AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
File Nos. 33-63238
811-7742
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 17
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 18
(Check appropriate box or boxes.)
VOYAGEUR MUTUAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
90 SOUTH SEVENTH STREET, SUITE 4400, MINNEAPOLIS, MINNESOTA 55402
(Address of Principal Executive Offices) (Zip Code)
(612) 376-7000
(Registrant's Telephone Number, including Area Code)
THOMAS J. ABOOD
90 SOUTH SEVENTH STREET, SUITE 4400, MINNEAPOLIS, MINNESOTA 55402
(Name and Address of Agent for Service)
Copy to:
Michael J. Radmer, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing will become effective (check appropriate box):
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on April 28, 1997 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (specify date) pursuant to paragraph (a)(1) of Rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
___ on (specify date) pursuant to paragraph (a)(2) of Rule 485
The Registrant has registered an indefinite number of shares of common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. A Rule 24f-2 Notice was filed by the Registrant on or about
February 28, 1997.
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
Item No.
of Form N-1A Caption in Prospectus
- ------------ ---------------------
1 Cover Page
2 Fees and Expenses
3 Financial Highlights
4 The Funds; Investment Objectives and Policies; Investment
Restrictions; General Information
5 Management; General Information
6 Distributions to Shareholders and Taxes; General Information
7 How to Purchase Shares; Management; Determination of Net Asset
Value; Exchange Privilege
8 How to Sell Shares; Reinstatement Privilege
9 Not Applicable
Caption in Statement of Additional Information
----------------------------------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Policies and Restrictions; Special Factors Affecting
the Funds
14 Board Members and Executive Officers of the Funds
15 Board Members and Executive Officers of the Funds; Additional
Information
16 Board Members and Executive Officers of the Funds; The Investment
Adviser and Underwriter
17 The Investment Adviser and Underwriter
18 Not Applicable
19 Special Purchase Plans; Monthly Cash Withdrawal Plan; Net Asset
Value and Public Offering Price
20 Taxes
21 The Investment Adviser and Underwriter
22 Calculation of Performance Data
23 Additional Information
Explanatory Note
This Registration Statement contains three Prospectuses (Part A) and
three Statements of Additional Information (Part B) for seven Registrants (each
of which offers its shares in one or more series): two series of Voyageur Tax
Free Funds, Inc., five series of Voyageur Intermediate Tax Free Funds, Inc.,
four series of Voyageur Insured Funds, Inc., nine series of Voyageur Investment
Trust, one series of Voyageur Investment Trust II, six series of Voyageur Mutual
Funds, Inc. and one series of Voyageur Mutual Funds II, Inc. This Registration
Statement contains only one part C, that of the Registrant.
A separate Registration Statement, each of which incorporates by
reference the combined Part A and Part B and includes its own Part C, is being
filed for each Registrant; however, this Registration Statement contains only
those exhibits which relate to Voyageur Mutual Funds, Inc.
TAX FREE MUTUAL FUNDS
[GRAPHIC OMITTED]
VOYAGEUR LOGO
- --------------------------------------------------------------------------------
ARIZONA Tax Free Funds
CALIFORNIA Tax Free Funds
COLORADO Tax Free Funds
FLORIDA Tax Free Funds
IDAHO Tax Free Fund
IOWA Tax Free Fund
KANSAS Tax Free Fund
MINNESOTA Tax Free Funds
MISSOURI Insured Tax Free Fund
NEW MEXICO Tax Free Fund
NEW YORK Tax Free Fund
NORTH DAKOTA Tax Free Fund
OREGON Insured Tax Free Fund
UTAH Tax Free Fund
WASHINGTON Insured Tax Free Fund
WISCONSIN Tax Free Fund
NATIONAL Tax Free Funds
VOYAGEUR FUNDS (NOT PART OF PROSPECTUS); DATED APRIL 28, 1997.
TABLE OF CONTENTS
3 Fees and Expenses
- --------------------------------------------------------------------------------
6 Financial Highlights
- --------------------------------------------------------------------------------
11 The Funds
- --------------------------------------------------------------------------------
11 Investment Objectives and Policies
- --------------------------------------------------------------------------------
21 Risks and Special Investment Considerations
- --------------------------------------------------------------------------------
24 Investment Restrictions
- --------------------------------------------------------------------------------
24 How to Purchase Shares
- --------------------------------------------------------------------------------
30 How to Sell Shares
- --------------------------------------------------------------------------------
33 Reinstatement Privilege
- --------------------------------------------------------------------------------
33 Exchange Privilege
- --------------------------------------------------------------------------------
34 Management
- --------------------------------------------------------------------------------
37 Determination of Net Asset Value
- --------------------------------------------------------------------------------
37 Distributions to Shareholders and Taxes
- --------------------------------------------------------------------------------
43 Investment Performance
- --------------------------------------------------------------------------------
44 General Information
- --------------------------------------------------------------------------------
VOYAGEUR FUNDS (NOT PART OF PROSPECTUS); DATED APRIL 28, 1997.
PROSPECTUS
Dated April 28, 1997
- --------------------------------------------------------------------------------
Each fund listed on this page (individually, a "Fund" and together, the "Funds")
is a series of an open end management investment company, commonly referred to
as a mutual fund. Three styles of funds are contained in this combined
Prospectus: limited term tax free funds (the "Limited Term Tax Free Funds"),
longer term tax free funds (the "Tax Free Funds") and longer term insured tax
free funds (the "Insured Funds"). The investment objective of each Limited Term
Tax Free Fund is to provide investors with preservation of capital and,
secondarily, current income exempt from federal income tax and (except for the
"national" fund) the personal income tax, if any, of the Fund's particular
state, by maintaining a weighted average portfolio maturity of 10 years or less.
The investment objective of each Tax Free Fund and Insured Fund is to seek as
high a level of current income exempt from federal income tax and (except for
the "national" fund) from the personal income tax, if any, of the Fund's
particular state, as is consistent with preservation of capital. The weighted
average maturity of the investment portfolio of each Tax Free Fund and Insured
Fund is expected to be approximately 15 to 25 years. There is no assurance that
any Fund will achieve its investment objective.
<TABLE>
<S> <C>
Voyageur Arizona Limited Term Tax Free Fund Voyageur Minnesota Limited Term Tax Free Fund(1)
Voyageur Arizona Insured Tax Free Fund(1) Voyageur Minnesota Insured Fund(1)
Voyageur Arizona Tax Free Fund Voyageur Minnesota Tax Free Fund(1)
Voyageur California Limited Term Tax Free Fund Voyageur Missouri Insured Tax Free Fund
Voyageur California Insured Tax Free Fund(1) Voyageur New Mexico Tax Free Fund
Voyageur California Tax Free Fund Voyageur New York Tax Free Fund
Voyageur Colorado Limited Term Tax Free Fund Voyageur North Dakota Tax Free Fund
Voyageur Colorado Insured Tax Free Fund Voyageur Oregon Insured Tax Free Fund
Voyageur Colorado Tax Free Fund(1) Voyageur Utah Tax Free Fund
Voyageur Florida Limited Term Tax Free Fund Voyageur Washington Insured Tax Free Fund
Voyageur Florida Insured Tax Free Fund(1) Voyageur Wisconsin Tax Free Fund
Voyageur Florida Tax Free Fund Voyageur National Limited Term Tax Free Fund(1)
Voyageur Idaho Tax Free Fund Voyageur National Insured Tax Free Fund(1)
Voyageur Iowa Tax Free Fund Voyageur National Tax Free Fund(1)
Voyageur Kansas Tax Free Fund
</TABLE>
- --------------------------------------------------------------------------------
(1) Diversified series
AN INVESTMENT IN ANY OF THE FUNDS IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE
UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER FEDERAL AGENCY. AN INVESTMENT IN ANY OF THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL DUE TO
FLUCTUATIONS IN THE APPLICABLE FUND'S NET ASSET VALUE.
ON JANUARY 15, 1997, DOUGHERTY FINANCIAL GROUP, INC. ("DFG"), THE
PARENT COMPANY OF VOYAGEUR FUND MANGERS, INC. ("VOYAGEUR" OR THE "ADVISER")
EXECUTED AN AGREEMENT AND PLAN OF MERGER ("AGREEMENT") WITH LINCOLN NATIONAL
CORPORATION ("LNC") PURSUANT TO WHICH A SUBSIDIARY OF LNC WILL BE MERGED WITH
AND INTO DFG CAUSING DFG TO BECOME A WHOLLY OWNED SUBSIDIARY OF LNC. THE FUNDS'
BOARDS OF DIRECTORS AND SHAREHOLDERS HAVE APPROVED THE MERGER AT A SPECIAL
MEETING OF SHAREHOLDERS.
LNC, HEADQUARTERED IN FORT WAYNE, INDIANA, OWNS AND OPERATES INSURANCE
AND INVESTMENT MANAGEMENT BUSINESSES, INCLUDING DELAWARE MANAGEMENT HOLDINGS,
INC. ("DMH"). AFFILIATES OF DMH SERVE AS ADVISER AND DISTRIBUTOR FOR THE
DELAWARE GROUP OF INVESTMENT COMPANIES, WHICH CURRENTLY INCLUDES 16 OPEN-END
FUNDS AND 2 CLOSED-END FUNDS (COMPRISING 48 SEPARATE INVESTMENT PORTFOLIOS).
DMH, THROUGH ITS SUBSIDIARIES, IS RESPONSIBLE FOR THE MANAGEMENT OF
APPROXIMATELY $32 BILLION.
CONSUMMATION OF THE MERGER WILL CAUSE A CHANGE IN CONTROL OF VOYAGEUR.
UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THIS WILL RESULT IN AN
"ASSIGNMENT" AND AUTOMATIC TERMINATION OF THE FUNDS' INVESTMENT ADVISORY AND
DISTRIBUTION AGREEMENTS WITH VOYAGEUR. THE FUNDS' BOARDS OF DIRECTORS HAVE
APPROVED NEW INVESTMENT ADVISORY AND DISTRIBUTION AGREEMENTS CONTAINING THE SAME
TERMS AND FEES AS THE FORMER AGREEMENTS AND SHAREHOLDERS HAVE ALSO APPROVED SUCH
AGREEMENTS AND OTHER MATTERS RELATED TO THE MERGER. THE MERGER IS EXPECTED TO BE
FINAL ON OR ABOUT APRIL 30, 1997.
This Prospectus sets forth certain information about the Funds that a
prospective investor ought to know before investing. Investors should read and
retain this Prospectus for future reference. The Funds have filed a Statement of
Additional Information (dated April 28, 1997) with the Securities and Exchange
Commission. The Statement of Additional Information is available free of charge
by telephone (800-553-2143) and is incorporated by reference herein in its
entirety.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Funds offer investors a choice among classes of shares which offer
different sales charges and bear different expenses. These alternatives permit
an investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances.
CLASS A SHARES
An investor who purchases Class A shares pays a sales charge at the time of
purchase. As a result, Class A shares are not subject to any charges when they
are redeemed (except for sales at net asset value in excess of $1 million or
sales subject to special promotions identified from time to time by Voyageur
which in either case are subject to a contingent deferred sales charge). The
initial sales charge may be reduced or waived for certain purchases. Class A
shares of each Fund are subject to a Rule 12b-1 fee payable at an annual rate of
.25% of a Fund's average daily net assets attributable to Class A shares. See
"How to Purchase Shares--Class A Shares."
CLASS B SHARES
Class B shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5% if redeemed within six years of
purchase. Class B shares are also subject to a higher Rule 12b-1 fee than Class
A shares. The Rule 12b-1 fee for Class B shares will be paid at an annual rate
of 1% of a Fund's average daily net assets attributable to Class B shares. Class
B shares will automatically convert to Class A shares at net asset value
approximately eight years after purchase. Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made but until conversion will have a higher expense ratio and pay
lower dividends than Class A shares due to the higher Rule 12b-1 fee. See "How
to Purchase Shares--Class B Shares."
CLASS C SHARES
Class C shares are sold without an initial sales charge but are subject to a
contingent deferred sales charge of 1% if redeemed within one year of purchase.
Class C shares are also subject to a higher Rule 12b-1 fee than Class A shares.
The Rule 12b-1 fee for Class C shares of each Fund will be paid at an annual
rate of 1% of the Fund's average daily net assets attributable to Class C
shares. Class C shares provide an investor the benefit of putting all of the
investor's dollars to work from the time the investment is made, but will have a
higher expense ratio and pay lower dividends than Class A shares due to the
higher Rule 12b-1 fee. See "How to Purchase Shares--Class C Shares." Class C
shares do not convert to any other class of shares.
The decision as to which class of shares provides a more suitable
investment for an investor depends on a number of factors, including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Other investors might
consider Class B or Class C shares because all of the purchase price is invested
immediately. Voyageur will treat orders for Class B shares for $250,000 or more
as orders for Class A shares or such orders will be declined. Sales personnel
may receive different compensation depending on which class of shares they sell.
