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: 811-4989
Exact name of registrant as specified in charter: Voyageur Mutual Funds II
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: August 31
Date of reporting period: October 31, 2005
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 Tax-Free Colorado Fund of the Registrant, information on which is
included in the following shareholder reports.
Delaware
Investments(R)
-----------------------------------
A member of Lincoln Financial Group
FIXED INCOME
ANNUAL REPORT AUGUST 31, 2005
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DELAWARE TAX-FREE COLORADO FUND
[LOGO] POWERED BY RESEARCH(R)
TABLE
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARIES
Delaware Tax-Free Arizona Insured Fund 4
Delaware Tax-Free California Fund 6
Delaware Tax-Free Colorado Fund 8
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DISCLOSURE OF FUND EXPENSES 10
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SECTOR ALLOCATIONS 11
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FINANCIAL STATEMENTS:
Statements of Net Assets 14
Statements of Operations 23
Statements of Changes in Net Assets 24
Financial Highlights 25
Notes to Financial Statements 34
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 40
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OTHER FUND INFORMATION 41
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BOARD OF TRUSTEES/DIRECTORS AND OFFICERS 44
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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.
PORTFOLIO September 13, 2005
MANAGEMENT REVIEW
FUND MANAGERS
Joseph R. Baxter
Co-Manager
Robert F. Collins
Co-Manager
Andrew M. McCullagh, Jr.
Co-Manager
PLEASE DESCRIBE THE OVERALL MARKET CONDITIONS DURING
THE FISCAL YEAR.
The last three years have been remarkably similar; at least as it pertains to
market expectations and how the actual markets can prove them wrong. In the
beginning of calendar years 2003, 2004, and 2005, many market participants
appeared convinced that interest rates were unreasonably low, and many managers
adjusted the risk profiles of their portfolios to reflect the coming of higher
rates and lower bond prices. In each year, the markets weathered the storms and
generated positive results, with price gains adding to the income generated.
Defensive strategies did not pan out.
Over the 12 months ended August 31, 2005, the fixed income markets rallied while
the Federal Reserve was in the midst of tightening credit by raising short-term
rates -- notably, the fed-funds rate. The tightening cycle started at the end of
June 2004, prior to the start of the fiscal year, and continues today. As of
August 31, 2005, the Federal Reserve raised rates by one quarter of a percentage
point at every one of its meetings -- a total of eight rate hikes that took the
fed-funds rate from 1.50% to 3.50%.
While the Federal Reserve's actions sent short-term yields in both the taxable
and the tax-exempt bond markets higher, the reaction of the intermediate and
long-term markets prompted Fed Chairman Alan Greenspan's "conundrum" comment
earlier this year. This type of sustained market rally through a Fed tightening
is highly unusual and is precisely what confounded many investors. In the
municipal market, yields on two-year, AAA-rated bonds increased by 1.2% during
the year, from 1.7%, to end the fiscal year near 2.9%. The crossover point where
rates were relatively flat year-over-year was in the 10-year maturity range,
where rates began and ended the year at about 3.5%. Longer rates fell. For
example, yields dropped by four tenths of a percent on 30-year AAA-rated
municipals, ending the fiscal year with yields of approximately 4.3% (source:
Municipal Market Data).
These divergent moves between short-term and long-term rates continued to
"flatten the yield curve." In the Treasury market, the difference between the 2-
and 30-year yields narrowed dramatically, from about two-and-a-half percentage
points to less than half of a percent at the end of the fiscal year. Some market
strategists have started discussing the prospects for, and implications of, an
inverted yield curve. Historically, an inverted yield curve has been associated
with the onset of an economic recession. The curve in the tax-exempt markets
flattened as well, but not quite as dramatically. While the difference between
2- and 30-year high-grade municipal bond yields started the year at 2.9%, it
narrowed by 1.5 percent, ending the year with a 1.4% differential. Historically,
when the Treasury market has inverted, the municipal market has maintained a
positively sloped curve.
Municipal bonds, particularly long-term bonds, traded weaker relative to
Treasuries during the year. Yields on 30-year AAA-rated municipals, measured as
a percentage of the yield on long Treasury bonds, started the fiscal year at
about 95%. By the end of June 2005, the ratio had increased above 100%. This
would be typical -- the market was rallying and the Treasury market led the way
toward lower yields. The municipal market recaptured some of that
underperformance in the last two months, ending the year with yields at about
98% of the long Treasury bond.
WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE LAST
12 MONTHS IN ARIZONA, CALIFORNIA, AND COLORADO?
Credit has performed very well this year, partially due to investors' desire to
seek higher yields, but also due to the fact that quality continued to improve
throughout the municipal market. A strong economic backdrop has largely been the
cause.
After several years of slow growth or even flat performance, Arizona's economy
provided solid growth for the last two years. The state has produced the second
fastest rate of job growth for 2005 to date, compared to all the states (Source:
The Business Journal Phoenix). These solid growth trends provided the state with
better-than-anticipated revenue flows. State revenues for the first eight months
of fiscal 2005 increased by nearly 17%. However, expenditure pressures will
continue to come from education, healthcare, and social services, limiting the
state's financial flexibility. In order to maintain a lid on taxes while
addressing these expenditure pressures, the governor has proposed various
non-recurring revenue sources to balance the 2006 budget.
California had a similar pattern over the last two years, helping the state cope
with its structural deficit problems. State revenues were up approximately 17%
for the first eight months of fiscal 2005 (source: Municipal Market Data); with
personal and corporate tax receipts coming in ahead of budget. The
1
absence of any planned issuance of recovery bonds in the fiscal 2006 budget is
credited to the strong revenue flow. Despite the increase in tax receipts, the
California Department of Finance estimated that the budget gap will continue
into next fiscal year. This ongoing fiscal challenge is a major reason for the
still-low bond rating relative to other states (A2/A).
After experiencing a sharper economic downturn than the nation in recent years,
we believe Colorado is now recovering at a healthy pace. The state's employment
declines bottomed out in early 2004. With the resumption of moderate growth in
tax revenues, state finances appear to have improved over the past year and are
expected to remain relatively stable in fiscal 2006. Voter initiatives limit
state revenue and expenditure growth to the rate of population growth plus
inflation. Any tax revenues that exceed the constitutional limit must be
refunded. In November, voters will consider amendments to these initiatives.
Without these amendments, the governor's office projects that the state will
accrue a refund liability in fiscal 2006, with refund amounts growing
significantly in subsequent years.
Overall, municipal bond issuance has remained robust in 2005, and the western
states are no exception. Total national issuance in 2005 may even surpass the
record of $384 billion sold in 2003 if this pace remains. The drivers of this
record volume continue to be the low interest rate environment and the
flattening yield curve, both of which stimulate refunding activity. Arizona and
Colorado have experienced 12% and 7% growth in new issue volume year-to-date,
respectively. California new issuance levels are down by $5.5 billion, but
recall that last year the state issued over $10 billion in recovery bonds.
Excluding that issue, the state's new issue volume would have increased by 13%
(source: Municipal Market Data). Much of the increase in each state reflects
refunding activity (up 62% on a national basis).
HOW DID DELAWARE TAX-FREE COLORADO FUND PERFORM DURING
THE FISCAL YEAR?
For the fiscal year ended August 31, 2005, Delaware Tax-Free Colorado Fund
returned 5.78% (Class A shares at net asset value with distributions reinvested)
and 1.03% (at maximum offer price with distributions reinvested).* Class A
shares (at net asset value with distributions reinvested) outperformed the
Lipper Colorado Municipal Debt Funds Universe Average, which returned 4.53%, and
the Lehman Brothers Municipal Bond Index, which returned 5.31% for the 12-month
period, both of which exclude sales charges (source: Lipper, Inc.).**
FOR EACH FUND, WHAT STRATEGIES INFLUENCED PERFORMANCE?
