UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-2715
Exact name of registrant as specified in charter: Delaware Group State
Tax-Free Income Trust
Address of principal executive offices: 2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service: David F. Connor, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: February 28
Date of reporting period: February 28, 2006
Item 1. Reports to Stockholders
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FIXED INCOME [DELAWARE INVESTMENTS(R) LOGO]
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Annual Report FEBRUARY 28, 2006
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DELAWARE TAX-FREE PENNSYLVANIA FUND
[POWERED BY RESEARCH(R) LOGO]
Table
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARY 4
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DISCLOSURE OF FUND EXPENSES 6
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SECTOR ALLOCATION 7
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FINANCIAL STATEMENTS:
Statement of Net Assets 8
Statement of Operations 12
Statements of Changes in Net Assets 13
Financial Highlights 14
Notes to Financial Statements 17
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 20
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BOARD OF TRUSTEES/DIRECTORS AND OFFICERS 21
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ABOUT THE ORGANIZATION 23
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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)2006 Delaware Distributors, L.P.
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Delaware Tax-Free Pennsylvania Fund
Portfolio February 28, 2006
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MANAGEMENT REVIEW
Fund Managers
Patrick P. Coyne
Executive Vice President, Managing Director, Head of Equity Investments
Mr. Coyne leads the investment team overseeing Delaware Investments(R) and
Lincoln Financial Group(R) and asset allocation funds. He joined Delaware
Investments(R) in 1989 and initially co-managed portfolios and traded securities
for the company's nuclear decommissioning trust clients. He led the firm's
municipal and tax-efficient fixed income investments teams from 1996 to 2004,
and in January 2003 was appointed managing director and co-head of the fixed
income department. Mr. Coyne began his career with Kidder, Peabody & Co., where
he managed the firm's Philadelphia trading desk. He has lectured on securities
trading and portfolio management at the Philadelphia Bond Club. He serves as
president of
the Lincoln National Income Fund, Inc. and the Lincoln National
Convertible Securities Fund, Inc. Mr. Coyne graduated magna cum laude from
Harvard University and earned an MBA with a concentration in finance from The
Wharton School of the University of Pennsylvania.
Robert F. Collins, CFA
Senior Vice President, Senior Portfolio Manager
Mr. Collins is a co-portfolio manager of several of Delaware Investments(R)
municipal bond funds and client accounts. Prior to joining Delaware
Investments(R) in 2004, he spent five years as a co-manager of the municipal
portfolio management group within PNC Advisors, where he oversaw the tax-exempt
investments of high net worth and institutional accounts. Before that, he headed
the municipal fixed income team at Wilmington Trust Company. Mr. Collins earned
a bachelor's degree in economics from Ursinus College, and he is also a former
president of the Financial Analysts of Wilmington, Del.
Joseph R. Baxter
Senior Vice President, Head of Municipal Bond Department,
Senior Portfolio Manager
Mr. Baxter heads the Delaware Investments(R) municipal bond department and is
responsible for setting investment strategy. He is also a co-portfolio manager
of municipal bond funds and several client accounts. Before joining Delaware
Investments in 1999, he held investment positions with First Union, most
recently as a municipal portfolio manager with the Evergreen Funds. Mr. Baxter
received a bachelor's degree in finance and marketing from LaSalle University.
Q: What was the investment environment like for Delaware Tax-Free Pennsylvania
Fund during the fiscal year ended February 28, 2006?
Changes in interest rates and municipal bond refinancings were among the key
stories in the municipal bond market during the fiscal year. The Federal Reserve
Board maintained its policy of tightening U.S. monetary policy, aimed at keeping
inflation in check. This included a continuous string of eight quarter-point
increases to the fed funds rate, which took this target for short-term interest
rates from 2.50% on February 28, 2005 to 4.50% as of February 28, 2006 (source:
Bloomberg).
Despite the fed's actions on short-term interest rates, longer term rates did
not follow suit and generally remained low throughout the course of the fiscal
year. The 30-year Treasury bond yield, for instance, actually declined over the
course of the fiscal year, from 4.70% at the start of the year to 4.51% on
February 28, 2006. Similarly, the 30-year municipal bond yield declined from
4.48% to 4.36% during the same period (source: Bloomberg).
Due to their tax-advantaged status, municipal bonds typically trade at lower
yields than Treasury securities. During the year, municipals generally held
their value compared to Treasuries. Although the relationship varied throughout
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 95.8% and ended
the year with yields at about 95.5% of the long Treasury bond on February 28,
2006 (source: Thomson Financial).
Rising short-term rates, coupled with long-term rates' downward trend, created a
situation that economists typically refer to as a "flattening yield curve." That
is, the difference between short- and long-term bond yields grows smaller across
the spectrum of maturities.
In this type of environment, bonds with intermediate maturities -- those in the
three- to seven-year maturity range -- frequently underperform. We found this to
be particularly true during the second half of the fiscal year, when the
flattening of the yield curve became more pronounced.
Credit quality among municipal bond issuers generally improved during the fiscal
year, and it was another factor influencing the markets. As a result of
improving credit quality, demand generally increased for high yield -- or
non-investment grade -- bonds. High yield securities performed well. Similarly,
among investment grade municipal bonds, lower-rated securities often
outperformed higher-rated securities by a significant margin on a total return
basis.
Q: What other market-related events influenced Fund performance?
Issuance of new municipal bonds remained strong during most of the fiscal year.
Supply of new municipal bonds is typically assessed on a calendar year basis
and, supply in calendar 2005 totaled a record $408 billion. New issuance in 2005
for the Commonwealth of Pennsylvania increased 28% to total $17.8 billion
(source: Municipal Market Data).
Driving that record issuance was low interest rates, which provided many issuers
with refinancing opportunities. We believe the ability of the market to absorb
additional supply was aided by non-traditional buyers (buyers more interested in
the relative valuation of the asset class than the tax-advantaged status of
municipal bonds). As more and more municipal issuers
1
refinanced in 2005, new issuance dropped off. By the first months of 2006, the
rate of new issuance had declined significantly.
The economy in Pennsylvania generally grew, and is expected to continue to do
so, as a result of the $2 billion in-state economic stimulus and the recent
approval of legalized gaming (slots). Gaming is expected by some estimates to
create more than $1 billion of annual revenue, which would be used to lower
local school property taxes. Debt issued over a four year period is expected to
fund the economic stimulus program. This funding, combined with private
investments, will be invested in economic development projects within the state.
We believe Pennsylvania benefits from a low debt burden and a well-funded state
pension system.
Pennsylvania has long been known as a heavily industrialized state; however,
much has changed in recent years. We believe Pennsylvania now has a diverse
economic base, excellent educational facilities, and strong health care systems.
Although manufacturing jobs continue to decline, there have been employment
gains in education, health care, leisure/hospitality, and retail trade sectors.
Despite the recent strong economic showing, Pennsylvania is challenged by weak
demographics and below average employment growth. The Commonwealth's population
base is among the eldest in the nation.
Q: How did Delaware Tax-Free Pennsylvania Fund perform versus its benchmark
index and peer funds?
Delaware Tax-Free Pennsylvania Fund returned 3.97% at net asset value and -0.66%
at maximum offer price (both returns include distributions reinvested). By
comparison, the 61 funds in the Lipper Pennsylvania Municipal Debt Funds
category gained an average of 3.37% for the same period. The Fund's benchmark --
the national Lehman Brothers Municipal Bond Index -- gained 3.87%.
For complete, annualized performance for Delaware Tax-Free Pennsylvania Fund,
please see the table on page 4.
Q: What strategies did you pursue during the year, and how did they influence
the Fund's performance?
With a flattening yield curve and general outperformance by lower-rated
securities, the story throughout the Fund's fiscal year was often about actions
we chose not to take within the Fund, rather than those we did.
In the environment that prevailed, our approach to the municipal bond markets at
times dictated that we stay the course and ultimately resulted in limited
transactions. During the year, it was possible for municipal bond investors to
gain total return performance by favoring lower-rated bonds or by taking on
additional interest rate risk. Consistent with our philosophy, our approach was
to find and hold mid to low investment grade bonds with attractive income.