FEES AND EXPENSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION ANNUAL FUND OPERATING EXPENSES TOTAL FUND
EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS OPERATING
------------------------ AFTER FEE WAIVERS AND EXPENSES
REIMBURSEMENT ARRANGEMENTS WITHOUT
----------------------------------------------- VOLUNTARY
WAIVER AND
REIMBURSEMENT(5)
-------------------------
MAXIMUM MAXIMUM
FRONT END CDSC
SALES LOAD IMPOSED ON
IMPOSED ON REDEMPTIONS
PURCHASES
----------------------------------------------
MANAGEMENT RULE OTHER TOTAL FUND
FEE 12b-1 FEE EXPENSES OPERATING
VOYAGEUR FUNDS(4) EXPENSES
- --------------------------------------------------------------------------------------------------------------------------
STATE LONG TERM FUNDS
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona Tax Free - Class A 3.75% 1.00%(2) 0% 0.25% 0.21% 0.46% 1.25%
Arizona Tax Free - Class B N/A(1) 5.00 0 0.90 0.21 1.11 2.00
Arizona Tax Free - Class C N/A(1) 1.00 0 1.00 0.21 1.21 2.00
California Tax Free - Class A 3.75 1.00(2) 0 0.25 0.02 0.27 1.25
California Tax Free - Class B N/A(1) 5.00 0 0.48 0.02 0.50 2.00
California Tax Free - Class C N/A(1) 1.00 0 0.76 0.02 0.78 2.00
Colorado Tax Free - Class A 3.75 1.00(2) 0.50 0.12 0.16 0.78 0.91
Colorado Tax Free - Class B N/A(1) 5.00 0.50 0.92 0.16 1.58 1.65
Colorado Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.16 1.66 1.66
Florida Tax Free - Class A 3.75 1.00(2) 0 0.25 0.08 0.33 1.25
Florida Tax Free - Class B N/A(1) 5.00 0 0.60 0.16 0.76 2.00
Florida Tax Free - Class C N/A(1) 1.00 0 1.00 0.15 1.15 2.00
Idaho Tax Free - Class A 3.75 1.00(2) 0 0.25 0.35 0.60 1.10
Idaho Tax Free - Class B N/A(1) 5.00 0 0.75 0.36 1.11 1.85
Idaho Tax Free - Class C N/A(1) 1.00 0 1.00 0.33 1.33 1.82
Iowa Tax Free - Class A 3.75 1.00(2) 0.49 0.12 0.31 0.92 1.06
Iowa Tax Free - Class B N/A(1) 5.00 0.49 0.81 0.31 1.61 1.81
Iowa Tax Free - Class C N/A(1) 1.00 0.49 0.95 0.31 1.75 1.81
Kansas Tax Free - Class A 3.75 1.00(2) 0.25 0.12 0.46 0.83 1.21
Kansas Tax Free - Class B N/A(1) 5.00 0.25 0.86 0.50 1.61 2.00
Kansas Tax Free - Class C N/A(1) 1.00 0.25 1.00 0.52 1.77 2.00
Minnesota Tax Free - Class A 3.75 1.00(2) 0.50 0.25 0.17 0.92 0.92
Minnesota Tax Free - Class B N/A(1) 5.00 0.50 0.83 0.17 1.50 1.67
Minnesota Tax Free - Class C N/A(1) 1.00 0.50 1.00 0.17 1.67 1.67
New Mexico Tax Free - Class A 3.75 1.00(2) 0.50 0.06 0.32 0.88 1.07
New Mexico Tax Free - Class B N/A(1) 5.00 0.50 0.79 0.32 1.61 1.82
New Mexico Tax Free - Class C N/A(1) 1.00 0.50 0.91 0.33 1.74 1.83
New York Tax Free - Class A 3.75 1.00(2) 0 0.13 0.84 0.97 1.12
New York Tax Free - Class B N/A(1) 5.00 0 1.00 0.87 1.87 2.00
New York Tax Free - Class C N/A(1) 1.00 0 1.00 0.84 1.84 2.00
North Dakota Tax Free - Class A 3.75 1.00(2) 0.50 0.05 0.33 0.88 1.08
North Dakota Tax Free - Class B N/A(1) 5.00 0.50 0.53 0.33 1.36 1.83
North Dakota Tax Free - Class C N/A(1) 1.00 0.50 0.92 0.33 1.75 1.75
Utah Tax Free - Class A 3.75 1.00(2) 0 0.03 0.65 0.68 1.25
Utah Tax Free - Class B N/A(1) 5.00 0 0.80 0.66 1.46 2.00
Utah Tax Free - Class C N/A(1) 1.00 0 1.00 0.65 1.65 2.00
Wisconsin Tax Free - Class A 3.75 1.00(2) 0.46 0.18 0.34 0.98 1.09
Wisconsin Tax Free - Class B N/A(1) 5.00 0.46 0.84 0.36 1.66 1.85
Wisconsin Tax Free - Class C N/A(1) 1.00 0.46 0.96 0.33 1.75 1.83
STATE INSURED FUNDS
Arizona Insured - Class A 3.75 1.00(2) 0.50 0.12 0.20 0.82 0.95
Arizona Insured - Class B N/A(1) 5.00 0.50 0.89 0.20 1.59 1.70
Arizona Insured - Class C N/A(1) 1.00 0.50 1.00 0.20 1.70 1.70
California Insured - Class A 3.75 1.00(2) 0.31 0.25 0.26 0.82 1.01
California Insured - Class B N/A(1) 5.00 0.31 0.65 0.25 1.21 1.76
California Insured - Class C N/A(1) 1.00 0.31 1.00 0.27 1.58 1.77
Colorado Insured - Class A 3.75 1.00(2) 0.50 0.25 0.25 1.00 1.25
Colorado Insured - Class B N/A(1) 5.00 0.50 1.00 0.25 1.75 2.00
Colorado Insured - Class C N/A(1) 1.00 0.50 1.00 0.25 1.75 2.00
Florida Insured - Class A 3.75 1.00(2) 0.49 0.03 0.21 0.73 0.96
Florida Insured - Class B N/A(1) 5.00 0.49 0.53 0.22 1.24 1.72
Florida Insured - Class C N/A(1) 1.00 0.49 1.00 0.21 1.70 1.71
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
- ------------------------------------------
EXAMPLE OF EXPENSES
AN INVESTOR IN A VOYAGEUR FUND WOULD PAY
THE FOLLOWING DOLLAR AMOUNT OF EXPENSES
ON
A $1,000 INVESTMENT ASSUMING
(a) A 5% ANNUAL RETURN AND
(b) REDEMPTION AT THE END OF EACH PERIOD
- ------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------
$ 42 $ 52 $ 62 $ 93
61(3) 75(3) 81(3) 117
22(3) 38 66 147
40 46 52 71
55(3) 56(3) 48(3) 56
18(3) 25 43 97
45 61 79 130
66(3) 90(3) 106(3) 166
27(3) 52 90 197
41 48 55 78
58(3) 64(3) 62(3) 82
22(3) 37 63 140
43 56 70 110
61(3) 75(3) 81(3) 121
24(3) 42 73 160
47 66 87 146
66(3) 91(3) 108(3) 172
28(3) 55 95 206
46 63 82 136
66(3) 91(3) 108(3) 170
28(3) 56 96 208
47 66 87 146
65(3) 87(3) 102(3) 163
27(3) 53 91 198
46 65 84 142
66(3) 91(3) 108(3) 171
28(3) 55 94 205
47 67 89 152
69(3) 99(3) 121(3) 195
29(3) 58 100 216
46 65 84 142
64(3) 83(3) 94(3) 150
28(3) 55 95 206
44 58 74 119
65(3) 86(3) 100(3) 153
27(3) 52 90 195
47 68 90 153
67(3) 92(3) 110(3) 178
28(3) 55 95 206
46 63 81 135
66(3) 90(3) 107(3) 168
27(3) 54 92 201
46 63 81 135
62(3) 78(3) 86(3) 136
26(3) 50 86 188
47 68 91 155
68(3) 95(3) 115(3) 186
28(3) 55 95 206
45 60 77 125
63(3) 79(3) 88(3) 136
27(3) 54 92 201
FEES AND EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION ANNUAL FUND OPERATING EXPENSES TOTAL FUND
EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS OPERATING
------------------------- AFTER FEE WAIVERS AND EXPENSES
REIMBURSEMENT ARRANGEMENTS WITHOUT
---------------------------------------------- VOLUNTARY
WAIVER AND
REIMBURSEMENT(5)
-------------------------
MAXIMUM MAXIMUM
FRONT END CDSC
SALES LOAD IMPOSED ON
IMPOSED ON REDEMPTIONS
PURCHASES
---------------------------------------------
MANAGEMENT RULE OTHER TOTAL FUND
FEE 12b-1 FEE EXPENSES OPERATING
VOYAGEUR FUNDS(4) EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------
STATE INSURED FUNDS (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
Minnesota Insured - Class A 3.75% 1.00%(2) 0.50% 0.25% 0.17% 0.92% 0.92%
Minnesota Insured - Class B N/A(1) 5.00 0.50 0.89 0.17 1.56 1.68
Minnesota Insured - Class C N/A(1) 1.00 0.50 1.00 0.18 1.68 1.68
Missouri Insured - Class A 3.75 1.00(2) 0.34 0.10 0.27 0.71 1.03
Missouri Insured - Class B N/A(1) 5.00 0.34 0.67 0.28 1.29 1.78
Missouri Insured - Class C N/A(1) 1.00 0.34 1.00 0.28 1.62 1.78
Oregon Insured - Class A 3.75 1.00(2) 0.24 0.15 0.32 0.71 1.07
Oregon Insured - Class B N/A(1) 5.00 0.24 0.68 0.33 1.25 1.83
Oregon Insured - Class C N/A(1) 1.00 0.24 1.00 0.31 1.55 1.82
Washington Insured - Class A 3.75 1.00(2) 0 0.07 0.37 0.44 1.25
Washington Insured - Class B N/A(1) 5.00 0 0.83 0.38 1.21 2.00
Washington Insured - Class C N/A(1) 1.00 0 1.00 0.37 1.37 2.00
STATE LIMITED TERM FUNDS
Arizona Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
Arizona Limited Term - Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
Arizona Limited Term- Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
California Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
California Limited Term- Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
California Limited Term - Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
Colorado Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.35 1.00 1.25
Colorado Limited Term- Class B N/A(1) 4.00 0.40 1.00 0.35 1.75 2.00
Colorado Limited Term- Class C N/A(1) 0.50 0.40 1.00 0.35 1.75 2.00
Florida Limited - Class A 2.75 0.50(2) 0 0.05 0.61 0.66 1.25
Florida Limited - Class B N/A(1) 4.00 0 0.83 0.65 1.48 2.00
Florida Limited - Class C N/A(1) 0.50 0 1.00 0.55 1.55 2.00
Minnesota Limited Term - Class A 2.75 0.50(2) 0.40 0.25 0.24 0.89 0.89
Minnesota Limited Term - Class B N/A(1) 4.00 0.40 0.92 0.24 1.56 1.62
Minnesota Limited Term - Class C N/A(1) 0.50 0.40 1.00 0.24 1.64 1.64
NATIONAL FUNDS
National Tax Free - Class A 3.75 1.00(2) 0 0.25 0.09 0.34 1.25
National Tax Free - Class B N/A(1) 5.00 0 0.70 0.10 0.80 2.00
National Tax Free - Class C N/A(1) 1.00 0 1.00 0.09 1.09 2.00
National Insured - Class A 3.75 1.00(2) 0.09 0.23 0.38 0.70 1.14
National Insured - Class B N/A(1) 5.00 0.09 0.69 0.38 1.16 1.89
National Insured - Class C N/A(1) 1.00 0.09 1.00 0.41 1.50 1.91
National Limited Term - Class A 2.75 0.50(2) 0 0.15 0.21 0.36 1.25
National Limited Term - Class B N/A(1) 4.00 0 0.60 0.22 0.82 2.00
National Limited Term - Class C N/A(1) 0.50 0 1.00 0.21 1.21 2.00
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
- -----------------------------------------
EXAMPLE OF EXPENSES
AN INVESTOR IN A VOYAGEUR FUND WOULD PAY
THE FOLLOWING DOLLAR AMOUNT OF EXPENSES
ON
A $1,000 INVESTMENT ASSUMING
(a) A 5% ANNUAL RETURN AND
(b) REDEMPTION AT THE END OF EACH PERIOD
- -----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------
$47 $66 $87 $146
66(3) 89(3) 105(3) 168
27(3) 53 91 199
44 59 76 122
63(3) 81(3) 91(3) 140
26(3) 51 88 192
44 59 76 122
63(3) 80(3) 89(3) 136
26(3) 49 84 185
42 51 61 91
62(3) 78(3) 86(3) 125
24(3) 43 75 165
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
37 58 81 147
58(3) 85(3) 105(3) 186
23(3) 55 95 206
34 48 63 107
55(3) 77(3) 91(3) 154
21(3) 49 85 185
36 55 75 134
56(3) 79(3) 95(3) 167
22(3) 52 89 194
41 48 56 79
58(3) 66(3) 64(3) 86
21(3) 35 60 133
44 59 75 121
62(3) 77(3) 84(3) 128
25(3) 47 82 179
31 39 47 72
48(3) 56(3) 56(3) 88
17(3) 38 66 147
1 Class B and Class C shares are sold without a front end sales charge, but
their Rule 12b-1 fees may cause long term shareholders to pay more than the
economic equivalent of the maximum permitted front end sales charges.
2 A contingent deferred sales charge of 1% is imposed on certain redemptions
of Class A shares (.50% for Class A shares of the Limited Term Tax Free
Funds) that were purchased without an initial sales charge as part of an
investment of $1 million or more.
3 Class B and Class C share expenses would be lower assuming no redemption at
the end of the period.
4 Voyageur Fund Distributors, Inc. (the "Underwriter") pays broker-dealers
and financial institutions an annual fee equal to .25% of the average daily
net assets attributable to the Class A shares (.15% for Class A shares of
the Limited Term Tax Free Funds), .15% of the average daily net assets
attributable to the Class B shares, and .90% of the average daily net
assets attributable to the Class C shares held by their customers. The fee
is paid quarterly commencing when such shares are sold for Class A and
Class B shares. The fee is paid quarterly commencing in the thirteenth
month after such shares are sold for Class C shares.
5 The expense ratios reflects the effect of gross expenses attributable to
earnings credits on uninvested cash balances received by each Fund.
THE EXAMPLES CONTAINED IN THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The purpose of the above Fees and Expenses table is to
assist the investor in understanding the various costs and expenses that
investors in the Funds will bear directly or indirectly. The information set
forth in the table under the heading "Annual Fund Operating Expenses as a
Percentage of Net Assets After Fee Waiver and Expense Arrangements" reflects
expenses incurred during the year ended December 31, 1996, after voluntary
expense waivers and fee reimbursements. Absent such fee and expense waivers,
Total Fund Operating Expenses for such period would be equivalent to the
corresponding percentages disclosed under the column "Total Fund Operating
Expenses Without Voluntary Waiver and Reimbursement."
FINANCIAL HIGHLIGHTS
The following table shows certain per share data and selected information for a
share outstanding during the indicated periods for each Fund. This information
has been audited by KPMG Peat Marwick LLP, independent auditors, and should be
read in conjunction with the financial statements of each Fund contained in its
annual report. An annual report of each Fund is available without charge by
contacting the Funds at 800-553-2143. In addition to financial statements, the
annual reports contain further information about the performance of the Funds.
Per share data is not presented for all Funds or all classes since not all Funds
and all classes of shares were outstanding during the periods presented below.
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
--------------------- -------------------
NET
REALIZED
AND DISTRI- NET
NET ASSET NET UNREALIZED DIVIDENDS BUTIONS ASSET TOTAL
VALUE INVEST- GAINS (LOSS) FROM NET FROM VALUE INVEST-
BEGINNING MENT ON INVESTMENT CAPITAL END OF MENT
VOYAGEUR STATE FUNDS OF PERIOD INCOME SECURITIES INCOME GAINS PERIOD RETURN(4)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIZONA TAX FREE
Class A - 12/31/96 $10.02 0.58 (0.01) (0.58) (0.04) $10.70 5.48%
Class A - 12/31/95(1) 10.00 0.46 0.84 (0.46) (0.09) 10.75 13.27
Class B - 12/31/96 10.74 0.51 (0.01) (0.51) (0.04) 10.69 4.84
Class B - 12/31/95(1) 10.30 0.26 0.53 (0.26) (0.09) 10.74 7.74
Class C - 12/31/96 10.76 0.50 (0.01) (0.50) (0.04) 10.71 4.70
Class C - 12/31/95(1) 10.20 0.30 0.65 (0.30) (0.09) 10.76 9.43
ARIZONA INSURED
Class A - 12/31/96 11.15 0.53 (0.09) (0.53) -- 11.06 4.09
Class A - 12/31/95 9.86 0.54 1.31 (0.56) -- 11.15 19.10
Class A - 12/31/94 11.31 0.55 (1.37) (0.53) (0.10)(8) 9.86 (7.41)(6)
Class A - 12/31/93 10.71 0.58 0.74 (0.58) (0.14) 11.31 12.64
Class A - 12/31/92 10.39 0.61 0.38 (0.61) (0.06) 10.71 9.86
Class A - 12/31/91(1) 10.00 0.50 0.47 (0.50) (0.08) 10.39 9.98
Class B - 12/31/96 11.14 0.45 (0.09) (0.45) -- 11.05 3.32
Class B - 12/31/95(1) 10.44 0.38 0.69 (0.37) -- 11.14 10.36
Class C - 12/31/96 11.15 0.43 (0.09) (0.43) -- 11.06 3.18
Class C - 12/31/95 9.86 0.45 1.31 (0.47) -- 11.15 18.10
Class C - 12/31/941 10.48 0.27 (0.56) (0.25) (0.08)(8) 9.86 (2.84)
CALIFORNIA TAX FREE
Class A - 12/31/96 10.64 0.60 (0.18) (0.60) (0.03) 10.43 4.21
Class A - 12/31/95(1) 10.00 0.47 0.70 (0.47) (0.06) 10.64 11.97
Class B - 12/31/96 10.65 0.56 (0.18) (0.56) (0.03) 10.44 3.77
Class B - 12/31/95(1) 9.96 0.20 0.74 (0.19) (0.06) 10.65 9.52
Class C - 12/31/96 10.07 0.37 0.38 (0.37) (0.03) 10.42 7.58
CALIFORNIA INSURED
Class A - 12/31/96 10.65 0.52 (0.15) (0.52) -- 10.50 3.63
Class A - 12/31/95 9.33 0.53 1.34 (0.55) -- 10.65 20.51