Returns in each of the Funds were aided by yield-curve positioning, credit
tightening, sector concentration, and security selection. While the Federal
Reserve raised short-term rates by increasing the fed-funds target rate,
long-term bond yields declined, as inflation remained tame during a period of
moderate growth. This resulted in what is termed a "flattening of the yield
curve," where the difference between long- and short-term rates narrows. The
Funds are positioned to take advantage of this environment, combining long
maturity bonds that participate in the rally and shorter-duration securities
with high coupons trading to short calls that are less price sensitive. This is
known as a "barbell" structure, and it generally aided in the returns for all
three Funds.
When the yield curve flattens and long-term interest rates decline, market
participants seek alternative sources of yield. This is often found in
lower-rated bonds, and as the market reaches for this yield, it causes the
credit curve to tighten and results in good performance for those securities.
Bonds rated A and BBB, and non-investment grade securities have all outperformed
high-grade and insured bonds in the municipal market over the past year. The
Funds benefited from allotment to these higher-risk credits.
*For complete annualized performance, see tables on pages 4, 6 and 8.
**A portion of the income from tax-exempt funds may be subject to the
alternative minimum tax.
2
Two of our favored sectors, healthcare and higher education, have benefited from
both the market's reach for yield as well as positive fundamentals. The credit
and financial environments have been positive for hospitals, as they have
received favorable reimbursements from Medicare and the managed care industry.
The demographics provided by the baby boom generation have provided favorable
enrollment environment for colleges and universities while a recovering stock
market has bolstered endowments.
Individual security selection remains the heart of our investment process and is
the primary source of our excess returns. Some securities that have performed
well over the past year in Delaware Tax-Free Arizona Insured Fund include a
Maricopa healthcare issue for Catholic Healthcare West and an Arizona State
University bond. There was a refinancing of a Southern Arizona Capital
Facilities bond, issued for the University of Arizona, which resulted in a
significant upward price move during the fiscal year. In addition, two issues
for U.S. territories, one for Puerto Rico and one for the Virgin Islands,
performed well due to their longer maturities.
In Delaware Tax-Free California Fund, we are favorable on the tobacco bonds
enhanced by a state appropriation, and our Golden State Tobacco positions that
are backed by the State of California were among the Fund's best performing
securities. The bonds were pre-refunded to their first call date and appreciated
in price. Like Delaware Tax-Free Arizona Insured Fund, Delaware Tax-Free
California Fund owned a healthcare bond secured by Catholic Healthcare West,
which was a top performer for the year. Rounding out some of the other top
performers in California were two long maturity general obligation bonds
(California and San Diego Unified School District), a higher education revenue
bond that was refinanced (Pepperdine University), and a seasoned land
development issue (Southern California Logistics Airport Project).
Delaware Tax-Free Colorado Fund also had healthcare and education bonds
contribute to performance, as well as several refinancing events. Bonds issued
for Evangelical Lutheran and Vail Valley Medical Center were top healthcare
performers, and a bond issued for the Montessori Charter schools topped the list
for education bonds. There were several bonds refunded during the year, which
often generates a price pop due to the improved security standing of the issue.
WHAT DETRACTED FROM FUND PERFORMANCE?
Detracting from each of our Funds' performance, relative to its benchmark index,
was the significant decision to avoid the unenhanced tobacco sector. This
sector, in which we did not participate, has been the best performing sector in
the municipal bond market over the past year and the biggest influence on market
performance. The master settlement agreement between the major tobacco companies
and 46 states secures these bonds. However, the sector is subject to litigation
risk and, therefore, volatile. We are comfortable foregoing this potential
volatility in the Funds.
Airline securities significantly outperformed the municipal market this year
during the second and third quarters, which are a traditional busy season.
Although the Funds held several airport revenue bonds, we have been
underweighted in this sector and have generally avoided securities backed by
airline corporation revenues, as we are concerned about the long-term
fundamentals of the industry.
The decision to hold high-coupon, short-call legacy bonds provides an above
market yield to the portfolios and helps to balance the Funds' interest rate
exposure, offsetting the bonds with long maturities. However, during the fiscal
year it resulted in negligible price performance during market rallies due to
the short duration of the securities. This decision to hold these
underperforming securities also detracted from relative performance.
3
PERFORMANCE SUMMARY
DELAWARE TAX-FREE COLORADO 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 Colorado Fund prospectus contains this and
other important information about the Fund. Please request a prospectus by
calling 800 523-1918. Read it carefully before you invest or send money.
Performance includes reinvestment of all distributions and is subject to
change. A rise/fall in the interest rates can have a significant impact on
bond prices and the net asset value (NAV) of the Fund. Funds that invest in
bonds can lose their value as interest rates rise and an investor can lose
principal.
FUND PERFORMANCE
Average Annual Total Returns
Through August 31, 2005 Lifetime 10 Years Five Years One Year
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Class A (Est. 4/23/87)
Excluding Sales Charge +6.89% +5.76% +5.97% +5.78%
Including Sales Charge +6.63% +5.28% +5.00% +1.03%
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Class B (Est. 3/22/95)
Excluding Sales Charge +5.32% +5.12% +5.18% +4.89%
Including Sales Charge +5.32% +5.12% +4.93% +0.89%
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Class C (Est. 5/6/94)
Excluding Sales Charge +5.16% +4.95% +5.19% +4.99%
Including Sales Charge +5.16% +4.95% +5.19% +3.99%
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Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. 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.
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 and 10-year performance figures for
Class B shares reflect conversion to Class A shares after 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
Colorado 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
FUND BASICS
As of August 31, 2005
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FUND OBJECTIVE:
The Fund seeks as high a level of current income exempt from federal income tax
and from the Colorado state personal income tax, as is consistent with
preservation of capital.
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TOTAL FUND NET ASSETS:
$290 million
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NUMBER OF HOLDINGS:
90
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FUND START DATE:
April 23, 1987
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YOUR FUND MANAGERS:
Joseph R. Baxter
Robert F. Collins
Andrew M. McCullagh, Jr.
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NASDAQ SYMBOLS:
Class A VCTFX
Class B DVBTX
Class C DVCTX
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PERFORMANCE OF A $10,000 INVESTMENT
August 31, 1995 through August 31, 2005
DELAWARE TAX-FREE
COLORADO FUND -- LEHMAN BROTHERS
CLASS A SHARES MUNICIPAL BOND INDEX
AUG-95 $9,550 $10,000
AUG-96 $10,146 $10,524
AUG-97 $11,164 $11,496
AUG-98 $12,254 $12,491
AUG-99 $12,047 $12,553
AUG-00 $12,516 $13,403
AUG-01 $13,774 $14,769
AUG-02 $14,407 $15,691
AUG-03 $14,767 $16,183
AUG-04 $15,803 $17,334
AUG-05 $16,716 $18,254
Chart assumes $10,000 invested on August 31, 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. 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.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemption of Fund shares. An expense
limitation was in effect for all classes of the Delaware Tax-Free Colorado Fund
during the period shown. Performance would have been lower had the expense
limitation not been in effect. Past performance is not a guarantee of future
results.