The objective of Delaware Tax-Free Pennsylvania Fund is a high level of current
interest income exempt from federal income tax and certain Pennsylvania state
and local taxes, with preservation of capital. During much of the year, our
preferred way to achieve that objective was to hold onto legacy bonds --
securities purchased in prior fiscal periods -- and to depend on the attractive
bond yields that already exist within our portfolio of investments. Generally
speaking, with interest rates in decline, it became increasingly difficult to
identify bonds in the marketplace that were more attractive than our holdings in
the portfolio. We believed that rotating out of these legacy bonds would only
serve to decrease the Fund's yield and potentially create undesirable taxable
events.
We adhered to our bottom-up investment style, which is based on
security-by-security analysis and a free exchange of information among the
various members of a deep team that includes portfolio managers, credit
analysts, and traders. Frequently during the year, we opted to focus our
resources on monitoring the credit of legacy bonds.
A key reason for maintaining the status quo much of the year is that we consider
the Fund a yield-oriented vehicle. One of the principles of our investment
approach is that we believe income is the most significant and predictable
component of total return over time. Price change is highly volatile and less
significant.
As such, we also do not typically make bold interest rate forecasts, and when we
do adjust the Fund's duration (a measure of the Fund's sensitivity to interest
rate changes), we attempt to track the average duration of our peer group. This
strategy proved beneficial during the fourth calendar quarter of 2005, as
economic uncertainty increased in the aftermath of the Gulf coast hurricanes.
During that volatile period in the market, Delaware Tax-Free Pennsylvania Fund
generally tracked the performance of its peer group. We did trim the Fund's
duration late in the fiscal year, in anticipation of further interest rate
increases.
During the course of the fiscal year, the Fund's makeup by sector and credit
rating was not strategically altered.
2
Q: How did individual securities influence performance?
Bonds issued to finance hospitals and other healthcare-industry projects
outperformed during the fiscal year. These bonds are frequently lower-rated
investment grade issues (rated A or BBB), and their outperformance as a group
was in keeping with the trend of strong performance among lower-rated issues. An
example is a bond issued by Allegheny County Hospital Development Authority for
the Ohio Valley General Hospital.
Tax-free municipal bonds backed by corporations also frequently saw a measure of
gain. Bonds issued by the Pennsylvania Economic Development Authority for Amtrak
and Proctor & Gamble were among holdings in this category. The Amtrak bonds
performed well along with other lower-rated securities. The Proctor & Gamble
bonds outperformed because of their long duration.
In the declining interest rate environment, refundings and bond restructurings
occasionally influenced performance, with both positive and negative outcomes at
times. For example, several bonds in the Fund were prerefunded during the year.
When a bond becomes prerefunded, a new bond is issued, and the proceeds are
placed in escrow to be invested in U.S. Treasury securities. The proceeds
generated are then used to pay the principal and interest on the prerefunded
bond. As such, these bonds typically receive the highest credit ratings and
benefit from a price boost when they initially become prerefunded. A bond issued
to finance a Wellspan Heath Center was a Fund holding that became prerefunded.
On the other hand, bonds that were prerefunded in prior periods tend to
underperform as the yield curve flattens, as do bonds with short call dates. We
had holdings in these categories as well, which detracted from performance
versus the benchmark and peers.
Similarly, a bond issued by the Delaware County Industrial Development Authority
for Main Line Health was restructured during the year. This bond restructuring
caused the security to be a detractor for us when measuring relative performance
over the course of the fiscal year.
Q: How was the portfolio positioned at the end of the period, to begin the
2006-2007 fiscal year?
More than 70% of the securities in the portfolio were rated either AAA or AA,
and more than 96% of net assets were in securities with investment grade credit
ratings. Bonds supporting finance of educational institutions and hospitals
continued to be the Fund's largest sectors. We aimed to position the Fund
neutrally compared to our peers with regard to interest rate risk, expecting at
least some further rate hikes by the Fed in 2006. Our recent shortening of
duration is designed to be a conservative measure, as there is still some degree
of uncertainty with regard to the direction of the economy and the
intermediate-term interest rate outlook. We will continue to seek opportunities
to reposition the Fund, with the hope that future quarters may offer municipal
investors a more accommodating investment environment.
3
Performance Summary
DELAWARE TAX-FREE PENNSYLVANIA 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. A rise or fall in 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 can rise and an investor can lose
principal. 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 Pennsylvania Fund prospectus contains this and
other important information about the investment company. Please request a
prospectus by calling 800 523-1918. Read it carefully before you invest or send
money. Performance includes reinvestment of all distributions and is subject to
change.
Fund Performance
Average Annual Total Returns
Through February 28, 2006 Lifetime 10 Years Five Years One Year
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Class A (Est. 3/23/77)
Excluding Sales Charge + 6.10% + 4.86% + 5.44% +3.97%
Including Sales Charge + 5.94% + 4.37% + 4.47% -0.66%
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Class B (Est. 5/2/94)
Excluding Sales Charge + 4.67% + 4.19% + 4.62% +3.17%
Including Sales Charge + 4.67% + 4.19% + 4.37% -0.81%
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Class C (Est. 11/29/95)
Excluding Sales Charge + 4.05% + 4.03% + 4.62% + 3.17%
Including Sales Charge + 4.05% + 4.03% + 4.62% + 2.18%
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Returns reflect the reinvestment of 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 for periods after June 1, 1992, have
an annual distribution and service fee of up to 0.30%. The distributor has
contracted to limit this amount to 0.25% through June, 30 2006.
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 Class A shares of Delaware Tax-Free
Pennsylvania Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
4
Fund Basics
As of February 28, 2006
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FUND OBJECTIVE:
The Fund seeks a high level of current interest income exempt from federal
income tax and certain Pennsylvania state and local taxes, consistent with
preservation of capital.
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TOTAL FUND NET ASSETS:
$596 million
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NUMBER OF HOLDINGS:
118
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FUND START DATE:
March 23, 1977
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NASDAQ SYMBOLS:
Class A DELIX
Class B DPTBX
Class C DPTCX
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Performance of a $10,000 Investment
February 29, 1996 through February 28, 2006
Delaware Tax-Free Lehman Brothers
Pennsylvania Fund Municipal Bond
Class A Shares Index
2/29/1996 $ 9,550 $ 10,000
2/28/1997 $ 9,965 $ 10,551
2/28/1998 $ 10,741 $ 11,515
2/28/1999 $ 11,240 $ 12,224
2/29/2000 $ 10,658 $ 11,969
2/28/2001 $ 11,773 $ 13,446
2/28/2002 $ 12,571 $ 14,366
2/28/2003 $ 13,486 $ 15,468
2/29/2004 $ 14,294 $ 16,442
2/28/2005 $ 14,756 $ 16,929
2/28/2006 $ 15,341 $ 17,584
Chart assumes $10,000 invested on February 29, 1996 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance for other Fund classes will vary due to differing charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The Lehman Brothers Municipal Bond Index is an unmanaged index that
generally tracks the performance of municipal bonds. An index is unmanaged and
does not reflect the costs of operating a mutual fund, such as the costs of
buying, selling, and holding securities. You cannot invest directly in an index.
Past performance is not a guarantee of future results.
An expense limitation was in effect for the periods shown. Performance would
have been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
5
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Disclosure For the Period September 1, 2005 to February 28, 2006
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OF FUND EXPENSES
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period September 1, 2005 to February 28, 2006.
Actual Expenses
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table, reflect fee waivers in
effect for Class A shares. The expenses shown in the table assume reinvestment
of all dividends and distributions.
Delaware Tax-Free Pennsylvania Fund
Expense Analysis of an Investment of $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 9/1/05 to
9/1/05 2/28/06 Ratios 2/28/06*
Actual Fund Return
Class A $ 1,000.00 $ 1,007.60 0.91% $ 4.53
Class B 1,000.00 1,003.70 1.68% 8.35
Class C 1,000.00 1,003.70 1.68% 8.35
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Hypothetical 5% Return (5% return before expenses)
Class A $ 1,000.00 $ 1,020.28 0.91% $ 4.56
Class B 1,000.00 1,016.46 1.68% 8.40
Class C 1,000.00 1,016.46 1.68% 8.40
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* "Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied
by the 181/365 (to reflect the one-half year period).
6
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Sector Allocation As of February 28, 2006
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DELAWARE TAX-FREE PENNSYLVANIA FUND
Sector designations may be different than the sector designations presented in
other Fund materials.