Class A - 12/31/94 9.51 0.10 (0.18) (0.09) (0.01) 9.33 (0.84)
Class A - 10/31/94 11.08 0.55 (1.52) (0.54) (0.06) 9.51 (8.97)
Class A - 10/31/93 10.02 0.60 1.11 (0.60) (0.05) 11.08 17.29
Class A - 10/31/92(1) 10.00 -- 0.02 -- -- 10.02 0.20
Class B - 12/31/96 10.65 0.48 (0.15) (0.48) -- 10.50 3.22
Class B - 12/31/95 9.33 0.50 1.33 (0.51) -- 10.65 20.01
Class B - 12/31/94 9.51 0.08 (0.17) (0.08) (0.01) 9.33 (0.92)
Class B - 10/31/94(1) 10.68 0.31 (1.16) (0.30) (0.02) 9.51 (7.93)
Class C - 12/31/96 10.65 0.44 (0.19) (0.44) -- 10.46 2.47
Class C - 12/31/95(1) 10.19 0.25 0.53 (0.32) -- 10.65 7.77
COLORADO TAX FREE
Class A - 12/31/96 10.90 0.56 (0.13) (0.55) -- 10.78 4.08
Class A - 12/31/95 9.53 0.54 1.38 (0.55) -- 10.90 20.54
Class A - 12/31/94 11.10 0.55 (1.54) (0.54) (0.04) 9.53 (9.12)
Class A - 12/31/93 10.57 0.56 0.85 (0.56) (0.32) 11.10 13.72
Class A - 12/31/92 10.27 0.58 0.45 (0.58) (0.15) 10.57 10.42
Class A - 12/31/91 10.02 0.61 0.43 (0.61) (0.18) 10.27 10.80
Class A - 12/31/90 10.00 0.64 0.02 (0.64) -- 10.02 6.81
Class A - 12/31/89 9.74 0.67 0.32 (0.67) (0.06) 10.00 10.73
Class A - 12/31/88 9.43 0.69 0.34 (0.69) (0.03) 9.74 10.57
Class A - 12/31/87(1) 9.58 0.49 (0.15) (0.49) -- 9.43 3.27
Class B - 12/31/96 10.90 0.47 (0.13) (0.46) -- 10.78 3.25
Class B - 12/31/95(1) 10.25 0.35 0.65 (0.35) -- 10.90 9.96
Class C - 12/31/96 10.90 0.46 (0.13) (0.45) -- 10.78 3.17
Class C - 12/31/95 9.53 0.45 1.37 (0.45) -- 10.90 19.44
Class C - 12/31/94(1) 10.21 0.29 (0.67) (0.27) (0.03) 9.53 (3.75)
FLORIDA TAX FREE
Class A - 12/31/96 10.73 0.59 (0.21) (0.59) -- 10.52 3.74
Class A - 12/31/95(1) 10.00 0.47 0.75 (0.47) (0.02) 10.73 12.49
Class B - 12/31/96 10.73 0.56 (0.20) (0.56) -- 10.53 3.51
Class B - 12/31/95(1) 10.37 0.15 0.38 (0.15) (0.02) 10.73 5.10
Class C - 12/31/96 10.73 0.37 (0.21) (0.37) -- 10.52 2.97
Class C - 12/31/95(1) 10.20 0.33 0.56 (0.34) (0.02) 10.73 8.88
FLORIDA INSURED
Class A - 12/31/96 10.94 0.53 (0.23) (0.53) -- 10.71 2.90
Class A - 12/31/95 9.52 0.54 1.44 (0.56) -- 10.94 21.22
Class A - 12/31/94 9.64 0.10 (0.12) (0.09) (0.01) 9.52 (0.11)
Class A - 10/31/94 11.15 0.55 (1.46) (0.54) (0.06) 9.64 (8.38)
Class A - 10/31/93 10.11 0.58 1.12 (0.58) (0.08) 11.15 17.27
Class A - 10/31/92(1) 10.00 0.51 0.15 (0.51) (0.04) 10.11 6.74
Class B - 12/31/96 10.94 0.48 (0.23) (0.48) -- 10.71 2.40
Class B - 12/31/95 9.52 0.50 1.44 (0.52) -- 10.94 20.76
Class B - 12/31/94 9.63 0.09(3) (0.11) (0.08) (0.01) 9.52 (0.03)
Class B - 10/31/94(1) 10.82 0.31 (1.19) (0.30) (0.01) 9.63 (8.10)
FLORIDA LIMITED TERM
Class A - 12/31/96 10.56 0.42 (0.08) (0.47) -- 10.43 3.34
Class A - 12/31/95 9.64 0.44 1.01 (0.49) (0.04) 10.56 15.14
Class A - 12/31/94(1) 10.00 0.18 (0.36) (0.18) -- 9.64 (1.55)
Class B - 12/31/96 10.56 0.34 (0.09) (0.39) -- 10.42 2.47
Class B - 12/31/95(1) 10.58 0.10 0.03 (0.11) (0.04) 10.56 1.13
Class C - 12/31/96 10.55 0.33 (0.09) (0.37) -- 10.42 2.37
Class C - 12/31/95(1) 10.08 0.25 0.55 (0.29) (0.04) 10.55 7.95
IDAHO TAX FREE
Class A - 12/31/96 11.02 0.58 (0.12) (0.57) -- 10.91 4.36
Class A - 12/31/95(1) 10.00 0.60 1.10 (0.60) (0.08) 11.02 17.48
Class B - 12/31/96 11.01 0.52 (0.13) (0.51) -- 10.89 3.75
Class B - 12/31/95(1) 10.50 0.42 0.59 (0.42) (0.08) 11.01 9.86
Class C - 12/31/96 11.02 0.50 (0.13) (0.49) -- 10.90 3.48
Class C - 12/31/95(1) 10.04 0.50 1.06 (0.50) (0.08) 11.02 15.81
IOWA TAX FREE
Class A - 12/31/96 9.83 0.44 (0.21) (0.44) -- 9.62 2.56
Class A - 12/31/95 8.56 0.45 1.29 (0.47) -- 9.83 20.80
Class A - 12/31/94 9.26 0.17 (0.72) (0.15) -- 8.56 (5.86)
Class A - 8/31/941 10.00 0.49 (0.74) (0.49) -- 9.26 (2.67)
Class B - 12/31/96 9.83 0.38 (0.22) (0.38) -- 9.61 1.76
Class B - 12/31/95(1) 9.18 0.31 0.64 (0.30) -- 9.83 10.62
Class C - 12/31/96 9.83 0.36 (0.22) (0.36) -- 9.61 1.56
Class C - 12/31/95(1) 8.55 0.37 1.28 (0.37) -- 9.83 19.66
KANSAS TAX FREE
Class A - 12/31/96 10.73 0.52 (0.17) (0.52) -- 10.56 3.43
Class A - 12/31/95 9.50 0.56 1.22 (0.55) -- 10.73 19.13
Class A - 12/31/94 9.63 0.09 (0.13) (0.09) -- 9.50 (0.38)
Class A - 10/31/94 10.85 0.57 (1.21) (0.57) (0.01) 9.63 (6.10)
Class A - 10/31/93(1) 10.00 0.56 0.85 (0.56) -- 10.85(1) 4.49
Class B - 12/31/96 10.74 0.45 (0.17) (0.45) -- 10.57 2.69
Class B - 12/31/95(1) 10.19 0.34 0.54 (0.33) -- 10.74 8.76
Class C - 12/31/96 10.72 0.43 (0.17) (0.43) -- 10.55 2.52
Class C - 12/31/95(1) 10.20 0.32 0.51 (0.31) -- 10.72 8.29
MINNESOTA TAX FREE
Class A - 12/31/96 12.63 0.63 (0.23) (0.63) -- 12.40 3.33
Class A - 12/31/95 11.33 0.62 1.32 (0.64) -- 12.63 17.49
Class A - 12/31/94 12.85 0.63 (1.48) (0.61) (0.06)(7) 11.33 (6.73)
Class A - 12/31/93 12.21 0.64 0.87 (0.64) (0.23) 12.85 12.70
Class A - 12/31/92 12.07 0.70 0.23 (0.70) (0.09) 12.21 7.97
Class A - 12/31/91 11.67 0.75 0.49 (0.75) (0.09) 12.07 11.04
Class A - 12/31/90 11.68 0.77 0.02 (0.77) (0.03) 11.67 7.03
Class A - 12/31/89 11.48 0.80 0.22 (0.80) (0.02) 11.68 9.11
Class A - 12/31/88 11.16 0.80 0.32 (0.80) -- 11.48 10.31
Class A - 12/31/87 11.85 0.81 (0.66) (0.81) (0.03) 11.16 1.38
Class B - 12/31/96 12.62 0.56 (0.22) (0.56) -- 12.40 2.83
Class B - 12/31/95(1) 11.90 0.45 0.71 (0.44) -- 12.62 9.95
Class C - 12/31/96 12.63 0.54 (0.22) (0.54) -- 12.41 2.64
Class C - 12/31/95 11.33 0.53 1.32 (0.55) -- 12.63 16.62
Class C - 12/31/94(1) 11.96 0.34 (0.61) (0.32) (0.04) 11.33 (2.30)
MINNESOTA INSURED
Class A - 12/31/96 10.73 0.52 (0.13) (0.52) -- 10.60 3.75
Class A - 12/31/95 9.61 0.51 1.14 (0.53) -- 10.73 17.52
Class A - 12/31/94 11.02 0.54 (1.39) (0.52) (0.04) 9.61 (7.88)
Class A - 12/31/93 10.27 0.54 0.84 (0.54) (0.09) 11.02 13.80
Class A - 12/31/92 10.07 0.59 0.25 (0.59) (0.05) 10.27 8.57
Class A - 12/31/91 9.65 0.60 0.48 (0.60) (0.06) 10.07 11.59
Class A - 12/31/90 9.64 0.61 0.02 (0.61) (0.01) 9.65 6.63(5)
Class A - 12/31/89 9.48 0.63 0.20 (0.63) (0.04) 9.64 8.96
Class A - 12/31/88 9.19 0.67 0.29 (0.67) -- 9.48 10.70
Class A - 12/31/87(1) 9.51 0.46 (0.32) (0.46) -- 9.19 1.48
Class B - 12/31/96 10.72 0.45 (0.14) (0.45) -- 10.58 3.03
Class B - 12/31/95(1) 10.14 0.38 0.58 (0.38) -- 10.72 9.59
Class C - 12/31/96 10.73 0.44 (0.13) (0.44) -- 10.60 2.98
Class C - 12/31/95 9.61 0.43 1.14 (0.45) -- 10.71 6.63
Class C - 12/31/94(1) 10.23 0.30 (0.62) (0.28) (0.02) 9.61 (3.14)
MINNESOTA LIMITED TERM
Class A - 12/31/96 11.14 0.51 (0.15) (0.51) -- 10.99 3.46
Class A - 12/31/95 10.50 0.51 0.64 (0.51) -- 11.14 11.00
Class A - 12/31/94 11.16 0.45 (0.66) (0.45) -- 10.50 (1.91)
Class A - 12/31/93 10.83 0.47 0.37 (0.47) (0.04) 11.16 7.88
Class A - 12/31/92 10.69 0.51 0.18 (0.51) (0.04) 10.83 6.62
Class A - 12/31/91 10.32 0.55 0.37 (0.55) -- 10.69 9.24
Class A - 12/31/90 10.26 0.60 0.06 (0.60) -- 10.32 6.59
Class A - 12/31/89 10.21 0.59 0.05 (0.59) -- 10.26 6.43
Class A - 12/31/88 10.17 0.53 0.04 (0.53) -- 10.21 6.02
Class A - 12/31/87 10.43 0.55 (0.25) (0.55) (0.01) 10.17 2.97
Class B - 12/31/96 11.14 0.44 (0.15) (0.44) -- 10.99 2.74
Class B - 12/31/95(1) 10.95 0.17 0.19 (0.17) -- 11.14 3.26
Class C - 12/31/96 11.13 0.43 (0.14) (0.43) -- 10.99 2.69
Class C - 12/31/95 10.50 0.42 0.63 (0.42) -- 11.13 10.18
Class C - 12/31/94(1) 10.74 0.24 (0.24) (0.24) -- 10.50 (0.03)
MISSOURI INSURED
Class A - 12/31/96 10.54 0.52 (0.18) (0.51) -- 10.37 3.41
Class A - 12/31/95 9.27 0.52 1.29 (0.54) -- 10.54 19.96
Class A - 12/31/94 9.37 0.10 (0.11) (0.09) -- 9.27 (0.07)
Class A - 10/31/94 10.82 0.55 (1.43) (0.54) (0.03) 9.37 (8.28)
Class A - 10/31/93(1) 10.00 0.55 0.89 (0.55) (0.07) 10.82 14.74
Class B - 12/31/96 10.54 0.46 (0.18) (0.45) -- 10.37 2.93
Class B - 12/31/95 9.27 0.48 1.28 (0.49) -- 10.54 19.18
Class B - 12/31/94 9.37 0.08 (0.10) (0.08) -- 9.27 (0.14)
Class B - 10/31/94(1) 10.30 0.33 (0.94) (0.32) -- 9.37 (6.16)
Class C - 12/31/96 10.54 0.43 (0.18) (0.42) -- 10.37 2.48
Class C - 12/31/95(1) 10.36 0.06 0.17 (0.05) -- 10.54 2.24
NEW MEXICO TAX FREE
Class A - 12/31/96 10.89 0.54 (0.11) (0.53) -- 10.79 4.13
Class A - 12/31/95 9.59 0.52 1.33 (0.55) -- 10.89 19.64
Class A - 12/31/94 9.77 0.11 (0.20) (0.09) -- 9.59 (0.90)
Class A - 10/31/94 10.92 0.56 (1.16) (0.55) -- 9.77 (5.56)
Class A - 10/31/93 10.00 0.57 0.98 (0.57) (0.06) 10.92 15.77
Class A - 10/31/92(1) 10.00 -- -- -- -- 10.00 --
Class B - 12/31/96 10.89 0.46 (0.11) (0.45) -- 10.79 3.39
Class B - 12/31/95 9.59 0.46 1.32 (0.48) -- 10.89 18.84
Class B - 12/31/94 9.77 0.09 (0.19) (0.08) -- 9.59 (0.98)
Class B - 10/31/94(1) 10.69 0.31 (0.93) (0.30) -- 9.77 (5.84)
Class C - 12/31/96 10.41 0.28 0.37 (0.27) -- 10.79 6.30
NEW YORK TAX FREE
Class A - 12/31/96(11) 10.72 0.12 0.01 (0.12) (0.04) 10.69 1.21
Class A - 9/30/96 10.87 0.55 (0.13) (0.55) (0.02) 10.72 3.94
Class A - 9/30/95 10.74 0.57 0.17 (0.59) (0.02) 10.87 7.31
Class A - 9/30/94 10.81 0.15 (0.06) (0.16) -- 10.74 0.79
Class A - 6/30/94 11.51 0.62 (0.54) (0.62) (0.16) 10.81 0.63
Class A - 6/30/93 11.03 0.65 0.65 (0.66)(10)(0.16) 11.51 12.19
Class A - 6/30/92 10.57 0.66 0.62 (0.66) (0.16) 11.03 12.53
Class A - 6/30/91 10.27 0.48 0.30 (0.48) -- 10.57 5.49
Class A - 9/30/90 10.50 0.67 (0.22) (0.67) (0.01) 10.27 4.44
Class A - 9/30/89 10.30 0.72 0.20 (0.72) -- 10.50 9.21
Class A - 9/30/88(1) 10.00 0.64 0.30 (0.64) -- 10.30 10.09
Class B - 12/31/96 10.69 0.10 -- (0.10) (0.04) 10.65 0.95
Class B - 9/30/96 10.84 0.47 (0.13) (0.47) (0.02) 10.69 3.14
Class B - 9/30/95(1) 10.34 0.43 0.54 (0.45) (0.02) 10.84 9.46
Class C - 12/31/96 10.70 0.10 -- (0.10) (0.04) 10.66 0.95
Class C - 9/30/96 10.85 0.47 (0.13) (0.47) (0.02) 10.70 3.14
Class C - 9/30/95(1) 10.79 0.21 0.06 (0.21) -- 10.85 2.54
NORTH DAKOTA TAX FREE
Class A - 12/31/96 11.00 0.54 (0.13) (0.53) -- 10.88 3.89
Class A - 12/31/95 9.85 0.54 1.18 (0.57) -- 11.00 17.81
Class A - 12/31/94 11.07 0.56 (1.15) (0.53) (0.10)(9) 9.85 (5.47)
Class A - 12/31/93 10.59 0.58 0.58 (0.58) (0.10) 11.07 11.20
Class A - 12/31/92 10.34 0.62 0.34 (0.62) (0.09) 10.59 9.70
Class A - 12/31/91(1) 10.00 0.49 0.41 (0.49) (0.07) 10.34 9.23
Class B - 12/31/96 11.00 0.49 (0.13) (0.48) -- 10.88 3.39
Class B - 12/31/95 9.85 0.48 1.18 (0.51) -- 11.00 17.24
Class B - 12/31/94(1) 10.31 0.30 (0.39) (0.27) (0.10)(9) 9.85 (0.77)
Class C - 12/31/96 11.00 0.44 (0.14) (0.43) -- 10.87 2.81
Class C - 12/31/95(1) 10.51 0.17 0.50 (0.18) -- 11.00 6.47
OREGON INSURED
Class A - 12/31/96 10.05 0.48 (0.18) (0.48) -- 9.87 3.15
Class A - 12/31/95 8.92 0.49 1.14 (0.50) -- 10.05 18.71
Class A - 12/31/94 9.00 0.09 (0.09) (0.08) -- 8.92 0.06
Class A - 10/31/94 10.24 0.50 (1.24) (0.50) -- 9.00 (7.35)
Class A - 10/31/93(1) 10.00 0.13 0.24 (0.13) -- 10.24 3.64
Class B - 12/31/96 10.05 0.43 (0.18) (0.43) -- 9.87 2.61
Class B - 12/31/95 8.92 0.44 1.14 (0.45) -- 10.05 18.10
Class B - 12/31/94 9.00 0.08 (0.09) (0.07) -- 8.92 0.03
Class B - 10/31/94(1) 9.85 0.27 (0.85) (0.27) -- 9.00 (5.95)
Class C - 12/31/96 10.05 0.40 (0.17) (0.40) -- 9.88 2.38
Class C - 12/31/95(1) 9.63 0.19 0.41 (0.18) -- 10.05 6.35
UTAH TAX FREE
Class A - 12/31/96 11.04 0.55 (0.20) (0.55) -- 10.84 3.35
Class A - 12/31/95 9.80 0.59 1.24 (0.59) -- 11.04 19.06
Class A - 12/31/94 9.94 0.10 (0.15) (0.09) -- 9.80 (0.41)
Class A - 10/31/94 11.07 0.60 (1.07) (0.60) (0.06) 9.94 (4.50)
Class A - 10/31/93 10.00 0.65 1.07 (0.65) -- 11.07 17.54
Class A - 10/31/92(1) 10.00 -- -- -- -- 10.00 --
Class B - 12/31/96 11.04 0.47 (0.21) (0.47) -- 10.83 2.47
Class B - 12/31/95(1) 10.63 0.30 0.39 (0.28) -- 11.04 6.60
WASHINGTON INSURED
Class A - 12/31/96 10.44 0.54 (0.14) (0.54) -- 10.30 3.98
Class A - 12/31/95 9.21 0.59 1.21 (0.57) -- 10.44 19.94
Class A - 12/31/94 9.37 0.09 (0.16) (0.09) -- 9.21 (0.69)
Class A - 10/31/94 10.67 0.55 (1.26) (0.57) (0.02) 9.37 (6.85)
Class A - 10/31/93(1) 10.00 0.15 0.67 (0.15) -- 10.67 8.05
Class B - 12/31/96 10.44 0.47 (0.14) (0.46) -- 10.31 3.32
Class B - 12/31/95(1) 10.18 0.09 0.25 (0.08) -- 10.44 3.30
Class C - 12/31/96 10.43 0.45 (0.14) (0.44) -- 10.30 3.12
Class C - 12/31/95(1) 9.94 0.31 0.48 (0.30) -- 10.43 8.13
WISCONSIN TAX FREE
Class A - 12/31/96 9.78 0.46 (0.14) (0.46) -- 9.64 3.49
Class A - 12/31/95 8.74 0.48 1.04 (0.48) -- 9.78 17.74
Class A - 12/31/94 9.28 0.16 (0.55) (0.15) -- 8.74 (4.12)
Class A - 8/31/94(1) 10.00 0.49 (0.72) (0.49) -- 9.28 (2.40)
Class B - 12/31/96 9.77 0.41 (0.14) (0.41) -- 9.63 2.84
Class B - 12/31/95(1) 9.39 0.28 0.37 (0.27) -- 9.77 7.08
Class C - 12/31/96 9.79 0.39 (0.13) (0.39) -- 9.66 2.74
Class C - 12/31/95(1) 9.34 0.30 0.44 (0.29) -- 9.79 8.06
NATIONAL TAX FREE
Class A - 12/31/96 10.48 0.58 (0.14) (0.58) (0.01) 10.33 4.38
Class A - 12/31/95(1) 10.00 0.18 0.58 (0.18) (0.10) 10.48 7.11
Class B - 12/31/96 10.48 0.53 (0.14) (0.53) (0.01) 10.33 3.83
Class B - 12/31/95(1) 10.09 0.15 0.49 (0.15) (0.10) 10.48 6.41
Class C - 12/31/96 10.48 0.50 (0.14) (0.50) (0.01) 10.33 3.51
Class C - 12/31/95(1) 10.00 0.15 0.58 (0.15) (0.10) 10.48 7.32
NATIONAL INSURED
Class A - 12/31/96 10.64 0.53 (0.26) (0.53) -- 10.38 2.70
Class A - 12/31/95 9.32 0.54 1.34 (0.56) -- 10.64 20.63
Class A - 12/31/94 10.67 0.56 (1.34) (0.55) (0.02) 9.32 (7.45)
Class A - 12/31/93 10.14 0.60 0.60 (0.60) (0.07) 10.67 12.10
Class A - 12/31/92(1) 10.00 0.57 0.14 (0.57) -- 10.14 7.43
Class B - 12/31/96 10.64 0.48 (0.26) (0.48) -- 10.38 2.24
Class B - 12/31/95 9.32 0.50 1.34 (0.52) -- 10.64 20.10
Class B - 12/31/94(1) 9.81 0.31 (0.50) (0.29) (0.01) 9.32 (1.94)
Class C - 12/31/96 10.63 0.46 (0.26) (0.45) -- 10.38 2.02
Class C - 12/31/95(1) 10.38 0.09 0.24 (0.08) -- 10.63 3.21
NATIONAL LIMITED TERM
Class A - 12/31/96 10.16 0.48 0.01 (0.47) (0.01) 10.17 4.87
Class A - 12/31/95(1) 10.00 0.14 0.17 (0.14) (0.01) 10.16 3.22
Class B - 12/31/96 10.20 0.34 (0.02) (0.33) (0.01) 10.18 3.19
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Highlights
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
NET RATIO OF RATIO OF EXPENSES
ASSETS RATIO OF NET INVESTMENT TO AVERAGE NET
END OF EXPENSES TO INCOME TO PORTFOLIO ASSETS ASSUMING NO
PERIOD AVERAGE AVERAGE NET TURNOVER VOLUNTARY WAIVERS
(000s) NET ASSETS(2) ASSETS RATE AND REIMBURSEMENTS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARIZONA TAX FREE
Class A - 12/31/96 $ 9,755 0.46% 5.43% 70.14% 1.25%
Class A - 12/31/95(1) 6,225 0.52(5) 5.19(5) 38.05 1.25(5)
Class B - 12/31/96 3,491 1.11 4.77 70.14 2.00
Class B - 12/31/95(1) 1,629 0.99(5) 4.60(5) 38.05 2.00(5)
Class C - 12/31/96 23 1.21 4.68 70.14 2.00
Class C - 12/31/95(1) 27 1.20(5) 4.65(5) 38.05 2.00(5)
ARIZONA INSURED
