erie Water Authority Revenue Series A
5.125% 12/1/25-11 (MBIA) 4,000,000 4,407,840
Harrisburg Authority Office & Parking
Revenue Series A 6.00% 5/1/19-08 7,500,000 8,073,750
Indiana County Industrial Development
Authority Revenue
(Student Co-op Association, Inc. Project)
Series A 5.875% 11/1/24-06 (AMBAC) 1,000,000 1,034,020
5.875% 11/1/29-06 (AMBAC) 1,000,000 1,034,020
Norwin School District
6.00% 4/1/30-10 (FGIC) 2,000,000 2,230,140
Pennsylvania State Higher Education
Assistance Agency Capital Acquisition
5.875% 12/15/30-10 (MBIA) 7,385,000 8,338,404
Pennsylvania State Higher Educational
Facilities Authority Revenue
(Drexel University Project)
6.00% 5/1/29-09 3,000,000 3,297,570
(University of Pennsylvania Project)
Series B 5.90% 9/1/15-05 4,205,000 4,205,000
(Ursinus College Project)
5.90% 1/1/27-07 1,000,000 1,057,960
Pennsylvania State Turnpike
Commission Series F
5.00% 7/15/31-11 (AMBAC) 1,000,000 1,100,090
5.00% 7/15/41-11 (AMBAC) 1,600,000 1,760,144
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
!Pre-Refunded Bonds (continued)
Philadelphia Authority for Industrial
Development Revenue (Stapeley Hall
Germantown Continuing Care
Community Project) 6.60% 1/1/16-07 $ 5,250,000 $ 5,327,700
Southcentral General Authority Revenue
(Wellspan Health Obligated)
5.625% 5/15/26-11 16,390,000 18,533,320
-----------
68,337,990
-----------
Public Utility District Revenue Bonds - 0.32%
^Philadelphia Gas Works Revenue Capital
Appreciation Series C
6.884% 1/1/12 (AMBAC) 2,500,000 1,986,925
-----------
1,986,925
-----------
School District General Obligation Bonds - 2.27%
Canon McMillan School District Series B
5.25% 12/1/34 (FGIC) 3,580,000 3,910,792
Greater Johnstown School District
Series C 5.125% 8/1/25 (MBIA) 7,500,000 7,985,325
McGuffey School District
5.125% 8/1/31 (FGIC) 2,000,000 2,151,240
-----------
14,047,357
-----------
School District Revenue Bonds - 0.85%
Pennsylvania Economic Development
Financing Authority School Revenue
(Germantown Friends School Project)
5.35% 8/15/31 2,820,000 2,983,165
Pennsylvania State Public School
Building Authority (Lehigh Career &
Technical Institute Project)
5.25% 10/1/32 (FGIC) 2,140,000 2,309,788
-----------
5,292,953
-----------
Single Family Housing Revenue Bonds - 3.51%
Allegheny County Residential Finance
Authority Mortgage Revenue
Series II-2 5.90% 11/1/32 (GNMA) (AMT) 975,000 1,026,812
Series KK-2 5.40% 5/1/26 (GNMA) (AMT) 2,740,000 2,857,683
Pennsylvania Housing Finance Agency
Single Family Mortgage
Series 66A 5.65% 4/1/29 (AMT) 3,765,000 3,909,312
Series 70A 5.90% 4/1/31 (AMT) 8,250,000 8,603,925
Series 72A 5.35% 10/1/31 (AMT) 5,190,000 5,352,810
-----------
21,750,542
-----------
Tax Increment/Special Assessment Bonds - 0.96%
Allegheny County Redevelopment Authority
(Pittsburgh Mills Project) 5.60% 7/1/23 2,000,000 2,111,800
(Waterfront Project) Series B
6.00% 12/15/10 1,000,000 1,097,670
6.40% 12/15/18 2,500,000 2,766,400
-----------
5,975,870
-----------
Territorial Revenue Bonds - 5.93%
Puerto Rico Commonwealth Highway &
Transportation Authority Revenue
Series E 5.50% 7/1/19 (FSA) 1,450,000 1,719,251
Series G 5.00% 7/1/33 3,000,000 3,144,330
Series G 5.00% 7/1/42 5,000,000 5,232,100
Series J 5.00% 7/1/34 3,550,000 3,737,511
5
STATEMENT DELAWARE TAX-FREE PENNSYLVANIA FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Territorial Revenue Bonds (continued)
Puerto Rico Commonwealth Infrastructure
