COLORADO TAX FREE FUND
ANNUAL REPORT
Dated December 31, 1995
Voyageur offers a family of mutual funds, each with an individual objective
stated in its prospectus. Investment objectives of the funds range from high
current income to long-term capital appreciation. Exchange privileges allow you
to change your investment between Voyageur Funds
as your objectives or market conditions change.
VOYAGEUR TAX FREE FUNDS seek high current income free from both Federal income
taxes and state income taxes (where applicable). The Funds invest in investment
grade municipal bonds.
Voyageur ARIZONA Tax Free Fund Voyageur MINNESOTA Tax Free Fund
Voyageur CALIFORNIA Tax Free Fund Voyageur NATIONAL Tax Free Fund
Voyageur COLORADO Tax Free Fund Voyageur NEW MEXICO Tax Free Fund
Voyageur FLORIDA Tax Free Fund Voyageur NORTH DAKOTA Tax Free Fund
Voyageur IDAHO Tax Free Fund Voyageur UTAH Tax Free Fund
Voyageur IOWA Tax Free Fund Voyageur WISCONSIN Tax Free Fund
Voyageur KANSAS Tax Free Fund
VOYAGEUR INSURED TAX FREE FUNDS seek high current income free from both Federal
income taxes and state income taxes (where applicable) with the added safety of
an insured portfolio. The Funds invest in insured municipal bonds.
Voyageur ARIZONA Insured Voyageur MISSOURI Insured
Tax Free Fund Tax Free Fund
Voyageur CALIFORNIA Insured Voyageur NATIONAL Insured
Tax Free Fund Tax Free Fund
Voyageur FLORIDA Voyageur OREGON
Tax Free Fund Tax Free Fund
Voyageur MINNESOTA Insured Fund Voyageur WASHINGTON
Tax Free Fund
VOYAGEUR LIMITED TERM FUNDS seek to preserve original investment principal while
providing income free from both Federal income taxes and state income taxes
(where applicable). The Funds invest in intermediate term investment grade
municipal bonds.
Voyageur FLORIDA Limited Term Tax Free Fund Voyageur NATIONAL Limited
Voyageur MINNESOTA Limited Term Tax Free Fund Term Tax Free Fund
VOYAGEUR EQUITY FUNDS seek long term capital appreciation by investing in common
stocks.
Voyageur AGGRESSIVE GROWTH Fund Voyageur GROWTH Stock Fund
Voyageur GROWTH AND INCOME Fund Voyageur INTERNATIONAL Equity Fund
VOYAGEUR INCOME FUNDS seek high current income from investments issued,
guaranteed or otherwise backed by the full faith and credit of the U.S.
Government.
Voyageur U.S. GOVERNMENT SECURITIES Fund
VOYAGEUR CASH TRUST SERIES MONEY MARKET FUNDS seek high current income,
principal protection and liquidity by investing in money market instruments.
Voyageur CALIFORNIA MUNICIPAL CASH Series Voyageur MUNICIPAL CASH Series
Voyageur FLORIDA MUNICIPAL CASH Series Voyageur OHIO MUNICIPAL CASH Series
Voyageur GOVERNMENT CASH Series Voyageur PRIME CASH Series
Voyageur MINNESOTA MUNICIPAL CASH Series Voyageur TREASURY CASH Series
For more complete information regarding the investment objectives, fees and
expenses of the Funds, please obtain a prospectus from your Investment
Representative or from Voyageur, 90 South Seventh Street, Suite 4400,
Minneapolis, MN 55402-4115; (612) 376-7044 (local); 800-525-6584 (MKTG).
Dear Shareholder:
1995 was an excellent year for municipal bond fund investors and I am pleased to
report that your Fund did extremely well.
As you may recall, the previous year, 1994, represented one of the most
difficult years for fixed income investors since the 1920s. Voyageur's
investment strategy, however, emphasizes total return over the long term.
Shareholders who maintained a long term outlook through 1994 are to be
congratulated for their patience. This patience was rewarded in 1995.
Two of the major factors contributing to the resurgence of the municipal bond
market this past year were:
* Progressively lower interest rates throughout the year. (Falling interest
rates directly increases the value of your Fund's portfolio, and hence,
your shares.)
* A narrowing "spread" between yields on higher quality bonds versus lower
quality bonds. (Your Fund benefited from maintaining a large position in
quality bonds.)
In the following pages, I will elaborate on these and other points of interest
regarding the municipal bond market in 1995. I will also share Voyageur's
economic outlook for the next fiscal year.
Finally, I'd like to apprise you of the amount of capital appreciation and
current income generated by the Fund on your behalf in 1995.
<TABLE>
<CAPTION>
TOTAL NET
NET ASSET NET ASSET ASSETS
VALUE VALUE DIVIDENDS END OF
BEGINNING END PAID PER PERIOD
PERIOD OF PERIOD OF PERIOD SHARE (000'S)
- ------ ----------- --------- ----------- ---------
Period ended December 31, 1995:
<S> <C> <C> <C> <C>
Class A Shares $9.53 $10.90 $0.55 $392,815
Class B Shares 10.25* 10.90 0.35 1,643
Class C Shares 9.53 10.90 0.45 1,042
___________________________________
* Net asset value at March 22, 1995 (commencement of operations)
</TABLE>
I will be reporting to you again in August, 1996 to review the first half of the
coming year. In the interim, if you have any questions or comments about your
Fund, please call Voyageur's Shareholder Services Department at (800)545-3863 or
your financial advisor.
Thank you for investing with Voyageur.
Sincerely,
Andrew M. McCullagh, Jr.
President
Voyageur Colorado Tax Free Fund
FUND INVESTMENT OBJECTIVE AND STRATEGY
The primary objective of the Voyageur Colorado Tax Free Fund is to seek as high
a level of current income exempt from federal income tax and from state income
tax as is consistent with preservation of capital.
The Colorado Tax Free Fund generally invests in long-term, quality bonds. The
Fund is exempt from federal income tax and Colorado state income tax. We believe
that investment grade bonds for the Colorado Tax Free Fund offer the best value
in today's interest rate environment.
DISCUSSION OF FUND PERFORMANCE
by Andrew M. McCullagh, Jr.