5
DISCLOSURE For the period March 1, 2005 to August 31, 2005
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. The following examples are
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 examples are 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 tables 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 tables shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Funds' actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Funds' actual returns. 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 a 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 tables 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 each 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. Each Fund's actual expenses shown in each table reflect fee waivers in
effect. The expenses shown in each table assume reinvestment of all dividends
and distributions. "Expenses Paid During Period" are equal to the Funds'
annualized expense ratio, multiplied by the average account value over the
period, multiplied by 184/365 (to reflect the one-half year period).
DELAWARE TAX-FREE COLORADO 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 $1,033.60 0.94% $4.82
Class B 1,000.00 1,028.80 1.69% 8.64
Class C 1,000.00 1,029.70 1.69% 8.65
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HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,020.47 0.94% $4.79
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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6
SECTOR ALLOCATION As of August 31, 2005
DELAWARE TAX-FREE COLORADO 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 98.85%
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Airport Revenue Bonds 4.45%
Charter School Revenue Bonds 7.40%
City General Obligation Bonds 0.91%
Continuing Care/Retirement Revenue Bonds 5.18%
Convention Center/Auditorium/Hotel Revenue Bonds 0.91%
Dedicated Tax & Fees Revenue Bonds 1.01%
Escrowed to Maturity Bonds 2.29%
Higher Education Revenue Bonds 10.63%
Hospital Revenue Bonds 8.20%
Miscellaneous Revenue Bonds 4.29%
Multifamily Housing Revenue Bonds 6.16%
Municipal Lease Revenue Bonds 5.82%
Political Subdivision General Obligation Bonds 8.47%
Pre-Refunded Bonds 11.09%
Public Power Revenue Bonds 1.80%
Recreational Area Revenue Bonds 1.19%
School District General Obligation Bonds 6.25%
Tax Increment/Special Assessment Bonds 1.92%
Territorial General Obligation Bonds 1.50%
Territorial Revenue Bonds 1.65%
Turnpike/Toll Road Revenue Bonds 6.01%
Water & Sewer Revenue Bonds 1.72%
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SHORT-TERM INVESTMENTS 0.02%
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TOTAL MARKET VALUE OF SECURITIES 98.87%
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RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 1.13%
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TOTAL NET ASSETS 100.00%
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7
STATEMENTS DELAWARE TAX-FREE COLORADO FUND
OF NET ASSETS August 31, 2005
Principal Market
Amount Value
MUNICIPAL BONDS - 98.85%
Airport Revenue Bonds - 4.45%
Denver City & County Airport Revenue
Series B 5.00% 11/15/33 (XLCA) $ 4,000,000 $ 4,221,360
Series E 5.25% 11/15/23 (MBIA) 8,250,000 8,664,728
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12,886,088
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Charter School Revenue Bonds - 7.40%
Colorado Educational & Cultural
Facilities Authority
(Charter Schools Project)
5.50% 5/1/36 (XLCA) 2,280,000 2,524,393
(Liberty Common Charter School Project)
5.125% 12/1/33 (XLCA) 2,740,000 2,914,812
(Littleton Academy Charter School
Project) 6.125% 1/15/31 2,000,000 2,016,060
(Montessori Districts Charter School
Projects) 6.125% 7/15/32 5,590,000 5,637,794
(Pinnacle Charter School Project)
5.00% 6/1/33 (XLCA) 2,170,000 2,281,495
(Renaissance Charter School Project)
6.75% 6/1/29 2,000,000 1,927,680
(Stargate Charter School Project)
6.125% 5/1/33 2,000,000 2,005,240
(Woodrow Wilson)
5.25% 12/1/34 (XLCA) 1,960,000 2,122,210
-----------
21,429,684
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City General Obligation Bonds - 0.91%
Bowles Metropolitan District
5.00% 12/1/33 (FSA) 2,500,000 2,651,500
-----------
2,651,500
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Continuing Care/Retirement Revenue Bonds - 5.18%
Colorado Health Facilities Authority Revenue
(Covenant Retirement Communities)
Series A 5.50% 12/1/33 (RADIAN) 5,000,000 5,373,200
(Evangelical Lutheran)
Series A 5.25% 6/1/34 2,000,000 2,098,960
(Porter Place)
Series A 6.00% 1/20/36 (GNMA) 5,000,000 5,399,550
Mesa County Residential Care Facilities
Mortgage Revenue
(Hilltop Community Resources)
Series A 5.375% 12/1/28 (RADIAN) 2,000,000 2,133,060
-----------
15,004,770
-----------
Convention Center/Auditorium/Hotel Revenue Bonds - 0.91%
Denver Convention Center Series A
5.00% 12/1/33 (XLCA) 2,500,000 2,630,050
-----------
2,630,050
-----------
Dedicated Tax & Fees Revenue Bonds - 1.01%
Gypsum Sales Tax & General Funding
Revenue 5.25% 6/1/30 2,690,000 2,933,015
-----------
2,933,015
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Escrowed to Maturity Bonds - 2.29%
Colorado Health Facilities Authority
(Catholic Health Initiatives)
5.50% 3/1/32 5,000,000 5,550,100
Galleria Metropolitan District
7.25% 12/1/09 1,005,000 1,080,918
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6,631,018
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Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
Higher Education Revenue Bonds - 10.63%
Boulder County Development Revenue
University Corporation for
Atmospheric Research
5.00% 9/1/33 (MBIA) $ 1,000,000 $ 1,049,630
5.00% 9/1/35 (AMBAC) 2,000,000 2,116,820
Colorado Educational & Cultural
Facilities Authority
(Johnson & Wales University Project)
Series A 5.00% 4/1/28 (XLCA) 1,000,000 1,054,450
(Regis University Project)
5.00% 6/1/22 (RADIAN) 1,820,000 1,907,906
5.00% 6/1/24 (RADIAN) 1,700,000 1,775,820
(University of Denver Project)
5.375% 3/1/23 (AMBAC) 1,025,000 1,113,458
Series A 5.00% 3/1/27 (MBIA) 5,000,000 5,258,850
(University of Northern Colorado Student
Housing Project) 5.125% 7/1/37 (MBIA) 7,500,000 7,878,524
Colorado School Mines Auxiliary Facilities
Revenue 5.00% 12/1/37 (AMBAC) 3,130,000 3,297,925
Colorado State University Systems
Series B 5.00% 3/1/35 (AMBAC) 2,000,000 2,111,900
University of North Colorado
5.00% 6/1/35 (FSA) 2,000,000 2,137,540
University of Colorado Enterprise System
5.375% 6/1/26 1,000,000 1,078,190
-----------
30,781,013
-----------
Hospital Revenue Bonds - 8.20%
Boulder County Hospital
Revenue Development
(Longmont United Hospital Project)
5.60% 12/1/27 (RADIAN) 1,250,000 1,311,563
6.00% 12/1/30 (RADIAN) 5,000,000 5,567,799
Colorado Health Facilities Authority
(Longmont United Hospital)
5.00% 12/1/19 (ACA) 1,150,000 1,194,804
(Vail Valley Medical Center Project)
5.80% 1/15/27 3,475,000 3,714,532
5.00% 1/15/17 1,000,000 1,049,940
Delta County Memorial Hospital
District 5.35% 9/1/17 4,000,000 4,206,879
Denver Health & Hospital Authority
Healthcare Revenue Series A
5.375% 12/1/28 (ACA) 2,770,000 2,872,906
University of Colorado Hospital Authority
Series A 5.60% 11/15/31 3,650,000 3,836,990
