<PAGE>
March 18, 1996
DEAR
- --------------------------------------------------------------------------------
SHAREHOLDER:
- --------------------------------------------------------------------------------
During the six months ended February 29, 1996, prices of intermediate
municipal bonds were more stable than in early calendar 1995 and more stable
than prices of long-term municipal bonds.
Your Fund performed well relative to its benchmark, the Merrill Lynch
Three-to-Seven Year Municipal Bond Index, during the period, primarily because
of your Fund's focus on providing high current income. Monthly dividends
provided more than half of your Fund's total return since August 31, 1995.
Interest rates on municipal bonds that mature in three-to-seven years
declined by 0.15% to 0.25% (15 to 25 basis points) during the six months ended
February 29, 1996. By contrast, interest rates on securities of similar quality
maturing in more than 15 years dropped by as much as twice that amount.
The modest decline in intermediate-term interest rates -- and
consequent increase in municipal bond prices -- occurred against a backdrop of
very modest consumer price inflation, slowing U.S. economic growth and a Federal
Reserve Board that lowered its target for the federal funds rate (the interest
rate banks charge each other for overnight loans) by 0.50% (50 basis points) to
5.25%.
These fundamental factors outweighed the uncertainty generated by the
re-emergence of "flat tax" proposals that contain provisions to end federal
taxation of investment income. If enacted into law, some investors fear these
provisions could reduce the value of municipal bonds.
In our opinion, federal tax and budget policies will remain rhetorical
footballs until the November elections. However, we believe income-oriented
investors need not hesistate to take advantage of the attractive opportunities
in today's municipal bond market.
Municipal credit quality as measured by bond rating services is
improving. The supply of new bond issues across the country has dropped by 46%
since 1993, helping support bond prices. In our report, Patrick P. Coyne,
senior portfolio manager, discusses these trends, reviews the Fund's
performance and outlines his approach for the coming months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
TOTAL RETURN AVERAGE ANNUAL ANNUALIZED
SIX-MONTHS ENDED RETURN SINCE YIELD AS OF
FEB. 29, 1996 INCEPTION* FEB. 29, 1996
------------------ ---------------- ---------------
<S> <C> <C> <C>
Tax-Free USA Intermediate
Fund A Class +3.44% +6.90% 4.35%
Merrill Lynch Three-to Seven-Year
Municipal Bond Index +3.11% +5.43% 4.37%
Lipper Intermediate Municipal
Debt Fund Average +3.72% +5.62% 3.86%
</TABLE>
*The Fund began operating on January 3, 1993. Tax-Free USA Intermediate
Fund's performance and that of the Lipper Average is based on net asset
value. Performance information and yield for all classes of the Fund can be
found on page 4. The 30-day yield is calculated according to Securities and
Exchange Commission guidelines. The Lipper Average consisted of 135 and 55
funds, respectively, for the six-month and lifetime periods ended February
29, 1996.
- ------------------------------------------------------------------------------
As Tax-Free USA Intermediate Fund enters its fourth year, we are
pleased to report that your Fund's lifetime performance has surpassed both its
peers and its benchmark, as shown in the middle column in the table above. We
wish to thank you for your confidence in Delaware Group.
Sincerely,
/s/ Wayne A. Stork
- -------------------
Wayne A. Stork
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
PORTFOLIO
- -----------------------
MANAGER'S REVIEW
- -----------------------
In our annual report last summer, we reported that intermediate-term bond
prices rose by a greater degree during the Fund's 1995 fiscal year than any
other segment of the municipal bond market. During the latest six months, the
reverse was true; intermediate bond prices were more stable than any other
segment of the market.
The Municipal Bond
Yield Curve Has Flattened
- --------------------------
AAA-rated Municipal Bond Yields
August 31, 1995 vs. February 29, 1996
August 31, 1995 February 29, 1996
1 yr 3.65% 3.35%
2 yr 3.85 3.65
3 yr 4.01 3.85
4 yr 4.16 3.97
5 yr 4.31 4.09
7 yr 4.56 4.31
10 yr 4.86 4.61
15 yr 5.46 5.10
20 yr 5.73 5.29
25 yr 5.85 5.34
30 yr 5.87 5.37
Source: Bloomberg Business News
LAST SUMMER, A 30-YEAR MATURITY MUNICIPAL BOND PROVIDED 1.3 PERCENTAGE POINTS
OF ADDITIONAL YIELD (130 BASIS POINTS) COMPARED TO A SEVEN-YEAR BOND OF
SIMILAR QUALITY. AS OF FEBRUARY 29, THIS AMOUNT HAD DROPPED TO JUST 1
PERCENTAGE POINT (100 BASIS POINTS). GIVEN THE GREATER RISK OF PRICE CHANGE
OF LONGER TERM BONDS, WE BELIEVE THIS SHOWS INTERMEDIATE-TERM BONDS HAVE A
MORE ATTRACTIVE RISK/REWARD PROFILE.