MR. MCCULLAGH IS PRESIDENT OF THE VOYAGEUR COLORADO TAX FREE FUND AS WELL AS
SENIOR VICE PRESIDENT FOR VOYAGEUR FUND MANAGERS. HE HAS MANAGED THE FUND SINCE
ITS INCEPTION IN 1987.
We at Voyageur are pleased to report the 1995 performance results of the
Voyageur Colorado Tax Free Fund. For the fiscal year ending December 31, 1995
only Class A and C Shares of the Fund were in operation for the entire year. The
Fund achieved a total return of +20.54% for Class 'A' shares, assuming purchase
of shares at net asset value and reinvestment of dividend and capital gains and
+19.44% for Class 'C' shares. For additional information about total returns
achieved by the Fund over other time frames and including the effect of sales
charges, please refer to the chart on page 7.
FACTORS AFFECTING FUND PERFORMANCE IN 1995
As previously discussed, a general downward trend in prevailing interest rates
had a positive impact on the net asset value of Fund shares in 1995. The Fund
was able to achieve an excellent total return relative to other Colorado Tax
Free Funds during this period. (According to Lipper Analytical Services, your
Fund was ranked #1 of 18 Colorado municipal bond funds for total return in 1995.
The Lipper Colorado group's total return averaged +16.55% during this period.)
Keep in mind, however, that past performance does not guarantee future results.
Your Fund was able to capture significant capital appreciation through duration
management. Longer duration funds experience wider fluctuations in market prices
that shorter duration funds. The Voyageur Colorado Tax Free Fund started 1995
with an average weighted duration of over 11.3 years which allowed for a
significant increase in net asset value. After having captured this market
rally, the duration of the Fund was systematically reduced, closing the year at
approximately 7.7 years.
The Voyageur Colorado Tax Free Fund also benefited from relative changes in
value between high quality bonds and lower quality bonds. As interest rate
spreads between these two classes of municipal bonds narrowed, high quality
bonds (which had been dramatically oversold during the 1994 bear market) gained
significant relative value. As of December 31, 1995 the Fund was comprised of
52% AAA and/or Aaa bonds, and 100% of the Fund was held in investment grade
securities.
Finally, supply and demand trends of Colorado municipal bonds benefited Fund
shareholders. Even though the Colorado economy grew at a robust pace in 1995,
new issuance of municipal bonds remained low. This was partially a result of the
passage of Amendment One in 1993 which required many new issues of Colorado
municipal bonds to be ratified by referendum. A lower level of supply of
Colorado bonds favors existing bond holders, particularly large institutional
buyers, such as mutual funds. Voyageur Colorado Tax Free Fund shareholders
benefited from participating in the growth of the largest Colorado municipal
bond fund in the industry.
OUTLOOK FOR 1996
Our outlook for the Colorado municipal bond market remains bullish. However, we
do not anticipate as significant levels of total return in the upcoming year as
was achieved in 1995.
Our 1996 economic outlook calls for:
* CONTINUED LOW RATES OF INFLATION. We expect a Consumer Price Index (CPI)
increase of from 2.5% to 2.8%.
* SLOWING OF ECONOMIC GROWTH. In 1995 U.S. Gross Domestic Product (GDP)
climbed about 3%. Voyageur's 1996 projection for GDP calls for an increase
of about 2.4%.
* STABLE TO SLIGHTLY DECLINING INTEREST RATES. During 1995 the Federal
Reserve Board encouraged lower interest rates by reducing the Federal Funds
Rate by a total of .5%. (Rates were subsequently lowered by an additional
.25% in February 1996.) We expect further reductions of .5% to .75%, which
will likely occur well in advance of the November elections.
In conclusion, Voyageur believes the municipal bond market will have a good year
in 1996. However, we advise against expectations of total return levels achieved
in 1995.
PURSUANT TO RULE 232.304(a) OF REGULATION S-T THE FOLLOWING IS A TABULAR
REPRESENTATION OF A LINE GRAPH FOR VOYAGEUR COLORADO TAX FREE FUND PORTFOLIO
ABSTRACT FOR THE PERIOD ENDED DECEMBER 31, 1995. THE DATA REPRESENTS THE
CUMULATIVE TOTAL RETURN OF A HYPOTHETICAL INVESTMENT IN CLASS A SHARES OF
$10,000 MADE ON THE DATE THE FUND COMMENCED OPERATIONS THROUGH DECEMBER 31,
1995.
ENDING VALUE ENDING VALUE ENDING VALUE
WITH SALES WITHOUT SALES LEHMAN BROS.