Percentage
Sector of Net Assets
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Municipal Bonds 96.58%
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Airport Revenue Bonds 2.49%
Continuing Care/Retirement Revenue Bonds 2.46%
Corporate Backed Revenue Bonds 10.31%
Electric & Gas Revenue Bonds 1.72%
Escrowed to Maturity Bonds 7.12%
Higher Education Revenue Bonds 15.44%
Hospital Revenue Bonds 11.59%
Investor Owned Utilities Revenue Bonds 0.53%
Municipal Lease Revenue Bonds 4.75%
Parking Revenue Bonds 0.81%
Political Subdivision General Obligation Bonds 0.35%
Ports & Harbors Revenue Bonds 1.78%
Pre-Refunded Bonds 11.20%
School District General Obligation Bonds 3.42%
Single Family Housing Revenue Bonds 2.15%
Tax Increment/Special Assessment Bonds 0.99%
Territorial Revenue Bonds 2.91%
Transportation Revenue Bonds 0.91%
Turnpike/Toll Road Revenue Bonds 2.38%
Water & Sewer Revenue Bonds 13.27%
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Variable Rate Demand Notes 2.22%
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Total Market Value 98.80%
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Receivables and Other Assets Net of Liabilities 1.20%
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Total Net Assets 100.00%
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7
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Delaware Tax-Free Pennsylvania Fund
Statement February 28, 2006
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OF NET ASSETS
Principal Market
Amount Value
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Municipal Bonds - 96.58%
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Airport Revenue Bonds - 2.49%
Allegheny County Airport Revenue
(Pittsburgh International Airport Project)
Series A 5.75% 1/1/14 (MBIA) (AMT) $ 6,910,000 $ 7,630,989
Lehigh Northampton Airport Authority
Revenue (Lehigh Valley Airport Project)
Series A
6.00% 5/15/25 (MBIA) (AMT) 1,525,000 1,642,395
6.00% 5/15/30 (MBIA) (AMT) 2,700,000 2,907,846
Philadelphia Authority for Industrial
Development Revenue
(Sub-Air Cargo Project) Series A
7.50% 1/1/25 (AMT) 2,500,000 2,671,925
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14,853,155
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Continuing Care/Retirement Revenue Bonds - 2.46%
Bucks County Industrial Development
Authority Multi-Family County-Guaranteed
(New Hope Manor Project) Series A
5.40% 3/1/22 (AMT) 1,265,000 1,314,272
5.50% 3/1/41 (AMT) 5,340,000 5,509,918
Delaware County Industrial Development
Authority Revenue Care Institute
(Main Line Care Institute Project)
9.00% 8/1/31 1,782,389 1,480,506
Lancaster County Hospital Authority
Revenue Health Center
(Willow Valley Retirement Project)
5.875% 6/1/31 2,100,000 2,218,713
Lancaster Industrial Development
Authority Revenue
(Garden Spot Village Project)
Series A 7.625% 5/1/31 1,650,000 1,800,497
Philadelphia Authority for Industrial
Development Revenue
(Germantown Senior Living
Presbyterian Homes Project)
Series A 5.625% 7/1/35 2,295,000 2,343,700
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14,667,606
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Corporate Backed Revenue Bonds - 10.31%
Allegheny County Industrial Development
Authority Environmental Improvement
Revenue (USX Corp. Project)
5.50% 12/1/29 13,000,000 13,507,780
Beaver County Industrial Development
Authority Pollution Control Revenue
(Atlantic Richfield Co. Project)
5.95% 7/1/21 5,100,000 5,241,270
Bucks County Industrial Development
Authority Environmental Improvement
Revenue (USX Corp. Project)
5.40% 11/1/17 2,250,000 2,414,475
Dauphin County Industrial Development
Authority Water Revenue
(Dauphin Consolidated Water
Supply Project) Series B 6.70% 6/1/17 1,750,000 2,126,303
Delaware County Industrial Development
Authority Water Facilities Revenue
(Aqua Income Project) Series C
5.00% 2/1/35 (FGIC) (AMT) 7,670,000 7,951,949
Principal Market
Amount Value
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Municipal Bonds (continued)
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Corporate Backed Revenue Bonds (continued)
Delaware County Industrial Development
Authority Water Facilities Revenue
(Philadelphia Suburban Water Project)
6.00% 6/1/29 (FGIC) (AMT) $ 3,000,000 $ 3,228,240
Luzerne County Industrial Development
Authority Water Facilities Revenue
(American Water Co. Project)
Series A 5.10% 9/1/34 (AMBAC) (AMT) 15,000,000 15,617,400
Pennsylvania Economic Development
Financing Authority Solid Waste
Disposal Revenue
(Proctor & Gamble Paper Project)
5.375% 3/1/31 (AMT) 10,000,000 11,346,200
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61,433,617
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Electric & Gas Revenue Bonds - 1.72%
Carbon County Industrial Development
Authority Resource Recovery
(Panther Creek Partners Project)
6.65% 5/1/10 (AMT) 7,790,000 8,230,135
^Philadelphia Gas Works Revenue Capital
Appreciation Series C
6.884% 1/1/12 (AMBAC) 2,500,000 2,004,200
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10,234,335
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Escrowed to Maturity Bonds - 7.12%
Delaware County Authority Health
Facilities Revenue
(Mercy Health Corp. Project)
6.00% 12/15/26 3,500,000 3,639,755
Pennsylvania State Higher Educational
Facilities Authority College & University
Revenue (University of the Arts Project)
5.20% 3/15/25 (RADIAN) 4,490,000 4,654,693
Philadelphia Authority for Industrial
Development Commercial Revenue
(Girard Estates Facilities Leasing Project)
5.00% 5/15/27 4,500,000 4,561,200
Philadelphia Hospitals & Higher Education
Facilities Authority Revenue
(Presbyterian Medical Center Project)
6.65% 12/1/19 13,000,000 15,902,901
Pittsburgh Water & Sewer Authority
Revenue (Crossover Refunding Projects)
7.25% 9/1/14 (FGIC) 8,355,000 9,642,923
Pottsville School District
9.375% 5/1/06 (AMBAC) 105,000 106,079
Southcentral General Authority Revenue
(Wellspan Health Obligated Project)
5.625% 5/15/26 3,610,000 3,957,932
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42,465,483
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Higher Education Revenue Bonds - 15.44%
Allegheny County Higher Education
Building Authority Revenue
(Carnegie Mellon University Project)
5.25% 3/1/32 1,900,000 2,009,611
(Chatham College Project)
Series A 5.85% 3/1/22 650,000 691,002
Series A 5.95% 3/1/32 1,000,000 1,059,030
Series B 5.75% 11/15/35 4,000,000 4,227,320
8
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Delaware Tax-Free Pennsylvania Fund
Statement
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OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
- --------------------------------------------------------------------------------
Higher Education Revenue Bonds (continued)
Delaware County Authority College Revenue
(Eastern College Project) Series B
5.50% 10/1/19 $ 4,175,000 $ 4,276,369
5.50% 10/1/24 2,850,000 2,916,377
(Haverford College Project)
5.75% 11/15/29 1,875,000 2,050,763
Erie Higher Education Building Authority
College Revenue (Mercyhurst College
Project) Series B 5.00% 3/15/23 750,000 763,200
Lehigh County General Purpose Authority
Revenue (Desales University Project)
5.125% 12/15/23 (RADIAN) 5,000,000 5,213,650
Lycoming County Authority College Revenue
(Pennsylvania College of Technology
Project) 5.375% 7/1/30 (AMBAC) 5,000,000 5,326,800
Pennsylvania Economic Development
Financing Authority School Revenue
(Germantown Friends School Project)
5.35% 8/15/31 2,820,000 2,956,065
Pennsylvania State Higher Educational
Facilities Authority College &
University Revenue
(Drexel University Project) Series A
5.20% 5/1/29 1,500,000 1,565,835
5.20% 5/1/32 1,000,000 1,041,720
(Lafayette College Project)
6.00% 5/1/30 2,500,000 2,725,450
(Philadelphia University Project)
5.00% 6/1/35 1,665,000 1,672,842
6.00% 6/1/29 (RADIAN) 1,800,000 1,936,998
(Thomas Jefferson University Project)
5.00% 1/1/29 5,000,000 5,175,300
(Trustees University) Series C
5.00% 7/15/38 6,000,000 6,323,520
(Ursinus College)
5.125% 1/1/33 (RADIAN) 2,000,000 2,067,180
(Widener University) 5.00% 7/15/39 7,915,000 8,082,797
Pennsylvania State Public School
Building Authority Revenue