Class A - 12/31/96 209,258 0.82 4.89 42.76 0.95
Class A - 12/31/95 238,114 0.69 5.07 42.96 0.95
Class A - 12/31/94 231,736 0.72 5.20 25.18 0.92
Class A - 12/31/93 263,312 0.59 5.00 33.80 1.03
Class A - 12/31/92 124,120 0.35 5.60 40.29 1.16
Class A - 12/31/91(1) 38,322 --(6) 6.58(5) 177.66 1.24(5)
Class B - 12/31/96 3,110 1.59 4.11 42.76 1.70
Class B - 12/31/95(1) 2,048 1.33(5) 4.08(5) 42.96 1.60(5)
Class C - 12/31/96 554 1.70 4.01 42.76 1.70
Class C - 12/31/95 541 1.54 4.18 42.96 1.69
Class C - 12/31/94(1) 326 1.50(5) 4.10(5) 25.18 1.71(5)
CALIFORNIA TAX FREE
Class A - 12/31/96 1,218 0.27 5.71 7.87 1.25
Class A - 12/31/95(1) 1,012 0.46(5) 5.57(5) 39.51 1.22(5)
Class B - 12/31/96 660 0.50 5.34 7.87 2.00
Class B - 12/31/95(1) 128 0.60(5) 5.33(5) 39.51 1.93(5)
Class C - 12/31/96 94 0.78 5.13(5) 7.87 2.00
CALIFORNIA INSURED
Class A - 12/31/96 30,551 0.82 5.05 54.52 1.01
Class A - 12/31/95 33,860 0.70 5.23 107.45 1.02
Class A - 12/31/94 27,994 0.10(5) 6.30(5) 7.28 1.24(5)
Class A - 10/31/94 27,282 0.20 5.37 18.34 1.25
Class A - 10/31/93 12,509 -- 5.26 24.19 1.25
Class A - 10/31/92(1) 2,056 -- -- 7.31 --
Class B - 12/31/96 6,717 1.21 4.64 54.52 1.76
Class B - 12/31/95 6,029 1.10 4.75 107.45 1.75
Class B - 12/31/94 2,219 0.57(5) 5.54(5) 7.28 1.94(5)
Class B - 10/31/94(1) 1,427 0.73(5) 4.82(5) 18.34 1.95(5)
Class C - 12/31/96 55 1.58 4.02 54.52 1.77
Class C - 12/31/95(1) 53 1.53(5) 4.25(5) 107.45 1.77(5)
COLORADO TAX FREE
Class A - 12/31/96 358,328 0.78 5.27 40.35 0.91
Class A - 12/31/95 392,815 0.76 5.18 82.83 0.93
Class A - 12/31/94 354,138 0.66 5.35 69.32 0.72
Class A - 12/31/93 399,218 0.75 4.97 58.61 0.75
Class A - 12/31/92 202,165 0.80 5.59 69.72 0.80
Class A - 12/31/91 104,863 0.82 6.15 92.42 0.82
Class A - 12/31/90 53,987 1.00 6.38 69.64 1.00
Class A - 12/31/89 34,625 1.00 6.37 33.06 1.00
Class A - 12/31/88 19,767 1.00 6.77 56.31 1.00
Class A - 12/31/87(1) 5,546 1.00(5) 6.49(5) 92.80 1.00(5)
Class B - 12/31/96 4,172 1.58 4.45 40.35 1.65
Class B - 12/31/95(1) 1,643 1.39(5) 3.96(5) 82.83 1.60(5)
Class C - 12/31/96 1,522 1.66 4.40 40.35 1.66
Class C - 12/31/95 1,042 1.66 4.20 82.83 1.66
Class C - 12/31/94(1) 465 1.80(5) 4.23(5) 69.32 1.81(5)
FLORIDA TAX FREE
Class A - 12/31/96 5,761 0.33 5.66 70.17 1.25
Class A - 12/31/95(1) 4,421 0.32(5) 5.26(5) 63.52 1.25(5)
Class B - 12/31/96 1,635 0.76 5.23 70.17 2.00
Class B - 12/31/95(1) 101 0.44(5) 4.88(5) 63.52 2.00(5)
Class C - 12/31/96 16 1.15 4.83 70.17 2.00
Class C - 12/31/95(1) 9 1.11(5) 4.57(5) 63.52 2.00(5)
FLORIDA INSURED
Class A - 12/31/96 192,171 0.73 5.02 57.18 0.96
Class A - 12/31/95 242,425 0.51 5.24 101.48 0.95
Class A - 12/31/94 240,228 0.20(5) 6.24(5) 2.51 1.06(5)
Class A - 10/31/94 259,702 0.44 5.24 49.12 0.96
Class A - 10/31/93 289,682 0.18 5.18 53.51 1.12
Class A - 10/31/92(1) 50,666 -- 5.38(5) 208.24 1.25(5)
Class B - 12/31/96 3,222 1.24 4.51 57.18 1.72
Class B - 12/31/95 2,814 0.89 4.80 101.48 1.68
Class B - 12/31/94 1,477 0.59(5) 5.68(5) 2.51 1.81(5)
Class B - 10/31/94(1) 1,135 1.00(5) 4.63(5) 49.12 1.28(5)
FLORIDA LIMITED TERM
Class A - 12/31/96 3,159 0.66 4.63 63.06 1.25
Class A - 12/31/95 859 0.63 4.28 27.76 1.25
Class A - 12/31/94(1) 592 -- 4.19(5) -- 1.25(5)
Class B - 12/31/96 1,042 1.48 3.81 63.06 2.00
Class B - 12/31/95(1) 41 1.52(5) 3.32(5) 27.76 2.00(5)
Class C - 12/31/96 54 1.55 3.74 63.06 2.00
Class C - 12/31/95(1) 54 1.62(5) 3.10(5) 27.76 2.00(5)
IDAHO TAX FREE
Class A - 12/31/96 27,684 0.60 5.29 34.68 1.10
Class A - 12/31/95(1) 13,540 0.26(5) 5.24(5) 41.97 1.25(5)
Class B - 12/31/96 4,945 1.11 4.78 34.68 1.85
Class B - 12/31/95(1) 1,977 0.79(5) 4.68(5) 41.97 1.90(5)
Class C - 12/31/96 822 1.33 4.57 34.68 1.82
Class C - 12/31/95(1) 789 1.05(5) 4.48(5) 41.97 2.00(5)
IOWA TAX FREE
Class A - 12/31/96 40,037 0.92 4.68 14.56 1.06
Class A - 12/31/95 42,374 0.72 4.88 21.67 1.06
Class A - 12/31/94 32,373 0.11(5) 5.71(5) 7.18 1.25(5)
Class A - 8/31/941 38,669 0.12 4.89 119.35 1.25
Class B - 12/31/96 1,645 1.61 3.97 14.56 1.81
Class B - 12/31/95(1) 819 1.28(5) 4.06(5) 21.67 1.65(5)
Class C - 12/31/96 670 1.75 3.82 14.56 1.81
Class C - 12/31/95(1) 462 1.61(5) 3.74(5) 21.67 1.72(5)
KANSAS TAX FREE
Class A - 12/31/96 10,176 0.83 4.97 56.77 1.21
Class A - 12/31/95 10,677 0.37 5.32 19.71 1.11
Class A - 12/31/94 7,355 0.01(5) 5.88(5) -- 1.25(5)
Class A - 10/31/94 6,469 0.06 5.30 38.96 1.25
Class A - 10/31/93(1) 2,057 -- 5.26(5) 28.87 1.25(5)
Class B - 12/31/96 2,402 1.61 4.16 56.77 2.00
Class B - 12/31/95(1) 677 0.94(5) 4.63(5) 19.71 1.68(5)
Class C - 12/31/96 90 1.77 4.02 56.77 2.00
Class C - 12/31/95(1) 40 1.27(5) 4.21(5) 19.71 1.79(5)
MINNESOTA TAX FREE
Class A - 12/31/96 428,380 0.92 5.13 27.67 0.92
Class A - 12/31/95 455,220 0.93 5.11 50.84 0.93
Class A - 12/31/94 406,497 0.90 5.29 24.26 0.90
Class A - 12/31/93 458,145 1.02 5.02 31.77 1.02
Class A - 12/31/92 331,314 0.96 5.73 23.60 1.04
Class A - 12/31/91 251,594 0.83 6.44 26.40 0.98
Class A - 12/31/90 197,629 0.82 6.68 20.54 1.02
Class A - 12/31/89 172,476 0.77 6.85 22.84 0.77
Class A - 12/31/88 150,031 0.77 7.01 9.56 0.77
Class A - 12/31/87 124,082 0.78 7.10 13.84 0.78
Class B - 12/31/96 6,233 1.50 4.53 27.67 1.67
Class B - 12/31/95(1) 2,701 1.38(5) 4.43(5) 50.84 1.63(5)
Class C - 12/31/96 3,083 1.67 4.38 27.67 1.67
Class C - 12/31/95 2,319 1.67 4.33 50.84 1.67
Class C - 12/31/94(1) 1,061 1.72(5) 4.56(5) 24.26 1.72(5)
MINNESOTA INSURED
Class A - 12/31/96 304,877 0.92 4.93 14.04 0.92
Class A - 12/31/95 307,734 0.87 4.92 53.72 0.92
Class A - 12/31/94 284,132 0.61 5.29 24.75 0.94
Class A - 12/31/93 311,187 0.70 4.93 18.25 1.02
Class A - 12/31/92 162,728 0.37 5.66 14.11 1.06
Class A - 12/31/91 68,250 0.78 6.13 43.68 1.16
Class A - 12/31/90 29,394 0.74 6.30 15.12 1.25
Class A - 12/31/89 8,217 0.78 6.55 28.34 1.00
Class A - 12/31/88 4,707 0.86 7.08 68.09 1.00
Class A - 12/31/87(1) 2,759 0.76(5) 7.93(5) 20.66 1.00(5)
Class B - 12/31/96 6,817 1.56 4.29 14.04 1.68
Class B - 12/31/95(1) 4,655 1.34(5) 4.15(5) 53.72 1.64(5)
Class C - 12/31/96 3,126 1.68 4.18 14.04 1.68
Class C - 12/31/95 3,166 1.66 4.11 53.72 1.67
Class C - 12/31/94(1) 1,525 1.36(5) 4.68(5) 24.75 1.68(5)
MINNESOTA LIMITED TERM
Class A - 12/31/96 66,024 0.89 4.69 28.18 0.89
Class A - 12/31/95 72,405 0.91 4.61 40.28 0.91
Class A - 12/31/94 84,168 0.92 4.18 42.06 0.92
Class A - 12/31/93 75,374 0.99 4.18 19.13 0.99
Class A - 12/31/92 48,210 1.09 4.71 25.56 1.09
Class A - 12/31/91 27,268 1.23 5.35 43.39 1.23
Class A - 12/31/90 22,526 1.18 5.81 51.47 1.18
Class A - 12/31/89 21,884 0.84 5.74 68.23 0.84
Class A - 12/31/88 24,157 0.84 5.15 16.13 0.84
Class A - 12/31/87 29,063 0.84 5.14 24.79 0.84
Class B - 12/31/96 408 1.56 3.99 28.18 1.62
Class B - 12/31/95(1) 27 1.30(5) 3.93(5) 40.28 1.55(5)
Class C - 12/31/96 1,137 1.64 3.94 28.18 1.64
Class C - 12/31/95 694 1.63 3.82 40.28 1.63
Class C - 12/31/94(1) 341 1.71(5) 3.35(5) 42.05 1.71(5)
MISSOURI INSURED
Class A - 12/31/96 49,301 0.71 5.05 28.26 1.03
Class A - 12/31/95 50,211 0.50 5.25 31.69 1.07
Class A - 12/31/94 37,790 0.11(5) 6.00(5) 8.85 1.12(5)
Class A - 10/31/94 37,384 0.15 5.39 32.02 1.13
Class A - 10/31/93(1) 30,270 -- 4.82(5) 76.51 1.25(5)
Class B - 12/31/96 10,432 1.29 4.46 28.26 1.78
Class B - 12/31/95 6,195 0.97 4.70 31.69 1.81
Class B - 12/31/94 2,742 0.60(5) 5.32(5) 8.85 1.84(5)
Class B - 10/31/94(1) 1,701 0.49(5) 4.89(5) 32.02 1.83(5)
Class C - 12/31/96 152 1.62 4.10 28.26 1.78
Class C - 12/31/95(1) 20 1.22(5) 4.09(5) 31.69 1.55(5)
NEW MEXICO TAX FREE
Class A - 12/31/96 20,133 0.88 5.06 42.12 1.07
Class A - 12/31/95 21,402 0.87 5.07 55.72 1.09
Class A - 12/31/94 19,706 0.06(5) 6.38(5) 2.21 1.25(5)
Class A - 10/31/94 23,096 0.29 5.26 22.94 1.16
Class A - 10/31/93 17,302 -- 5.10 30.76 1.25
Class A - 10/31/92(1) 361 -- -- -- --
Class B - 12/31/96 794 1.61 4.31 42.12 1.82
Class B - 12/31/95 605 1.53 4.33 55.72 1.83
Class B - 12/31/94 272 0.75(5) 5.60(5) 2.21 2.00(5)
Class B - 10/31/94(1) 264 0.98(5) 4.57(5) 22.94 1.86(5)
Class C - 12/31/96 341 1.74(5) 4.21(5) 42.12 1.83(5)
NEW YORK TAX FREE
Class A - 12/31/96(11) 10,044 0.97(5) 5.31(5) 5.00 1.12(5)
Class A - 9/30/96 10,548 1.34 5.14 12.00 1.55
Class A - 9/30/95 11,931 1.31 5.66 10.00 1.82
Class A - 9/30/94 12,797 1.09(5) 5.74(5) -- 1.09(5)
Class A - 6/30/94 12,851 0.99 5.55 4.00 1.09
Class A - 6/30/93 13,915 0.99 5.74 17.00 1.05
Class A - 6/30/92 14,943 1.00 6.15 19.00 1.26
Class A - 6/30/91 15,592 1.23(5) 6.08(5) 18.00 1.48(5)
Class A - 9/30/90 27,065 1.09 6.35 31.00 1.49
Class A - 9/30/89 23.069 0.60 6.75 11.00 1.70
Class A - 9/30/88(1) 9,260 0.45 6.87(5) 18.00 2.04
Class B - 12/31/96 254 1.87(5) 4.43(5) 5.00 2.00(5)
Class B - 9/30/96 448 2.09 4.39 12.00 2.30
Class B - 9/30/95(1) 266 2.09(5) 4.68(5) 10.00 2.60(5)
Class C - 12/31/96 53 1.84(5) 4.45(5) 5.00 2.00(5)
Class C - 9/30/96 52 2.09 4.39 12.00 2.30
Class C - 9/30/95(1) 51 2.09(5) 4.44(4) 10.00 2.60(5)
NORTH DAKOTA TAX FREE
Class A - 12/31/96 33,713 0.88 5.01 57.60 1.08
Class A - 12/31/95 36,096 0.81 5.07 45.34 1.05
Class A - 12/31/94 33,829 0.46 5.36 32.60 1.14
Class A - 12/31/93 34,880 0.59 5.11 27.39 1.25
Class A - 12/31/92 15,846 0.40 5.78 26.27 1.25
Class A - 12/31/91(1) 4,914 0.16(5) 6.43(5) 126.37 1.25(5)
Class B - 12/31/96 700 1.36 4.52 57.60 1.83
Class B - 12/31/95 375 1.29 4.56 45.34 1.79
Class B - 12/31/94(1) 144 0.99(5) 4.97(5) 32.60 1.89(5)
Class C - 12/31/96 40 1.75 4.06 57.60 1.75
Class C - 12/31/95(1) 20 1.73(5) 4.00(5) 45.34 1.73(5)
OREGON INSURED
Class A - 12/31/96 20,913 0.71 4.92 39.54 1.07
Class A - 12/31/95 21,590 0.54 5.12 41.08 1.11
Class A - 12/31/94 14,650 0.05(5) 5.79(5) -- 1.25(5)
Class A - 10/31/94 14,086 0.03 5.17 48.98 1.25
Class A - 10/31/93(1) 4,609 -- 4.61(5) 11.08 1.25(5)
Class B - 12/31/96 4,758 1.25 4.37 39.54 1.83
Class B - 12/31/95 2.786 1.04 4.57 41.08 1.86
Class B - 12/31/94 1,303 0.60(5) 5.19(5) -- 2.00(5)
Class B - 10/31/94(1) 1,146 0.75(5) 4.43(5) 48.98 2.00(5)
Class C - 12/31/96 360 1.55 4.03 39.54 1.82
Class C - 12/31/95(1) 250 1.39(5) 4.00(5) 41.08 1.74(5)
UTAH TAX FREE
Class A - 12/31/96 3,861 0.68 5.14 39.58 1.25
Class A - 12/31/95 4,142 0.38 5.51 35.28 1.25
Class A - 12/31/94 3,728 0.11(5) 6.38(5) -- 1.14(5)
Class A - 10/31/94 4,054 0.10 5.64 2.77 1.25
Class A - 10/31/93 3,913 -- 5.65 44.54 1.25
Class A - 10/31/92(1) 19 -- -- -- --
Class B - 12/31/96 397 1.46 4.34 39.58 2.00
Class B - 12/31/95(1) 363 0.92(5) 4.74(5) 35.28 2.00(5)
WASHINGTON INSURED
Class A - 12/31/96 2.382 0.44 5.29 33.30 1.25
Class A - 12/31/95 2,099 0.28 5.57 50.54 1.25
Class A - 12/31/94 2,049 0.10(5) 6.18(5) -- 1.25(5)
Class A - 10/31/94 2,118 0.14 5.44 -- 1.25
Class A - 10/31/93(1) 2,108 -- 5.50(5) 45.14 1.25(5)
Class B - 12/31/96 516 1.21 4.47 33.30 2.00
Class B - 12/31/95(1) 15 1.04(5) 4.44(5) 50.54 2.00(5)
Class C - 12/31/96 19 1.37 4.36 33.30 2.00
Class C - 12/31/95(1) 19 1.30(5) 4.45(5) 50.54 2.00(5)
WISCONSIN TAX FREE
Class A - 12/31/96 28,292 0.98 4.90 38.54 1.09
Class A - 12/31/95 26,449 0.88 5.05 12.10 1.09
Class A - 12/31/94 20,167 0.08(5) 5.54(5) 20.52 1.25(5)
Class A - 8/31/94(1) 16,093 0.04 4.89 86.26 1.25
Class B - 12/31/96 1,339 1.66 4.37 38.54 1.85
Class B - 12/31/95(1) 725 1.45(5) 4.31(5) 12.10 1.70(5)
Class C - 12/31/96 555 1.75 4.12 38.54 1.83
Class C - 12/31/95(1) 73 1.77(5) 4.04(5) 12.10 1.77(5)
NATIONAL TAX FREE
Class A - 12/31/96 3,203 0.34 5.50 62.25 1.25
Class A - 12/31/95(1) 1,274 0.35(5) 5.03(5) 49.62 1.25(5)
Class B - 12/31/96 472 0.80 5.07 62.25 2.00
Class B - 12/31/95(1) 157 0.88(5) 4.52(5) 49.62 2.00(5)
Class C - 12/31/96 62 1.09 4.74 62.25 2.00
Class C - 12/31/95(1) 48 1.22(5) 4.36(5) 49.62 2.00(5)
NATIONAL INSURED
Class A - 12/31/96 30,160 0.70 5.15 83.45 1.14
Class A - 12/31/95 35,662 0.61 5.29 192.90 1.16
Class A - 12/31/94 35,305 0.10 5.71 31.25 1.25
Class A - 12/31/93 25,315 -- 5.29 77.79 1.25
Class A - 12/31/92(1) 2,919 -- (3) 5.85(5) 114.92 1.25(5)
Class B - 12/31/96 1,780 1.16 4.66 83.45 1.89
Class B - 12/31/95 1,545 0.93 4.85 192.90 1.81
Class B - 12/31/94(1) 478 0.48(5) 5.37(5) 31.25 1.99(5)
Class C - 12/31/96 90 1.50 4.27 83.45 1.91
Class C - 12/31/95(1) 10 0.93(5) 4.46(5) 192.90 1.40(5)
NATIONAL LIMITED TERM
Class A - 12/31/96 1,133 0.36 4.72 67.35 1.25
Class A - 12/31/95(1) 1,230 0.56(5) 4.17(5) 54.31 1.25(5)
Class B - 12/31/96 51 0.82 4.30 67.35 2.00
- -----------------------------------------------------------------------------------------------
</TABLE>
Notes to Financial Highlights
1 The information is for the period from each Fund's commencement of
operations to the Fund's year end. The classes of each Fund commenced
operations on the following dates:
ARIZONA TAX FREE FUND
Class A March 2, 1995
Class B June 29, 1995
Class C May 13, 1995
ARIZONA INSURED TAX FREE FUND
Class A April 1, 1991
Class B March 10, 1995
Class C May 26, 1994
CALIFORNIA TAX FREE FUND
Class A March 3, 1995
Class B August 23, 1995
Class C April 9, 1996
CALIFORNIA INSURED TAX FREE FUND
Class A October 15, 1992
Class B March 1, 1994
Class C April 12, 1995
COLORADO TAX FREE FUND
Class A April 23, 1987
Class B March 22, 1995
Class C May 6, 1994
FLORIDA TAX FREE FUND
Class A March 2, 1995
Class B September 15, 1995
Class C April 22, 1995
FLORIDA INSURED TAX FREE FUND
Class A January 1, 1992
Class B March 11, 1994
FLORIDA LIMITED TERM TAX FREE FUND
Class A May 1, 1994
Class B September 15, 1995
Class C March 23, 1995
IDAHO TAX FREE FUND
Class A January 4, 1995
Class B March 16, 1995
Class C January 11, 1995
IOWA TAX FREE FUND
Class A September 1, 1993
Class B March 24, 1995
Class C January 4, 1995
KANSAS TAX FREE FUND
Class A November 30, 1992
Class B April 8, 1995
Class C April 12, 1995
MINNESOTA TAX FREE FUND
Class B March 11, 1995
Class C May 4, 1994
MINNESOTA INSURED FUND
Class A May 1, 1987
Class B March 7, 1995
Class C May 4, 1994
MINNESOTA LIMITED TERM TAX FREE FUND
Class B August 15, 1995
Class C April 30, 1994
MISSOURI INSURED TAX FREE FUND
Class A November 2, 1992
Class B March 12, 1994
Class C November 11, 1995
NEW MEXICO TAX FREE FUND
Class A October 5, 1992
Class B March 3, 1994
Class C May 7, 1996
NEW YORK TAX FREE FUND
Class A November 6, 1987
Class B November 14, 1994
Class C April 26, 1995
NORTH DAKOTA TAX FREE FUND
Class A April 1, 1991
Class B May 10, 1994
Class C July 29, 1995
OREGON INSURED TAX FREE FUND
Class A August 1, 1993
Class B March 12, 1994
Class C July 7, 1995