-----------
23,755,413
-----------
Miscellaneous Revenue Bonds - 4.29%
Colorado Educational & Cultural Facilities
Authority Revenue 5.25% 6/1/21 2,000,000 2,107,720
Lowry Economic Redevelopment Authority
Revenue Series A
7.30% 12/1/10 915,000 969,433
7.80% 12/1/10 8,770,000 9,344,611
-----------
12,421,764
-----------
Multifamily Housing Revenue Bonds - 6.16%
Adams County Housing Authority
Mortgage Revenue (Greenbriar Project)
6.75% 7/1/21 1,730,000 1,778,492
8
STATEMENTS DELAWARE TAX-FREE COLORADO FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
Multifamily Housing Revenue Bonds (continued)
Colorado Housing & Finance Authority
(Multifamily Housing Insured Mortgage)
Series A-36.25% 10/1/26 (FHA) $ 6,205,000 $ 6,420,252
Series C-36.15% 10/1/41 1,590,000 1,675,971
Denver City & County Multifamily Housing
Revenue Federal Housing Authority
(Insured Mortgage Loan - Garden Court)
5.40% 7/1/39 (FHA) 2,000,000 2,064,480
Englewood Multifamily Housing Revenue
(Marks Apartments Project)
6.65% 12/1/26 5,700,000 5,893,515
-----------
17,832,710
-----------
Municipal Lease Revenue Bonds - 5.82%
Aurora Certificates of Participation
5.50% 12/1/30 (AMBAC) 8,000,000 8,720,719
Conejos & Alamosa Counties School
District Region Certificates of
Participation 6.50% 4/1/11 1,085,000 1,120,187
El Paso County Certificates of Participation
(Detention Facilities Project)
Series B 5.00% 12/1/27 (AMBAC) 1,500,000 1,585,290
(Judicial Building Project)
Series A 5.00% 12/1/27 (AMBAC) 2,000,000 2,113,720
Fremont County Certificates of Participation
Refunding & Improvement Series A
5.25% 12/15/24 (MBIA) 3,045,000 3,323,435
-----------
16,863,351
-----------
Political Subdivision General Obligation Bonds - 8.47%
Arapahoe County Water & Wastewater
Public Improvement District Refunding
Series A 5.125% 12/1/32 (MBIA) 4,500,000 4,780,395
Denver West Metropolitan District
5.00% 12/1/33 (RADIAN) 4,000,000 4,150,240
Lincoln Park Metropolitan District
7.75% 12/1/26 2,560,000 2,752,051
Meridian Metropolitan District Refunding
Series A 5.00% 12/1/31 (RADIAN) 7,000,000 7,211,400
North Range Metropolitan District #1
7.25% 12/15/31 3,400,000 3,459,976
Saddle Rock Metropolitan District
5.35% 12/1/31 (RADIAN) 1,580,000 1,666,426
Sand Creek Metropolitan District
Refunding & Improvement
5.00% 12/1/31 (XLCA) 500,000 527,795
-----------
24,548,283
-----------
ss.Pre-Refunded Bonds - 11.09%
Aurora Golf Course Enterprise System
Revenue (Saddle Rock Golf Course)
6.20% 12/1/15-05 2,000,000 2,016,520
Burlingame Multifamily Housing Revenue
Series A 6.00% 11/1/29-09 (MBIA) 1,250,000 1,398,063
Colorado Educational & Cultural Facilities
Authority (Core Knowledge Charter
School Project) 7.00% 11/1/29-09 1,000,000 1,145,480
Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
ss.Pre-Refunded Bonds (continued)
Colorado Educational & Cultural
Facilities Authority
(Lincoln Academy Charter School Project)
8.375% 3/1/26-06 $ 2,330,000 $ 2,436,551
(Pinnacle Charter School Project)
6.00% 12/1/21-11 1,750,000 2,002,560
(University of Denver Project)
5.375% 3/1/23-11 (AMBAC) 975,000 1,079,208
Colorado Springs Revenue (Colorado
College Project) 5.375% 6/1/32-09 5,570,000 6,069,907
Greeley County Building Authority
Certificates of Participation
6.10% 8/15/16-07 2,600,000 2,753,972
Pueblo County Certificates of Participation
6.50% 12/1/24-10 5,460,000 6,293,304
Pueblo Urban Renewal Authority Tax
Increment Revenue 6.625% 12/1/19-06 1,755,000 1,834,923
Silver Dollar Metropolitan District
7.05% 12/1/30-06 4,875,000 5,111,779
-----------
32,142,267
-----------
Public Power Revenue Bonds - 1.80%
Colorado Springs Utilities Revenue
Series A 5.00% 11/15/29 5,000,000 5,223,150
-----------
5,223,150
-----------
Recreational Area Revenue Bonds - 1.19%
South Suburban Park & Recreation District
(Golf & Ice Arena Facility) 6.00% 11/1/15 2,330,000 2,396,289
Westminster Golf Course
5.55% 12/1/23 (RADIAN) 1,000,000 1,065,770
-----------
3,462,059
-----------
School District General Obligation Bonds - 6.25%
Douglas County School District #1 Building
(Douglas & Elbert Counties) Series B
5.00% 12/15/30 (FSA) 2,335,000 2,496,769
5.125% 12/15/25 (FSA) 2,000,000 2,148,500
El Paso County School District #2
(Harrison) 5.00% 12/1/27 (MBIA) 2,115,000 2,240,694
El Paso County School District #49
(Falcon) 5.50% 12/1/21 (FGIC) 3,580,000 3,982,857
Fremont County School District #1
(Canon City) 5.00% 12/1/24 (MBIA) 1,735,000 1,862,731
Garfield County School District #2
5.00% 12/1/25 (FSA) 1,000,000 1,064,600
Garfield Pitkin & Eagle County
5.00% 12/15/27 (FSA) 3,000,000 3,217,440
La Plata County School District #9-R
5.125% 11/1/24 (MBIA) 1,000,000 1,081,140
-----------
18,094,731
-----------
Tax Increment/Special Assessment Bonds - 1.92%
Loveland Special Improvements
District #1 7.50% 7/1/29 5,540,000 5,558,171
-----------
5,558,171
-----------
Territorial General Obligation Bonds - 1.50%
Puerto Rico Commonwealth Public
Improvement Series A 5.25% 7/1/21 4,000,000 4,336,000
-----------
4,336,000
-----------
9
STATEMENTS DELAWARE TAX-FREE COLORADO FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (CONTINUED)
Territorial Revenue Bonds - 1.65%
Puerto Rico Electric Power Authority
Power Revenue Series NN
5.00% 7/1/32 (MBIA) $ 1,000,000 $ 1,062,820
Puerto Rico Public Buildings Authority
Revenue (Government Facilities)
Series I 5.25% 7/1/33 1,500,000 1,618,590
Virgin Islands Public Finance Authority
5.00% 10/1/31 (ACA) 2,000,000 2,095,860
-----------
4,777,270
-----------
Turnpike/Toll Road Revenue Bonds - 6.01%
E-470 Public Highway Authority
Series A 5.75% 9/1/35 (MBIA) 3,100,000 3,478,665
Northwest Parkway Public Highway
Authority Series A 5.25% 6/15/41 (FSA) 13,000,000 13,935,480
-----------
17,414,145
-----------
Water & Sewer Revenue Bonds - 1.72%
Erie Water Enterprise Revenue
5.00% 12/1/23 (ACA) 1,750,000 1,772,365
Ute Utility Water Conservancy District
Water Revenue 5.75% 6/15/20 (MBIA) 2,900,000 3,224,713
-----------
4,997,078
-----------
TOTAL MUNICIPAL BONDS (cost $266,197,830) 286,373,530
-----------
Number of
Shares
SHORT-TERM INVESTMENTS - 0.02%
Money Market Instruments - 0.02%
Dreyfus Cash Management Fund 50,431 50,431
------------
TOTAL SHORT-TERM INVESTMENTS (cost $50,431) 50,431
------------
TOTAL MARKET VALUE OF SECURITIES - 98.87%
(cost $266,248,261) 286,423,961
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 1.13% 3,264,591
------------
NET ASSETS APPLICABLE TO 25,870,527
SHARES OUTSTANDING - 100.00% $289,688,552
============
Net Asset Value - Delaware Tax-Free Colorado Fund
Class A ($270,149,166 / 24,127,665 Shares) $11.20
------
Net Asset Value - Delaware Tax-Free Colorado Fund
Class B ($10,369,888 / 925,515 Shares) $11.20
------
Net Asset Value - Delaware Tax-Free Colorado Fund
Class C ($9,169,498 / 817,347 Shares) $11.22
------
COMPONENTS OF NET ASSETS AT AUGUST 31, 2005:
Shares of beneficial interest
(unlimited authorization - no par) $278,833,503
Accumulated net realized loss on investments (9,320,651)
Net unrealized appreciation of investments 20,175,700
------------
Total net assets $289,688,552
============
ss. 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 8 in
"Notes to Financial Statements."