Financing Authority Tax Revenue
Series B 5.00% 7/1/41 $ 5,350,000 $ 5,641,736
Puerto Rico Public Buildings Authority
Revenue (Government Facilities) Series I
5.25% 7/1/33 16,000,000 17,264,959
------------
36,739,887
------------
Transportation Revenue Bonds - 0.88%
Pennsylvania Economic Development
Financing Authority Facilities Revenue
(Amtrak Project)
Series A 6.375% 11/1/41 (AMT) 5,000,000 5,434,850
------------
5,434,850
------------
Turnpike/Toll Road Revenue Bonds - 2.31%
Delaware River Toll Bridge 5.00% 7/1/28 3,000,000 3,154,530
Pennsylvania State Turnpike Commission
Series A 5.00% 12/1/34 (AMBAC) 8,000,000 8,533,280
Series R 5.00% 12/1/30 (AMBAC) 2,500,000 2,642,900
------------
14,330,710
------------
Waste Disposal Revenue Bonds - 0.11%
Chester Resource Recovery
(Guaranteed Host Community Project)
7.25% 12/1/05 655,000 657,987
------------
657,987
------------
Water & Sewer Revenue Bonds - 13.07%
Allegheny County Sanitation Authority
Series A 5.00% 12/1/30 (MBIA) 2,500,000 2,685,525
Dauphin County Industrial Development
Authority Water Development Revenue
(Dauphin Consolidated Water
Supply Project) Series B 6.70% 6/1/17 1,750,000 2,171,680
Delaware County Industrial Development
Authority Water Facilities Revenue
(Philadelphia Suburban Water Project)
6.00% 6/1/29 (FGIC) (AMT) 3,000,000 3,283,710
&First Albany Corporation Municipal
Trusts Inverse Floater
5.68% 12/15/14 (AMBAC) 46,500,000 54,650,055
Philadelphia Water & Waste Revenue
5.00% 7/1/35 (FSA) 5,000,000 5,333,750
Pittsburgh Water & Sewer Authority
Revenue First Lien
5.00% 9/1/29 (MBIA) 2,210,000 2,363,418
5.125% 12/1/31 (AMBAC) 10,000,000 10,556,200
------------
81,044,338
------------
TOTAL MUNICIPAL BONDS (cost $556,682,047) 609,213,366
------------
SHORT-TERM INVESTMENTS - 0.24%
oVariable Rate Demand Notes - 0.24%
Chester County Industrial Development
Authority Revenue
(Archdiocese of Philadelphia)
2.30% 7/1/31 1,500,000 1,500,000
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,500,000) 1,500,000
------------
TOTAL MARKET VALUE OF SECURITIES - 98.51%
(cost $558,182,047) $610,713,366
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES - 1.49% 9,240,736
------------
NET ASSETS APPLICABLE TO 75,393,108 SHARES
OUTSTANDING - 100.00% $619,954,102
============
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class A ($591,992,699 / 71,992,647 Shares) $8.22
-----
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class B ($20,176,504 / 2,453,833 Shares) $8.22
-----
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class C ($7,784,899 / 946,628 Shares) $8.22
-----
COMPONENTS OF NET ASSETS AT AUGUST 31, 2005:
Shares of beneficial interest
(unlimited authorization -- no par) $591,826,744
Accumulated net realized loss on investments (24,403,961)
Net unrealized appreciation of investments 52,531,319
------------
Total net assets $619,954,102
============
&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, 2005. See Note 7 in
"Notes to Financial Statements."
^Zero coupon security. The interest rate shown is the yield at the time of
purchase.
!Pre-Refunded Bonds are municipals that are generally backed or secured by U.S.
Treasury bonds. For Pre-Refunded Bonds, the stated maturity is followed by the
year in which the bond is pre-refunded. See Note 7 in "Notes to Financial
Statements."
oVariable rate securities. The interest rate shown is the rate as of August 31,
2005.