This shift reflected a slight "flattening" of the yield curve for all
types of fixed-income investments. That is, the amount of extra income
available from bonds maturing in more than 10 years declined dramatically
compared to the income from bonds maturing in less than 10 years.
THE FUND'S INVESTMENT STRATEGY
Municipal bonds with the longest maturities, 20 to 30 years, generally
provide the highest level of income. But in order to take advantage of those
opportunities, your Fund would have to take interest rate risks that would be
inconsistent with the Fund's objective of providing relative stability of
principal. So we look for other ways to provide high income.
To increase income, we invest in bonds from a diverse group of states,
such as Florida, that have little or no income taxes. Generally, we are able to
get higher yields on bonds from low tax states -- as opposed to high tax
states, such as California and New York, because there is less demand for bonds
from low tax states, requiring municipalities to offer higher yields to attract
investors.
Tax-Free USA Intermediate Fund also invests in bonds with higher
coupons (a bond's coupon is the interest rate calculated by dividing the
bond's annual interest income by its face value). Although these older bonds
tend not to appreciate as much as more recently issued bonds when interest
rates fall, we believe investors in tax-free mutual funds are more interested
in higher income than capital appreciation. High coupon bonds may also
provide somewhat greater protection of principal because such bonds generally
do not fall as much in price when interest rates rise.
<PAGE>
During the six months ended February 29, 1996, we slightly reduced the
Fund's average effective duration and average effective maturity. Duration is
the most common measure of a bond's sensitivity to interest rates. It indicates
the approximate percentage of change in a bond's price given a 1% movement in
interest rate changes. A shorter duration can generally help investors when
interest rates rise, although it tends to reduce the degree to which an
investment can appreciate in value when interest rates fall.
- -------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
AUGUST 31, FEBRUARY 29,
1995 1996
---------- ------------
Average Effective
Maturity 5.9 years 5.8 years
Average Effective
Duration 4.9 years 4.8 years
Average Bond Rating AA AA
- -------------------------------------------------------------------------------
OUTLOOK
In the coming months, we believe municipal bond market performance
will be influenced by four factors, all of which we consider to be positive
trends that could support further increases in bond prices.
* LOW INFLATION. During calendar year 1995, consumer prices rose a very
modest 2.5%, the smallest increase since 1986, according to U.S. government
figures. Many economists as well as U.S. government forecasters predict
inflation will be around 3% during 1996, still a relatively low level.
* FAVORABLE FEDERAL RESERVE BOARD POLICY. Since August, the Fed has twice
lowered the federal funds target rate by a total of 50 basis points (0.50%)
to help the economy. This overnight lending rate between banks now stands at
5.25%.
* DECLINING SUPPLIES OF NEW BONDS. The amount of new tax-exempt securities
issued by states and municipalities declined by 5% in 1995 to $156 billion.
Since peaking in 1993, the supply of new bonds has fallen more than 46%
according to Moody's Investors Services. This should help bond prices if
investor demand remains steady or increases.
* IMPROVING CREDIT QUALITY. Some 325 municipalities had their bonds' credit
rating upgraded during calendar year 1995 by Moody's Investors Services
while only 196 municipalities had their debt downgraded. This shows that many
states and cities generally remain in strong financial shape despite public
officials' posturing about the effects of federal budget cuts.
PATRICK P. COYNE
/s/ Patrick P. Coyne
---------------------------
Patrick P. Coyne
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
MARCH 18, 1996
A LOOK AT LIFETIME
- ------------------------
PERFORMANCE
- ------------------------
Although interest rates on intermediate-term municipal bonds dropped
modestly during the six months ended February 29, 1996, the past three years
have been marked by sharp swings for bond prices.
Interest rates fell in 1993, the year your Fund was introduced, rose
in 1994 after the Federal Reserve Board raised interest rates and declined
sharply in 1995 as inflation remained low and U.S. economic growth slowed.