UTAH TAX FREE FUND
Class A October 5, 1992
Class B May 27, 1995
WASHINGTON INSURED TAX FREE FUND
Class A August 1, 1993
Class B October 24, 1995
Class C April 21, 1995
WISCONSIN TAX FREE FUND
Class A September 1, 1993
Class B April 22, 1995
Class C March 28, 1995
NATIONAL TAX FREE FUND
Class A September 8, 1995
Class B September 15, 1995
Class C September 12, 1995
NATIONAL INSURED TAX FREE FUND
Class A January 10, 1992
Class B May 26, 1994
Class C October 20, 1995
NATIONAL LIMITED TERM TAX FREE FUND
Class A September 7, 1995
Class B March 7, 1996
2 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.
3 The Advisor also paid $6,364 beyond total fees and expenses for National
Insured Tax Free Fund for the period ended December 31, 1992.
4 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.
5 Adjusted to an annual basis.
6 The Adviser also paid $25,631 for Arizona Insured Tax Free Fund for the
period ended December 31, 1991.
7 Includes (.01) in excess of net realized gains.
8 Includes (.06) and (.04) in excess of net realized gains for Class A and
Class C shares, respectively.
9 Includes (.02) and (.02) in excess of net realized gains for Class A and
Class B shares, respectively.
10 Includes (.01) in excess distributions of net investment income.
11 Effective November 16, 1996, the funds shareholders approved a change of
investment advisor from Fortis Advisors, Inc. to Voyageur Fund Managers,
Inc.
THE FUNDS
- --------------------------------------------------------------------------------
Each of the Funds is a separate series of one of the parent corporate or trust
entities described herein under the heading "General Information." The series
which are diversified, as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act") are designated as such by a footnote on the
cover page of this Prospectus. All other series are non-diversified. Each
non-diversified Fund will be able to invest, subject to certain federal tax
requirements, a relatively higher percentage of its assets in the securities of
a limited number of issuers which may result in such Fund's securities being
more susceptible to any single economic, political or regulatory occurrence than
the securities of a diversified Fund. The investment objectives and policies of
each Fund are described below. Except where noted, an investment objective or
policy description applies to all Funds.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of each Limited Term Tax Free Fund is to provide
investors with preservation of capital and, secondarily, current income exempt
from federal income tax and (except for the National Limited Term Tax Free Fund)
the personal income tax, if any, of the Fund's particular state, by maintaining
a weighted average portfolio maturity of 10 years or less. The investment
objective of each Tax Free Fund and Insured Fund is to seek as high a level of
current income exempt from federal income tax and (except for National Tax Free
Fund and National Insured Tax Free Fund) from the personal income tax, if any,
of the Fund's particular state, as is consistent with preservation of capital.
The weighted average maturity of the investment portfolio of each Tax Free Fund
and Insured Fund is expected to be approximately 15 to 25 years. Each of Florida
Limited Term Tax Free Fund, Florida Tax Free Fund and Florida Insured Tax Free
Fund will seek to select investments that will enable its shares to be exempt
from the Florida intangible personal property tax.
During times of adverse market conditions when a defensive investment
posture is warranted, each Fund may temporarily select investments without
regard to the foregoing policy. There are risks in any investment program, and
there is no assurance that a Fund's investment objective will be achieved. The
value of each Fund's shares will fluctuate with changes in the market value of
its investments. Each Fund's investment objective and certain other investment
policies explicitly designated herein as such are fundamental, which means that
they cannot be changed without the vote of its respective shareholders as
provided in the 1940 Act.
Each Fund anticipates that, in normal market conditions, it will invest
substantially all of its assets in Tax Exempt Obligations (as defined below),
the interest on which is exempt from federal income tax and (for Funds other
than the three "national" funds) from the personal income tax, if any, of its
respective state (and with respect to New York Fund, New York City personal
income tax). As a fundamental policy, New York Fund will invest at least 80% of
the value of its net assets in such obligations under normal market conditions
(not including obligations subject to the alternative minimum tax). Up to 20% of
the securities owned by each such Fund may generate interest that is an item of
tax preference for purposes of federal and state alternative minimum tax
("AMT"), except that the Minnesota Insured Fund may invest without limit in such
securities and the Minnesota Tax Free Fund may not invest in such AMT
securities. New York Fund may also invest in such securities which generate an
item of tax preference for purposes of New York City alternative minimum tax.
TAX FREE AND LIMITED TERM TAX FREE FUNDS
Each Tax Free Fund and each Limited Term Tax Free Fund may invest without
limitation in securities rated "investment grade," i.e., within the four highest
investment grades, at the time of investment by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") or, if unrated, judged
by Voyageur to be of comparable quality. Bonds included in the lowest investment
grade rating category involve certain speculative characteristics, and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case for
higher rated bonds. Up to 20% of the Tax Exempt Obligations purchased by the
Funds may be rated lower than investment grade; however, all bonds must be rated
"B" or better by Moody's or S&P (or, if unrated, judged by Voyageur to be of
comparable quality). Such bonds are often referred to as "junk" bonds or "high
yield" bonds. Bonds rated below "BBB" have a greater vulnerability to default
than higher grade bonds. See "Risks and Special Investment
Considerations--General" for a discussion of the risks of investing in lower
grade Tax Exempt Obligations. A description of the ratings assigned by Moody's
and S&P is set forth in Appendix A to the Statement of Additional Information.
The following table sets forth the weighted average percentage of total
investments with respect to the portfolios of certain Funds as of December 31,
1996.
<TABLE>
<CAPTION>
MOODY'S RATING Aaa Aa A Baa Ba B Unrated
(S&P RATING) (AAA) (AA) (A) (BBB) (BB) (B) Bonds Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VOYAGEUR TAX FREE FUNDS
Colorado 32% 21% 19% 24% -- -- 4% 100%
Florida 28% 20% 17% 17% -- -- 18% 100%
Idaho 28% 11% 28% 23% -- -- 10% 100%
Kansas 58% 18% 2% 17% -- -- 5% 100%
Minnesota 54% 12% 15% 9% -- -- 10% 100%
National 55% 12% 7% 19% -- -- 7% 100%
North Dakota 38% 27% 16% 18% -- -- 1% 100%
Utah 68% 11% 10% 2% -- -- 9% 100%
Wisconsin 23% 10% 29% 7% 8% -- 23% 100%
VOYAGEUR LIMITED TERM
TAX FREE FUNDS
Florida 65% 8% 6% 16% -- -- 5% 100%
Minnesota 53% 10% 9% 18% -- -- 10% 100%
National 57% 17% 13% 9% -- -- 4% 100%
- ------------------------------------------------------------------------------------------------
</TABLE>
INSURED FUNDS
The Tax Exempt Obligations in each Insured Fund's portfolio will consist of (a)
obligations that at all times are fully insured as to scheduled payments of
principal and interest ("insured securities") and (b) "escrow secured" or
"defeased" bonds. Insured securities may consist of bonds covered by Primary
Insurance, Secondary Market Insurance or Portfolio Insurance (as defined below).
All insurers must have a triple A-rated claims paying ability (as assigned by
either or both of Moody's and S&P) at the time of investment. Securities that
are covered by either Primary or Secondary Market Insurance will carry a
triple-A rating at the time of investment by the Fund. However, securities that
are not covered by either Primary or Secondary Market Insurance at the time of
investment (or that are not "escrow secured" or "defeased") must be covered by
Portfolio Insurance immediately after their acquisition. Voyageur anticipates
that such securities, at the time of investment, generally will be rated
investment grade. However, all securities in each Insured Fund's portfolio,
after application of insurance, will be rated Aaa by Moody's and/or AAA by S&P
at the time of investment. Pending the investment or reinvestment of its assets
in longer-term Tax Exempt Obligations, each Insured Fund may invest up to 35% of
its net assets in short-term tax exempt instruments, without obtaining
insurance, provided such instruments carry an A-l+ or SP-l+ short-term rating or
AAA or Aaa long-term rating by S&P or Moody's, and may invest up to 10% of its
net assets in securities of tax exempt money market mutual funds. The "insured
securities" in each Insured Fund's investment portfolio are insured as to the
scheduled payment of all installments of principal and interest as they fall
due. The purpose of such insurance is to minimize credit risks to such Funds and
their shareholders associated with defaults in Tax Exempt Obligations owned by
such Funds. Such insurance does not insure against market risk and therefore
does not guarantee the market value of the securities in an Insured Fund's
investment portfolio or the value of any Insured Funds' shares.
Certain insurance companies will issue policies guaranteeing the timely
payment of principal of, and interest on, particular Tax Exempt Obligations or
on a portfolio of Tax Exempt Obligations. Insurance may be purchased by the
issuer of a Tax Exempt Obligation or by a third party at the time of issuance of
the Tax Exempt Obligation ("Primary Insurance") or by the Fund or a third party
subsequent to the original issuance of a Tax Exempt Obligation ("Secondary
Market Insurance"). In each case, a single premium is paid to the insurer by the
party purchasing the insurance when the insurance is obtained. Primary Insurance
and Secondary Market Insurance policies are non-cancelable and remain in effect
for so long as the insured Tax Exempt Obligation is outstanding and the insurer
is in business.
The Insured Funds may also purchase insurance covering certain Tax
Exempt Obligations which the Insured Funds intend to purchase for their
portfolios or which the Insured Funds already own ("Portfolio Insurance").
Portfolio Insurance policies guarantee the timely payment of principal of, and
interest on, covered Tax Exempt Obligations only while they are owned by the
Insured Funds. Such policies are non-cancelable and remain in effect until the
Fund terminates, provided the Fund pays the applicable insurance premiums and
the insurer remains in business. Tax Exempt Obligations in the Insured Funds'
portfolios covered by a Portfolio Insurance policy will not be covered by such
policy after they are sold by a Fund unless the Fund elects to obtain some form
of Secondary Market Insurance for them at the time of sale. The Insured Funds
would obtain such Secondary Market Insurance only if, in Voyageur's view, it
would be economically advantageous for the Funds to do so. Further information
about insurance (including its limitations) is set forth in the Statement of
Additional Information.
ALL FUNDS
The foregoing policies as to credit quality of portfolio investments will apply
only at the time of the purchase of a security, and the Funds are not required
to dispose of securities in the event that Moody's or S&P downgrades its
assessment of the credit characteristics of a particular issuer or, in the case
of unrated securities, in the event Voyageur reassesses its view with respect to
the credit quality of the issuer thereof. In no event, however, will more than
5% of each Fund's total assets consist of securities that have been downgraded
to a rating lower than the minimum rating in which each Fund is permitted to
invest or, in the case of unrated securities, that Voyageur has determined to
have a quality lower than such minimum rating. With respect to the Insured
Funds, up to 35% of each such Fund's total assets may consist of securities that
have been downgraded to AA or Aa subsequent to initial investment in such
securities by an Insured Fund.
Each Fund may invest without limitation in short term Tax Exempt
Obligations or in taxable obligations on a temporary, defensive basis due to
market conditions or, with respect to taxable obligations, for liquidity
purposes. Such taxable obligations, whether purchased for liquidity purposes or
on a temporary, defensive basis, may include: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
within the three highest grades by either Moody's or S&P; commercial paper rated
in the highest grade by either of such rating services (Prime-1 or A-1,
respectively); certificates of deposit and bankers' acceptances of domestic
banks which have capital, surplus and undivided profits of over $100 million;
high-grade taxable municipal bonds; and repurchase agreements with respect to
any of the foregoing investments. Each Fund also may hold its assets in cash and
in securities of tax exempt money market mutual funds.
TAX EXEMPT OBLIGATIONS
As used in this Prospectus, the term "Tax Exempt Obligations" refers to debt
obligations issued by or on behalf of a state or territory or its agencies,
instrumentalities, municipalities and political subdivisions, the interest
payable on which is, in the opinion of bond counsel, excludable from gross
income for purposes of federal income tax and (with respect to Funds other than
the National Fund, National Insured Fund or National Limited Term Fund) from the
personal income tax, if any, of the state specified in the Fund's name. The term
"Tax Exempt Obligations" also includes Derivative Tax Exempt Obligations as
defined below. In certain instances the interest on Tax Exempt Obligations may
be an item of tax preference includable in alternative minimum taxable income
depending upon the shareholder's tax status. See "Distributions to Shareholders
and Taxes--Taxes."