SUMMARY OF ABBREVIATIONS:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
Connie Lee - Insured by the College Construction Insurance Association
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
XLCA - Insured by XL Capital Assurance
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE TAX-FREE PENNSYLVANIA FUND
Net asset value Class A (A) $8.22
Sales charge (4.50% of offering price) (B) 0.39
-----
Offering price $8.61
=====
(A) Net asset value per share, as illustrated, is the 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
6
STATEMENT DELAWARE TAX-FREE PENNSYLVANIA FUND
OF OPERATIONS Six Months Ended August 31, 2005 (Unaudited)
INVESTMENT INCOME:
Interest $16,379,663
-----------
EXPENSES:
Management fees $1,695,300
Distribution expenses -- Class A 795,882
Distribution expenses -- Class B 106,871
Distribution expenses -- Class C 35,935
Dividend disbursing and transfer agent fees and expenses 177,835
Accounting and administration expenses 112,430
Reports and statements to shareholders 50,652
Legal and professional fees 47,468
Insurance fees 44,208
Custodian fees 19,763
Trustees' fees 15,814
Registration fees 9,645
Pricing fees 1,920
Other 17,412 3,131,135
----------
Less waived distribution expenses -- Class A (124,683)
Less expense paid indirectly (15,601)
-----------
Total expenses 2,990,851
-----------
NET INVESTMENT INCOME 13,388,812
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 1,305,459
Net change in unrealized appreciation/depreciation of investments 4,721,432
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 6,026,891
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $19,415,703
===========
See accompanying notes
7
STATEMENTS DELAWARE TAX-FREE PENNSYLVANIA FUND
OF CHANGES IN NET ASSETS
Six Months Year
Ended Ended
8/31/05 2/28/05
(Unaudited)
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 13,388,812 $ 28,586,626
Net realized gain (loss) on investments 1,305,459 (2,301,473)
Net change in unrealized appreciation/depreciation of investments 4,721,432 (6,871,442)
------------ ------------
Net increase in net assets resulting from operations 19,415,703 19,413,711
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (12,885,298) (27,377,048)
Class B (376,990) (966,625)
Class C (126,524) (242,953)
------------ ------------
(13,388,812) (28,586,626)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 8,232,402 19,585,281
Class B 486,588 839,761
Class C 1,046,129 1,176,846
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 7,400,947 15,748,757
Class B 196,716 489,434
Class C 89,844 180,938
------------ ------------
17,452,626 38,021,017
------------ ------------
Cost of shares repurchased:
Class A (28,572,392) (65,815,138)
Class B (3,938,705) (7,252,145)
Class C (278,060) (501,276)
------------ ------------
(32,789,157) (73,568,559)
------------ ------------
Decrease in net assets derived from capital share transactions (15,336,531) (35,547,542)
------------ ------------
NET DECREASE IN NET ASSETS (9,309,640) (44,720,457)
NET ASSETS:
Beginning of period 629,263,742 673,984,199
------------ ------------
End of period (there was no undistributed net investment income at either period end) $619,954,102 $629,263,742
============ ============
See accompanying notes
8
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Pennsylvania Fund Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended
8/31/05(1) 2/28/05 2/29/04 2/28/03 2/28/02 2/28/01
(Unaudited)
NET ASSET VALUE, BEGINNING OF PERIOD $8.140 $8.250 $8.140 $7.950 $7.820 $7.460
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.177 0.365 0.365 0.374 0.387 0.402
Net realized and unrealized gain (loss) on investments 0.080 (0.110) 0.110 0.189 0.130 0.360
------ ------ ------ ------ ------ ------
Total from investment operations 0.257 0.255 0.475 0.563 0.517 0.762
------ ------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.177) (0.365) (0.365) (0.373) (0.387) (0.402)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.177) (0.365) (0.365) (0.373) (0.387) (0.402)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $8.220 $8.140 $8.250 $8.140 $7.950 $7.820
====== ====== ====== ====== ====== ======
TOTAL RETURN(2) 3.19% 3.23% 6.00% 7.29% 6.78% 10.47%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $591,993 $599,172 $638,325 $669,042 $682,030 $695,329
Ratio of expenses to average net assets 0.91% 0.89% 0.90% 0.92% 0.89% 0.92%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 0.96% 0.93% 0.94% 0.92% 0.89% 0.92%
Ratio of net investment income to average net assets 4.31% 4.54% 4.47% 4.69% 4.92% 5.26%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 4.26% 4.50% 4.43% 4.69% 4.92% 5.26%
Portfolio turnover 16% 11% 12% 18% 38% 23%
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(2) Total investment return is based on the change in net asset value of a share
for 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 distributor,
as applicable. Performance would have been lower had the expense limitation
not been in effect.