Despite such volatility, the dividends generated by a $10,000
investment in the Fund would have steadily increased with the reinvestment of
monthly dividends. We are pleased to report that more than half the Fund's
shareholders have taken advantage of the power of compounding by reinvesting
dividends.
<PAGE>
Tax-Free USA Intermediate Fund A Class
Dividend History
$10,000 Investment 1993-1996
Total Dividends $1,759
Feb-93 $ 66*
Feb-94 526
Feb-95 556
Feb-96 611
12 months ended February
*Reflects January 7, 1993 inception date
CHART ASSUMES $10,000 INVESTED ON JANUARY 7, 1993, AND INCLUDES THE EFFECT OF
THE 3% MAXIMUM FRONT-END SALES CHARGE AND ASSUMES THE REINVESTMENT OF ALL
DIVIDENDS. DIVIDENDS FOR CLASS B AND CLASS C SHARES CAN BE EXPECTED TO BE
LOWER THAN CLASS A DIVIDENDS DUE TO DIFFERENT SALES CHARGES AND EXPENSES.
Tax-Free USA Intermediate Fund Performance
Average Annual Return through February 29, 1996
LIFETIME ONE YEAR
Class A (Est.1993) +5.86% +5.25%
- -----------------------------------------------------------------------------
Class B (Est.1994)
Excluding Sales Charge +5.98% +7.64%
Including Sales Charge +4.93% +5.64%
- -----------------------------------------------------------------------------
Class C* (Est.1995)
Excluding Sales Charge +1.22% --
Including Sales Charge +0.22% --
*Aggregate return through February 29, 1996.
TAX-FREE USA INTERMEDIATE FUND'S RETURNS AND SHARE VALUE FLUCTUATES WITH
RISING AND FALLING INTEREST RATES SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE IS NOT A GUARANTEE OF
FUTURE RESULTS. UP TO 20% OF THE ASSETS OF THE FUND MAY BE INVESTED IN
MUNICIPAL SECURITIES THAT GENERATE INCOME SUBJECT TO THE FEDERAL ALTERNATIVE
MINIMUM TAX. ANY CAPITAL GAINS DISTRIBUTED TO INVESTORS WILL BE TAXABLE.
Class A returns reflect the impact of the 3% maximum front-end sales charge,
reinvestment of all distributions and a 12b-1 fee of up to 0.30%, currently
set at 0.15%. The 30-day yield as of February 29, 1996, was 4.35%, calculated
according to Securities and Exchange Commission guidelines.
Class B performance reflects the reinvestment of all distributions. Class B
shares do not carry a front-end sales charge, but are subject to a 1% annual
distribution and service fee. They are subject to a deferred sales charge of
up to 2%. Lifetime performance "excluding sales charge" assumes the
investment was not redeemed. Class B was initially offered on May 2, 1994.
The 30-day yield as of February 29, 1996, was 3.66%, calculated according to
Securities and Exchange Commission guidelines.
Class C performance is for only a three-month period and may not be
representative of longer term results. Class C shares have a 1% annual
distribution and service fee. If redeemed within 12 months, a 1% contingent
deferred sales charge applies. Class C was initially offered on November 29,
1995. The 30-day yield as of February 29, 1996, was 3.66%, calculated
according to Securities and Exchange Commission guidelines.
<PAGE>
FINANCIAL
- --------------------
STATEMENTS
- --------------------
DELAWARE GROUP
TAX-FREE USA INTERMEDIATE FUND
STATEMENT OF NET ASSETS
FEBRUARY 29, 1996
(UNAUDITED)
Principal Market
Amount Value
MUNICIPAL BONDS - 100.91%
City and State Agency Bonds - 22.66%
Indiana Bond Bank
(State Revolving Fund Program)
6.00% 2/1/01 .................................... $ 500,000 $ 528,125
Michigan Municipal Bond Authority
Revenue (Local Government Loan Program)
5.85% 5/1/01 (AMBAC) ............................ 2,195,000 2,348,650
Pennsylvania State Industrial Development
Authority Revenue
6.00% 7/1/99 (AMBAC) ............................ 1,400,000 1,475,250
Vermont Municipal Bond Bank-Series 2
5.50% 12/1/03 (AMBAC) ........................... 500,000 532,500
----------
4,884,525
----------
General Obligation Bonds - 11.09%
Kansas City, Missouri Municipal Assistance Corp.