Tax Exempt Obligations are primarily debt obligations issued to obtain
funds for various public purposes such as constructing public facilities and
making loans to public institutions. The two principal classifications of Tax
Exempt Obligations are general obligation bonds and revenue bonds. General
obligation bonds are generally secured by the full faith and credit of an issuer
possessing general taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source.
Revenue bonds are payable only from the revenues derived from a particular
source or facility, such as a tax on particular property or revenues derived
from, for example, a municipal water or sewer utility or an airport. Tax Exempt
Obligations that benefit private parties in a manner different than members of
the public generally (so-called private activity bonds or industrial development
bonds) are in most cases revenue bonds, payable solely from specific revenues of
the project to be financed. The credit quality of private activity bonds is
usually directly related to the creditworthiness of the user of the facilities
(or the creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Tax Exempt Obligations, there
is a variety of types of municipal securities. Certain Tax Exempt Obligations
may carry variable or floating rates of interest whereby the rate of interest is
not fixed but varies with changes in specified market rates or indexes, such as
a bank prime rate or a tax exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Tax Exempt Obligations are zero coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
Tax Exempt Obligations also include state or municipal leases and
participation interests therein. The Funds may invest in these types of
obligation without limit. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered illiquid by the staff of the
Securities and Exchange Commission. Municipal lease obligations held by a Fund
will be treated as illiquid unless they are determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors. Under these guidelines,
Voyageur will consider factors including, but not limited to (a) whether the
lease can be cancelled, (b) what assurance there is that the assets represented
by the lease can be sold, (c) the municipality's general credit strength (e.g.,
its debt, administrative, economic and financial characteristics), (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
non-appropriation"), and (e) the legal recourse in the event of failure to
appropriate. Additionally, the lack of an established trading market for
municipal lease obligations may make the determination of fair market value more
difficult. See "Investment Policies and Restrictions--Tax Exempt Obligations" in
the Statement of Additional Information.
Each Fund may also acquire Derivative Tax Exempt Obligations, which are
custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain Tax Exempt Obligations. The sponsor of these certificates or receipts
typically purchases and deposits the securities in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt, a Fund typically would be authorized to assert its rights
directly against the issuer of the underlying obligation, a Fund could be
required to assert through the custodian bank those rights as may exist against
the underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, a Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if a Fund
had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which
the underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non taxable entity, it would be subject
to state (and with respect to New York Fund, potentially New York City) income
tax (but not federal income tax) on the income it earned on the underlying
security, and the yield on the security paid to such Fund and its shareholders
would be reduced by the amount of taxes paid. Furthermore, amounts paid by the
trust or custodial account to a Fund would lose their tax exempt character and
become taxable, for federal and state purposes, in the hands of the Fund and its
shareholders. However, each Fund will only invest in custodial receipts which
are accompanied by a tax opinion stating that interest payable on the receipts
is tax exempt. If a Fund invests in custodial receipts, it is possible that a
portion of the discount at which the Fund purchases the receipts might have to
be accrued as taxable income during the period that the Fund holds the receipts.
The principal and interest payments on the Tax-Exempt Obligations
underlying custodial receipts or trust certificates may be allocated in a number
of ways. For example, payments may be allocated such that certain custodial
receipts or trust certificates may have variable or floating interest rates and
others may be stripped securities which pay only the principal or interest due
on the underlying Tax-Exempt Obligations. The Funds may also invest in custodial
receipts or trust certificates which are "inverse floating obligations" (also
sometimes referred to as "residual interest bonds"). These securities pay
interest rates that vary inversely to changes in the interest rates of specified
short-term Tax-Exempt Obligations or an index of short-term Tax-Exempt
Obligations. Thus, as market interest rates increase, the interest rates on
inverse floating obligations decrease. Conversely, as market rates decline, the
interest rates on inverse floating obligations increase. Such securities have
the effect of providing a degree of investment leverage, since the interest
rates on such securities will generally change at a rate which is a multiple of
the change in the interest rates of the specified Tax-Exempt Obligations or
index. As a result, the market values of inverse floating obligations will
generally be more volatile than the market values of other Tax-Exempt
Obligations and investments in these types of obligations will increase the
volatility of the net asset value of shares of the Funds.
Investments in Derivative Tax Exempt Obligations, when combined with
investments in below investment grade rated securities, will not exceed 20% of
each Fund's total assets. For a discussion of certain risks involved in
investments in Derivative Tax Exempt Obligations, see "Risks and Special
Investment Considerations--General."
MISCELLANEOUS INVESTMENT PRACTICES
FORWARD COMMITMENTS
New issues of Tax Exempt Obligations and other securities are often purchased on
a "when issued" or delayed delivery basis, with delivery and payment for the
securities normally taking place 15 to 45 days after the date of the
transaction. The payment obligation and the interest rate that will be received
on the securities are each fixed at the time the buyer enters into the
commitment. Each Fund may enter into such "forward commitments" if it holds and
maintains, until the settlement date in a segregated account, cash or high-grade
liquid debt obligations in an amount sufficient to meet the purchase price.
There is no percentage limitation on each Fund's total assets which may be
invested in forward commitments. Tax Exempt Obligations purchased on a
when-issued basis and the securities held in a Fund's portfolio are subject to
changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Tax Exempt Obligations
purchased on a when-issued basis may expose a Fund to risk because they may
experience such fluctuations prior to their actual delivery. Purchasing Tax
Exempt Obligations on a when-issued basis can involve the additional risk that
the yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. Any significant commitment
by a Fund to the purchase of securities on a when-issued basis may increase the
volatility of the Fund's net asset value. Although each Fund will generally
enter into forward commitments with the intention of acquiring securities for
its portfolio, it may dispose of a commitment prior to settlement if the Fund's
investment manager deems it appropriate to do so. The Funds may realize
short-term profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to not more than 10%
of its total assets (taken at current value), except when investing for
defensive purposes during times of adverse market conditions. Each Fund may
enter into repurchase agreements with respect to any securities which it may
acquire consistent with its investment policies and restrictions.
A repurchase agreement involves the purchase by a Fund of securities
with the condition that, after a stated period of time, the original seller (a
member bank of the Federal Reserve System or a recognized securities dealer)
will buy back the same securities ("collateral") at a predetermined price or
yield. Repurchase agreements involve certain risks not associated with direct
investments in securities. In the event the original seller defaults on its
obligation to repurchase, as a result of its bankruptcy or otherwise, the Fund
will seek to sell the collateral, which action could involve costs or delays. In
such case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Fund could suffer a
loss. See "Investment Policies and Restrictions--Taxable Obligations" in the
Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS
Certain Funds (Arizona Limited Term Tax Free Fund, Arizona Tax Free Fund,
California Limited Term Tax Free Fund, California Tax Free Fund, Colorado
Limited Term Tax Free Fund, Colorado Insured Tax Free Fund, Florida Limited Term
Tax Free Fund, Florida Tax Free Fund, Idaho Tax Free Fund, New York Tax Free
Fund, National Limited Term Tax Free Fund and National Tax Free Fund) may engage
in "reverse repurchase agreements" with banks and securities dealers with
respect to not more than 10% of its total assets. Reverse repurchase agreements
are ordinary repurchase agreements in which the Fund is the seller of, rather
than the investor in, securities and agrees to repurchase them at an agreed upon
time and price. Use of a reverse repurchase agreement may be preferable to a
regular sale and later repurchase of the securities because it avoids certain
market risks and transaction costs. Because certain of the incidents of
ownership of the security are retained by the Fund, reverse repurchase
agreements are considered a form of borrowing by the Fund from the buyer,
collateralized by the security. At the time a Fund enters into a reverse
repurchase agreement, cash, U. S. Government securities or other liquid debt
obligations having a value sufficient to make payments for the securities to be
repurchased will be segregated, and will be marked to market daily and
maintained throughout the period of the obligation. Reverse repurchase
agreements may be used as a means of borrowing for investment purposes subject
to the 10% limitation set forth above. This speculative technique is referred to
as leveraging. Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs which may or may not be
recovered by income from or appreciation of the securities purchased. Because
the Funds do not currently intend to utilize reverse repurchase agreements in
excess of 10% of total assets, the Funds believe the risks of leveraging due to
use of reverse repurchase agreements to principal are reduced. Voyageur believes
that the limited use of leverage may facilitate the Fund's ability to provide
current income without adversely affecting the Fund's ability to preserve
capital.
OPTIONS AND FUTURES
Each Fund may utilize put and call transactions and certain Funds (see "Futures
Contracts and Options on Futures Contracts" below) may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See "Investment Policies and Restrictions--Options and Futures Transactions" in
the Statement of Additional Information. Options and futures may be used to
attempt to protect against possible declines in the market value of a Fund's
portfolio resulting from downward trends in the debt securities markets
(generally due to a rise in interest rates), to protect a Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of a Fund's portfolio or to establish a position in the securities markets as a
temporary substitute for purchasing particular securities. The use of options
and futures is a function of market conditions. Other transactions may be used
by the Funds in the future for hedging purposes as they are developed to the
extent deemed appropriate by the Board.
OPTIONS ON SECURITIES
Each Fund may write (i.e., sell) covered put and call options and purchase put
and call options on the securities in which it may invest and on indices of
securities in which it may invest, to the extent such put and call options are
available.
A put option gives the buyer of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the purchaser of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price.
In purchasing a call option, a Fund would be in a position to realize a
gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the period
by more than the amount of the premium. In purchasing a put option, a Fund would
be in a position to realize a gain if, during the option period, the price of
the security declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained the same or
did not decrease during that period by more than the amount of the premium. If a
put or call option purchased by a Fund were permitted to expire without being
sold or exercised, its premium would be lost by the Fund.
If a put option written by a Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by a Fund were exercised, the Fund would be obligated to sell the
underlying security at the exercise price. The risk involved in writing a put
option is that there could be a decrease in the market value of the underlying
security caused by rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then be sold to the
Fund at a higher price than its current market value. The risk involved in
writing a call option is that there could be an increase in the market value of
the underlying security caused by declining interest rates or other factors. If
this occurred, the option could be exercised and the underlying security would
then be sold by the Fund at a lower price than its current market value. These
risks could be reduced by entering into a closing transaction as described in
Appendix B to the Statement of Additional Information. The Fund retains the
premium received from writing a put or call option whether or not the option is
exercised.
Over-the-counter options are purchased or written by a Fund in
privately negotiated transactions. Such options are illiquid, and it may not be
possible for a Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when Voyageur believes it
would be advantageous to do so. Over the counter options are subject to each
Fund's 15% illiquid investment limitation. See Appendix B to the Statement of
Additional Information for a further discussion of the general characteristics
and risks of options.
Participation in the options market involves investment risks and
transaction costs to which the Funds would not be subject absent the use of this
strategy. If Voyageur's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include (a) dependence on Voyageur's
ability to predict correctly movements in the direction of interest rates and
securities prices; (b) imperfect correlation between the price of options and
movements in the prices of the securities being hedged; (c) the fact that the
skills needed to use these strategies are different from those needed to select
portfolio securities; (d) the possible absence of a liquid secondary market for
any particular instrument at any time; and (e) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences. See
"Investment Policies and Restrictions-- Risks of Transactions in Futures
Contracts and Options" in the Statement of Additional Information for further
discussion and see Appendix B for a discussion of closing transactions and other
risks.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Certain Funds (Arizona Limited Term Tax Free Fund, Arizona Tax Free Fund,
California Limited Term Tax Free Fund, California Tax Free Fund, Colorado
Limited Term Tax Free Fund, Colorado Insured Tax Free Fund, Florida Limited Term
Tax Free Fund, Florida Tax Free Fund, Idaho Tax Free Fund, New York Tax Free
Fund, National Limited Term Tax Free Fund and National Tax Free Fund) may enter
into contracts for the purchase or sale for future delivery of fixed income
securities or contracts based on financial indices including any index of
securities in which the Fund may invest ("futures contracts") and may purchase
and write put and call options to buy or sell futures contracts ("options on
futures contracts"). A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. The purchaser of a futures contract on an
index agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of the index on the
expiration date of the contract ("current contract value") and the price at
which the contract was originally struck. Options on futures contracts to be
written or purchased by the Fund will be traded on exchanges or over the
counter. The successful use of such instruments draws upon Voyageur's experience
with respect to such instruments and usually depends upon Voyageur's ability to
forecast interest rate movements correctly. Should interest rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses and would thus
be in a worse position than if such strategies had not been used. In addition,
the correlation between movements in the price of futures contracts or options
on futures contracts and movements in the prices of the securities hedged or
used for cover will not be perfect.
A Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements. To the extent required to
comply with applicable Securities and Exchange Commission releases and staff
positions, when purchasing a futures contract or writing a put option, the Fund
will maintain in a segregated account cash, U. S. Government securities or other
liquid high grade debt securities equal to the value of such contracts, less any
margin on deposit. In addition, the rules and regulations of the Commodity
Futures Trading Commission currently require that, in order to avoid "commodity
pool operator" status, the Fund must use futures and options positions (a) for
"bona fide hedging purposes" (as defined in the regulations) or (b) for other
purposes so long as aggregate initial margins and premiums required in
connection with non hedging positions do not exceed 5% of the liquidation value
of the Fund's portfolio. There are no other numerical limits on a Fund's use of
futures contracts and options on futures contracts. For a discussion of the tax
treatment of futures contracts and options on futures contracts, see "Taxes" in
the Statement of Additional Information. For a further discussion of the general
characteristics and risks of futures, see Appendix B to the Statement of
Additional Information.
CONCENTRATION POLICY
As a fundamental policy, no Fund will invest 25% or more of its total assets in
the securities of any industry, although for purposes of this limitation,
tax-exempt securities and U.S. government obligations are not considered to be
part of any industry. Each Fund may invest 25% or more of its total assets in
industrial development revenue bonds. In addition, it is possible that the Funds
from time to time will invest 25% or more of their total assets in a particular
segment of the municipal bond market such as in housing, health care, and/or
utility obligations. In addition, Arizona Limited Term Tax Free Fund, Arizona
Tax Free Fund, California Limited Term Tax Free Fund, California Tax Free Fund,
Colorado Limited Term Tax Free Fund, Colorado Insured Tax Free Fund, Florida
Limited Term Tax Free Fund, Florida Tax Free Fund, Idaho Tax Free Fund, New York
Tax Free Fund, National Limited Term Tax Free Fund and National Tax Free Fund
may invest in transportation, education and/or industrial obligations. In such
circumstances, economic, business, political and other changes affecting one
bond might also affect other bonds in the same segment, thereby potentially
increasing market or credit risk. For a discussion of these segments of the
municipal bond market, see "Investment Policies and Restrictions-- Concentration
Policy" in the Statement of Additional Information.
Each Fund's Board may change any of the foregoing policies that are not
specifically designated fundamental.
RISKS AND SPECIAL INVESTMENT CONSIDERATIONS
- --------------------------------------------------------------------------------
GENERAL
The yields on Tax Exempt Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and monetary
conditions, conditions in the relevant market, the size of a particular issue,
maturity of the obligation and the rating of the issue. Generally, the value of
Tax Exempt Obligations will tend to fall as interest rates rise and will tend to
increase as interest rates decrease. In addition, Tax Exempt Obligations of
longer maturity produce higher current yields than Tax Exempt Obligations with
shorter maturities but are subject to greater price fluctuation due to changes
in interest rates, tax laws and other general market factors. Lower-rated Tax
Exempt Obligations generally produce a higher yield than higher-rated Tax Exempt
Obligations due to the perception of a greater degree of risk as to the payment
of principal and interest. Certain Tax Exempt Obligations held by a Fund may
permit the issuer at its option to "call," or redeem, its securities. If an
issuer were to redeem securities held by a Fund during a time of declining
interest rates, the Fund may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
In normal circumstances, each Fund (except for the Insured Funds) may
invest up to 20% of its total assets in Tax Exempt Obligations rated below
investment grade (but not rated lower than B by S&P or Moody's) or in unrated
Tax Exempt Obligations considered by Voyageur to be of comparable quality to
such securities. Investment in such lower grade Tax Exempt Obligations involves
special risks as compared with investment in higher grade Tax Exempt
Obligations. The market for lower grade Tax Exempt Obligations is considered to
be less liquid than the market for investment grade Tax Exempt Obligations,
which may adversely affect the ability of a Fund to dispose of such securities
in a timely manner at a price which reflects the value of such securities in
Voyageur's judgment. The market price for less liquid securities tends to be
more volatile than the market price for more liquid securities. The lower
liquidity of and the absence of readily available market quotations for lower
grade Tax Exempt Obligations may make Voyageur's valuation of such securities
more difficult, and Voyageur's judgment may play a greater role in the valuation
of the Fund's lower grade Tax Exempt Obligations. Periods of economic
uncertainty and changes may have a greater impact on the market price of such
bonds and, therefore, the net asset value of any Fund investing in such
obligations.
Lower grade Tax Exempt Obligations generally involve greater credit
risk than higher grade Tax Exempt Obligations and are more sensitive to adverse
economic changes, significant increases in interest rates and individual issuer
developments. Because issuers of lower grade Tax Exempt Obligations frequently
choose not to seek a rating of such securities, a Fund will rely more heavily on
Voyageur's ability to determine the relative investment quality of such
securities than if such Fund invested exclusively in higher grade Tax Exempt
Obligations. A Fund may, if deemed appropriate by Voyageur, retain a security
whose rating has been downgraded below B by S & P or Moody's, or whose rating
has been withdrawn. In no event, however, will more than 5% of each Fund's total
assets consist of securities that have been downgraded to a rating lower than
the minimum rating in which each Fund is permitted to invest or, in the case of
unrated securities, that have been determined by Voyageur to be of a quality
lower than such minimum rating. Additional information concerning the risks
associated with instruments in lower grade Tax Exempt Obligations is included in
the Fund's Statement of Additional Information.
The principal and interest payments on the Derivative Tax Exempt
Obligations underlying custodial receipts may be allocated in a number of ways.
For example, payments may be allocated such that certain custodial receipts may
have variable or floating interest rates and others may be stripped securities
which pay only the principal or interest due on the underlying Tax Exempt
Obligations. The Funds may also invest in custodial receipts which are "inverse
floating obligations" (also sometimes referred to as "residual interest bonds").