See accompanying notes
9
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Pennsylvania Fund Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended
8/31/05(1) 2/28/05 2/29/04 2/28/03 2/28/02 2/28/01
(Unaudited)
NET ASSET VALUE, BEGINNING OF PERIOD $8.140 $8.250 $8.140 $7.950 $7.820 $7.460
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.145 0.303 0.301 0.312 0.324 0.341
Net realized and unrealized gain (loss) on investments 0.080 (0.110) 0.110 0.189 0.130 0.360
------ ------ ------ ------ ------ ------
Total from investment operations 0.225 0.193 0.411 0.501 0.454 0.701
------ ------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.145) (0.303) (0.301) (0.311) (0.324) (0.341)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.145) (0.303) (0.301) (0.311) (0.324) (0.341)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $8.220 $8.140 $8.250 $8.140 $7.950 $7.820
====== ====== ====== ====== ====== ======
TOTAL RETURN(2) 2.79% 2.44% 5.17% 6.46% 5.93% 9.59%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $20,176 $23,235 $29,589 $34,914 $37,533 $36,350
Ratio of expenses to average net assets 1.69% 1.67% 1.68% 1.70% 1.69% 1.72%
Ratio of net investment income to average net assets 3.53% 3.76% 3.69% 3.91% 4.12% 4.46%
Portfolio turnover 16% 11% 12% 18% 38% 23%
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(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.
See accompanying notes
10
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Tax-Free Pennsylvania Fund Class C
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended
8/31/05(1) 2/28/05 2/29/04 2/28/03 2/28/02 2/28/01
(Unaudited)
NET ASSET VALUE, BEGINNING OF PERIOD $8.140 $8.250 $8.140 $7.950 $7.820 $7.460
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.145 0.302 0.301 0.312 0.324 0.340
Net realized and unrealized gain (loss) on investments 0.080 (0.110) 0.110 0.189 0.130 0.360
------ ------ ------ ------ ------ ------
Total from investment operations 0.225 0.192 0.411 0.501 0.454 0.700
------ ------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.145) (0.302) (0.301) (0.311) (0.324) (0.340)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.145) (0.302) (0.301) (0.311) (0.324) (0.340)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $8.220 $8.140 $8.250 $8.140 $7.950 $7.820
====== ====== ====== ====== ====== ======
TOTAL RETURN(2) 2.79% 2.43% 5.17% 6.46% 5.93% 9.58%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $7,785 $6,857 $6,070 $5,197 $4,512 $3,898
Ratio of expenses to average net assets 1.69% 1.67% 1.68% 1.70% 1.69% 1.72%
Ratio of net investment income to average net assets 3.53% 3.76% 3.69% 3.91% 4.12% 4.46%
Portfolio turnover 16% 11% 12% 18% 38% 23%
(1) Ratios and portfolio turnover have been annualized and total return has not
been annualized.
(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.
See accompanying notes
11
NOTES DELAWARE TAX-FREE PENNSYLVANIA FUND
TO FINANCIAL STATEMENTS August 31, 2005 (Unaudited)
Delaware Group State Tax-Free Income Trust (the "Trust") is organized as
a Delaware statutory trust and offers one series: Delaware Tax-Free Pennsylvania
Fund (the "Fund"). The Trust is an open-end investment company. The Fund is
considered non-diversified under the Investment Company Act of 1940, as amended,
and offers Class A, Class B and Class C shares. Class A shares are sold with a
front-end sales charge of up to 4.50%. Class B shares are sold with a contingent
deferred sales charge that declines from 4% to zero depending upon the period of
time the shares are held. Class B shares will automatically convert to Class A
shares on a quarterly basis approximately 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 the Delaware Tax-Free Pennsylvania Fund is to seek a
high level of current interest income exempt from federal income tax and certain
Pennsylvania state and local taxes, consistent with the preservation of capital.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation -- Long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Fund's Board of
Trustees. In determining whether market quotations are readily available or fair
valuation will be used, various factors will be taken into consideration, such
as market closures, aftermarket trading or significant events after local market
trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes -- The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting -- Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund on the basis of
daily net assets of each class. Distribution expenses relating to a specific
class are charged directly to that class.
Use of Estimates -- The preparation of financial statements in conformity with
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(R) Family
of Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date).
Costs used in calculating realized gains and losses on the sale of investment
securities are those of the specific securities sold. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. The Fund declares dividends
daily from net investment income and pays such dividends monthly and declares
and pays distributions from net realized gain on investments, if any, annually.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The earnings
credits for the six months ended August 31, 2005 were approximately $15,601. The
expense paid under the above arrangement is included in custodian fees on the
Statement of Operations with the corresponding expense offset shown as "expense
paid indirectly."
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.55% on the first $500 million of average daily net assets of the Fund,
0.50% on the next $500 million, 0.45% on the next $1.5 billion, and 0.425% on
average daily net assets in excess of $2.5 billion.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. Effective May
19, 2005, the Fund pays DSC a monthly fee computed at the annual rate of 0.04%
of the Fund's average daily net assets for accounting and administration
services. Prior to May 19, 2005, the Fund paid DSC a monthly fee based on
average net assets subject to certain minimums for accounting and administration
services. The Fund pays DSC a monthly fee based on the number of shareholder
accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Class A shares and 1.00% of the average daily net assets of the
Class B and C shares.