SUMMARY OF ABBREVIATIONS:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
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 COLORADO FUND
Net asset value Class A (A) $11.20
Sales charge (4.50% of offering price) (B) 0.53
------
Offering price $11.73
======
(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
10
STATEMENTS Year Ended August 31, 2005
OF OPERATIONS
Delaware Tax-Free
Colorado Fund
INVESTMENT INCOME:
Interest $ 15,887,308
------------
EXPENSES:
Management fees 1,616,498
Distribution expenses - Class A 684,331
Distribution expenses - Class B 113,527
Distribution expenses - Class C 91,479
Dividend disbursing and transfer agent fees and expenses 157,524
Accounting and administration expenses 101,698
Legal and professional fees 34,974
Reports and statements to shareholders 44,757
Registration fees 8,580
Insurance fees 20,745
Trustees' fees 15,129
Custodian fees 13,655
Pricing fees 5,568
Taxes (other than taxes on income) 2,114
Other 11,967
------------
2,922,546
Less expenses absorbed or waived (12,434)
Less expense paid indirectly (1,118)
------------
Total expenses 2,908,994
------------
NET INVESTMENT INCOME 12,978,314
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (2,712,031)
Net change in unrealized appreciation/depreciation of investments 5,986,463
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,274,432
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 16,252,746
============
See accompanying notes
11
STATEMENTS
OF CHANGES IN NET ASSETS
Delaware Tax-Free
Colorado Fund
Year Ended
8/31/05 8/31/04
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 12,978,314 $ 14,471,591
Net realized gain (loss) on investments (2,712,031) (4,565,021)
Net change in unrealized
appreciation/depreciation of investments 5,986,463 11,114,857
------------- -------------
Net increase in net assets resulting from operations 16,252,746 21,021,427
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (12,211,017) (13,609,362)
Class B (421,258) (502,768)
Class C (338,621) (352,469)
Net realized gain on investments:
Class A -- --
Class B -- --
Class C -- --
------------- -------------
(12,970,896) (14,464,599)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 15,027,725 13,656,841
Class B 899,393 1,476,128
Class C 1,382,314 2,007,890
Net assets from reorganization*:
Class A -- --
Class B -- --
Class C -- --
Net asset value of shares issued upon reinvestment
of dividends and distributions:
Class A 7,395,797 8,258,947
Class B 262,793 327,698
Class C 234,982 249,923
------------- -------------
25,203,004 25,977,427
------------- -------------
Cost of shares repurchased:
Class A (31,859,739) (51,015,972)
Class B (3,327,004) (2,762,319)
Class C (2,134,310) (1,473,488)
------------- -------------
(37,321,053) (55,251,779)
------------- -------------
Increase (decrease) in net assets derived
from capital share transactions (12,118,049) (29,274,352)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS (8,836,199) (22,717,524)
NET ASSETS:
Beginning of year 298,524,751 321,242,275
------------- -------------
End of year(1) $ 289,688,552 $ 298,524,751
============= =============
(1) Including undistributed (distribution in excess of)
net investment income $ -- $ --
============= =============
* See Note 6 in "Notes to Financial Statements."
See accompanying notes
12
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- -----------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Colorado Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/05 8/31/04 8/31/03 8/31/02(1) 8/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $11.070 $10.830 $11.080 $11.120 $10.630
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.495 0.510 0.527 0.532 0.549
Net realized and unrealized gain (loss) on investments 0.130 0.240 (0.250) (0.040) 0.490
------- ------- ------- ------- -------
Total from investment operations 0.625 0.750 0.277 0.492 1.039
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.495) (0.510) (0.527) (0.532) (0.549)
------- ------- ------- ------- -------
Total dividends and distributions (0.495) (0.510) (0.527) (0.532) (0.549)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.200 $11.070 $10.830 $11.080 $11.120
======= ======= ======= ======= =======
TOTAL RETURN(2) 5.78% 7.04% 2.52% 4.60% 10.05%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $270,149 $276,534 $299,528 $314,695 $318,550
Ratio of expenses to average net assets 0.94% 0.95% 0.99% 0.95% 1.00%
Ratio of net investment income to average net assets 4.46% 4.63% 4.76% 4.86% 5.09%
Portfolio turnover 8% 13% 30% 36% 64%
(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. The
effect of this change for the year ended August 31, 2002 was an increase in
net investment income per share of less than $0.001, a decrease in net
realized and unrealized gain (loss) per share of less than $0.001, and an
increase in the ratio of net investment income to average net assets of
less than 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 returns for the years ended August 31, 2005 and
2001 reflect waivers and payment of fees by the manager of less than 0.01%.
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 Colorado Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/05 8/31/04 8/31/03 8/31/02(1) 8/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $11.080 $10.830 $11.090 $11.120 $10.630
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.412 0.427 0.444 0.450 0.468
Net realized and unrealized gain (loss) on investments 0.120 0.250 (0.260) (0.030) 0.490
------- ------- ------- ------- -------
Total from investment operations 0.532 0.677 0.184 0.420 0.958
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.412) (0.427) (0.444) (0.450) (0.468)
------- ------- ------- ------- -------
Total dividends and distributions (0.412) (0.427) (0.444) (0.450) (0.468)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.200 $11.080 $10.830 $11.090 $11.120
======= ======= ======= ======= =======
TOTAL RETURN(2) 4.89% 6.34% 1.66% 3.92% 9.24%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $10,370 $12,411 $13,108 $14,843 $14,330
Ratio of expenses to average net assets 1.69% 1.70% 1.74% 1.70% 1.75%
Ratio of net investment income to average net assets 3.71% 3.88% 4.01% 4.11% 4.34%
Portfolio turnover 8% 13% 30% 36% 64%
(1) 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. The
effect of this change for the year ended August 31, 2002 was an increase in
net investment income per share of less than $0.001, a decrease in net
realized and unrealized gain (loss) per share of less than $0.001, and an
increase in the ratio of net investment income to average net assets of
less than 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 returns for the years ended August 31, 2005 and
2001 reflect waivers and payment of fees by the manager of less than 0.01%.