These securities pay interest rates that vary inversely to changes in the
interest rates of specified short term Tax Exempt Obligations or an index of
short term Tax Exempt Obligations. Thus, as market interest rates increase, the
interest rates on inverse floating obligations decrease. Conversely, as market
rates decline, the interest rates on inverse floating obligations increase. Such
securities have the effect of providing a degree of investment leverage, since
the interest rates on such securities will generally change at a rate which is a
multiple of the change in the interest rates of the specified Tax Exempt
Obligations or index. As a result, the market values of inverse floating
obligations will generally be more volatile than the market values of other Tax
Exempt Obligations and investments in these types of obligations will increase
the volatility of the net asset value of shares of the Funds.
STATE CONSIDERATIONS
The value of Tax Exempt Obligations owned by the Funds may be adversely affected
by local political and economic conditions and developments within a particular
state. Adverse conditions in an industry significant to a local economy could
have a correspondingly adverse effect on the financial condition of local
issuers. Other factors that could affect Tax Exempt Obligations include a change
in the local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example, legislation or court decisions reducing state aid to local
governments or mandatory additional services). A summary description of certain
factors affecting and statistics describing issuers of Tax Exempt Obligations of
each applicable state is set forth below. Such information has been taken from
publicly available offering documents relating to the relevant state or issuers
located in such state. No Fund or Voyageur has independently verified this
information and no Fund or Voyageur makes any representation regarding such
information. See "Special Factors Affecting the Funds" in the Statement of
Additional Information.
ARIZONA'S primary economic sectors include services, trade, tourism and
manufacturing. Arizona maintained a general fund surplus of $399.9 million (on
general fund revenues of approximately $4.663 billion) for its 1996 fiscal year.
Currently there are no general obligation ratings for the state. CALIFORNIA'S
primary economic sectors are agriculture, services, trade and manufacturing. In
1994, Orange County, California filed a voluntary petition under the bankruptcy
code. Moody's and Standard & Poor's suspended, reduced to below investment grade
levels, or placed on "Credit Watch" various securities of the County and the
entities participating in the pooled investment fund. California projects a
general fund surplus of $648 million for its 1996-97 fiscal year (on estimated
revenues of approximately $48.4 billion). Currently, California's general
obligation bonds are rated A1 by Moody's, A by S&P and "A+" by Fitch Investors
Service, Inc. ("Fitch"). COLORADO'S economy is based primarily on services.
Colorado maintained a generally balanced budget for its 1996 fiscal year (on
general fund revenues of approximately $4.269 billion). Currently there are no
general obligation ratings for Colorado. FLORIDA'S economy is based primarily on
the services sector and tourism in particular. Florida projected unencumbered
reserves of $610.1 million for its 1996-1997 fiscal year (on estimated revenues
of approximately $15.567 billion). Currently, Florida's general obligation bonds
are rated Aa by Moody's and AA by S&P. IDAHO'S primary economic sectors are
services, agriculture, manufacturing and mining. Idaho maintained a fiscal year
1996 general fund surplus of approximately $11.7 million (on revenues of
approximately $1.351 billion). Currently there are no general obligation ratings
for Idaho. IOWA'S primary economic sectors are services, manufacturing and
agriculture. Iowa maintained an unreserved fund balance of approximately $201.6
million (on revenues of approximately $4.405 billion) for its fiscal year 1996.
Currently there are no general obligation ratings for Iowa. KANSAS' economy is
based primarily on agriculture, manufacturing, and services. Kansas projected a
positive general fund balance for its 1997 fiscal year (on estimated general
fund revenues of approximately $3.527 billion). Currently there are no general
obligation ratings for Kansas. MINNESOTA'S economy is based primarily on
agriculture, manufacturing and services. Minnesota projects a balanced general
fund at the end of its 1997 biennium of $502.4 million (based on estimated
General Fund revenues of $19.1 billion). Currently Minnesota's general
obligation bonds are rated Aaa by Moody's, AA+ by S&P and AAA by Fitch.
MISSOURI'S primary economic sectors are services, manufacturing and agriculture.
Missouri had a general fund surplus of $335.4 million for its 1996 fiscal year
(on revenues of approximately $5.442 billion). Currently Missouri's general
obligation bonds are rated Aaa by Moody's, AAA by S&P and AAA by Fitch. NEW
MEXICO'S economy is based primarily on agriculture but also has tourism,
services and mining sectors. New Mexico projected a $144 million general fund
surplus for its 1996 fiscal year (on estimated revenues of approximately $2.757
billion). Currently New Mexico's general obligation bonds are rated Aa1 by
Moody's and AA+ by S&P. NEW YORK'S economy is based primarily on services and
tourism. New York projects a general fund balance of $358 million for its 1997
fiscal year, and a projected surplus of $1.3 billion for its 1996-97 General
Fund Financial Plan (based on total estimated revenues of $32.966 billion). The
City's 1996-99 Financial Plan successfully implemented a $3.1 billion
gap-closing program for the 1996 fiscal year. Currently, New York's general
obligation bonds are rated A by Moody's and A- by S&P. The City's general
obligation bonds are rated Baa1 by Moody's and A- by S&P. NORTH DAKOTA'S economy
is based primarily on agriculture and services. North Dakota projects a positive
fund balance for its 1997 biennium of $63 million (on revenues of approximately
$1.37 billion). Currently North Dakota's general obligation bonds are rated Aa
by Moody's and AA- by S&P. OREGON'S economy is based primarily on forestry,
agriculture, manufacturing and tourism sectors. Oregon expects to maintain a
general fund surplus of approximately $536.3 million for its 1997 biennium (on
estimated revenue of approximately $7.399 billion). Currently Oregon's general
obligation bonds are rated Aa by Moody's and AA by S&P. UTAH'S economy is based
primarily on services, agriculture and mining sectors. Utah maintained a general
and Uniform School fund surplus of approximately $9.1 million for its 1996
fiscal year (on estimated revenues of approximately $2.67 billion). Currently
Utah's general obligation bonds are rated Aaa by Moody's, AAA by S&P and AAA by
Fitch. WASHINGTON'S economy is based primarily on manufacturing and service
sectors as well as agriculture and timber production. Washington projected a
positive general fund surplus for its 1995-1997 biennium (on estimated revenues
of approximately $18.3 billion). Currently Washington's general obligation bonds
are rated Aa by Moody's and AA by S&P. WISCONSIN'S economy is based primarily on
agriculture, services and manufacturing. Wisconsin maintained a general fund
balance of $442 million for its 1996 fiscal year (on estimated revenues of
approximately $20.686 billion). Currently Wisconsin's general obligation bonds
are rated Aa by Moody's and AA by S&P.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
Each Fund has adopted certain investment restrictions in addition to those set
forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the restriction providing
that no Fund may borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% of the value of its total assets (10%
for Colorado Tax Free Fund) (certain Funds may also borrow money in the form of
reverse repurchase agreements up to 10% of total assets). Also, certain Funds
may not, as a matter of fundamental policy invest more than 15% of their net
assets in illiquid securities and pledge, hypothecate, mortgage or otherwise
encumber their assets in excess of 10% of net assets. See "Investment Policies
and Restrictions--Investment Restrictions" in the Statement of Additional
Information. Each Fund also has a number of non-fundamental investment
restrictions which may be changed by the Fund's Board without the shareholder
approval. These include restrictions providing that no Fund may (a) invest more
than 5% of its total assets in securities of any single investment company or
(b) invest more than 10% of its total assets in securities of two or more
investment companies. To the extent that a Fund invests in the securities of
other open-end investment companies, Voyageur will take appropriate action to
avoid subjecting such Fund's shareholders to duplicate management and other fees
and expenses.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
ALTERNATIVE PURCHASE ARRANGEMENTS
The Funds offer investors the choice among three classes of shares which offer
different sales charges and bear different expenses. These alternatives permit
an investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. Page 2 of the Prospectus contains a
summary of these alternative purchase arrangements.
A broker-dealer may receive different levels of compensation depending
on which class of shares is sold. In addition, the Underwriter from time to time
pays certain additional cash incentives of up to $100 and/or non cash incentives
such as vacations or merchandise to its investment executives and other
broker-dealers and financial institutions in consideration of their sales of
Fund shares. In some instances, the Underwriter pays amounts not to exceed 1.25%
of a Fund's net assets (such as payments related to retention of shares sold by
a particular broker-dealer or financial institution for a specified period of
time), to broker-dealers and financial institutions who meet certain objective
standards developed by the Underwriter.
GENERAL PURCHASE INFORMATION
The minimum initial investment in each Fund is $1,000, and the minimum
additional investment is $100. Each Fund's shares may be purchased at the public
offering price from the Underwriter, from other broker-dealers who are members
of the National Association of Securities Dealers, Inc. and who have selling
agreements with the Underwriter, and from certain financial institutions that
have selling agreements with the Underwriter.
When orders are placed for shares of a Fund, the public offering price
used for the purchase will be the net asset value per share next determined,
plus the applicable sales charge, if any. If an order is placed with the
Underwriter or other broker-dealer, the broker-dealer is responsible for
promptly transmitting the order to the Fund. The Fund reserves the right, in its
absolute discretion, to reject any order for the purchase of shares.
Shares of the Funds may be purchased by opening an account either by
mail or by phone. Dividend income begins to accrue as of the opening of the New
York Stock Exchange (the "Exchange") on the day that payment is received. If
payment is made by check, payment is considered received on the day the check is
received if the check is drawn upon a member bank of the Federal Reserve System
within the Ninth Federal Reserve District (Michigan's Upper Peninsula,
Minnesota, Montana, North Dakota, South Dakota and northwestern Wisconsin). In
the case of other checks, payment is considered received when the check is
converted into "Federal Funds," i.e., monies of member banks within the Federal
Reserve System that are on deposit at a Federal Reserve Bank, normally within
two days after receipt.
An investor who may be interested in having shares redeemed shortly
after purchase should consider making unconditional payment by certified check
or other means approved in advance by the Underwriter. Payment of redemption
proceeds will be delayed as long as necessary to verify by expeditious means
that the purchase payment has been or will be collected. Such period of time
typically will not exceed 15 days.
AUTOMATIC INVESTMENT PLAN
Investors may make systematic investments in fixed amounts automatically on a
monthly basis through each Fund's Automatic Investment Plan. Additional
information is available from the Underwriter by calling 800-545-3863.
PURCHASES BY MAIL
To open an account by mail, complete the general authorization form attached to
this Prospectus, designate an investment dealer or other financial institution
on the form, and mail it, along with a check payable to the applicable Fund, to:
NW 9369
P.O. BOX 1450
MINNEAPOLIS, MN 55485-9369
PURCHASES BY TELEPHONE
To open an account by telephone, call 612-376-7014 or 800-545-3863 to obtain an
account number and instructions. Information concerning the account will be
taken over the phone. The investor must then request a commercial bank with
which he or she has an account and which is a member of the Federal Reserve
System to transmit Federal Funds by wire to the appropriate Fund as follows:
NORWEST BANK MINNESOTA, N.A., ABA #091000019
FOR CREDIT OF: (INSERT APPLICABLE FUND NAME)
CHECKING ACCOUNT NO.: 872-458
ACCOUNT NUMBER: (ASSIGNED BY TELEPHONE)
Information on how to transmit Federal Funds by wire is available at
any national bank or any state bank that is a member of the Federal Reserve
System. The bank may charge the shareholder for the wire transfer. If the phone
order and Federal Funds are received before the close of trading on the
Exchange, the order will be deemed to become effective at that time. Otherwise,
the order will be deemed to become effective as of the close of trading on the
Exchange on the next day the Exchange is open for trading. The investor will be
required to complete the general authorization form attached to this Prospectus
and mail it to the Fund after making the initial telephone purchase.
CLASS A SHARES--FRONT END SALES CHARGE ALTERNATIVE
The public offering price of Class A shares of each Fund is the net asset value
of the Fund's shares plus the applicable front end sales charge ("FESC"), which
will vary with the size of the purchase. The Fund receives the net asset value.
The FESC varies depending on the size of the purchase and is allocated between
the Underwriter and other broker-dealers.
The current sales charges are:
GROUP 1* FUNDS
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER DISCOUNT
AS % OF AS % OF AS % OF
AMOUNT OF PURCHASE NET ASSET VALUE OFFERING PRICE OFFERING PRICE(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.90% 3.75% 3.25%
$50,000 but less than $100,000 3.63 3.50 3.00
$100,000 but less than $250,000 2.83 2.75 2.50
$250,000 but less than $500,000 2.04 2.00 1.75
$500,000 but less than $1,000,000 1.78 1.75 1.75
$1,000,000 or more NAV(3) NAV(3) 1.00(2)
- -----------------------------------------------------------------------------------------------
</TABLE>
GROUP 2** FUNDS
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER DISCOUNT
AS % OF AS % OF AS % OF
AMOUNT OF PURCHASE NET ASSET VALUE OFFERING PRICE OFFERING PRICE(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 2.83% 2.75% 2.25%
$50,000 but less than $100,000 2.56 2.50 2.00
$100,000 but less than $250,000 1.78 1.75 1.50
$250,000 but less than $500,000 1.01 1.00 0.75
$500,000 but less than $1,000,000 0.76 0.75 0.75
$1,000,000 or more NAV(3) NAV(3) 0.50(2)
- -------------------------------------------------------------------------------------------
</TABLE>
1 Brokers and dealers who receive 90% or more of the sales charge may be
considered to be underwriters under the Securities Act of 1933, as
amended.
2 The Underwriter intends to pay its investment executives and other
broker-dealers and banks that sell Fund shares, out of its own assets, a
fee of 1% (.50% for Group 2 Funds) of the offering price of sales of
$1,000,000 or more, other than on sales not subject to a contingent
deferred sales charge.
3 Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge at the time of redemption. See "How to Sell
Shares--Contingent Deferred Sales Charge."
* Group 1 Funds: Arizona Tax Free, Arizona Insured Tax Free, California Tax
Free, California Insured Tax Free, Florida Tax Free, Florida Insured Tax
Free, Missouri Insured Tax Free, National Tax Free, National Insured Tax
Free, New York Tax Free Fund, Oregon Insured Tax Free, Washington Insured
Tax Free, Kansas Tax Free, Minnesota Tax Free, Minnesota Insured, North
Dakota Tax Free, Colorado Tax Free, Colorado Insured Tax Free, Iowa Tax
Free, New Mexico Tax Free, Utah Tax Free, Wisconsin Tax Free and Idaho
Tax Free.
** Group 2 Funds: Arizona Limited Term Tax Free, Colorado Limited Term Tax
Free, California Limited Term Tax Free, National Limited Term Tax Free,
Minnesota Limited Term Tax Free and Florida Limited Term Tax Free.
In connection with the distribution of the Funds' Class A shares, the
Underwriter is deemed to receive all applicable sales charges. The Underwriter,
in turn, pays its investment executives and other broker-dealers selling such
shares a "dealer discount," as set forth above. In the event that shares are
purchased by a financial institution acting as agent for its customers, the
Underwriter or the broker-dealer with whom such order was placed may pay all or
part of its dealer discount to such financial institution in accordance with
agreements between such parties.
SPECIAL PURCHASE PLANS--REDUCED SALES CHARGES
Certain investors (or groups of investors) may qualify for reductions in the
sales charges shown above. Investors should contact their broker-dealer or the
Funds for details about the Funds' Combined Purchase Privilege, Cumulative
Quantity Discount and Letter of Intention plans. Descriptions are also included
with the general authorization form and in the Statement of Additional
Information. These special purchase plans may be amended or eliminated at any
time by the Underwriter without notice to existing Fund shareholders.
RULE 12b-1 FEES
Class A shares are subject to a Rule 12b-1 fee payable at an annual rate of .25%
of the average daily net assets of a Fund attributable to Class A shares. All or
a portion of such fees are paid quarterly to financial institutions and service
providers with respect to the average daily net assets attributable to shares
sold or serviced by such institutions and service providers. For additional
information about this fee, see "Management--Plan of Distribution" below.
CONTINGENT DEFERRED SALES CHARGE
Although there is no initial sales charge on purchases of Class A shares of
$1,000,000 or more, the Underwriter pays investment dealers out of its own
assets, a fee of 1% (.50% for Group 2 Funds) of the offering price of such
shares. If these shares are redeemed within two years after purchase (one year
for Group 2 Funds), the redemption proceeds will be reduced by a contingent
deferred sales charge ("CDSC") of 1%. For additional information, see "How to
Sell Shares-- Contingent Deferred Sales Charge."
WAIVER OF SALES CHARGES
A limited group of institutional and other investors may qualify to purchase
Class A shares at net asset value, with no front end or deferred sales charges.
The investors qualifying to purchase such shares are: (a) officers and directors
of the Funds; (b) officers, directors and full-time employees of Dougherty
Financial Group, Inc. and Pohlad Companies, and officers, directors and
full-time employees of parents and subsidiaries of the foregoing companies; (c)
officers, directors and full-time employees of investment advisers of other
mutual funds subject to a sales charge and included in any other family of
mutual funds that includes any Voyageur Fund as a member ("Other Load Funds"),
and officers, directors and full-time employees of parents, subsidiaries and
corporate affiliates of such investment advisers; (d) spouses and lineal
ancestors and descendants of the officers, directors/trustees and employees
referenced in clauses (a), (b) and (c), and lineal ancestors and descendants of
their spouses; (e) investment executives and other employees of banks and
dealers that have selling agreements with the Underwriter and parents, spouses
and children under the age of 21 of such investment executives and other
employees; (f) trust companies and bank trust departments for funds held in a
fiduciary, agency, advisory, custodial or similar capacity; (g) any state or any
political subdivision thereof or any instrumentality, department, authority or
agency of any state or political subdivision thereof; (h) partners and full-time
employees of the Funds' counsel; (i) managed account clients of Voyageur,
clients of investment advisers affiliated with Voyageur and other registered
investment advisers and their clients (the Funds may be available through a
broker-dealer which charges a transaction fee for purchases and sales) and (j)
"wrap accounts" for the benefit of clients of financial planners adhering to
certain standards established by Voyageur.