The Board of Trustees has adopted a formula for calculating 12b-1 plan fees for
the Fund's Class A shares that went into effect on June 1, 1992. The total 12b-1
fees to be paid by Class A shareholders of the Fund will be sum of 0.10% of the
average daily net assets representing shares that were acquired prior to June 1,
1992 and 0.30% of the average daily net assets representing shares that were
acquired on or after June 1, 1992. All Class A shareholders will bear 12b-1 fees
at the same rate, the blended rate based upon the allocation of the 0.10% and
0.30% rates described above. DDLP has contracted to waive distribution and
service fees through June 30, 2006 in order to prevent distribution and service
fees of Class A shares from exceeding 0.25% of average daily net assets. This
contractual waiver is applied to the shares of the Fund that were acquired on or
after June 1, 1992 in calculating the applicable 12b-1 fee rate.
At August 31, 2005, the Fund had liabilities payable to affiliates as follows:
Investment management fees payable to DMC $282,822
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses
payable to DSC 54,716
Other expenses payable to DMC and affiliates* 187,216
*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 internal legal services provided to
the Fund by DMC employees. For the six months ended August 31, 2005, the
Delaware Tax-Free Pennsylvania Fund was charged $16,074 for internal legal
services provided by DMC.
12
NOTES DELAWARE TAX-FREE PENNSYLVANIA FUND
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
For the six months ended August 31, 2005, DDLP earned $21,862 for commissions on
sales of the Fund's Class A shares. For the six months ended August 31, 2005,
DDLP received gross contingent deferred sales charge commissions of $3,550,
$5,247 and $622 on redemption of the Fund's Class A, Class B and Class C shares,
respectively. These commissions were entirely used to offset up-front
commissions previously paid by DDLP to broker-dealers on sales of those shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. INVESTMENTS
For the six months ended August 31, 2005, the Fund made purchases of $48,240,692
and sales of $66,356,858 of investment securities other than short-term
investments.
At August 31, 2005, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At August 31, 2005, the cost of investments was $562,877,857.
At August 31, 2005, the net unrealized appreciation was $47,835,509 of which
$47,837,550 related to unrealized appreciation of investments and $2,041 related
to unrealized depreciation of investments.
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the six
months ended August 31, 2005 and the year ended February 28, 2005 was as
follows:
Six Months Year
Ended Ended
8/31/05* 2/28/05
----------- -----------
Tax-exempt income $13,388,812 $28,586,626
*Tax information for the six months ended August 31, 2005 is an estimate and the
tax character of dividends and distributions may be redesignated at fiscal year
end.
The components of net assets are estimated since the final tax characteristics
cannot be determined until fiscal year end. As of August 31, 2005, the estimated
components of net assets on a tax basis were as follows:
Shares of beneficial interest $591,826,744
Capital loss carryforwards (19,708,151)
Unrealized appreciation of investments 47,835,509
------------
Net assets $619,954,102
============
The difference between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at February 28, 2005 will expire as follows: $9,193,068 expires in
2008, $8,323,306 expires in 2009 and $1,161,652 expires in 2010.
For the six months ended August 31, 2005, the Fund had capital losses of
$1,030,125, which may be added to the capital loss carryforwards.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Six Months Year
Ended Ended
8/31/05 2/28/05
Shares sold:
Class A 1,009,930 2,429,500
Class B 59,583 104,213
Class C 127,934 146,265
Shares issued upon reinvestment of
dividends and distributions:
Class A 906,683 1,952,449
Class B 24,102 60,707
Class C 11,006 22,433
---------- ----------
2,139,238 4,715,567
---------- ----------
Shares repurchased:
Class A (3,500,289) (8,183,287)
Class B (483,261) (898,361)
Class C (34,210) (62,560)
---------- ----------
(4,017,760) (9,144,208)
---------- ----------
Net decrease (1,878,522) (4,428,641)
========== ==========
For the six months ended August 31, 2005 and the year ended February 28, 2005,
339,915 Class B shares were converted to 339,696 Class A shares valued at
$2,767,656 and 510,991 Class B shares were converted to 510,991 Class A shares
valued at $4,123,073, respectively. 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.
6. LINE OF CREDIT
The Fund, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $183,100,000 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
Fund had no amounts outstanding as of August 31, 2005, or at any time during the
period.