DATE CHARGE CHARGE BOND INDEX
- ---- ------ ------ ----------
Apr-87 9,625.00 10000 10000
Apr-87 9,606.61 9980.9 9845.9099
May-87 9,602.29 9976.41 9771.081
Jun-87 9,747.44 10127.21 10048.58
Jul-87 9,825.30 10208.1 10143.036
Aug-87 9,903.61 10289.47 10187.666
Sep-87 9,589.84 9963.47 9841.2851
Oct-87 9,526.95 9898.13 9850.1422
Nov-87 9,784.95 10166.19 10105.261
Dec-87 9,940.01 10327.28 10255.829
Jan-88 10,203.63 10601.18 10705.035
Feb-88 10,337.17 10739.92 10847.412
Mar-88 10,206.70 10604.37 10652.158
Apr-88 10,308.88 10710.52 10743.767
May-88 10,306.83 10708.39 10741.618
Jun-88 10,541.53 10952.23 10950.005
Jul-88 10,603.46 11016.59 11043.08
Aug-88 10,610.94 11024.35 11058.541
Sep-88 10,793.09 11213.6 11317.311
Oct-88 10,977.83 11405.54 11570.818
Nov-88 10,903.15 11327.95 11477.095
Dec-88 10,986.77 11414.82 11629.74
Jan-89 11,168.90 11604.05 11928.624
Feb-89 11,169.13 11604.29 11784.288
Mar-89 11,209.91 11646.66 11757.184
Apr-89 11,352.65 11794.97 12080.507
May-89 11,591.29 12042.9 12368.023
Jun-89 11,776.17 12234.98 12527.57
Jul-89 11,939.47 12404.64 12701.703
Aug-89 11,815.13 12275.46 12567.065
Sep-89 11,750.84 12208.67 12474.069
Oct-89 11,921.57 12386.05 12667.417
Nov-89 12,043.06 12512.27 12899.231
Dec-89 12,166.07 12640.07 12992.105
Jan-90 12,113.75 12585.72 12885.57
Feb-90 12,208.95 12684.62 13013.137
Mar-90 12,250.02 12727.29 13040.465
Apr-90 12,215.28 12691.2 12915.276
May-90 12,408.27 12891.7 13245.908
Jun-90 12,512.50 13000 13351.875
Jul-90 12,703.40 13198.33 13574.851
Aug-90 12,576.20 13066.18 13299.282
Sep-90 12,545.20 13033.97 13283.322
Oct-90 12,652.60 13145.55 13527.736
Nov-90 12,873.56 13375.13 13849.696
Dec-90 12,996.05 13502.39 13917.559
Jan-91 13,118.30 13629.4 14085.962
Feb-91 13,259.79 13776.4 14201.467
Mar-91 13,262.93 13779.67 14212.828
Apr-91 13,342.82 13862.67 14418.914
May-91 13,506.47 14032.7 14568.87
Jun-91 13,484.12 14009.47 14526.621
Jul-91 13,677.92 14210.83 14738.709
Aug-91 13,844.68 14384.08 14936.208
Sep-91 13,996.78 14542.11 15139.341
Oct-91 14,127.24 14677.65 15287.706
Nov-91 14,174.17 14726.41 15312.166
Dec-91 14,397.17 14958.1 15638.316
Jan-92 14,428.99 14991.16 15671.156
Feb-92 14,474.16 15038.09 15677.424
Mar-92 14,505.19 15070.33 15715.05
Apr-92 14,635.95 15206.18 15862.772
May-92 14,796.40 15372.88 16070.574
Jun-92 14,986.74 15570.64 16366.273
Jul-92 15,482.10 16085.3 16952.185
Aug-92 15,283.97 15879.45 16740.283
Sep-92 15,346.84 15944.77 16823.984
Oct-92 15,189.17 15780.96 16585.084
Nov-92 15,694.53 16306.01 17006.345
Dec-92 15,894.78 16514.06 17229.128
Jan-93 16,080.20 16706.7 17413.48
Feb-93 16,569.15 17214.7 18151.811
Mar-93 16,511.99 17155.31 17993.89
Apr-93 16,682.04 17331.99 18220.613
May-93 16,792.35 17446.6 18371.844
Jun-93 17,118.93 17785.9 18709.886
Jul-93 17,244.97 17916.85 18732.338
Aug-93 17,589.21 18274.51 19180.041
Sep-93 17,842.33 18537.49 19421.71
Oct-93 18,018.50 18720.52 19456.669
Nov-93 17,833.29 18528.09 19242.645
Dec-93 18,075.30 18779.54 19706.393
Jan-94 18,320.44 19034.23 19954.694
Feb-94 17,863.31 18559.29 19362.039
Mar-94 17,139.11 17806.87 18341.66
Apr-94 16,940.11 17600.12 18492.061
May-94 17,102.83 17769.17 18710.268
Jun-94 16,965.25 17626.24 18523.165
Jul-94 17,263.42 17936.02 18947.346
Aug-94 17,242.97 17914.77 19000.398
Sep-94 16,917.58 17576.7 18620.39
Oct-94 16,521.94 17165.65 18128.812
Nov-94 16,055.53 16681.07 17704.598
Dec-94 16,427.12 17067.13 18260.522
Jan-95 17,025.24 17688.56 18974.509
Feb-95 17,695.52 18384.96 19663.283
Mar-95 17,878.56 18575.13 19887.445
Apr-95 17,939.50 18638.44 19883.467
May-95 18,581.48 19305.43 20633.074
Jun-95 18,431.16 19149.26 20315.325
Jul-95 18,493.88 19214.42 20420.964
Aug-95 18,681.96 19409.83 20700.731
Sep-95 18,906.21 19642.81 20864.267
Oct-95 19,256.91 20007.17 21308.676
Nov-95 19,573.60 20336.21 21779.598
Dec-95 19,800.59 20572.04 22084.512
VOYAGEUR COLORADO TAX FREE FUND
AVERAGE ANNUAL TOTAL RETURNS
(CLASS A SHARES)
----------------
SINCE
1 YEAR 5 YEARS 4/23/87**
------ ------- ---------
Without Sales Charge 20.54% 8.79% 8.65%
With Sales Charge* 16.02% 7.96% 8.18%
Lehman Bros. 20 Year 20.94% 9.67% 9.55%
Municipal Bond Index
VOYAGEUR COLORADO TAX FREE FUND
TOTAL RETURNS
(CLASS B SHARES)
----------------
Since
-----
3/22/95**
Without Contingent
Deferred Sales Charge 9.96%
With Contingent
Deferred Sales Charge*** 5.96%
VOYAGEUR COLORADO TAX FREE FUND
AVERAGE ANNUAL TOTAL RETURNS
(CLASS C SHARES)
----------------
Since
1 YEAR 5/6/94**
------ --------
19.44% 8.78%
* Average annual total returns include the maximum 3.75% sales charge.