(Lehigh Career & Technical Institute
Project) 5.125% 10/1/28 (FGIC) 2,800,000 2,957,136
Pennsylvania State University
5.00% 9/1/29 2,500,000 2,646,400
Philadelphia Hospitals & Higher Educational
Facilities Authority College Revenue
(Chestnut Hill College Project)
6.00% 10/1/29 4,360,000 4,479,290
Philadelphia Redevelopment Authority
Revenue (Beech Student Housing
Complex Project)
5.50% 7/1/35 (ACA) 1,500,000 1,575,060
5.625% 7/1/28 (ACA) 1,000,000 1,067,780
Swarthmore Borough Authority College
Revenue (Swarthmore College Project)
5.00% 9/15/31 15,000,000 15,524,249
West Cornwall Township Municipal
Authority College Revenue
(Elizabethtown College Project)
6.00% 12/15/27 1,615,000 1,719,910
------------
92,051,654
------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
- --------------------------------------------------------------------------------
Hospital Revenue Bonds - 11.59%
Allegheny County Hospital Development
Authority Revenue
(Ohio Valley General Hospital Project)
Series A 5.125% 4/1/35 $ 1,750,000 $ 1,770,720
Berks County Municipal Authority Revenue
(Health Care Reading Hospital Pooled
Financing Project) 5.00% 3/1/28 11,750,000 12,004,153
Chester County Health & Educational
Facilities Authority Revenue
(Jefferson Health Systems Project)
Series B 5.375% 5/15/27 14,270,000 14,785,431
Lancaster County Hospital Revenue
(General Hospital Project)
5.50% 3/15/26 3,000,000 3,163,590
Monroe County Hospital Authority Revenue
(Pocono Medical Center Project)
6.00% 1/1/43 6,710,000 7,190,704
Montgomery County Higher Education &
Health Authority Revenue
(Abington Memorial Hospital) Series A
5.125% 6/1/32 4,600,000 4,728,708
(Catholic Health East)
Series C 5.50% 11/15/24 1,150,000 1,233,341
Mount Lebanon Hospital Authority Revenue
(St. Clair Memorial Hospital Project)
Series A 5.625% 7/1/32 4,500,000 4,734,495
Pennsylvania Economic Development
Financing Authority Revenue
(Dr. Gertrude A. Barber Center, Inc.
Project) 5.90% 12/1/30 (RADIAN) 2,250,000 2,425,838
Pennsylvania State Higher Educational
Facilities Authority Revenue
(UPMC Health Systems Project)
Series A 6.00% 1/15/31 10,000,000 10,944,400
St. Mary Hospital Authority Health System
Revenue (Catholic Health East) Series B
5.375% 11/15/34 5,750,000 6,124,325
------------
69,105,705
------------
Investor Owned Utilities Revenue Bonds - 0.53%
Indiana County Industrial Development
Authority Pollution Control Revenue
(PSE&G Power Project)
5.85% 6/1/27 (AMT) 3,000,000 3,150,570
------------
3,150,570
------------
Municipal Lease Revenue Bonds - 4.75%
Pennsylvania State Public School Building
Authority Revenue (Lehigh Career &
Technical Institute Project)
5.25% 10/1/32 (FGIC) 2,140,000 2,286,633
Philadelphia Authority for Industrial
Development Lease Revenue Series B
5.25% 10/1/30 (FSA) 4,510,000 4,780,555
Philadelphia Redevelopment Authority
Revenue (Neighborhood Transformation)
Series C 5.00% 4/15/31 (FGIC) 4,000,000 4,210,960
Puerto Rico Public Buildings Authority
Revenue (Government Facilities)
Series I 5.25% 7/1/33 16,000,000 17,032,000
------------
28,310,148
------------
9
- --------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund
Statement
- --------------------------------------------------------------------------------
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
- --------------------------------------------------------------------------------
Parking Revenue Bonds - 0.81%
Pennsylvania Economic Development
Financing Authority Revenue
(30th Street Station Garage Project)
5.875% 6/1/33 (ACA) (AMT) $ 4,500,000 $ 4,831,695
------------
4,831,695
------------
Political Subdivision General Obligation Bonds - 0.35%
Lancaster County Series A
5.00% 11/1/27 (FGIC) 2,000,000 2,083,360
------------
2,083,360
------------
Ports & Harbors Revenue Bonds - 1.78%
Delaware River Port Authority
(Pennsylvania & New Jersey Port
District Project)
Series B 5.70% 1/1/21 (FSA) 8,560,000 9,188,304
Erie, Western Pennsylvania Port Authority
General Revenue
6.25% 6/15/10 (AMT) 1,365,000 1,416,501
------------
10,604,805
------------
- -/-Pre-Refunded Bonds - 11.20%
Abington School District
6.00% 5/15/26-06 (FGIC) 6,000,000 6,034,080
Erie Water Authority Revenue
Series A 5.125% 12/1/25-11 (MBIA) 4,000,000 4,318,360
Harrisburg Authority Office & Parking
Revenue Series A 6.00% 5/1/19-08 7,500,000 7,902,150
Indiana County Industrial Development
Authority Revenue (Student Co-op
Association, Inc. Project) Series A
5.875% 11/1/24-06 (AMBAC) 1,000,000 1,016,870
5.875% 11/1/29-06 (AMBAC) 1,000,000 1,016,870
Montgomery County Higher Education &
Health Authority Revenue
(Beaver College Project)
5.85% 4/1/21-06 (Connie Lee) 5,465,000 5,585,449
Norwin School District
6.00% 4/1/30-10 (FGIC) 2,000,000 2,179,040
Pennsylvania State Higher Education
Assistance Agency Capital Acquisition
5.875% 12/15/30-10 (MBIA) 7,385,000 8,141,667
Pennsylvania State Higher Educational
Facilities Authority Revenue
(Drexel University Project)
6.00% 5/1/29-09 3,000,000 3,222,600
(Ursinus College Project)
5.90% 1/1/27-07 1,000,000 1,040,090
Pennsylvania State Turnpike
Commission Series F
5.00% 7/15/31-11 (AMBAC) 1,000,000 1,077,820
5.00% 7/15/41-11 (AMBAC) 1,600,000 1,724,512
Philadelphia Authority for Industrial
Development Revenue
(Stapeley Hall Germantown Continuing
Care Community Project)
6.60% 1/1/16-07 5,250,000 5,422,725
Southcentral General Authority Revenue
(Wellspan Health Obligated Project)
5.625% 5/15/26-11 16,390,000 18,065,386
------------
66,747,619
------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
- --------------------------------------------------------------------------------
School District General Obligation Bonds - 3.42%
Abington School District Series A
5.00% 4/1/29 (FSA) $ 3,085,000 $ 3,271,828
Canon McMillan School District
Series B 5.25% 12/1/34 (FGIC) 3,580,000 3,833,965
Catasauqua Area School District
5.00% 2/15/31 (FSA) 1,000,000 1,061,640
5.00% 2/15/36 (FSA) 2,100,000 2,215,458
Greater Johnstown School District
Series C 5.125% 8/1/25 (MBIA) 7,500,000 7,883,625
McGuffey School District
5.125% 8/1/31 (FGIC) 2,000,000 2,123,520
------------
20,390,036
------------
Single Family Housing Revenue Bonds - 2.15%
Allegheny County Residential Finance
Authority Single Family Mortgage Revenue
Series II-2 5.90% 11/1/32 (GNMA) (AMT) 925,000 963,665
Series KK-2 5.40% 5/1/26 (GNMA) (AMT) 2,605,000 2,689,350
Pennsylvania Housing Finance Agency
Single Family Mortgage Revenue
Series 66A 5.65% 4/1/29 (AMT) 3,765,000 3,850,428
Series 72A 5.35% 10/1/31 (AMT) 5,190,000 5,306,360
------------
12,809,803
------------
Tax Increment/Special Assessment Bonds - 0.99%
Allegheny County Redevelopment
Authority Revenue
(Pittsburgh Mills Project)
5.60% 7/1/23 2,000,000 2,109,900
(Waterfront Project) Series B
6.00% 12/15/10 1,000,000 1,056,010
6.40% 12/15/18 2,500,000 2,737,050
------------
5,902,960
------------
Territorial Revenue Bonds - 2.91%
Puerto Rico Commonwealth Highway &
Transportation Authority Revenue
Series G 5.00% 7/1/33 3,000,000 3,083,280
Series G 5.00% 7/1/42 5,000,000 5,116,850
Series J 5.00% 7/1/34 3,550,000 3,658,417
Puerto Rico Commonwealth Infrastructure
Financing Authority Tax Revenue
Series B 5.00% 7/1/41 5,350,000 5,502,529
------------
17,361,076
------------
Transportation Revenue Bonds - 0.91%
Pennsylvania Economic Development
Financing Authority Exempt Facilities
Revenue (Amtrak Project)
Series A 6.375% 11/1/41 (AMT) 5,000,000 5,399,350
------------
5,399,350
------------
Turnpike/Toll Road Revenue Bonds - 2.38%
Delaware River Toll Bridge 5.00% 7/1/28 3,000,000 3,119,340
Pennsylvania State Turnpike
Commission Revenue
Series A 5.00% 12/1/34 (AMBAC) 8,000,000 8,425,520
Series R 5.00% 12/1/30 (AMBAC) 2,500,000 2,620,225
------------
14,165,085
------------
10
- --------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund
Statement
- --------------------------------------------------------------------------------
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
- --------------------------------------------------------------------------------
Water & Sewer Revenue Bonds - 13.27%
Allegheny County Sanitation Authority
Sewer Revenue Series A
5.00% 12/1/30 (MBIA) $ 2,500,000 $ 2,657,575