13
NOTES DELAWARE TAX-FREE PENNSYLVANIA FUND
TO FINANCIAL STATEMENTS (CONTINUED)
7. CREDIT AND MARKET RISK
The Fund concentrates its investments in securities issued by Pennsylvania
municipalities. The value of these investments may be adversely affected by new
legislation within Pennsylvania, regional or local economic conditions, and
differing levels of supply and demand for municipal bonds. Many municipalities
insure repayment for their obligations. Although bond insurance reduces the risk
of loss due to default by an issuer, such bonds remain subject to the risk that
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 Statement of Net Assets.
The Fund 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.
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased
bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding". "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates. Bonds are considered "pre-refunded" when
the refunding issue's proceeds are escrowed only until a permitted call date or
dates on the refunded issue with the refunded issue being redeemed at that time,
including any required premium. Bonds become "defeased" when the rights and
interests of the bondholders and of their lien on the pledged revenues or other
security under the terms of the bond contract are substituted with an
alternative source of revenues (the escrow securities) sufficient to meet
payments of principal and interest to maturity or to the first call dates.
Escrowed secured bonds will often receive a rating of AAA from Moody's, S&P,
and/or Fitch due to the strong credit quality of the escrow securities and the
irrevocable nature of the escrow deposit agreement.
The Fund may invest up to 10% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so. At
August 31, 2005, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Fund's Liquidity Procedures. While
maintaining oversight, the Board of Trustees has delegated to DMC the day-to-day
functions of determining whether individual securities are liquid for purposes
of the Fund's limitation on investments in illiquid assets.
8. CONTRACTUAL OBLIGATIONS
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
14
OTHER DELAWARE TAX-FREE PENNSYLVANIA FUND
FUND INFORMATION August 31, 2005 (Unaudited)
BOARD CONSIDERATION OF DELAWARE TAX-FREE PENNSYLVANIA FUND INVESTMENT ADVISORY
AGREEMENT
At a meeting held on May 18-19, 2005 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the Delaware
Tax-Free Pennsylvania Fund (the "Fund"). In making its decision, the Board
considered information furnished throughout the year at regular Board meetings,
as well as information prepared specifically in connection with the Annual
Meeting. Information furnished and discussed throughout the year included
reports detailing Fund performance, investment strategies, expenses, compliance
matters and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Fund, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board separately received and reviewed
independent historical and comparative reports prepared by Lipper Inc.
("Lipper"), an independent statistical compilation organization. The Lipper
reports compared the Fund's investment performance and expenses with those of
other comparable mutual funds. The Board also requested and received certain
supplemental information regarding management's policy with respect to advisory
fee levels and its philosophy with respect to breakpoints; the structure of
portfolio manager compensation; the investment manager's profitability organized
by client type, including the Fund; and any constraints or limitations on the
availability of securities in certain investment styles which might inhibit the
advisor's ability to fully invest in accordance with the Fund's policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Jude Driscoll, Chairman
of the Delaware Investments Family of Funds, and Chairman and Chief Executive
Officer of the investment advisor, was present to respond to questions raised by
Lipper and the independent Trustees. While the Board considered the Investment
Advisory Agreements for all of the funds in the Delaware Investments Family of
Funds at the same Board meeting, information was provided and considered by the
Board for each fund individually. In approving the continuance of the Investment
Advisory Agreement for the Fund, the Board, including a majority of independent
Trustees, determined that the existing advisory fee structure was fair and
reasonable and that the continuance of the Investment Advisory Agreement was in
the best interests of the Fund and its shareholders. While attention was given
to all information furnished, the following discusses the primary factors
relevant to the Board's deliberations and determination, including those
relating to the selection of the investment advisor and the approval of the
advisory fee.
NATURE, EXTENT AND QUALITY OF SERVICE. Consideration was given to the services
provided by Delaware Investments to the Fund and its shareholders. In reviewing
the nature, extent and quality of services, the Board emphasized reports
furnished to it throughout the year at regular Board meetings covering matters
such as the compliance of portfolio managers with the investment policies,
strategies and restrictions for the Fund, the compliance of management personnel
with the Code of Ethics adopted throughout the Delaware Investments Family of
Funds complex, the adherence to fair value pricing procedures as established by
the Board, and the accuracy of net asset value calculations. The Board noted
that it was pleased with the current staffing of the Fund's investment advisor
during the past year, the emphasis on research and the compensation system for
advisory personnel. Favorable consideration was given to DMC's efforts to
maintain, and in some instances increase, financial and human resources
committed to fund matters. Other factors taken into account by the Board were
Delaware Investments' preparedness for, and response to, legal and regulatory
matters. The Board also considered the transfer agent and shareholder services
provided to Fund shareholders by Delaware Investments' affiliate, Delaware
Service Company, Inc., noting the receipt by such affiliate of the DALBAR
Pyramid Award in four of the last six years and the continuing expenditures by
Delaware Investments to increase and improve the scope of shareholder services.