** Commencement of operations.
*** Assumes redemption on December 31, 1995
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Voyageur Mutual Funds II, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of Voyageur Colorado Tax
Free Fund (a fund within Voyageur Mutual Funds II, Inc.) as of December 31,
1995, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
ended December 31, 1995 and the financial highlights for each of the years in
the five-year period ended December 31, 1995. These financial statements and the
financial highlights are the responsibility of Fund management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Investment securities
held in custody are confirmed to us by the custodian. As to securities purchased
but not received, we request confirmations from brokers, and where replies are
not received, we carry out other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Voyageur Colorado Tax Free
Fund at December 31, 1995 and the results of its operations for the year then
ended, the changes in its net assets for each of the years in the two-year
period ended December 31, 1995 and the financial highlights for each of the
years in the five-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 9, 1996
<TABLE>
<CAPTION>
VOYAGEUR COLORADO TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Investments in securities, at market value (note 1)
(identified cost: $381,709,777)......................................... $397,604,644
Cash in bank on demand deposit............................................. 464
Accrued interest receivable................................................ 3,325,886
Receivable for Fund shares sold............................................ 211,139
------------
Total assets............................................................ 401,142,133
------------
LIABILITIES
Dividends payable to shareholders.......................................... 1,647,111
Payable for investment securities purchased................................ 3,575,119
Payable for Fund shares redeemed........................................... 317,230
Distribution fees payable.................................................. 18,993
Other accrued expenses..................................................... 82,643
------------
Total liabilities....................................................... 5,641,096
------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK......................... $395,501,037
============
Represented by:
Capital Stock - $.001 par value (note 1)................................ $ 36,277
Additional paid-in capital.............................................. 388,957,334
Undistributed net investment income..................................... 18,456
Accumulated net realized loss on investments............................ (9,405,897)
Unrealized appreciation of investments.................................. 15,894,867
------------
TOTAL NET ASSETS...................................................... $395,501,037
============
Net assets applicable to outstanding Class A shares........................ $392,815,381
============
Net assets applicable to outstanding Class B shares........................ $ 1,643,379
============
Net assets applicable to outstanding Class C shares........................ $ 1,042,277
============
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE
Class A - Shares of Capital Stock outstanding: 36,030,584 (note 4)..... $10.90
======
Class B - Shares of Capital Stock outstanding: 150,774 (note 4)........ $10.90
======
Class C - Shares of Capital Stock outstanding: 95,610 (note 4)......... $10.90
======
</TABLE>
<TABLE>
<CAPTION>
VOYAGEUR COLORADO TAX FREE FUND
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------
Investment income:
<S> <C>
Interest................................................................ $23,054,355
-----------
Expenses (note 3):
Investment advisory and management fee.................................. 1,944,802
Dividend-disbursing, administrative and accounting services fees........ 441,178
Printing, postage and supplies.......................................... 91,178
Audit and accounting fees............................................... 26,171
Legal fees.............................................................. 11,947
Distribution fees - Class A............................................. 969,424
Distribution fees - Class B............................................. 5,460
Distribution fees - Class C............................................. 7,874
Directors' fees......................................................... 22,643
Registration fees....................................................... 24,267
Custodian fees.......................................................... 53,780
Other................................................................... 28,435
-----------
Total expenses........................................................ 3,627,159
Less: Expenses waived or absorbed by the distributor................... (643,560)
-----------
Net expenses before earnings credits on uninvested cash................. 2,983,599
Less: Earnings credits on uninvested cash.............................. (53,780)
-----------
Total net expenses.................................................... 2,929,819
-----------
Investment income - net............................................... 20,124,536
-----------
Realized and unrealized gain (loss) on investments:
Realized loss on security transactions (note 2)......................... (9,220,493)
Net change in unrealized appreciation or depreciation of investments.... 61,036,568
-----------
Net gain on investments............................................... 51,816,075
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $71,940,611
===========
</TABLE>
<TABLE>
<CAPTION>
VOYAGEUR COLORADO TAX FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
Operations: 1995 1994
------------ ------------
<S> <C> <C>
Investment income - net................................................. $ 20,124,536 $ 21,790,358
Realized gain (loss) on investments - net............................... (9,220,493) 1,506,570
Net change in unrealized appreciation or
depreciation of investments........................................... 61,036,568 (63,674,505)
------------ ------------
Net increase (decrease) in net assets resulting from operations..... 71,940,611 (40,377,577)
------------ ------------
Distributions to shareholders from:
Investment income - net:
Class A............................................................... (20,437,593) (21,407,562)
Class B............................................................... (20,541) N/A
Class C............................................................... (33,262) (8,634)
Net realized gain on investments:
Class A............................................................... -- (1,505,770)
Class C............................................................... -- (800)
Excess distribution of net realized gain:
Class A............................................................... -- (185,306)
Class C............................................................... -- (98)
------------ ------------
Total distributions................................................. (20,491,396) (23,108,170)
------------ ------------
Capital share transactions (note 4):
Proceeds from sale of shares:
Class A (note 3)...................................................... 37,603,482 91,267,797
Class B............................................................... 1,630,345 N/A
Class C............................................................... 570,571 533,645
Net asset value of shares issued in reinvestment of net investment income
distributions and realized gain distributions:
Class A............................................................. 13,311,806 22,202,278
Class B............................................................. 12,329 N/A
Class C............................................................. 27,040 6,041
Payments for redemption of shares:
Class A............................................................... (63,543,450) (95,093,556)
Class B (note 3)...................................................... (49,987) N/A
Class C (note 3)...................................................... (112,717) (46,472)
------------ ------------
Increase (decrease) in net assets from capital share transactions....... (10,550,581) 18,869,733
------------ ------------
Total increase (decrease) in net assets............................... 40,898,634 (44,616,014)
Net assets at beginning of period.......................................... 354,602,403 399,218,417
------------ ------------
Net assets at end of period (including undistributed net investment
income of $18,456 of $385,316, respectively)............................ $395,501,037 $354,602,403
============ ============
</TABLE>
VOYAGEUR COLORADO TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Voyageur Colorado Tax Free Fund (the Fund), a fund within Voyageur Mutual
Funds II, Inc., is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. The Fund
seeks high current income free from both federal and state income taxes by
investing in investment grade municipal bonds.
The Fund offers Class A, Class B and Class C Shares. Class A Shares are
sold with a front-end sales charge. Class B Shares (first offered in 1995) may
be subject to a contingent deferred sales charge and such shares automatically
convert to Class A after eight years. Class C Shares may be subject to a
contingent deferred sales charge and have no conversion feature. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that the level of distribution fees charged
differs between classes. Income, expenses (other than expenses incurred under
each class' Distribution Agreement) and realized and unrealized gains or losses
on investments are allocated to each class of shares based upon its relative net
assets.
Pursuant to its amended articles of incorporation, Voyageur Mutual Funds
II, Inc. has 10 trillion shares of authorized capital stock that may be issued
in one or more series.