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 Colorado Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
8/31/05 8/31/04 8/31/03 8/31/02(1) 8/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $11.090 $10.850 $11.100 $11.130 $10.640
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.413 0.427 0.444 0.450 0.468
Net realized and unrealized gain (loss) on investments 0.130 0.240 (0.250) (0.030) 0.490
------- ------- ------- ------- -------
Total from investment operations 0.543 0.667 0.194 0.420 0.958
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.413) (0.427) (0.444) (0.450) (0.468)
------- ------- ------- ------- -------
Total dividends and distributions (0.413) (0.427) (0.444) (0.450) (0.468)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.220 $11.090 $10.850 $11.100 $11.130
======= ======= ======= ======= =======
TOTAL RETURN(2) 4.99% 6.23% 1.74% 3.91% 9.23%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $9,170 $9,579 $8,606 $8,074 $5,617
Ratio of expenses to average net assets 1.69% 1.70% 1.74% 1.70% 1.75%
Ratio of net investment income to average net assets 3.71% 3.88% 4.01% 4.11% 4.34%
Portfolio turnover 8% 13% 30% 36% 64%
(1) 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. The
effect of this change for the year ended August 31, 2002 was an increase in
net investment income per share of less than $0.001, a decrease in net
realized and unrealized gain (loss) per share of less than $0.001, and an
increase in the ratio of net investment income to average net assets of
less than 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 returns for the years ended August 31, 2005 and
2001 reflect waivers and payment of fees by the manager of less than 0.01%.
Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
15
NOTES August 31, 2005
TO FINANCIAL STATEMENTS
Voyageur Mutual Funds (the "Trust") is organized as a Delaware statutory trust
and offers five series: 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 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 Insured Fund, Delaware Tax-Free California 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 Insured Fund, Delaware
Tax-Free California 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. Open-end investment
companies are valued at their published net asset value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of each Fund's Board of
Trustees. In determining whether market quotations are readily available or fair
valuation will be used, various factors will be taken into consideration, such
as market closures, aftermarket trading or significant events after local market
trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
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(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. 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.
The Funds receive earnings credits from their custodian when positive balances
are maintained, which are used to offset custody fees. The expense paid under
the above arrangement is included in custodian fees on the Statements of
Operations with the corresponding expense offset shown as "expense paid
indirectly". The amount of this expense for the year ended August 31, 2005 was
as follows:
Delaware Tax-Free
Colorado Fund
-----------------
Earnings credits $1,118
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
Colorado 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%
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 as shown below:
Delaware Tax-Free
Colorado Fund
-----------------
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) 0.68%
Expiration Date 12/29/05
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. Effective May
19, 2005, each Fund pays DSC a monthly fee computed at the annual rate of 0.04%
of each Fund's average daily net assets for accounting and administration
services. Prior to May 19, 2005, each Fund paid 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, 2005, each Fund had liabilities payable to affiliates as follows:
Delaware Tax-Free
Colorado Fund
-----------------
Investment management fees payable to DMC $129,846
Dividend disbursing, transfer agent,
accounting and administration fees and
other expenses payable to DSC 24,851
Other expenses payable to DMC and affiliates* 94,867
*DMC, as a 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.
As provided in the investment management agreement, each Fund bears the cost of
certain legal services expenses, including internal legal services provided to
each Fund by DMC employees. For the year ended August 31, 2005, Delaware
Tax-Free Arizona Insured Fund, Delaware Tax-Free California Fund and Delaware
Tax-Free Colorado Fund were charged $1,618, $1,683, and $7,141, respectively,
for internal legal services provided by DMC.
For the year ended August 31, 2005, DDLP earned commissions on sales of Class A
shares for each Fund as follows:
Delaware Tax-Free
Colorado Fund
-----------------
$29,656
For the year ended August 31, 2005, DDLP received gross contingent deferred
sales charge commissions on redemption of each 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.
The amounts received were as follows:
Delaware Tax-Free
Colorado Fund
-----------------
Class A $ 175
Class B 10,431
Class C 18
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, 2005, the Funds made purchases and sales of
investment securities other than short-term investments as follows:
Delaware Tax-Free
Colorado Fund
-----------------
Purchases $22,641,362
Sales 31,401,237
17
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
At August 31, 2005, the cost of investments and unrealized appreciation
(depreciation) for federal income tax purposes for each Fund were as follows:
Delaware Tax-Free
Colorado Fund
-----------------
Cost of investments $ 266,232,402
=============
Aggregate unrealized appreciation $ 20,263,879
Aggregate unrealized depreciation (72,320)
-------------
Net unrealized appreciation $ 20,191,559
=============
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 years
ended August 31, 2005 and 2004 was as follows:
Delaware Tax-Free
Colorado Fund
-----------------------------
Year Ended
2005 2004
Tax-exempt income $12,970,896 $14,464,599
Ordinary income -- --
Long-term capital gain -- --
----------- -----------
Total $12,970,896 $14,464,599
=========== ===========
As of August 31, 2005, the components of net assets on a tax basis were as
follows:
Delaware Tax-Free
Colorado Fund
-----------------
Shares of beneficial interest $ 278,833,503
Undistributed tax-exempt income --
Other temporary differences --
Post-October losses (2,653,747)
Capital loss carryforwards (6,682,763)
Unrealized appreciation of investments 20,191,559
-------------
Net assets $ 289,688,552
=============
Post-October losses represent losses realized on investment transactions from
November 1, 2004, through August 31, 2005 that, in accordance with federal
income tax regulations, the Fund has 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 Tax-Free
Year of expiration Colorado Fund
------------------ -----------------
2008 $ --
2009 2,054,025
2011 --
2012 4,571,043
2013 57,695
----------
Total $6,682,763
==========
18
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of market discount and premium on certain debt instruments.
Results of operations and net assets were not affected by these
reclassifications. For the year ended August 31, 2005, the Funds recorded the
following reclassifications.
Delaware Tax-Free
Colorado Fund
-----------------
Undistributed (distributions in excess of)
net investment income $(7,418)
Accumulated net realized gain 7,418
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Delaware Tax-Free
Colorado Fund
----------------------------------
Year Ended
8/31/05 8/31/04
Shares sold:
Class A 1,352,576 1,232,689
Class B 80,929 132,430
Class C 124,689 181,664
Shares issued in connection with reorganization(1):
Class A -- --
Class B -- --
Class C -- --
Shares issued upon reinvestment of dividends and distributions:
Class A 665,732 748,959
Class B 23,640 29,702
Class C 21,109 22,627
---------- ----------
2,268,675 2,348,071
---------- ----------
Shares repurchased:
Class A (2,870,841) (4,660,958)
Class B (299,511) (251,515)
Class C (192,223) (133,918)
---------- ----------
(3,362,575) (5,046,391)
---------- ----------
Net increase (decrease) (1,093,900) (2,698,320)
========== ==========
(1) See note 6
For the years ended August 31, 2005 and August 31, 2004, the following shares
and values 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 as follows:
Year Ended Year Ended
8/31/05 8/31/04
Class B Shares Class A Shares Value Class B Shares Class A Shares Value
-------------- -------------- ----- -------------- -------------- -----
Delaware Tax-Free Colorado Fund 179,542 179,584 $1,993,160 52,002 52,026 $576,296
19
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
6. FUND REORGANIZATION
Effective April 11, 2005, Delaware Tax-Free Arizona Insured Fund and Delaware
Tax-Free California Fund acquired all of the assets and assumed all of the
liabilities of Delaware Tax-Free Arizona Fund and Delaware Tax-Free California
Insured Fund, respectively, each an open-end investment company, pursuant to
Plans and Agreements of Reorganization (the "Reorganizations"). The shareholders
of Delaware Tax-Free Arizona Fund and Delaware Tax-Free California Insured Fund
received shares of the respective class of Delaware Tax-Free Arizona Insured
Fund and Delaware Tax-Free California Fund, respectively, equal to the aggregate
net asset value of their shares prior to the Reorganizations based on the net
asset value per share of the respective classes of Delaware Tax-Free Arizona
Insured Fund and Delaware Tax-Free California Fund.