Additionally, the Board noted the extent of benefits provided to Fund
shareholders for being part of the Delaware Investments Family of Funds,
including the privilege to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the privilege to combine holdings in other funds to obtain a reduced sales
charge. The Board was satisfied with the nature, extent and quality of the
overall services provided by Delaware Investments.
INVESTMENT PERFORMANCE. The Board considered the investment performance of DMC
and the Fund. The Board was pleased by DMC's investment performance, noting
Barron's ranking of the Delaware Investments Family of Funds in the top quartile
of mutual fund families for 2002 - 2004. The Board placed significant emphasis
on the investment performance of the Fund in view of its importance to
shareholders. While consideration was given to performance reports and
discussions with portfolio managers at Board meetings throughout the year,
particular attention in assessing performance was given to the Lipper reports
furnished for the Annual Meeting. The Lipper reports prepared for the Fund
showed the investment performance of its Class A shares in comparison to a group
of similar funds as selected by Lipper (the "Performance Universe"). A fund with
the highest performance is ranked first, and a fund with the lowest is ranked
last. The highest/best performing 25% of funds in the Performance Universe make
up the first quartile; the next 25% - the second quartile; the next 25% - the
third quartile; and the lowest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Fund was shown for the past one, three, five and 10 year periods ended February
28, 2005. The Board noted its objective that the Fund's performance be at or
above the median of its Performance Universe. The following paragraph summarizes
the performance results for the Fund and the Board's view of such performance.
The Performance Universe for this Fund consisted of the Fund and all retail and
institutional Pennsylvania municipal debt funds as selected by Lipper. The
Lipper report comparison showed that the Fund's total return for the one and
three year periods was in the first quartile of such Performance Universe. The
report further showed that the Fund's total return for the five year period was
in the second quartile and the Fund's total return for the 10 year period was in
the third quartile. The Board was satisfied with such performance.
15
OTHER DELAWARE TAX-FREE PENNSYLVANIA FUND
FUND INFORMATION (CONTINUED)
BOARD CONSIDERATION OF DELAWARE TAX-FREE PENNSYLVANIA FUND INVESTMENT ADVISORY
AGREEMENT (CONTINUED)
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments Family of Funds, Delaware Investments' institutional
separate account business and other lines of business at Delaware Investments.
The Board stated its belief that, given the differing level of service provided
to Delaware Investments' various clients and other factors that related to the
establishment of fee levels, variations in the levels of fees and expenses were
justified. The Board placed significant emphasis on the comparative analysis of
the management fees and total expense ratios of the Fund compared with those of
a group of similar funds as selected by Lipper (the "Expense Group") and among
the other Delaware Investments funds. In reviewing comparative costs, the Fund's
contractual management fee and the actual management fee incurred by the Fund
were compared with the contractual management fees (assuming all funds in the
Expense Group were similar in size to the Fund) and actual management fees (as
reported by each fund) of other funds within the Expense Group, taking into
effect any applicable breakpoints and fee waivers. The Fund's total expenses
were also compared with those of its Expense Group. The Lipper total expenses,
for comparative consistency, were shown by Lipper for Class A shares and
compared total expenses including 12b-1 and non-12b-1 service fees. The Board
noted its objective to limit the Fund's total expense ratio to an acceptable
range as compared to the median of the Expense Group. The following paragraph
summarizes the expense results for the Fund and the Board's view of such
expenses.
The expense comparisons for the Fund showed that its management fee and total
expenses were in the quartile with the second highest expenses of its Expense
Group. The Board noted that the Fund's total expenses were not in line with the
Board's objective. In evaluating the total expenses, the Board considered
waivers in place through June 2006. The Board was satisfied with management's
efforts to improve the Fund's total expense ratio and bring it in line with the
Board's objective.
MANAGEMENT PROFITABILITY. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Fund.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC initiatives. The Board also
considered the extent to which Delaware Investments might derive ancillary
benefits from fund operations, including the potential for procuring additional
business as a result of the prestige and visibility associated with its role as
service provider to the Delaware Investments Family of Funds, the benefits from
allocation of fund brokerage to improve trading efficiencies and the use of
"soft" commission dollars to pay for proprietary and non-proprietary research.