5.50% 3/1/00 (CGIC) ............................. 1,250,000 1,301,563
Philadelphia, Pennsylvania School District
6.25% 5/15/01 (AMBAC) ........................... 1,000,000 1,087,500
----------
2,389,063
----------
Higher Education Revenue Bonds - 7.57%
Virginia College Building Authority
(University of Richmond Project)
Mandatory Put 11/1/01
6.40% 11/1/22 ................................... 1,000,000 1,063,750
Virginia State University
(Commonwealth of Virginia)
5.20% 5/1/06 .................................... 555,000 567,488
----------
1,631,238
----------
Hospital Revenue Bonds - 4.06%
Michigan State Hospital Finance Authority
(Genesys Health System)
Series 95A 6.10% 10/1/96 ........................ 515,000 518,883
Series 95A 6.40% 10/1/97 ........................ 350,000 357,000
----------
875,883
----------
<PAGE>
Principal Market
Amount Value
MUNICIPAL BONDS (Continued)
Housing Revenue Bonds - 14.02%
Maryland State Community Development
Administration (Single Family Program)
6th Series 5.90% 4/1/01 ......................... $1,000,000 $1,033,750
Montgomery County, Pennsylvania
Redevelopment Authority
Multifamily Housing Revenue
(KBF Associates) 6.00% 7/1/04 .................... 2,000,000 1,987,500
----------
3,021,250
----------
Industrial Development Revenue Bonds - 3.20%
Philadelphia Industrial Development
Authority (Gallery II Parking Garage Project)
6.125% 2/15/03 .................................. 685,000 689,281
----------
689,281
----------
Power Authority Revenue Bonds - 4.94%
New Madrid, Missouri Power Plant
5.65% 6/1/03 (AMBAC) ............................ 1,000,000 1,065,000
----------
1,065,000
----------
School Authority/District - 4.92%
West Virginia School Building Authority
Capital Improvement 5.625% 7/1/02 ................ 1,000,000 1,061,250
----------
1,061,250
----------
Transportation Revenue Bonds - 14.23%
Foothill/Eastern Transportation Corridor
Agency California Toll Road Revenue
Series 95A 0.00% 1/1/05 ......................... 1,500,000 886,875
*Rhode Island Port Authority and Economic
Development Corp. Airport Revenue
5.80% 7/1/02 (FSA) .............................. 565,000 599,606
5.90% 7/1/03 (FSA) .............................. 490,000 524,300
Southeastern Pennsylvania Transportation
Authority (Letter of Credit-Canadian Imperial)
6.00% 6/1/99 ...................................... 1,000,000 1,056,250
---------
3,067,031
---------
Waste Disposal Revenue Bonds - 4.52%
*Pinal County, Arizona Industrial Development
Auth. Solid Waste Disposal Revenue
(Browning-Ferris Industries Inc. Project)
5.00% 2/1/06 .................................... 1,000,000 973,750
---------
973,750
---------
Water And Sewer Revenue Bonds - 3.26%
Alabama Water Pollution Control Authority
Revolving-Series A
5.00% 8/15/06 (AMBAC) ........................... 280,000 281,750
Easton, Pennsylvania Joint Sewer Authority
5.60% 4/1/03 (ASSET GTY) ........................ 200,000 209,750
<PAGE>
Principal Market
Amount Value
MUNICIPAL BONDS (Continued)
Marysville, Washington Water & Sewer
Revenue 5.50% 12/1/02 (MBIA) ..................... $200,000 $211,750
---------
703,250
---------
Other Revenue Bonds - 6.44%
Charleston County, South Carolina
(Charleston Public Facilities Corp.)
5.20% 12/1/99 (MBIA) ............................ 860,000 889,025
Metropolitan Pier and Exposition Authority
Illinois Hospital Facilities Revenue
(McCormick Place Convention)
5.75% 7/1/06 .................................... 500,000 498,125
----------
1,387,150
----------
Total Municipal Bonds
(cost $20,888,665) .............................. 21,748,671
----------
VARIABLE RATE DEMAND NOTES - 0.46%
Allegheny County, Pennsylvania Hospital
Development Revenue (Presbyterian
University Hospital) 3.35% 3/1/18 .................. 100,000 100,000
-------
Total Variable Rate Demand Notes
(cost $100,000) ................................. 100,000
-------
Market
Value
TOTAL MARKET VALUE OF SECURITIES
OWNED - 101.37%
(cost $20,988,665) .............................. $21,848,671
LIABILITIES NET OF RECEIVABLES AND
OTHER ASSETS - (1.37%) .......................... (295,901)
----- -----------
NET ASSETS APPLICABLE TO 1,918,541
TAX-FREE USA INTERMEDIATE FUND
A CLASS SHARES, 126,859 TAX-FREE
USA INTERMEDIATE FUND B CLASS SHARES
AND 9,977 TAX-FREE USA INTERMEDIATE
FUND C CLASS SHARES ($.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO
$10.49 PER SHARE - 100.00% ....................... $ 21,552,770
============
- ------------
*This security is subject to the federal alternative minimum tax.