7. LINE OF CREDIT
Each 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
Funds had no amounts outstanding as of August 31, 2005, or at any time during
the fiscal year.
8. CREDIT AND MARKET RISK
The Funds concentrate their investments in securities issued by municipalities.
The value of these investments may be adversely affected by new legislation
within the states, regional or local economic conditions, and differing levels
of supply and demand for municipal bonds. Many municipalities insure repayment
for their obligations. Although bond insurance reduces the risk of loss due to
default by an issuer, such bonds remain subject to the risk that 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.
Each 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 the time,
including any required premium. Bonds become "defeased" when the rights and
interests of the bondholders and of their lien on the pledged revenues or other
security under the terms of the bond contract 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 Tax-Free Insured Funds
will purchase escrow secured bonds without additional insurance only where the
escrow is invested in securities of the U.S. government or agencies or
instrumentalities of the U.S. government.
Each Fund may invest up to 15% 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 each 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 Funds' limitation on investments in illiquid assets.
20
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
9. CONTRACTUAL OBLIGATIONS
The Funds enter into contracts in the normal course of business that contain a
variety of indemnifications. The Funds' maximum exposure under these
arrangements is unknown. However, the Funds have not had prior claims or losses
pursuant to these contracts. Management has reviewed each Fund's existing
contracts and expects the risk of loss to be remote.
10. 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, 2005, each Fund designates distributions
paid during the year as follows:
(A) (B)
Long Term Tax-
Capital Gains Exempt Total
Distributions Distributions Distributions
(Tax Basis) (Tax Basis) (Tax Basis)
------------- ------------- -------------
Delaware Tax-Free Colorado Fund -- 100% 100%
(A) and (B) are based on a percentage of each Fund's total distributions.
21
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Voyageur Insured Funds - Delaware Tax-Free
Arizona Insured Fund
Voyageur Mutual Funds -Delaware Tax-Free California Fund
Voyageur Mutual Funds II - Delaware Tax-Free Colorado Fund
We have audited the accompanying statements of net assets of Delaware Tax-Free
Arizona Insured Fund (one of the series constituting Voyageur Insured Funds),
Delaware Tax-Free California Fund (one of the series constituting Voyageur
Mutual Funds), and Voyageur Mutual Funds II (comprised of Delaware Tax-Free
Colorado Fund) (the "Funds") as of August 31, 2005, 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. We were
not engaged to perform an audit of the Funds' internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit procedures included confirmation of
securities owned as of August 31, 2005, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. 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 Insured Fund of Voyageur Insured Funds, the Delaware
Tax-Free California Fund of Voyageur Mutual Funds, and the Delaware Tax-Free
Colorado Fund of Voyageur Mutual Funds II at August 31, 2005, 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 14, 2005
22
OTHER
FUND INFORMATION
PROXY RESULTS
The shareholders of Voyageur Mutual Funds, Voyageur Insured Funds, Voyageur
Investment Trust and Voyageur Mutual Funds II (each a "Trust") voted on the
following proposals (as applicable) at the special meeting of shareholders on
March 23, 2005 or as adjourned. The description of each proposal and number of
shares voted are as follows:
1. To elect a Board of Trustees for the each of the Trusts.
Voyageur Mutual Funds Voyageur Insured Funds
------------------------------- ----------------------------------
Shares Shares Voted Shares Shares Voted
Voted For Withheld Authority Voted For Withheld Authority
---------- ------------------ --------- ------------------
Thomas L. Bennett 20,895,279 360,094 25,076,354 602,982
Jude T. Driscoll 20,914,640 340,733 25,120,169 559,167
John A. Fry 20,894,794 360,579 25,085,403 593,933
Anthony D. Knerr 20,894,489 360,884 25,066,460 612,876
Lucinda S. Landreth 20,879,032 376,341 25,124,950 554,386
Ann R. Leven 20,857,875 397,498 25,085,383 593,953
Thomas F. Madison 20,905,986 349,387 25,067,669 611,667
Janet L. Yeomans 20,859,671 395,702 25,123,301 556,035
J. Richard Zecher 20,914,640 340,733 25,055,313 624,023
Voyageur Investment Trust Voyageur Mutual Funds II
------------------------------- ----------------------------------
Shares Shares Voted Shares Shares Voted
Voted For Withheld Authority Voted For Withheld Authority
---------- ------------------ --------- ------------------
Thomas L. Bennett 14,252,335 431,663 16,692,794 597,061
Jude T. Driscoll 14,251,144 432,854 16,715,574 574,281
John A. Fry 14,258,739 425,259 16,720,892 568,963
Anthony D. Knerr 14,258,995 425,003 16,721,519 568,336
Lucinda S. Landreth 14,254,091 429,907 16,684,563 605,292
Ann R. Leven 14,252,612 431,386 16,712,163 577,692
Thomas F. Madison 14,259,139 424,859 16,651,912 637,943
Janet L. Yeomans 14,251,014 432,984 16,719,493 570,362
J. Richard Zecher 14,248,581 432,417 16,686,028 603,827
2. To approve the use of a "manager of managers" structure whereby the
investment manager of the funds of the Trusts will be able to hire and
replace subadvisers without shareholder approval.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
Delaware Tax-Free Colorado Fund 14,474,563 858,374 933,205 1,023,713
23
OTHER
FUND INFORMATION (CONTINUED)
BOARD CONSIDERATION OF DELAWARE TAX-FREE ARIZONA INSURED FUND,
DELAWARE TAX-FREE CALIFORNIA FUND AND DELAWARE TAX-FREE COLORADO FUND
INVESTMENT ADVISORY AGREEMENT
At a meeting held on May 18-19, 2005 (the "Annual Meeting"), the Boards of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreements for the Delaware
Tax-Free Arizona Insured Fund, Delaware Tax-Free California Fund and Delaware
Tax-Free Colorado Fund (each a "Fund" and together the "Funds"). 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 Funds, the costs of such services
to the Funds, 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 each 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
Funds; 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 each 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(R) 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 Agreements for the Funds, 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
Agreements was in the best interests of the Funds and their 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 Funds and their 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 Funds, the compliance of
management personnel with the Code of Ethics adopted throughout the Delaware
Investments(R) 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 Funds' 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 Funds. 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 Funds 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 each 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
Funds was shown for the past one-, three-, five- and 10-year periods, as
applicable, ended February 28, 2005. The Board noted its objective that each
Fund's performance be at or above the median of its Performance Universe. The
following paragraphs summarize the performance results for the Funds and the
Board's view of such performance.
24
OTHER
FUND INFORMATION (CONTINUED)
DELAWARE TAX-FREE COLORADO FUND -- The Performance Universe for
this Fund consisted of the Fund and all retail and institutional Colorado
municipal debt funds as selected by Lipper. The Lipper report comparison showed
that the Fund's total return for the one-, three-, five- and 10-year periods was
in the second quartile of such Performance Universe. The Board was satisfied
with such performance.
COMPARATIVE EXPENSES. The Board considered expense comparison data for the
Delaware Investments(R) 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 each 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, each
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. Each 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 each Fund's total expense ratio to an acceptable
range as compared to the median of the Expense Group. The following paragraphs
summarize the expense results for the Funds and the Board's view of such
expenses.