**First Albany Corp. Municipal Trusts
Inverse Floater
5.95% 12/15/14 (AMBAC) 46,500,000 52,731,464
Philadelphia Water & Waste Revenue
Series A 5.00% 7/1/35 (FSA) 7,130,000 7,501,830
Pittsburgh Water & Sewer Authority
Revenue First Lien
5.00% 9/1/29 (MBIA) 2,210,000 2,334,114
5.125% 12/1/31 (AMBAC) 10,000,000 10,626,999
Westmoreland County Municipal
Authority Service Revenue
5.25% 8/15/28 (FSA) 3,000,000 3,257,280
------------
79,109,262
------------
Total Municipal Bonds (cost $532,241,161) 575,677,324
------------
- --------------------------------------------------------------------------------
oVariable Rate Demand Notes - 2.22%
- --------------------------------------------------------------------------------
Chester County Industrial Development
Authority Revenue
(Archdiocese of Philadelphia)
2.93% 7/1/31 2,500,000 2,500,000
Philadelphia Authority for Industrial
Development Revenue
(Newcourtland Elder Services Project)
2.93% 3/1/27 6,000,000 6,000,000
Southcentral General Authority Revenue
(Wellspan Health Obligated Project)
Series C 3.17% 5/15/35 (AMBAC) 4,700,000 4,700,000
------------
Total Variable Rate Demand Notes
(cost $13,200,000) 13,200,000
------------
Total Market Value of Securities - 98.80%
(cost $545,441,161) 588,877,324
Receivables and Other Assets
Net of Liabilities - 1.20% 7,164,007
------------
Net Assets Applicable to 73,472,495
Shares Outstanding - 100.00% $596,041,331
============
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class A ($570,329,113 / 70,302,933 Shares) $ 8.11
------------
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class B ($17,761,783 / 2,189,654 Shares) $ 8.11
------------
Net Asset Value - Delaware Tax-Free Pennsylvania Fund
Class C ($7,950,435 / 979,908 Shares) $ 8.11
------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Components of Net Assets at February 28, 2006:
Shares of beneficial interest
(unlimited authorization -- no par) $576,295,511
Accumulated net realized loss on investments (23,690,343)
Net unrealized appreciation of investments 43,436,163
------------
Total net assets $596,041,331
============
** An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of February 28, 2006. See
Note 7 in "Notes to Financial Statements."
^ Zero coupon security. The interest rate shown is the yield at the time of
purchase.
- -/- Pre-Refunded Bonds. Municipals that are generally backed or
secured by U.S. Treasury bonds. For pre-refunded bonds, the stated
maturity is followed by the year in which the bond is pre-refunded. See
Note 7 in "Notes to Financial Statements."
o Variable rate security. The interest rate shown is the rate as of February
28, 2006.
Summary of Abbreviations:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
Connie Lee - Insured by the College Construction Insurance Association
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
Net Asset Value and Offering Price per Share -
Delaware Tax-Free Pennsylvania Fund
Net asset value Class A (A) $ 8.11
Sales charge (4.50% of offering price) (B) 0.38
------------
Offering price $ 8.49
============
(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
11
- --------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund
Statement Year Ended February 28, 2006
- --------------------------------------------------------------------------------
OF OPERATIONS
Investment Income:
Interest $ 31,728,732
-------------
Expenses:
Management fees $ 3,311,888
Distribution expenses -- Class A 1,563,147
Distribution expenses -- Class B 198,276
Distribution expenses -- Class C 75,011
Dividend disbursing and transfer agent fees and expenses 359,544
Accounting and administration expenses 231,839
Legal and professional fees 94,295
Insurance fees 49,568
Trustees' fees 32,824
Reports and statements to shareholders 26,969
Registration fees 22,199
Custodian fees 14,559
Pricing fees 3,541
Other 10,992 5,994,652
------------
Less waived distribution expenses -- Class A (245,095)
Less expense paid indirectly (5,535)
-------------
Total expenses 5,744,022
-------------
Net Investment Income 25,984,710
-------------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments 2,019,077
Net change in unrealized appreciation/depreciation of investments (4,373,724)
-------------
Net Realized and Unrealized Loss on Investments (2,354,647)
-------------
Net Increase in Net Assets Resulting from Operations $ 23,630,063
=============
See accompanying notes
12
- --------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund
Statements
- --------------------------------------------------------------------------------
OF CHANGES IN NET ASSETS
Year Ended
2/28/06 2/28/05
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 25,984,710 $ 28,586,626
Net realized gain (loss) on investments 2,019,077 (2,301,473)
Net change in unrealized appreciation/depreciation of investments (4,373,724) (6,871,442)
------------- -------------
Net increase in net assets resulting from operations 23,630,063 19,413,711
------------- -------------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (25,027,299) (27,377,048)
Class B (694,972) (966,625)
Class C (262,439) (242,953)
------------- -------------
(25,984,710) (28,586,626)
------------- -------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 16,672,721 19,585,281
Class B 889,307 839,761
Class C 1,745,792 1,176,846
Net asset value of shares issued upon reinvestment of dividends and
distributions:
Class A 14,709,393 15,748,757
Class B 373,907 489,434
Class C 193,099 180,938
------------- -------------
34,584,219 38,021,017
------------- -------------
Cost of shares repurchased:
Class A (57,983,544) (65,815,138)
Class B (6,658,177) (7,252,145)
Class C (810,262) (501,276)
------------- -------------
(65,451,983) (73,568,559)
------------- -------------
Decrease in net assets derived from capital share transactions (30,867,764) (35,547,542)
------------- -------------
Net Decrease in Net Assets (33,222,411) (44,720,457)
Net Assets:
Beginning of year 629,263,742 673,984,199
------------- -------------
End of year (there was no undistributed net investment income at either year end) $ 596,041,331 $ 629,263,742
============= =============
See accompanying notes
13
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund Class A
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended
2/28/06 2/28/05 2/29/04 2/28/03 2/28/02
Net asset value, beginning of period $ 8.140 $ 8.250 $ 8.140 $ 7.950 $ 7.820
Income (loss) from investment operations:
Net investment income 0.347 0.365 0.365 0.374 0.387
Net realized and unrealized gain (loss) on investments (0.030) (0.110) 0.110 0.189 0.130
----------- ------------ ------------ ------------ ------------
Total from investment operations 0.317 0.255 0.475 0.563 0.517
----------- ------------ ------------ ------------ ------------
Less dividends and distributions from:
Net investment income (0.347) (0.365) (0.365) (0.373) (0.387)
----------- ------------ ------------ ------------ ------------
Total dividends and distributions (0.347) (0.365) (0.365) (0.373) (0.387)
----------- ------------ ------------ ------------ ------------
Net asset value, end of period $ 8.110 $ 8.140 $ 8.250 $ 8.140 $ 7.950
=========== ============ ============ ============ ============
Total return(1) 3.97% 3.23% 6.00% 7.29% 6.78%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 570,329 $ 599,172 $ 638,325 $ 669,042 $ 682,030
Ratio of expenses to average net assets 0.91% 0.89% 0.90% 0.92% 0.89%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.95% 0.93% 0.94% 0.92% 0.89%
Ratio of net investment income to average net assets 4.27% 4.54% 4.47% 4.69% 4.92%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.23% 4.50% 4.43% 4.69% 4.92%
Portfolio turnover 13% 11% 12% 18% 38%
(1) Total investment return is based on the change in net asset value of a
share for the period and assumes reinvestment of dividends and
distributions at net asset value and does not reflect the impact of a
sales charge. Total investment return reflects waivers and payment of fees
by the distributor, as applicable. Performance would have been lower had
the expense limitation not been in effect.