AMBAC - Insured by AMBAC Indemnity Corporation.
ASSET GTY - Insured by the Asset Guaranty Insurance Corporation.
CGIC - Insured by the Capital Guaranty Insurance Company.
FSA - Insured by Financial Security Assurance.
MBIA - Insured by the Municipal Bond Insurance Association.
COMPONENTS OF NET ASSETS AT FEBRUARY 29, 1996:
Common stock, $.01 par value,
500,000,000 shares authorized to the
Tax-Free USA Intermediate Fund ................... $ 21,741,197
Accumulated undistribted:
Net reallized loss on investments ................ (1,048,433)
Net unrealized appreciation
of investments ................................. 860,006
------------
Total net assets ................................... $ 21,552,770
============
See accompanying notes
<PAGE>
DELAWARE GROUP
TAX-FREE USA INTERMEDIATE FUND
STATEMENT OF OPERATIONS
SIX-MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
INVESTMENT INCOME:
Interest .......................................... $ 590,950
EXPENSES:
Management fees ($50,849) and
directors' fees ($3,912) ........................ $ 54,761
Distribution expenses ............................. 20,973
Dividend disbursing and transfer agent
fees and expenses ............................... 8,738
Professional fees ................................. 6,335
Reports and statements to shareholders ............ 5,802
Custodian fees .................................... 3,745
Salaries .......................................... 2,437
Amortization of organization expense .............. 1,647
Taxes (other than taxes on income) ................ 986
Other ............................................. 1,535
---------
Total expenses .................................... 106,959
Less expenses absorbed by Delaware
Management Company, Inc. ........................ (75,229) 31,730
--------- ---------
NET INVESTMENT INCOME ............................. 559,220
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions ................... 18,508
Net unrealized appreciation of investments
during the period ............................................ 138,060
--------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS .......................................... 156,568
--------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................... $715,788
========
See accompanying notes
<PAGE>
DELAWARE GROUP
TAX-FREE USA INTERMEDIATE FUND
STATEMENT OF CHANGES IN NET ASSETS
Six-Months
Ended Year
2/29/96 Ended
(Unaudited) 8/31/95
OPERATIONS:
Net investment income ....................... $ 559,220 $ 1,202,418
Net realized gain (loss) from
security transactions ..................... 18,508 (623,654)
Net unrealized appreciation
during the period ......................... 138,060 560,494
------------ ------------
Net increase in net assets
resulting from operations ................. 715,788 1,139,258
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income:
Tax-Free USA Intermediate Fund A Class .... (533,895) (1,171,911)
Tax-Free USA Intermediate Fund B Class .... (24,877) (30,507)
Tax-Free USA Intermediate Fund C Class .... (448) --
------------ ------------
(559,220) (1,202,418)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Tax-Free USA Intermediate Fund A Class .... 2,209,615 5,342,070
Tax-Free USA Intermediate Fund B Class .... 431,745 557,360
Tax-Free USA Intermediate Fund C Class .... 104,653 --
Net asset value of shares issued upon
reinvestment of dividends from net
investment income:
Tax-Free USA Intermediate Fund A Class .... 358,895 822,660
Tax-Free USA Intermediate Fund B Class .... 15,182 23,597
Tax-Free USA Intermediate Fund C Class .... 438 --
------------ ------------
3,120,528 6,745,687
------------ ------------
Cost of shares repurchased:
Tax-Free USA Intermediate Fund A Class .... (3,093,771) (13,794,758)
Tax-Free USA Intermediate Fund B Class .... (71,225) (237,151)
Tax-Free USA Intermediate Fund C Class .... (99) --
------------ ------------
(3,165,095) (14,031,909)
------------ ------------
Decrease in net assets derived from
capital share transactions ................ (44,567) (7,286,222)
------------ ------------
NET INCREASE (DECREASE)
IN NET ASSETS ............................. 112,001 (7,349,382)
NET ASSETS:
Beginning of period ....................... 21,440,769 28,790,151
------------ ------------
End of period ............................. $ 21,552,770 $ 21,440,769
============ ============
See accompanying notes
<PAGE>
DELAWARE GROUP
TAX-FREE USA INTERMEDIATE FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
(UNAUDITED)
Delaware Group Tax-Free Fund, Inc. (the "Company") is registered as a
non-diversified open-end investment company under the Investment Company Act
of 1940, as amended. The Company is organized as a Maryland Corporation and
offers three portfolios, the Tax-Free USA Intermediate Fund (the "Fund"), the
Tax-Free USA Fund and the Tax-Free Insured Fund. Each portfolio offers three
classes of shares.