The significant accounting policies followed by the Fund are summarized as
follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net increase (decrease) in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
INVESTMENTS IN SECURITIES
Securities are valued at fair value as determined by the Board of
Directors. Determination of fair value involves, among other things, using
pricing services or prices quoted by independent brokers. Short-term securities
are valued at amortized cost which approximates market value.
Security transactions are accounted for on the trade date. Securities gains
and losses are calculated on the identified-cost basis. Interest income,
including level-yield amortization of premium and original issue discount, is
accrued daily.
The Fund concentrates its investments in a single state, and therefore may
have more credit risk related to the economic conditions of the state of
Colorado than a portfolio with broader geographical diversification.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Fund
on a forward commitment or when-issued basis can take place up to a month or
more after the transaction date. During this period, such securities are subject
to market fluctuations and the portfolio maintains, in a segregated account with
its custodian, assets with a market value equal to or greater than the amount of
its purchase commitments.
FEDERAL TAXES
The Fund's policy is to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to shareholders in amounts that will avoid or minimize
federal income or excise taxes for the Fund. Net investment income and net
realized gains (losses) for the Fund may differ for financial statement and tax
purposes primarily because of losses deferred for tax purposes due to "wash
sale" transactions. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. The effect on dividend
distributions on certain book-to-tax differences is reflected as excess
distributions of net realized gains in the statement of changes in net assets.
Also, due to the timing of dividend distributions, the fiscal year in which
amounts are distributed may differ from the year that the income or realized
gains (losses) were recorded by the Fund. For federal income tax purposes,
Colorado Tax Free Fund had a capital loss carryover at December 31, 1995, of
$8,359,188 that will expire in 2003 if not offset by subsequent capital gains.
It is unlikely the Board of Directors will authorize a distribution of any net
realized capital gains until the available capital loss carryover has been
offset or expires.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends declared daily from net investment income are payable monthly in
cash or reinvested in additional shares of the Fund. Net short-term realized
capital gains, if any, may be distributed throughout the year and net long-term
realized capital gains, when available, are distributed annually.
(2) SECURITIES TRANSACTIONS
Purchase cost and proceeds from sales of securities other than short-term
securities aggregated $318,826,048 and $335,673,049 , respectively, for the year
ended December 31, 1995.
(3) EXPENSES
The Fund has an investment advisory and management agreement with Voyageur
Fund Managers, Inc. (Voyageur) under which Voyageur manages the Fund's assets
and provides other specified services. The fee for investment management and
advisory services is paid monthly and is based on the average daily net assets
of the Fund at the annual rate of .50%. In addition, the Fund will pay most
other operating expenses including directors' fees, registration fees, printing
of shareholder reports, legal and auditing services and other miscellaneous
expenses. Voyageur is obligated to pay all expenses of the Fund (excluding
distribution fees, insurance premiums on portfolio securities, taxes, interest
and brokerage commissions) which exceed 1% of average daily net assets, on an
annual basis.
The Fund will also pay a fee to Voyageur for acting as the Fund's dividend
disbursing, administrative and accounting services agent. The fee is paid
monthly and is equal to the sum of $1.33 per shareholder account per month, a
fixed monthly fee ranging from $1,000 to $1,500 based on the level of the Fund's
average daily net assets and an annualized percentage of average daily net
assets at reducing rates from .11% to .02%. The Fund is also responsible for
reimbursing Voyageur's out-of-pocket expense in connection with the performance
of dividend-disbursing, administrative and accounting services. Each class of
shares has a Distribution Agreement under Rule 12b-1 of the Investment Company
Act of 1940 with Voyageur Fund Distributors, Inc. (Fund Distributors). Under
these plans the Fund is obligated to pay Fund Distributors a monthly
distribution fee at an annual rate of .25% of average daily net assets of the
Class A Shares and 1.00% of average daily net assets of the Class B and Class C
Shares. Fund Distributors may waive all or part of its distribution fees at its
sole discretion. During the period ended December 31, 1995, Fund Distributors
voluntarily waived Class A distribution fees of $642,447 and Class B
distribution fees of $1,113. During the period ended December 31, 1995, the Fund
earned $53,780 in credits on uninvested cash balances held by the Fund at the
custodian. These credits were used to reduce certain fees for various custodial,
pricing and accounting services provided by the custodian bank.
Sales charges paid by Class A shareholders were $719,397. Of this amount,
Fund Distributors received $115,688. Contingent deferred sales charges for the
period ended December 31, 1995 were $1,904 for Class B shareholders and $151 for
Class C shareholders.
(4) SHARE TRANSACTIONS
Transactions in shares of capital stock during the periods ended December 31,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------- ---------------- ---------------------------
YEAR YEAR PERIOD FROM YEAR PERIOD FROM
ENDED ENDED MARCH 22, 1995* ENDED MAY 6, 1994* TO
DECEMBER 31, DECEMBER 31, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995 1995 1994
----------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Shares sold.................... 3,671,995 8,693,338 154,321 54,821 52,742
Shares issued for reinvested
distributions............... 1,293,858 2,106,985 1,168 2,607 615
Shares redeemed................ (6,106,138) (9,582,653) (4,715) (10,608) (4,567)
----------- ----------- -------- -------- -------
Increase (decrease) in
shares outstanding.......... (1,140,285) 1,217,670 150,774 46,820 48,790
============ =========== ======== ======== =======
________________________________
* Commencement of operations.