See accompanying notes
14
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- --------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund Class B
- --------------------------------------------------------------------------------------------------------------------------
Year Ended
2/28/06 2/28/05 2/29/04 2/28/03 2/28/02
Net asset value, beginning of period $ 8.140 $ 8.250 $ 8.140 $ 7.950 $ 7.820
Income (loss) from investment operations:
Net investment income 0.285 0.303 0.301 0.312 0.324
Net realized and unrealized gain (loss) on investments (0.030) (0.110) 0.110 0.189 0.130
---------- ----------- ----------- ----------- -----------
Total from investment operations 0.255 0.193 0.411 0.501 0.454
---------- ----------- ----------- ----------- -----------
Less dividends and distributions from:
Net investment income (0.285) (0.303) (0.301) (0.311) (0.324)
---------- ----------- ----------- ----------- -----------
Total dividends and distributions (0.285) (0.303) (0.301) (0.311) (0.324)
---------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 8.110 $ 8.140 $ 8.250 $ 8.140 $ 7.950
========== =========== =========== =========== ===========
Total return(1) 3.17% 2.44% 5.17% 6.46% 5.93%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 17,762 $ 23,235 $ 29,589 $ 34,914 $ 37,533
Ratio of expenses to average net assets 1.68% 1.67% 1.68% 1.70% 1.69%
Ratio of net investment income to average net assets 3.50% 3.76% 3.69% 3.91% 4.12%
Portfolio turnover 13% 11% 12% 18% 38%
(1) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value and does not reflect the impact of a
sales charge.
See accompanying notes
15
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ---------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund Class C
- ---------------------------------------------------------------------------------------------------------------------
Year Ended
2/28/06 2/28/05 2/29/04 2/28/03 2/28/02
Net asset value, beginning of period $ 8.140 $ 8.250 $ 8.140 $ 7.950 $ 7.820
Income (loss) from investment operations:
Net investment income 0.284 0.302 0.301 0.312 0.324
Net realized and unrealized gain (loss) on investments (0.030) (0.110) 0.110 0.189 0.130
--------- ----------- ---------- ---------- ----------
Total from investment operations 0.254 0.192 0.411 0.501 0.454
--------- ----------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income (0.284) (0.302) (0.301) (0.311) (0.324)
--------- ----------- ---------- ---------- ----------
Total dividends and distributions (0.284) (0.302) (0.301) (0.311) (0.324)
--------- ----------- ---------- ---------- ----------
Net asset value, end of period $ 8.110 $ 8.140 $ 8.250 $ 8.140 $ 7.950
========= ========== ========== ========== ==========
Total return(1) 3.17% 2.43% 5.17% 6.46% 5.93%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 7,950 $ 6,857 $ 6,070 $ 5,197 $ 4,512
Ratio of expenses to average net assets 1.68% 1.67% 1.68% 1.70% 1.69%
Ratio of net investment income to average net assets 3.50% 3.76% 3.69% 3.91% 4.12%
Portfolio turnover 13% 11% 12% 18% 38%
(1) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value and does not reflect the impact of a
sales charge.
See accompanying notes
16
- --------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund
Notes February 28, 2006
- --------------------------------------------------------------------------------
TO FINANCIAL STATEMENTS
Delaware Group State Tax-Free Income Trust (the "Trust") is organized as a
Delaware statutory trust and offers one series: Delaware Tax-Free Pennsylvania
Fund (the "Fund"). The Trust is an open-end investment company. The Fund is
considered non-diversified under the Investment Company Act of 1940, as amended,
and offers Class A, Class B and Class C shares. Class A shares are sold with a
front-end sales charge of up to 4.50%. Class B shares are sold with a contingent
deferred sales charge that declines from 4% to zero depending upon the period of
time the shares are held. Class B shares will automatically convert to Class A
shares on a quarterly basis approximately eight years after purchase. Class C
shares are sold with a contingent deferred sales charge of 1%, if redeemed
during the first 12 months.
The investment objective of the Fund is to seek a high level of current interest
income exempt from federal income tax and certain Pennsylvania state and local
taxes, consistent with the preservation of capital.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation - Long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Fund's Board of
Trustees. In determining whether market quotations are readily available or fair
valuation will be used, various factors will be taken into consideration, such
as market closures, aftermarket trading or significant events after local market
trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes - The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting - Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund on the basis of
daily net assets of each class. Distribution expenses relating to a specific
class are charged directly to that class.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other - Expenses common to all funds within the Delaware Investments(R) Family
of Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Interest income is recorded on the accrual basis. Discounts and premiums
are amortized to interest income over the lives of the respective securities.
The Fund declares dividends daily from net investment income and pays such
dividends monthly and declares and pays distributions from net realized gain on
investments, if any, annually.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in the custodian fees and on the
Statement of Operations with the corresponding expense offset shown as "expense
paid indirectly."
2. Investment Management, Administration Agreements and Other Transactions
with Affiliates
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.55% on the first $500 million of average daily net assets of the Fund,
0.50% on the next $500 million, 0.45% on the next $1.5 billion, and 0.425% on
average daily net assets in excess of $2.5 billion.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. Effective June
1, 2005, the Fund pays DSC a monthly fee computed at the annual rate of 0.04% of
the Fund's average daily net assets for accounting and administration services.
Prior to June 1, 2005, the Fund paid DSC a monthly fee based on average net
assets subject to certain minimums for accounting and administration services.
The Fund pays DSC a monthly fee based on the number of shareholder accounts for
dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual distribution and service fee not to exceed 0.30% of the average daily net
assets of the Class A shares and 1.00% of the average daily net assets of the
Class B and C shares.
The Board of Trustees has adopted a formula for calculating 12b-1 plan fees for
the Fund's Class A shares that went into effect on June 1, 1992. The total 12b-1
fees to be paid by Class A shareholders of the Fund will be the sum of 0.10% of
the average daily net assets representing shares that were acquired prior to
June 1, 1992 and 0.30% of the average daily net assets representing shares that
were acquired on or after June 1, 1992. All Class A shareholders will bear 12b-1
fees at the same rate, the blended rate based upon the allocation of the 0.10%
and 0.30% rates described above. DDLP has contracted to waive distribution and
service fees through June 30, 2006 in order to prevent distribution and service
fees of Class A shares from exceeding 0.25% of average daily net assets. This
contractual waiver is applied to the shares of the Fund that were acquired on or
after June 1, 1992 in calculating the applicable 12b-1 fee rate.
At February 28, 2006, the Fund had liabilities payable to affiliates as follows:
Investment management fees payable to DMC $ 247,600
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses
payable to DSC 48,419
Distribution Fees Payable to DDLP 119,148
Other expenses payable to DMC and affiliates* 12,175
* DMC, as part of its administrative services, pays operating expenses on
behalf of the Fund and is reimbursed on a periodic basis. Such expenses
include items such as printing of shareholder reports, fees for audit,
legal and tax services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services expenses, including internal legal services provided to
the Fund by DMC employees. For the year ended February 28, 2006, the Fund was
charged $37,392 for internal legal services provided by DMC.