The investment objective of the Fund is to seek as high a level of current
interest income exempt from federal income tax as is available from municipal
bonds and is consistent with prudent investment management and preservation
of capital.
1. Significant Accounting Policies
The following accounting policies are in accordance with 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 are believed to reflect the fair value of such
securities. Money market instruments having less than 60 days to maturity are
valued at amortized cost which approximates market value.
Federal Income Taxes - The Fund intends to continue to qualify as a
regulated investment company and make the requisite distributions to
shareholders. Accordingly, no provision for federal income taxes is required
in the financial statements.
Class Accounting - Investment income, common expenses and 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.
Other - Expenses common to all Funds within the Delaware Group of Funds are
allocated amongst the funds on the basis of average net assets. Security
transactions are recorded on the date the securities are purchased or sold
(trade date). Costs used in calculating realized gains and losses on the sale
of investment securities are those of the specific securities sold. Interest
income is recorded on the accrual basis. Original issue discounts are
accreted 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.
Certain Fund expenses are paid directly by brokers. The amount of these
expenses is less than 0.01% of each Fund's average net assets.
<PAGE>
2. Investment Management and Distribution Agreements
In accordance with the terms of the Investment Management Agreement, the Fund
pays Delaware Management Company, Inc., (DMC) the Investment Manager of the
Fund, an annual fee which is calculated daily at the rate of 0.50% of the net
assets of the Fund less fees paid to the independent directors. DMC has
elected voluntarily to waive its fee and to absorb those expenses of the Fund
to the extent that the Fund's annual operating expenses exceed 0.25% of
average daily net assets inclusive of 12b-1 expenses through May 1, 1996.
Total expenses absorbed or waived by DMC for the six months ended
February 29, 1996, were $75,229.
Pursuant to the Distribution Agreement, the Fund pays Delaware Distributors,
L.P. (DDLP), the Distributor and an affiliate of DMC, an annual fee of 0.15%
of the average daily net assets of Class A and 1.00% of the average daily net
assets of Class B and Class C. For the six months ended February 29, 1996,
the Fund paid DDLP $6,838 for commissions earned on sales of Tax-Free USA
Intermediate Fund Class A shares. At February 29, 1996, the Fund had a
liability for distribution fees and other expenses payable to DDLP of
$42,269.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of
DMC to serve as dividend disbursing and transfer agent for the Fund. For the
six months ended February 29, 1996, the amount expensed for these services
was $8,738. At February 29, 1996, the Fund had a libility for such fees and
other expenses payable to DSC of $16,661.
Certain officers of DMC are officers, directors and/or employees of the Fund.
These officers, directors and employees are paid no compensation by the Fund.
3. Investments
During the six months ended February 29, 1996, the Fund had purchases of
$2,123,891 and sales of $1,566,112 of investment securities other than
temporary cash investments.
At February 29, 1996, unrealized appreciation for financial reporting and
federal income tax purposes aggregated $860,006 of which $892,887 related to
unrealized appreciation of securities and $32,881 related to unrealized
depreciation of securities.
Net gain based on cost of specific certificate or bond for federal income tax
purposes was $18,508 for the six months ended February 29, 1996. For
federal income tax purposes, the Fund had accumulated capital losses at
August 31, 1995, of $1,066,941 which may be carried forward and applied
against future capital gains. The capital loss carryforward expires as
follows: 2002--$443,287 and 2003--$623,654.