</TABLE>
(5) FINANCIAL HIGHLIGHTS
Per share data (rounded to the nearest cent) for a share of capital stock
outstanding and selected information for each period are as follows:
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
Net asset value:
<S> <C> <C> <C> <C> <C>
Beginning of period......................... $ 9.53 $11.10 $10.57 $10.27 $10.02
------- ------ ------ ------ ------
Operations:
Net investment income....................... .54 .55 .56 .58 .61
Net realized and unrealized
gain (loss) on investments................ 1.38 (1.54) .85 .45 .43
------- ------ ------ ------ ------
Total from operations....................... 1.92 (.99) 1.41 1.03 1.04
------- ------ ------ ------ ------
Distributions to shareholders:
From net investment income (a).............. (.55) (.54) (.56) (.58) (.61)
From net realized gains..................... -- (.04) (.32) (.15) (.18)
------- ------ ------ ------ ------
Total distributions....................... (.55) (.58) (.88) (.73) (.79)
------- ------ ------ ------ ------
Net asset value:
End of period............................... $10.90 $9.53 $11.10 $10.57 $10.27
====== ===== ====== ====== ======
Total investment return (b).................... 20.54% (9.12)% 13.72% 10.42% 10.80%
Net assets at end of
period (000's omitted)...................... $392,815 $354,138 $399,218 $202,165 $104,863
Ratios:
Ratio of expenses to
average daily net assets (f).............. .76% .66% .75% .80% .82%
Ratio of net investment income
to average daily net assets............... 5.18% 5.35% 4.97% 5.59% 6.15%
Assuming no voluntary waivers and
reimbursements:
Expenses (c)........................ .93% .72% .75% .80% .82%
Net investment income............... 5.01% 5.29% 4.97% 5.59% 6.15%
Portfolio turnover rate (excluding
short-term securities)...................... 82.83% 69.32% 58.61% 69.72% 92.42%
See accompanying notes to Financial Highlights.
</TABLE>
(5) FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------ ------------------------------
PERIOD FROM YEAR PERIOD FROM
MARCH 22, 1995(d) ENDED MAY 6, 1994(d)
TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1995 1995 1994
------------------ ------------- -------------
Net asset value:
<S> <C> <C> <C>
Beginning of period............................... $10.25 $ 9.53 $10.21
------ ------ ------
Operations:
Net investment income............................. .35 .45 .29
Net realized and unrealized
gain (loss) on investments...................... .65 1.37 (.67)
------ ------ ------
Total from operations......................... 1.00 1.82 (.38)
------ ------ ------
Distributions to shareholders:
From net investment income (a).................... (.35) (.45) (.27)
From net realized gains........................... -- -- (.03)
------ ------ ------
Total distributions............................. (.35) (.45) (.30)
------ ------ ------
Net asset value:
End of period..................................... $10.90 $10.90 $ 9.53
====== ====== ======
Total investment return (b).......................... 9.96% 19.44% (3.75)%
Net assets at end of
period (000's omitted)............................ $1,643 $1,042 $465
Ratios:
Ratio of expenses to
average daily net assets (f).................... 1.39%(e) 1.66% 1.80%(e)
Ratio of net investment income
to average daily net assets..................... 3.96%(e) 4.20% 4.23%(e)
Assuming no voluntary waivers and
reimbursements:
Expenses (c).............................. 1.60%(e) 1.66% 1.81%(e)
Net investment income..................... 3.75%(e) 4.20% 4.22%(e)
Portfolio turnover rate (excluding
short-term securities)............................ 82.83% 82.83% 69.32%
See accompanying notes to Financial Highlights.
</TABLE>
(5) FINANCIAL HIGHLIGHTS (CONTINUED)
NOTES TO FINANCIAL HIGHLIGHTS
(a) For federal income tax purposes, all of the net investment income
distributions were derived from interest on securities exempt from federal
income tax. For Class A Shares for the years ended December 31, 1993, 1992,
1991 and 1990, $.01 per share of the distributions from net investment
income were subject to state income tax.
(b) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value and does not reflect the impact of a sales charge.
(c) For the periods ended December 31, 1995 and 1994, Fund Distributors
voluntarily waived a portion of their distribution fees. The annual
contractual expense limit for the Fund (excluding distribution fees,
insurance premiums on portfolio securities, taxes, interest and brokerage
commissions) is 1% of average daily net assets. The maximum distribution
fee is .25% of the Fund's average daily net assets for Class A Shares and
1.00% of the Fund's average daily net assets for Class B and Class C
Shares.
(d) Commencement of operations.
(e) Annualized.
(f) Beginning in the year ended December 31, 1995, the expense ratio reflects
the effect of gross expenses attributable to earnings credits on uninvested
cash balances received by the Fund. Prior period expense ratios have not
been adjusted.
<TABLE>
<CAPTION>
VOYAGEUR COLORADO TAX FREE FUND
INVESTMENTS IN SECURITIES DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON MARKET
($000) NAME OF ISSUER (b) RATE MATURITY VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
(PERCENTAGE OF EACH INVESTMENT CATEGORY RELATES TO TOTAL NET ASSETS.)