DELAWARE TAX-FREE COLORADO FUND -- The expense comparisons for the Fund showed
that its management fee and total expenses were in the quartile with the 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 October 2005. 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 Funds.
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 Funds and the Delaware Investments Family of Funds.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are
realized by Delaware Investments as each 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 each Fund's management contract fell within the
standard structure. Although the Funds have not reached a size at which they can
take advantage of breakpoints, the Board recognized that the fee was structured
so that when the Funds grow, economies of scale may be shared.
25
DELAWARE INVESTMENTS(R) FAMILY OF FUNDS
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors ("Trustees"), which
has oversight responsibility for the management of a fund's business affairs.
Trustees 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 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 TRUSTEE
AND BIRTHDATE FUND(S) SERVED PAST 5 YEARS OR OFFICER OR OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
JUDE T. DRISCOLL(2) Chairman, 5 Years - Since August 2000, 92 None
2005 Market Street President, Executive Officer Mr. Driscoll has served in
Philadelphia, PA Chief Executive various executive capacities
19103 Officer and 1 Year - at different times at
Trustee Trustee Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-
Income Process -
Conseco Capital Management
(June 1998 - August 2000)
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
THOMAS L. BENNETT Trustee Since Private Investor - 92 None
2005 Market Street March 23, 2005 (March 2004 - Present)
Philadelphia, PA
19103 Investment Manager -
Morgan Stanley & Co.
October 4, 1947 (January 1984 - March 2004)
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN A. FRY Trustee 4 Years President - 92 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
May 28, 1960 University of Pennsylvania
(April 1995 - June 2002)
- ------------------------------------------------------------------------------------------------------------------------------------
ANTHONY D. KNERR Trustee 12 Years Founder/Managing Director - 92 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
- ------------------------------------------------------------------------------------------------------------------------------------
LUCINDA S. LANDRETH Trustee Since Chief Investment Officer - 92 None
2005 Market Street March 23, 2005 Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002 - 2004)
June 24, 1947
- ------------------------------------------------------------------------------------------------------------------------------------
ANN R. LEVEN Trustee 16 Years Treasurer/Chief 92 Director and
2005 Market Street Fiscal Officer - Audit Committee
Philadelphia, PA National Gallery of Art Chairperson - Andy
19103 (1994 - 1999) Warhol Foundation
November 1, 1940 Director and Audit
Committee Member -
Systemax Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
26
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 TRUSTEE
AND BIRTHDATE FUND(S) SERVED PAST 5 YEARS OR OFFICER OR OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
THOMAS F. MADISON Trustee 11 Years President/Chief 92 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director and Audit
and Consulting) Committee Member -
February 25, 1936 (January 1993 - Present) CenterPoint Energy
Director and Audit
Committee Member -
Digital River Inc.
Director and Audit
Committee Member -
Rimage
Corporation
Director - Valmont
Industries, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
JANET L. YEOMANS Trustee 6 Years Vice President/Mergers & 92 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.
- ------------------------------------------------------------------------------------------------------------------------------------
J. RICHARD ZECHER Trustee Since Founder - 92 Director and Audit
2005 Market Street March 23, 2005 Investor Analytics Committee Member -
Philadelphia, PA (Risk Management) Investor Analytics
19103 (May 1999 - Present)
Director and Audit
July 3, 1940 Committee Member -
Oxigene, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS
MICHAEL P. BISHOF Senior Chief Financial Mr. Bishof has served in 92 None(3)
2005 Market Street Vice President Officer since various executive capacities
Philadelphia, PA and February 17, 2005 at different times at
19103 Chief Financial Delaware Investments.
Officer
August 18, 1962
- ------------------------------------------------------------------------------------------------------------------------------------
RICHELLE S. MAESTRO Executive Vice President, 2 Years Ms. Maestro has served in 92 None(3)
2005 Market Street Chief Legal Officer various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN J. O'CONNOR Senior Vice President Treasurer Mr. O'Connor has served in 92 None(3)
2005 Market Street and Treasurer since various executive
Philadelphia, PA February 17, 2005 capacities at different
19103 times at Delaware
Investments.
June 16, 1957
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Delaware Investments is the marketing name for Delaware Management
Holdings, Inc. and its subsidiaries, including the Fund's(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(s') manager and distributor.
(3) Mr. Bishof, Ms. Maestro and Mr. O'Connor 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.
26
Delaware
Investments(R)
- -----------------------------------
A member of Lincoln Financial Group
This annual report is for the information of Delaware Tax-Free Arizona Insured A member of Lincoln Financial GroupFund, Delaware
Tax-Free California Fund, and Delaware Tax-Free Colorado Fund shareholders, but it may be used with prospective investors when
preceded or accompanied by a current prospectus for Delaware Tax-Free Arizona Insured Fund, Delaware Tax-Free California 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 the Funds. 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 a 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 Delaware Investments is the marketing name for
National Gallery of Art Delaware Management Holdings, Inc. and
Washington, DC its subsidiaries.
THOMAS F. MADISON
President and Chief Executive Officer +-----------------------------------------------------------------------------------+
MLM Partners, Inc. | Each Fund files its complete schedule of portfolio holdings with the Securities |
Minneapolis, MN | 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 |
JANET L. YEOMANS | procedures that each Fund uses to determine how to vote proxies (if any) |
Vice President/Mergers & Acquisitions | relating to portfolio securities is available without charge (i) upon request, |
3M Corporation | by calling 800 523-1918; (ii) on each Fund's Web site at |
St. Paul, MN | 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 |
J. RICHARD ZECHER | Commission's Public Reference Room in Washington, DC; information on the |
Founder | operation of the Public Reference Room may be obtained by calling |
Investor Analytics | 1-800-SEC-0330. |
Scottsdale, AZ | |
| 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. |
+-----------------------------------------------------------------------------------+
(9756) Printed in the USA
AR-WEST [8/05] IVES 10/05 MF-05-09-035 PO10442
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:
Thomas L. Bennett(1)
Thomas F. Madison
Janet L. Yeomans (1)
J. Richard Zecher
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 $19,800
for the fiscal year ended August 31, 2005.
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 $13,010
for the fiscal year ended August 31, 2004.
(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, 2005.
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 and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $33,875 for the registrant's fiscal year ended
August 31, 2005. 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 Registrant'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 Registrant.
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 and other service providers under common
control with the adviser 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 Registrant'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 Registrant.
- -----------------
(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 Mr.
Bennett qualifies as an audit committee financial expert by virtue of his
education, Chartered Financial Analyst designation, and his experience as a
credit analyst, portfolio manager and the manager of other credit analysts and
portfolio managers. 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.
(c) Tax fees.
---------
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $3,800 for the fiscal
year ended August 31, 2005. 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 return and review of annual excise distribution calculation.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's investment adviser and other
service providers under common control with the adviser and that relate directly
to the operations or financial reporting of the registrant were $0 for the
registrant's fiscal year ended August 31, 2005.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $1,750 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 return and review of annual excise distribution calculation.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's adviser and other service
providers under common control with the adviser 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.
(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, 2005.
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 and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $0 for the registrant's fiscal year ended
August 31, 2005.
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 and other service providers under common
control with the adviser 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.
(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
and other service providers under common control with the adviser were
$209,035 and $214,565 for the registrant's fiscal years ended August 31,
2005 and August 31, 2004, 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 and other service
providers under common control with the adviser 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. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company 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 fourth 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.
VOYAGEUR MUTUAL FUNDS II
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