At the Board's request, management also provided information relating to
Delaware Investments' profitability by client type. The information provided set
forth the revenue, expenses and pre-tax income/loss attributable to the Delaware
Investments Family of Funds, Delaware Investments' separate account business and
other lines of business at Delaware Investments. Emphasis was given to the level
and type of service provided to the various clients. The Board was satisfied
with the level of profits realized by Delaware Investments from its
relationships with the Fund and the Delaware Investments Family of Funds.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Fund's assets increase and the extent to
which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Fund's management contract fell within the standard
structure. The Board also noted that the Fund's assets exceeded the first
breakpoint level. The Board believed that, given the extent to which economies
of scale might be realized by the manager and its affiliates, the schedule of
fees under the Investment Advisory Agreement provides a sharing of benefits with
the Fund and its shareholders.
16
Delaware
Investments(R)
- -----------------------------------
A member of Lincoln Financial Group
This semiannual report is for the information of Delaware Tax-Free Pennsylvania
Fund shareholders, but it may be used with prospective investors when preceded
or accompanied by a current prospectus for Delaware Tax-Free Pennsylvania Fund
and the Delaware Investments Performance Update for the most recently completed
calendar quarter. The prospectus sets forth details about charges, expenses,
investment objectives, and operating policies of the Fund. You should read the
prospectus carefully before you invest. The figures in this report represent
past results that are not a guarantee of future results. The return and
principal value of an investment in the Fund will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
BOARD OF TRUSTEES AFFILIATED OFFICERS CONTACT INFORMATION
JUDE T. DRISCOLL MICHAEL P. BISHOF INVESTMENT MANAGER
Chairman Senior Vice President and Delaware Management Company,
Delaware Investments Family of Funds Chief Financial Officer a Series of Delaware Management Business Trust
Philadelphia, PA Delaware Investments Family of Funds Philadelphia, PA
Philadelphia, PA
THOMAS L. BENNETT NATIONAL DISTRIBUTOR
Private Investor RICHELLE S. MAESTRO Delaware Distributors, L.P.
Rosemont, PA Executive Vice President, Philadelphia, PA
Chief Legal Officer and Secretary
JOHN A. FRY Delaware Investments Family of Funds SHAREHOLDER SERVICING, DIVIDEND
President Philadelphia, PA DISBURSING AND TRANSFER AGENT
Franklin & Marshall College Delaware Service Company, Inc.
Lancaster, PA JOHN J. O'CONNOR 2005 Market Street
Senior Vice President and Treasurer Philadelphia, PA 19103-7094
ANTHONY D. KNERR Delaware Investments Family of Funds
Managing Director Philadelphia, PA FOR SHAREHOLDERS
Anthony Knerr & Associates 800 523-1918
New York, NY
FOR SECURITIES DEALERS AND FINANCIAL
LUCINDA S. LANDRETH INSTITUTIONS REPRESENTATIVES ONLY
Former Chief Investment Officer 800 362-7500
Assurant, Inc.
Philadelphia, PA WEB SITE
www.delawareinvestments.com
ANN R. LEVEN
Former Treasurer/Chief Fiscal Officer
National Gallery of Art
Washington, DC
THOMAS F. MADISON
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
JANET L. YEOMANS
Vice President/Mergers & Acquisitions
3M Corporation
St. Paul, MN
J. RICHARD ZECHER
Founder
Investor Analytics
Scottsdale, AZ
Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries.
- --------------------------------------------------------------------------------
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and
procedures that the Fund uses to determine how to vote proxies (if any) relating
to portfolio securities is available without charge (i) upon request, by calling
800 523-1918; (ii) on the Fund's Web site at http://www.delawareinvestments.com;
and (iii) on the Commission's Web site at http://www.sec.gov. The 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 the Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended June 30 is
available without charge (i) through the Fund's Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(9757) Printed in the USA
SA-007 [8/05] IVES 10/05 MF-05-09-023 PO10439
Item 2. Code of Ethics
Not applicable.
Item 3. Audit Committee Financial Expert
Not applicable.
Item 4. Principal Accountant Fees and Services
Not applicable.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. 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. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There were no significant changes in the registrant's internal control
over financial reporting that occurred during the second fiscal quarter of the
period covered by the report to stockholders included herein (i.e., the
registrant's second fiscal quarter) that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are
furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf, by the undersigned, thereunto duly authorized.
DELAWARE GROUP STATE TAX FREE INCOME TRUST
Jude T. Driscoll
- ----------------------------------
By: Jude T. Driscoll
Title: Chief Executive Officer
Date: November 2, 2005
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: Chief Executive Officer
Date: November 2, 2005
Michael P. Bishof
- ----------------------------------
By: Michael P. Bishof
Title: Chief Financial Officer
Date: November 2, 2005