COLORADO MUNICIPAL BONDS (100.4%):
GENERAL OBLIGATION (30.2%):
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1,000 Adams County School District #12 (MBIA Insured)........................ 5.60% 12-15-12 $1,021,600
6,000 Arapahoe County School District #5 - Cherry Creek...................... 5.15 12-15-15 5,904,300
1,900 Arapahoe County University School District #6 - Littleton.............. 5.30 12-01-11 1,915,580
1,500 Arapahoe County School District #6 - Littleton......................... 5.30 12-01-12 1,507,425
8,010 Arapahoe County Water & Sanitation Series 1995A........................ 6.00 12-01-15 8,203,201
10,075 Arapahoe County Water & Sanitation Series 1995A........................ 6.15 12-01-19 10,389,844
1,000 Boulder Colorado School District....................................... 6.25 12-01-12 1,084,100
3,000 Boulder Valley School District #RE-2 Revenue........................... 6.30 12-01-13 3,257,760
6,250 Boulder Valley Colorado School District #RE-2 Revenue.................. 6.30 12-01-14 6,775,813
3,060 Douglas County School District Series 94A (MBIA Insured)............... 6.50 12-15-16 3,362,175
1,000 Eagle County Colorado School District #RE50J (FGIC Insured)............ 6.30 12-01-12 1,090,990
6,575 Eagles Nest Metropolitan District Limited Tax.......................... 6.50 11-15-17 6,705,908
1,000 East Otero School District............................................. 5.30 12-15-15 997,530
4,500 El Paso County Harrison School District #2 Metropolitan District....... 5.70 12-01-14 4,575,690
5,000 El Paso County School District #20 (MBIA Insured)...................... 5.53 12-15-11 5,071,300
3,420 El Paso County School District #20 (MBIA Insured)...................... 6.15 12-15-08 3,794,900
3,225 El Paso County School District #20 (FSA Insured)....................... 5.55 12-15-14 3,271,666
2,500 Garfield Pitkin Eagle County Colorado School District #1 (MBIA Insured) 5.20 12-15-14 2,455,600
1,000 Gunnison Watershed Colorado University School District #RE001.......... 5.00 12-01-15 968,100
2,750 Highlands Ranch Metropolitan District #2............................... 5.00(e) 06-15-16 2,585,000
4,200 Highlands Ranch Metropolitan District #4 (LOC - Swiss Bank Insured).... 6.00 12-01-15 4,438,476
2,000 Highlands Ranch Colorado (FSA Insured)................................. 5.63 09-01-12 2,053,380
5,170 Interstate South Metropolitan District................................. 6.00 12-01-20 5,230,748
12,000 Jefferson County School District #R-001 (AMBAC Insured)................ 6.00 12-15-12 12,653,160
2,250 Jefferson County Colorado Section 14 Metro............................. 6.20 12-01-13 2,396,250
1,000 Jefferson County Colorado Section 14 Metro............................. 6.20 06-01-14 1,061,250
1,000 Larimer & Boulder County School District #R3 (AMBAC Insured)........... 5.40(e) 12-01-15 1,003,220
2,600 Larimer County Poudre School District (MBIA Insured)................... 6.15 12-15-16 2,757,482
3,385 Larimer County School District #R1 (MBIA Insured)...................... 5.63 12-15-12 3,455,780
1,500 Montezuma County Colorado Dolores School District...................... 7.00 12-01-19 1,687,050
1,000 Park County Colorado University School District #RE-2 (AMBAC Insured).. 5.20 12-01-15 985,320
3,000 Pueblo County Colorado School District #70 (MBIA Insured).............. 5.30 12-01-15 2,992,530
1,815 San Miguel County School District #R-1 (MBIA Insured).................. 5.50 12-01-12 1,841,680
1,765 Summit County Colorado School District #1 (FGIC Insured)............... 5.50 12-01-10 1,800,300
------------
119,295,108
------------
UTILITIES (4.4%):
------------------------------------------------------------------------------------------------------
4,000 Centennial County Water & Sanitary District (LOC - Swiss Bank Insured). 6.00 12-01-15 4,227,120
1,850 Fort Collins Wastewater (FGIC Insured)................................. 5.38 12-01-09 1,878,157
1,735 Fort Collins Wastewater (FGIC Insured)................................. 5.38 12-01-10 1,752,836
1,500 Little Thompson Water District (MBIA Insured).......................... 5.63 12-01-14 1,543,125
5,000 Platte River Power Authority Series BB................................. 6.13 06-01-14 5,310,450
1,500 Westminster Water & Sewer Utility Revenue (AMBAC Insured).............. 6.00 12-01-09 1,601,145
1,000 Westminster Water & Sewer Utility Revenue (AMBAC Insured).............. 6.25 12-01-14 1,075,530
------------
17,388,363
------------
TRANSPORTATION (12.4%):
------------------------------------------------------------------------------------------------------
11,920 Arapahoe County Colorado Vehicle Reg E-470 (MBIA Insured).............. 6.15 8-31-26 12,724,600
10,000 Arapahoe County Colorado Capital Imp E-470............................. 7.00 8-31-26 10,825,000
11,600 Denver City & County Airport Revenue (MBIA Insured).................... 5.60 11-15-20 11,672,500
13,825 Denver City & County Airport Revenue (MBIA Insured).................... 5.70 11-15-25 13,980,531
------------
49,202,631
------------
INDUSTRIAL (3.6%):
-------------------------------------------------------------------------------------------------------
5,000 Adams County Pollution Control (MBIA Insured).......................... 5.88 04-01-14 5,198,650
2,500 Grand Junction Industrial Development (Dayton Hudson).................. 5.25 05-01-03 2,496,875
6,500 Morgan County Pollution Control Revenue (MBIA Insured)................. 5.50 06-01-12 6,556,225
------------
14,251,750
------------
HEALTH CARE (23.0%):
-------------------------------------------------------------------------------------------------------
2,555 Boulder County Hospital Revenue Longmont United Project................ 5.80 12-01-13 2,508,269
3,250 Boulder County Hospital Revenue Longmont United Project................ 5.88 12-01-20 3,170,960
3,135 Colorado Craig Hospital Project........................................ 5.38 12-01-13 3,078,978
3,970 Colorado Craig Hospital Project........................................ 5.50 12-01-21 3,915,849
3,625 Colorado Health Hospital Revenue Series 1994B (MBIA Insured)........... 5.88 10-01-23 3,747,344
5,000 Colorado Health Facilities Medical Center (MBIA Insured)............... 5.95 05-15-12 5,220,950
3,500 Colorado Health Vail Valley Medical Center Revenue..................... 6.60 01-15-20 3,606,330
4,150 Colorado Health Facilities Covenant Retirement......................... 6.75 12-01-25 4,342,767
1,750 Colorado Health Facilities Covenant Retirement......................... 6.75 12-01-15 1,851,255
4,000 Colorado Health Facilities Parkview Hospital........................... 6.00 09-01-16 3,952,080
3,750 Colorado Health Facilities Parkview Hospital........................... 6.13 09-01-25 3,710,175
3,885 Colorado Rocky Mountain Adventist Healthcare........................... 6.63 02-01-22 3,982,125