17
- --------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund
Notes
- --------------------------------------------------------------------------------
TO FINANCIAL STATEMENTS (CONTINUED)
2. Investment Management, Administration Agreements and Other Transactions
with Affiliates (continued)
For the year ended February 28, 2006, DDLP earned $45,932 for commissions on
sales of the Fund's Class A shares. For the year ended February 28, 2006, DDLP
received gross contingent deferred sales charge commissions of $3,550, $17,373
and $807 on redemption of the Fund's Class A, Class B and Class C shares,
respectively and these commissions were entirely used to offset up-front
commissions previously paid by DDLP to broker-dealers on sales of those shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. Investments
For the year ended February 28, 2006, the Fund made purchases of $76,201,712 and
sales of $119,453,862 of investment securities other than short-term
investments.
At February 28, 2006, the cost of investments for federal income tax purposes
was $550,136,971. At February 28, 2006, net unrealized appreciation was
$38,740,353, of which $38,974,831 related to unrealized appreciation of
investments and $234,478 related to unrealized depreciation of investments.
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the years
ended February 28, 2006 and 2005 was as follows:
Year Ended
2/28/06 2/28/05
------------ -------------
Tax-exempt income $ 25,984,710 $ 28,586,626
As of February 28, 2006, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $ 576,295,511
Capital loss carryforwards (18,994,533)
Unrealized appreciation of investments 38,740,353
-------------
Net assets $ 596,041,331
=============
The difference between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at February 28, 2006 will expire as follows: $9,193,068 expires in
2008, $8,323,306 expires in 2009, $1,161,652 expires in 2010 and $316,507
expires in 2014.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
2/28/06 2/28/05
Shares sold:
Class A 2,053,783 2,429,500
Class B 109,469 104,213
Class C 214,354 146,265
Shares issued upon reinvestment of
dividends and distributions:
Class A 1,808,881 1,952,449
Class B 45,977 60,707
Class C 23,752 22,433
---------- ----------
4,256,216 4,715,567
---------- ----------
Shares repurchased:
Class A (7,136,054) (8,183,287)
Class B (819,201) (898,361)
Class C (100,096) (62,560)
---------- ----------
(8,055,351) (9,144,208)
---------- ----------
Net decrease (3,799,135) (4,428,641)
========== ==========
For the years ended February 28, 2006 and 2005, 522,668 Class B shares were
converted to 522,449 Class A shares valued at $4,249,239 and 510,991 Class B
shares were converted to 510,991 Class A shares valued at $4,123,073,
respectively. The respective amounts are included in Class B redemptions and
Class A subscriptions in the table above and the Statements of Changes in Net
Assets.
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Fund had no amounts outstanding as of February 28, 2006, or at any time during
the year.
18
- --------------------------------------------------------------------------------
Delaware Tax-Free Pennsylvania Fund
Notes
- --------------------------------------------------------------------------------
TO FINANCIAL STATEMENTS (CONTINUED)
7. Credit and Market Risk
The Fund concentrates its investments in securities issued by Pennsylvania
municipalities. The value of these investments may be adversely affected by new
legislation within Pennsylvania, regional or local economic conditions, and
differing levels of supply and demand for municipal bonds. Many municipalities
insure repayment for their obligations. Although bond insurance reduces the risk
of loss due to default by an issuer, such bonds remain subject to the risk that
market value may fluctuate for other reasons and there is no assurance that the
insurance company will meet its obligations. These securities have been
identified in the Statement of Net Assets.
The Fund may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Statement of Net Assets.
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased
bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding". Advance refunded bonds are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates. Bonds are considered "pre-refunded" when
the refunding issue's proceeds are escrowed only until a permitted call date or
dates on the refunded issue with the refunded issue being redeemed at that time,
including any required premium. Bonds become "defeased" when the rights and
interests of the bondholders and of their lien on the pledged revenues or other
security under the terms of the bond contract are substituted with an
alternative source of revenues (the escrow securities) sufficient to meet
payments of principal and interest to maturity or to the first call dates.
Escrowed secured bonds will often receive a rating of AAA from Moody's
Investor's Service, Inc., Standard & Poor's Rating Group, and/or Fitch due to
the strong credit quality of the escrow securities and the irrevocable nature of
the escrow deposit agreement.
The Fund may invest up to 10% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Fund's Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Fund's limitation on investments in illiquid assets. At
February 28, 2006, there were no Rule 144A securities and no securities have
been determined to be illiquid under the Fund's Liquidity Procedures.
8. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
9. Tax Information (Unaudited)
The information set forth below is for the Fund's fiscal year as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended February 28, 2006, the Fund designates distributions
paid during the year as follows:
(A)
Long-Term (B)
Capital Gains Tax-exempt Total
Distributions Distributions Distributions
(Tax Basis) (Tax Basis) (Tax Basis)
- ------------- ------------- -------------
-- 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
19
Report
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Delaware Group State Tax-Free Income Trust -
Delaware Tax-Free Pennsylvania Fund
We have audited the accompanying statement of net assets of Delaware Tax-Free
Pennsylvania Fund (the sole series of Delaware Group State Tax-Free Income
Trust) (the "Fund") as of February 28, 2006, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with 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 Fund's 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 Fund's 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 procedures included confirmation of
securities owned as of February 28, 2006, by correspondence with the custodian.
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 Pennsylvania Fund of Delaware Group State Tax-Free Income
Trust at February 28, 2006, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and its financial highlights for each of the five years in the
period then ended, in conformity with U.S. generally accepted accounting
principles.
Ernet & Young LLP
Philadelphia, Pennsylvania
April 10, 2006
20
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 who perform services for the
fund. The independent fund trustees, in particular, are advocates for
shareholder interests. Each trustee has served in that capacity since he or she
was elected to or appointed to the Board of Trustees, and will continue to serve
until his or her retirement or the election of a new trustee in his or her
place. 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, 87 None
2005 Market Street President, Executive Officer Mr. Driscoll has served in
Philadelphia, PA Chief Executive various executive capacities
19103 Officer and 2 Years - at different times at
Trustee Trustee Delaware Investments(1)
March 10, 1963
- -----------------------------------------------------------------------------------------------------------------------------------
independent trustees
Thomas L. Bennett Trustee Since Private Investor - 87 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 - 87 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 - 87 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 - 87 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 Fiscal 87 Director and
2005 Market Street 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.
- -----------------------------------------------------------------------------------------------------------------------------------
21
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 87 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director -
and Consulting) CenterPoint Energy
February 25, 1936 (January 1993 - Present)
Director 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 87 None
2005 Market Street (January 2003 - Present)
Philadelphia, PA and Treasurer
19103 (January 2006 - Present)
3M Corporation
July 31, 1948
Ms. Yeomans has held
various management positions
at 3M Corporation since 1983.
- -----------------------------------------------------------------------------------------------------------------------------------
J. Richard Zecher Trustee Since Founder - 87 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 87 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
- -----------------------------------------------------------------------------------------------------------------------------------
David F. Connor Vice President, Vice President since Mr. Connor has served as 87 None(3)
2005 Market Street Deputy General September 21,2000 Vice President and Deputy
Philadelphia, PA Counsel and and Secretary General Counsel of Delaware
19103 Secretary since Investments since 2000.
October 25, 2005
December 2, 1963
- -----------------------------------------------------------------------------------------------------------------------------------
David P. O' Connor Senior Vice Senior Vice Mr. O'Connor has served in 87 None(3)
2005 Market Street President, President, various executive and legal
Philadelphia, PA General Counsel General Counsel capacities at different
19103 and Chief and Chief Legal times
Legal Officer Officer since at Delaware Investments.
October 25, 2005
February 21, 1966
- -----------------------------------------------------------------------------------------------------------------------------------
John J. O'Connor Senior Vice Treasurer Mr. O'Connor has served in 87 None(3)
2005 Market Street President and since various executive capacities
Philadelphia, PA Treasurer February 17, 2005 at different times at
19103 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, Mr. Connor, Mr. David P. O'Connor and Mr. John J. O'Connor
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. Mr. John J. O'Connor also serves in a
similar capacity for Lincoln Variable Insurance Products Trust, which has
the same investment advisor as the registrant.
The Statement of Additional Information for the Fund(s) includes additional
information about the Trustees and Officers and is available, without charge,
upon request by calling 800 523-1918.