<PAGE>
4. Capital Stock
Transactions in capital stock shares were as follows:
Six-Months Year
Ended Ended
2/29/96 8/31/95
Shares sold:
Tax-Free USA Intermediate Fund A Class ......... 210,330 526,910
Tax-Free USA Intermediate Fund B Class ......... 41,055 54,596
Tax-Free USA Intermediate Fund C Class ......... 9,945 --
Shares issued upon reinvestment of dividends
from net investment income:
Tax-Free USA Intermediate Fund A Class ......... 34,180 80,984
Tax-Free USA Intermediate Fund B Class ......... 1,445 2,320
Tax-Free USA Intermediate Fund C Class ......... 42 --
---------- ----------
296,997 664,810
---------- ----------
Shares repurchased:
Tax-Free USA Intermediate Fund A Class ......... (295,172) (1,371,578)
Tax-Free USA Intermediate Fund B Class ......... (6,789) (23,622)
Tax-Free USA Intermediate Fund C Class ......... (10) --
---------- ----------
(301,971) (1,395,200)
---------- ----------
Net decrease ..................................... (4,974) (730,390)
========== ==========
5. Line of Credit
The Fund has a committed line of credit for $1,000,000. No amount was
outstanding at February 29, 1996, or at any time during the last fiscal
period.
6. Concentration of Credit Risk
The Fund concentrates its investments in securities issued by municipalities.
The value of these investments may be adversely affected by new legislation
within the states, regional or local economic conditions and differing levels
of supply and demand for municipal bonds. Many municipalities insure
repayment for their obligations. Although bond insurance reduces the risk of
loss due to default by an issuer, such bonds remain subject to the risk that
market value may fluctuate for other reasons and there is no assurance that
the insurance company will meet its obligations. These securities have been
identified in the Statement of Net Assets.
<PAGE>
7. Financial Highlights
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
Tax-Free USA Tax-Free USA Tax-Free USA
Intermediate Intermediate Intermediate
Fund A Class Fund B Class Fund C Class
---------------------------------------------- ------------------------------- ------------
Six-Months Year Year 1/7/93(1) Six-Months Year Period Period
Ended Ended Ended to Ended Ended 5/2/94(1) 11/29/95(1)
2/29/96(7) 8/31/95 8/31/94 8/31/93 2/29/96(7) 8/31/95 to 8/31/94 to 2/29/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.41 $10.32 $10.63 $10.00 $10.41 $10.32 $10.23 $10.48
Income from investment operations:
Net investment income 0.27 0.55 0.53 0.33 0.23 0.46 0.15 0.12
Net realized and unrealized gain
(loss) from security
transactions 0.08 0.09 (0.31) 0.63 0.08 0.09 0.09 0.01
----- ----- ----- ----- ----- ----- ----- -----
Total from investment operations 0.35 0.64 0.22 0.96 0.31 0.55 0.24 0.13
Less distributions:
Dividends from net
investment income (0.27) (0.55) (0.53) (0.33) (0.23) (0.46) (0.15) (0.12)
Distributions from net realized
gain on security transactions none none none none none none none none
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.27) (0.55) (0.53) (0.33) (0.23) (0.46) (0.15) (0.12)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $10.49 $10.41 $10.32 $10.63 $10.49 $10.41 $10.32 $10.49
====== ====== ====== ====== ====== ====== ====== ======
Total return(2) 3.44% 6.43% 2.09% 9.75% 3.00% 5.53% 2.31% 1.22%
Ratios/supplemental data:
Net assets, end of period
(000 omitted) $20,118 $20,492 $28,193 $14,684 $1,330 $949 $597 $105
Ratio of expenses to average
net assets 0.25%(3) 0.25%(3) 0.25%(3) 0.25%(3) 1.10%(5) 1.10%(5) 1.10%(5) 1.10%(8)
Ratio of net investment income
to average net assets 5.27%(4) 5.37%(4) 5.00%(4) 4.84%(4) 4.42%(6) 4.52%(6) 4.15%(6) 4.42%(9)
Portfolio turnover 15% 63% 81% 53% 15% 63% 81% 15%
</TABLE>
- ------------------
1Date of initial public offering; ratios have been annualized and total return
has not been annualized.
2Does not reflect the maximum front-end sales charge of 3.00% nor the 1.00%
limited contingent deferred sales charge that would apply in the event of
certain redemptions within 12 months of purchase for the Tax-Free USA
Intermediate Fund A Class and the contingent deferred sales charge that varies
from 1% - 2% for the Tax-Free USA Intermediate Fund B Class and 1% for the
Tax-Free USA Intermediate Fund C Class depending upon the holding period.