8,700 Colorado Rocky Mountain Adventist Healthcare........................... 6.63 02-01-13 8,955,606
8,975 Colorado Springs Memorial Hospital (MBIA Insured)...................... 6.00 12-15-15 9,479,934
14,850 Colorado Springs Memorial Hospital (MBIA Insured)...................... 6.00 12-15-24 15,581,065
6,000 Denver City and County Childrens Hospital (FGIC Insured)............... 6.00 10-01-15 6,289,740
7,000 University of Colorado Hospital Authority (AMBAC Insured).............. 6.40 11-15-22 7,533,750
------------
90,927,177
------------
HOUSING (12.0%):
------------------------------------------------------------------------------------------------------
8,680 Aurora Single Family Mortgage Revenue Series 1993A..................... 7.30 05-01-10 9,482,900
1,625 Colorado Housing Finance Authority Multifamily Housing Mortgage Revenue 5.90 10-01-29 1,638,634
5,160 Colorado Housing Finance Authority Single Family Access Series 94C..... 7.90 12-01-24 5,837,250
1,000 Colorado Housing Finance Authority Single Family Housing Project
Series C2............................................................ 7.45 06-01-17 1,123,750
3,470 Colorado Housing Finance Authority Single Family Mortgage.............. 7.50 11-01-24 3,899,412
3,375 Colorado Housing Finance Authority 1994 Series D II Revenue............ 8.13 06-01-25 3,855,938
4,900 Colorado Housing Finance Authority Single Family Mortgage Revenue ..... 8.00 12-01-24 5,561,500
1,400 Colorado State Single Family Housing Authority Senior Revenue.......... 5.63 06-01-10 1,403,500
1,000 Colorado State Single Family Housing Authority Senior Revenue.......... 7.10 06-01-14 1,097,500
9,145 Englewood Multifamily Marks Apartments Series B........................ 6.00 12-15-20 9,217,520
4,000 Pueblo County Single Family Mortgage Revenue Series 1994A(GNMA Insured) 7.05 11-01-27 4,351,720
------------
47,469,624
------------
EDUCATION (6.8%):
-------------------------------------------------------------------------------------------------------
1,850 Aurora Higher Education Center (AMBAC Insured)......................... 6.50 05-01-12 1,995,687
4,420 Aurora Educational Development (Connie Lee Insured).................... 6.00 10-15-15 4,634,105
2,000 Board of Trustees Adams St. College (MBIA Insured)..................... 5.75 05-15-19 2,057,260
1,000 Board of Trustees Mesa St. College (MBIA Insured)...................... 5.70 05-15-14 1,027,500
2,000 Board of Trustees Mesa St. College (MBIA Insured)...................... 5.75 05-15-19 2,057,260
1,250 Board of Trustees Western College (MBIA Insured)....................... 5.63 05-15-15 1,274,000
8,700 Colorado Education Facility Authority University of Denver
(Connie Lee Insured)................................................. 6.00 03-01-16 9,085,236
1,250 Colorado Post Sec Ed Auraria Fnd Project (FGIC Insured)................ 6.00 09-01-15 1,305,925
1,000 Colorado Post Sec Ed Auraria Fnd Project (FGIC Insured)................ 6.00 09-01-15 1,055,710
1,035 Colorado State Board Community College (AMBAC Insured)................. 5.70 11-01-15 1,062,500
1,250 University of Colorado Revenue......................................... 5.38 06-01-15 1,249,188
------------
26,804,371
------------
OTHER REVENUE (4.0%):
------------------------------------------------------------------------------------------------------
2,000 Aurora Colorado Saddle Rock Golf Course................................ 6.20 12-01-15 2,030,000
7,075 Governor Metropolitan District Colorado Series 95A Revenue............. 6.00 12-01-15 7,253,502
4,700 Governor Metropolitan District Colorado Series 95A Revenue............. 6.13 12-01-19 4,846,875
1,685 Pueblo Urban Renewal Authority Revenue (AMBAC Insured)................. 6.15 12-01-19 1,793,194
------------
15,923,571
------------
CERTIFICATE OF PARTICIPATION (4.0%):
-------------------------------------------------------------------------------------------------------
10,000 Jefferson County C.O.P. (MBIA Insured)................................. 5.25 12-01-09 9,997,500
5,890 Pueblo County Colorado School District (MBIA Insured).................. 5.38 12-01-10 5,950,549
------------
15,948,049
TOTAL MUNICIPAL BONDS (cost: $381,315,777) 397,210,644
------------
SHORT-TERM SECURITIES (0.1%):
------------------------------------------------------------------------------------------------------
394 Dreyfus Investment Tax-Exempt Money Market Fund (cost: $394,000).......4.37 (d) 394,000
------------
TOTAL INVESTMENTS IN SECURITIES (cost: $381,709,777) (c) $397,604,644
============
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES
- ----------------------------------
(a) Securities are valued by procedures described in note 1 to the financial
statements.
(b) Investments in bonds, by rating category (unaudited) as a percentage of
total bonds, are as follows:
AAA/AAA AA/AA A/A BAA/BBB TOTAL
52% 18% 16% 14% 100%
(c) The cost of securities for federal income tax purposes is $382,756,486. The
aggregate gross unrealized appreciation and depreciation in securities
based on this cost are as follows:
GROSS GROSS NET
Unrealized Unrealized Unrealized
APPRECIATION DEPRECIATION APPRECIATION
------------ ------------ ------------
$15,044,671 $(196,513) $14,848,158
(d) Dividend yields change daily to reflect current market conditions. Rate
shown is the quoted yield as of December 31, 1995.
(e) At December 31, 1995, the cost of securities purchased on a when issued
basis was $3,567,318.
FEDERAL INCOME TAX INFORMATION
- --------------------------------------------------------------------------------
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions for the year ended December
31, 1995 shown below. Exempt interest dividends are exempt from federal income
tax and should not be included in shareholder's gross income, but need to be
reported on the income tax return for informational purposes. Each shareholder
should consult a tax adviser about reporting this income for state and local
purposes. In January 1996, the Fund separately provided each shareholder with
tax information for calendar year 1995.
<TABLE>
<CAPTION>
PER CLASS PER CLASS PER CLASS
A SHARE B SHARE C SHARE
------- ------- -------
YEAR PERIOD FROM YEAR
ENDED MARCH 22, 1995 ENDED
DECEMBER 31, TO DECEMBER 31, DECEMBER 31,
1995 1995 1995
------------ --------------- ------------
Net investment income distributions
(none qualifying for corporate dividend
<S> <C> <C> <C>
received deduction)............................. $.5473 $.3466 $.4519
------ ------ ------
Total Distribution................................ $.5473 $.3466 $.4519
====== ====== ======
</TABLE>
For federal income tax purposes, 99.92% of the above net investment income
distributions were derived from interest on securities exempt from federal
income tax.