22
- --------------------------------------------------------------------------------
About
- --------------------------------------------------------------------------------
THE ORGANIZATION
This annual report is for the information of Delaware Tax-Free Pennsylvania Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Tax-Free Pennsylvania Fund and
the Delaware Investments(R) Performance Update for the most recently completed
calendar quarter. The prospectus sets forth details about charges, expenses,
investment objectives, and operating policies of the Fund. You should read the
prospectus carefully before you invest. The figures in this report represent
past results that are not a guarantee of future results. The return and
principal value of an investment in the Fund will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Board of Trustees
Jude T. Driscoll
Chairman
Delaware Investments(R) Family of Funds
Philadelphia, PA
Thomas L. Bennett
Private Investor
Rosemont, PA
John A. Fry
President
Franklin & Marshall College
Lancaster, PA
Anthony D. Knerr
Founder/Managing Director
Anthony Knerr & Associates
New York, NY
Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA
Ann R. Leven
Former Treasurer/Chief Fiscal Officer
National Gallery of Art
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN
J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ
Affiliated Officers
Michael P. Bishof
Senior Vice President and
Chief Financial Officer
Delaware Investments(R) Family of Funds
Philadelphia, PA
David F. Connor
Vice President, Deputy General Counsel
and Secretary
Delaware Investments(R) Family of Funds
Philadelphia, PA
David P. O'Connor
Senior Vice President, General Counsel
and Chief Legal Officer
Delaware Investments(R) Family of Funds
Philadelphia, PA
John J. O'Connor
Senior Vice President and Treasurer
Delaware Investments(R) Family of Funds
Philadelphia, PA
Contact Information
Investment Manager
Delaware Management Company,
a Series of Delaware Management Business Trust
Philadelphia, PA
National Distributor
Delaware Distributors, L.P.
Philadelphia, PA
Shareholder Servicing, Dividend
Disbursing and Transfer Agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094
For Shareholders
800 523-1918
For Securities Dealers and Financial
Institutions Representatives Only
800 362-7500
Web Site
www.delawareinvestments.com
Delaware Investments is the marketing name for
Delaware Management Holdings, Inc. and its subsidiaries.
- --------------------------------------------------------------------------------
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and
procedures that the Fund uses to determine how to vote proxies (if any) relating
to portfolio securities is available without charge (i) upon request, by calling
800 523-1918; (ii) on the Funds' Web site at http://www.delawareinvestments.com;
and (iii) on the Commission's Web site at http://www.sec.gov. The Fund's Forms
N-Q may be reviewed and copied at the Commission's Public Reference Room in
Washington, DC; information on the operation of the Public Reference Room may be
obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended June 30 is
available without charge (i) through the Funds' Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
23
This page intentionally left blank.
- --------------------------------------------------------------------------------
[DELAWARE INVESTMENTS(R) LOGO]
- --------------------------------------------------------------------------------
Contact Information
Web Site
www.delawareinvestments.com
E-mail
service@delinvest.com
Shareholder Service Center
800 523-1918
Call the Shareholder Service Center Monday to Friday, 8:00 a.m. to 7:00 p.m.
Eastern Time:
o For fund information, literature, price, yield, and performance figures.
o For information on existing regular investment accounts and retirement
plan accounts including wire investments, wire redemptions, telephone
redemptions, and telephone exchanges.
Delaphone Service
800 362-FUND (800 362-3863)
o For convenient access to account information or current performance
information on all Delaware Investments(R) Funds seven days a week, 24
hours a day, use this Touch-Tone(R) service.
- --------------------------------------------------------------------------------
(328) Printed in the USA
AR-007 [2/06] CGI 4/06 ANN-0603 TFPA PO10888
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 $32,800 for
the fiscal year ended February 28, 2006.
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 $24,700 for
the fiscal year ended February 28, 2005.
- -----------------------
(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.
(b) Audit-related fees.
-------------------
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended February 28, 2006.
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 $34,575 for the registrant's fiscal year ended
February 28, 2006. 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 February 28, 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 $38,875 for the registrant's fiscal year ended
February 28, 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.
(c) Tax fees.
---------
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $6,500 for the fiscal year
ended February 28, 2006. 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 February 28, 2006.
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 February 28, 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 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 February 28, 2005.
(d) All other fees.
---------------
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended February 28, 2006.
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
February 28, 2006.
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended February 28, 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
February 28, 2005.
(e) The registrant's Audit Committee has established pre-approval
policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of Regulation S-X
(the "Pre-Approval Policy") with respect to services provided by the
registrant's independent auditors. Pursuant to the Pre-Approval Policy, the
Audit Committee has pre-approved the services set forth in the table below with
respect to the registrant up to the specified fee limits. Certain fee limits are
based on aggregate fees to the registrant and other registrants within the
Delaware Investments Family of Funds.
- --------------------------------------------------------------------------------- -----------------------------------
Service Range of Fees
- --------------------------------------------------------------------------------- -----------------------------------
Audit Services
- --------------------------------------------------------------------------------- -----------------------------------
Statutory audits or financial audits for new Funds up to $25,000 per Fund
- --------------------------------------------------------------------------------- -----------------------------------
Services associated with SEC registration statements (e.g., Form N-1A, Form
N-14, etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings (e.g., comfort letters up to $10,000 per Fund
for closed-end Fund offerings, consents), and assistance in responding to SEC
comment letters
- --------------------------------------------------------------------------------- -----------------------------------
Consultations by Fund management as to the accounting or disclosure treatment of
transactions or events and/or the actual or potential impact of final or
proposed rules, standards or interpretations by the SEC, FASB, or other up to $25,000 in the aggregate
regulatory or standard-setting bodies (Note: Under SEC rules, some
consultations may be considered "audit-related services" rather than "audit
services")
- --------------------------------------------------------------------------------- -----------------------------------
- --------------------------------------------------------------------------------- -----------------------------------
Service Range of Fees
- --------------------------------------------------------------------------------- -----------------------------------
Audit-Related Services
- --------------------------------------------------------------------------------- -----------------------------------
Consultations by Fund management as to the accounting or disclosure treatment of
transactions or events and /or the actual or potential impact of final or
proposed rules, standards or interpretations by the SEC, FASB, or other up to $25,000 in the aggregate
regulatory or standard-setting bodies (Note: Under SEC rules, some
consultations may be considered "audit services" rather than "audit-related
services")
- --------------------------------------------------------------------------------- -----------------------------------
Tax Services
- --------------------------------------------------------------------------------- -----------------------------------
U.S. federal, state and local and international tax planning and advice (e.g.,
consulting on statutory, regulatory or administrative developments, evaluation
up to $25,000 in the aggregate of Funds' tax compliance function, etc.)
- --------------------------------------------------------------------------------- -----------------------------------
U.S. federal, state and local tax compliance (e.g., excise distribution up to $5,000 per Fund
reviews, etc.)
- --------------------------------------------------------------------------------- -----------------------------------
Review of federal, state, local and international income, franchise and other up to $5,000 per Fund
tax returns
- --------------------------------------------------------------------------------- -----------------------------------
Under the Pre-Approval Policy, the Audit Committee has also
pre-approved the services set forth in the table below with respect to the
registrant's investment adviser and other entities controlling, controlled by or
under common control with the investment adviser that provide ongoing services
to the registrant (the "Control Affiliates") up to the specified fee limit. This
fee limit is based on aggregate fees to the investment adviser and its Control
Affiliates.
- --------------------------------------------------------------------------------- -----------------------------------
Service Range of Fees
- --------------------------------------------------------------------------------- -----------------------------------
Non-Audit Services
- --------------------------------------------------------------------------------- -----------------------------------
Services associated with periodic reports and other documents filed with the up
to $10,000 in the aggregate SEC and assistance in responding to SEC comment
letters
- --------------------------------------------------------------------------------- -----------------------------------
The Pre-Approval Policy requires the registrant's independent auditors
to report to the Audit Committee at each of its regular meetings regarding all
services initiated since the last such report was rendered, including those
services authorized by the Pre-Approval Policy.
(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 $202,435
and $228,384 for the registrant's fiscal years ended February 28, 2006 and
February 28, 2005, 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.
DELAWARE GROUP STATE TAX-FREE INCOME TRUST
Jude T. Driscoll
- ------------------------------------
By: Jude T. Driscoll
Title: Chief Executive Officer
Date: May 8, 2006
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: May 8, 2006
Michael P. Bishof
- ------------------------------------
By: Michael P. Bishof
Title: Chief Financial Officer
Date: May 8, 2006