3Ratio of expenses to average net assets prior to expense limitation was 0.95%
for the six months ended February 29, 1996, 1.07% for the year ended
August 31, 1995, 1.19% for 1994 and 1.94% for 1993.
4Ratio of net investment income to average net assets prior to expense
limitation was 4.57% for the six months ended February 29, 1996, 4.55% for the
year ended August 31, 1995, 4.06% for 1994 and 3.15% for 1993.
5Ratio of expenses to average net assets prior to expense limitation was 1.80%
for the six months ended February 29, 1996, 1.92% for the year ended
August 31, 1995, and 2.04% for the period ended August 31, 1994.
6Ratio of net investment income to average net assets prior to expense
limitation was 3.72% for the six months ended February 29, 1996, 3.70% for the
year ended August 31, 1995, and 3.21% for the period ended August 31, 1994.
7Ratios have been annualized and total return has not been annualized.
8Ratio of expenses to average net assets prior to expense limitation was 1.80%
for the period ended February 29, 1996.
9Ratio of net investment income to average net assets prior to expense
limitation was 3.72% for the period ended February 29, 1996.
<PAGE>
This semi-annual report is for the information of Tax-Free USA Intermediate
Fund's shareholders, but it may be used with prospective investors when
preceded or accompanied by a current PROSPECTUS for Tax-Free USA Intermediate
Fund, which sets forth details about charges, expenses, investment objectives
and operating policies of the Fund. You should read the prospectus carefully
before you invest. Summary investment results are documented in the Fund's
current STATEMENT OF ADDITIONAL INFORMATION. The figures in this report
represent past results which are not a guarantee of future results. The
return and principal value of an investment in the Fund will fluctuate so
that shares, when redeemed, may be worth more or less than their original
cost.
DELAWARE GROUP
- ----------------------------
OF FUNDS
- ----------------------------
FOR GROWTH OF CAPITAL
Trend Fund
DelCap Fund
Value Fund
FOR TOTAL RETURN
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
Delaware Fund
FOR GLOBAL DIVERSIFICATION
International Equity Fund
Global Assets Fund
Global Bond Fund
FOR CURRENT INCOME
Delchester Fund
U.S. Government Fund
Limited-Term Government Fund
FOR TAX-FREE CURRENT INCOME
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Tax-Free Pennsylvania Fund
MONEY MARKET FUNDS
Delaware Cash Reserve
U.S. Government Money Fund
Tax-Free Money Fund
CLOSED-END EQUITY/INCOME*
Dividend and Income Fund
Global Dividend and Income Fund
For a prospectus of any Delaware Group fund, contact your financial adviser
or Delaware Group.
* Delaware Group Dividend and Income Fund and Delaware Group Global Dividend
and Income Fund purchases can be made through any registered broker.
<PAGE>
Be sure to consult your financial adviser when making investments. Mutual
funds can be a valuable part of your financial plan; however, shares of the
Fund are not FDIC or NCUSIF insured, are not guaranteed by any bank or any
credit union, are not obligations of any bank or any credit union, and involve
investment risk, including the possible loss of principal. Shares of the Fund
are not bank or credit union deposits.
This report must be preceded or accompanied by a current Tax-Free USA
Intermediate Fund PROSPECTUS and the Delaware Group Fund Performance Update for
the most recently completed calendar quarter.
INVESTMENT MANAGER
Delaware Management Company, Inc.
Philadelphia
INTERNATIONAL AFFILIATE
Delaware International Advisers Ltd.
London
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
Philadelphia
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
Philadelphia
1818 Market Street
Philadelphia, PA 19103-3682
Nationwide (800) 523-4640
SECURITIES DEALERS ONLY
Nationwide (800) 362-7500
FINANCIAL INSTITUTIONS REPRESENTATIVES ONLY
Nationwide (800) 659-2265
Copy Rights Delaware Distributors, L.P.
Printed in the U.S.A. on recycled paper.
SA - 037 [ -- ] PP3/96
- ------------------------------
DELAWARE
TAX-FREE USA
INTERMEDIATE
FUND
- ------------------------------
1996
Semi-Annual
Report
A Tradition of Sound Investing Since 1929
DELAWARE
GROUP
-----------
Philadelphia * London