Class A shares will also be issued at net asset value, without a front
end or deferred sales charge, if the purchase of such shares is funded by the
proceeds from the redemption of shares of any unrelated open-end investment
company that charges a front end sales charge, and, in certain circumstances, a
contingent deferred sales charge. In order to exercise this privilege, the
purchase order must be received by the Fund within 60 days after the redemption
of shares of the unrelated investment company.
CLASS B SHARES--CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE
The public offering price of Class B shares of each Fund is the net asset value
of the Fund's shares. Class B shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC of up to 5% will be imposed if shares are redeemed within six years of
purchase. For additional information, see "How to Sell Shares--Contingent
Deferred Sales Charge." In addition, Class B shares are subject to higher Rule
12b-1 fees as described below. The CDSC will depend on the number of years since
the purchase was made according to the following table:
CDSC AS A % OF AMOUNT REDEEMED*
<TABLE>
<CAPTION>
GROUPS 1 FUNDS Group 2 Funds
CDSC Period CDSC CDSC Period CDSC
- ------------------------------------------------ --------------------------------------------
<C> <C> <C> <C>
1st year after purchase 5% 1st year after purchase 4%
2nd year after purchase 4 2nd year after purchase 3
3rd year after purchase 4 3rd year after purchase 3
4th year after purchase 3 4th year after purchase 2
5th year after purchase 2 5th year after purchase 1
6th year after purchase 1 Thereafter 0
Thereafter 0
- -----------------------------------------------------------------------------------------------
</TABLE>
* The CDSC will be calculated on an amount equal to the lesser of the net
asset value of the shares at the time of purchase or the net asset value at
the time of redemption.
Proceeds from the CDSC are paid to the Underwriter and are used to
defray expenses of the Underwriter related to providing distribution-related
services to the Funds in connection with the sale of Class B shares, such as the
payment of compensation to selected broker dealers, and for selling Class B
shares. The combination of the CDSC and the Rule 12b-1 fee enables the Funds to
sell the Class B shares without deduction of a sales charge at the time of
purchase. Although Class B shares are sold without an initial sales charge at
the time the shares are sold, the Underwriter pays to brokers who sell Class B
shares a sales commission equal to 4% (3% for Group 2) of the amount invested
and pays an ongoing annual servicing fee of .15% (paid quarterly) calculated on
the net assets attributable to sales made by such broker-dealers.
RULE 12b-1 FEES
Class B shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of a Fund attributable to Class B shares. The
higher 12b-1 fee will cause Class B shares to have a higher expense ratio and to
pay lower dividends than Class A shares. For additional information about this
fee, see "Fees and Expenses" above and "Management--Plan of Distribution" below.
CONVERSION FEATURE
On the first business day of the month eight years after the purchase date,
Class B shares will automatically convert to Class A shares and will no longer
be subject to a higher Rule 12b-1 fee. Such conversion will be on the basis of
the relative net asset values of the two classes. Class A shares issued upon
such conversion will not be subject to any FESC or CDSC. Class B shares acquired
by exchange from Class B shares of another Voyageur Fund will convert into Class
A shares based on the time of the initial purchase. Similarly, Class B shares
acquired by exercise of the Reinstatement Privilege will convert into Class A
shares based on the time of the original purchase of Class B shares. See
"Reinstatement Privilege" below. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date of issuance of
such shares.
CLASS C SHARES--LEVEL LOAD ALTERNATIVE
The public offering price of Class C shares of each Fund is the net asset value
of the Fund's shares. Class C shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC of 1% (.50% for Group 2 Funds) will be imposed if shares are redeemed
within one year of purchase. For additional information see "How to Sell
Shares-- Contingent Deferred Sales Charge." In addition, Class C shares are
subject to higher annual Rule 12b-1 fees as described below.
RULE 12b-1 FEES
Class C shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of a Fund attributable to Class C shares. The
higher Rule 12b-1 fee will cause Class C shares to have a higher expense ratio
and to pay lower dividends than Class A shares. For additional information about
this fee, see "Fees and Expenses" and "Management--Plan of Distribution."
Proceeds from the CDSC are paid to the Underwriter and are used to
defray expenses of the Underwriter related to providing distribution-related
services to the Funds in connection with the sale of Class C shares, such as the
payment of compensation to selected broker-dealers and for selling Class C
shares. The combination of the CDSC and the Rule 12b-1 fee enables the Funds to
sell the Class C shares without deduction of a sales charge at the time of
purchase. Although Class C shares are sold without an initial sales charge, the
Underwriter pays to brokers who sell Class C shares a sales commission equal to
1% of the amount invested and an ongoing annual fee of .90% (paid quarterly
commencing in the thirteenth month after the sale of such shares) calculated on
the net assets attributable to sales made by such broker-dealers.
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Each Fund will redeem its shares in cash at the net asset value next determined
after receipt of a shareholder's written request for redemption in good order
(see below). If shares for which payment has been collected are redeemed,
payment must be made within seven days. Shareholders will not earn any income on
redeemed shares on the redemption date. Each Fund may suspend this right of
redemption and may postpone payment only when the Exchange is closed for other
than customary weekends or holidays, or if permitted by the rules of the
Securities and Exchange Commission during periods when trading on the Exchange
is restricted or during any emergency which makes it impracticable for such Fund
to dispose of its securities or to determine fairly the value of its net assets
or during any other period permitted by order of the Commission for the
protection of investors.
Each Fund reserves the right and currently plans to redeem Fund shares
and mail the proceeds to the shareholder if at any time the value of Fund shares
in the account falls below a specified value, currently set at $250.
Shareholders will be notified and will have 60 days to bring the account up to
the required value before any redemption action will be taken by a Fund.
CONTINGENT DEFERRED SALES CHARGE
The CDSC will be calculated on an amount equal to the lesser of the net asset
value of the shares at the time of purchase or their net asset value at the time
of redemption. No charge will be imposed on increases in net asset value above
the initial purchase price. In addition, no charge will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
In determining whether a CDSC is payable with respect to any
redemption, the calculation will be determined in the manner that results in the
lowest rate being charged. Therefore, it will be assumed that shares that are
not subject to the CDSC are redeemed first, shares subject to the lowest level
of CDSC are redeemed next, and so forth. If a shareholder owns Class A and
either Class B or Class C shares, then absent a shareholder choice to the
contrary, Class B or Class C shares not subject to a CDSC, will be redeemed in
full prior to any redemption of Class A shares not subject to a CDSC.
The CDSC does not apply to: (a) redemptions of Class B shares in
connection with the automatic conversion to Class A shares; (b) redemptions of
shares when a Fund exercises its right to liquidate accounts which are less than
the minimum account size; and (c) redemptions in the event of the death or
disability of the shareholder within the meaning of Section 72(m)(7) of the
Internal Revenue Code.
If a shareholder exchanges Class A, Class B or Class C shares subject
to a CDSC for Class A, Class B or Class C shares, respectively, of a different
Voyageur Fund, the transaction will not be subject to a CDSC. However, when
shares acquired through the exchange are redeemed, the shareholder will be
treated as if no exchange took place for the purpose of determining the CDSC.
Fund shares are exchangeable for shares of any money market fund available
through Voyageur. No CDSC will be imposed at the time of any such exchange;
however, the shares acquired in any such exchange will remain subject to the
CDSC and the period during which such shares represent shares of the money
market fund will not be included in determining how long the shares have been
held. Any CDSC due upon a redemption of Fund shares will be reduced by the
amount of any Rule 12b-1 payments made by such money market fund with respect to
such shares.
The Underwriter, upon notification, intends to provide, out of its own
assets, a pro rata refund of any CDSC paid in connection with a redemption of
Class A, Class B or Class C shares of any Fund (by crediting such refunded CDSC
to such shareholder's account) if, within 90 days of such redemption, all or any
portion of the redemption proceeds are reinvested in shares of the same class in
any of the Voyageur Funds. Any reinvestment within 90 days of a redemption to
which the CDSC was paid will be made without the imposition of a FESC but will
be subject to the same CDSC to which such amount was subject prior to the
redemption. The amount of the CDSC will be calculated from the original
investment date.
EXPEDITED REDEMPTIONS
Each Fund offers several expedited redemption procedures, described below, which
allow a shareholder to redeem Fund shares at net asset value determined on the
same day that the shareholder places the request for redemption of those shares.
Pursuant to these expedited redemption procedures, each Fund will redeem its
shares at their net asset value next determined following the Fund's receipt of
the redemption request. Each Fund reserves the right at any time to suspend or
terminate the expedited redemption procedures or to impose a fee for this
service. There is currently no additional charge to the shareholder for use of
the Funds' expedited redemption procedures.
EXPEDITED TELEPHONE REDEMPTION
Shareholders redeeming at least $1,000 and no more than $50,000 (for which
certificates have not been issued) may redeem by telephoning the Fund directly
at 612-376-7014 or 800-545-3863. The applicable section of the general
authorization form must have been completed by the shareholder and filed with
the Fund before the telephone request is received. The proceeds of the
redemption will be paid by check mailed to the shareholder's address of record
or, if requested at the time of redemption, by wire to the bank designated on
the general authorization form. The Funds will employ reasonable procedures to
confirm that telephone instructions are genuine, including requiring that
payment be made only to the shareholder's address of record or to the bank
account designated on the authorization form and requiring certain means of
telephonic identification. The Fund's Adviser and Distributor will not be liable
for following instructions which are reasonably believed to be genuine.
EXPEDITED REDEMPTIONS THROUGH CERTAIN BROKER DEALERS
Certain broker-dealers who have sales agreements with the Underwriter may allow
their customers to effect a redemption of shares of a Fund purchased through
such broker-dealer by notifying the broker-dealer of the amount of shares to be
redeemed. The broker-dealer is then responsible for promptly placing the
redemption request with the Fund on the customer's behalf. Payment will be made
to the shareholder by check or wire sent to the broker-dealer. Broker-dealers
offering this service may impose a fee or additional requirements for such
redemptions.
GOOD ORDER
"Good order" means that stock certificates, if issued, must accompany the
written request for redemption and must be duly endorsed for transfer, or must
be accompanied by a duly executed stock power. If no stock certificates have
been issued, a written request to redeem must be made. Stock certificates will
not be issued for Class B or Class C shares. In any case, the shareholder must
execute the redemption request exactly as the shares are registered. If the
redemption proceeds are to be paid to the registered holder(s), a signature
guarantee is not normally required. A signature guarantee is required in certain
other circumstances, for example, to redeem more than $50,000 or to have a check
mailed other than to the shareholder's address of record. See "Other
Information" in the Statement of Additional Information. The Adviser may waive
certain of these redemption requirements at its own risk, but also reserves the
right to require signature guarantees on all redemptions, in contexts perceived
by the Adviser to subject the Fund to an unusual degree of risk.
MONTHLY CASH WITHDRAWAL PLAN
An investor who owns or buys shares of any Fund valued at $10,000 or more at the
current offering price may open a Withdrawal Plan and have a designated sum of
money paid monthly to the investor or another person. Deferred sales charges may
apply to monthly redemptions of Class B or Class C shares. See "Monthly Cash
Withdrawal Plan" in the Statement of Additional Information.
REINSTATEMENT PRIVILEGE
- --------------------------------------------------------------------------------
An investor in a Fund whose shares have been redeemed and who has not previously
exercised the Reinstatement Privilege as to such Fund may reinvest the proceeds
of such redemption in shares of the same class of any Voyageur Fund eligible for
sale in the shareholder's state of residence. Reinvestment will be at the net
asset value of Fund shares next determined after the Underwriter receives a
check along with a letter requesting reinstatement. The Underwriter must receive
the letter requesting reinstatement within 365 days following the redemption.
Investors who desire to exercise the Privilege should contact their
broker-dealer or the Fund.
Exercise of the Reinstatement Privilege does not alter the income tax
treatment of any capital gains realized on a sale of shares of a Fund, but to
the extent that any shares are sold at a loss and the proceeds are reinvested
within 30 days in shares of such Fund, some or all of the loss may not be
allowed as a deduction, depending upon the number of shares reacquired.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Except as described below, shareholders may exchange some or all of their Fund
shares for shares of another Voyageur Fund, provided that the shares to be
acquired in the exchange are eligible for sale in the shareholder's state of
residence. Class A shareholders may exchange their shares for Class A shares of
other Voyageur Funds. Class B shareholders may exchange their shares for the
Class B shares of other Voyageur Funds and Class C shareholders may exchange
their shares for the Class C shares of other Voyageur Funds. Shares of each
class may also be exchanged for shares of any money market fund available
through Voyageur.
The minimum amount which may be exchanged is $1,000. The exchange will
be made on the basis of the relative net asset values next determined after
receipt of the exchange request, plus the amount, if any, by which the
applicable sales charge exceeds the sum of all sales charges previously paid in
connection with the prior investment. For a discussion of issues relating to the
contingent deferred sales charge upon such exchanges, see "How to Sell
Shares--Contingent Deferred Sales Charge." There is no specific limitation on
exchange frequency; however, the Funds are intended for long term investment and
not as a trading vehicle. The Adviser reserves the right to prohibit excessive
exchanges (more than four per quarter). The Adviser also reserves the right,
upon 60 days' prior notice, to restrict the frequency of, or otherwise modify,
condition, terminate or impose charges upon, exchanges. An exchange is
considered to be a sale of shares on which the investor may realize a capital
gain or loss for income tax purposes. Exchange requests may be placed directly
with the Fund in which the investor owns shares, through the Adviser or through
other broker-dealers. An investor considering an exchange should obtain a
prospectus of the Fund to be acquired and should read such prospectus carefully.
Contact any of the Funds, the Adviser or any of such other broker-dealers for
further information about the exchange privilege.
MANAGEMENT
- --------------------------------------------------------------------------------
The Boards of Directors, or Trustees, as the case may be, of the Funds are
responsible for managing the business and affairs of the Funds. The names,
addresses, principal occupations and other affiliations of Directors and
executive officers of the Funds are set forth in the Statement of Additional
Information.
INVESTMENT ADVISER; PORTFOLIO MANAGEMENT
Voyageur has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as each Fund's investment adviser, subject to the authority
of the Board of Directors. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group, Inc. ("DFG"), which is
owned approximately 49% by Michael E. Dougherty, 49% by Pohlad Companies and
less than 1% by certain retirement plans for the benefit of DFG employees. Mr.
Dougherty co-founded the predecessor of DFG in 1977 and has served as DFG's
Chairman of the Board and Chief Executive Officer since inception. Pohlad
Companies is a holding company owned in equal parts by each of James O. Pohlad,
Robert C. Pohlad and William M. Pohlad. As of March 31, 1996, Voyageur and its
affiliates served as the manager to six closed-end and ten open-end investment
companies (comprising 32 separate investment portfolios), administered numerous
private accounts and managed approximately $9 billion in assets. Voyageur's
principal business address is 90 South Seventh Street, Suite 4400, Minneapolis,
Minnesota 55402.
Each Fund pays Voyageur a monthly investment advisory and management
fee equivalent on an annual basis to .50% of its average daily net assets,
except each Limited Term Tax Free Fund pays .40% of its average daily net
assets.
Andrew M. McCullagh, Jr. has had, since inception, day-to-day portfolio
management responsibility for the Arizona Funds, California Funds, Colorado
Funds, National Insured Fund, as well as the New Mexico Fund, North Dakota Fund
and Utah Fund. Mr. McCullagh was a Director of Voyageur and the Underwriter from
1993 through 1995 and has been Senior Tax Exempt Portfolio Manager for Voyageur
since January 1990. He is President of Colorado Tax Free Fund and is an
Executive Vice President of each of the other Voyageur Funds. Mr. McCullagh
currently has over 23 years experience in municipal bond trading, underwriting
and portfolio management.
Elizabeth H. Howell has had, since 1991, day-to-day portfolio
management responsibility for the Minnesota Funds, as well as, since inception,
the Idaho, Kansas, Missouri, Oregon and Washington Funds. Ms. Howell is a
Vice President and Senior Tax Exempt Portfolio Manager for Voyageur, where she
has been employed since 1991 and is a Vice President of each of the Voyageur
Funds. Ms. Howell has over ten years experience as a securities analyst and
portfolio manager.
Steven P. Eldredge has had day-to-day portfolio management
responsibility for the Florida Funds, as well as National Tax Free, National
Limited Term Tax Free, Iowa and Wisconsin Funds since July 1995 and New York Tax
Free Fund since December 1996. Prior to that time, the Florida Funds and the
National Funds had been managed by Mr. McCullagh since their inception and the
Iowa and Wisconsin Funds had been managed by Ms. Howell since their inception.
Mr. Eldredge is a Senior Tax Exempt Portfolio Manager for Voyageur where he has
been employed since 1995. Prior to joining Voyageur, Mr. Eldredge was a
portfolio manager for ABT Mutual Funds from 1989 through 1995. Mr. Eldredge has
over 18 years experience in portfolio management.
PLAN OF DISTRIBUTION
Each Fund has adopted a Plan of Distribution under the 1940 Act (the "Plan") and
has entered into a Distribution Agreement with Voyageur Fund Distributors, Inc.
(the "Underwriter"). Pursuant to each Fund's Plan, the Fund pays the Underwriter
a Rule 12b-1 fee, at an annual rate of .25% of the Fund's average daily net
assets attributable to Class A shares and 1% of the Fund's average daily net
assets attributable to each of Class B and Class C shares for servicing of
shareholder accounts and distribution related services. Payments made under the
Plan are not tied exclusively to expenses actually incurred by the Underwriter
and may exceed or be less than expenses actually incurred by the Underwriter.
Please see the "Fees and Expenses" table at the beginning of this Prospectus for
information with respect to fee waivers, if any.
All of the Rule 12b-1 fee attributable to Class A shares, and a portion
of the fee equal to .25% of the average daily net assets of the Fund
attributable to each of Class B shares and Class C shares constitutes a
shareholder servicing fee designed to compensate the Underwriter for the
provision of certain services to the shareholders. The services provided may
include personal services provided to shareholders, such as answering
shareholder inquiries regarding the Funds and providing reports and other
information, and services related to the maintenance of shareholder accounts.
The Underwriter may use such Rule 12b-1 fee or portion thereof to make payments
to qualifying broker-dealers and financial institutions that provide such
services.
That portion of the Rule 12b-1 fee equal to .75% of the average daily
net assets of the Fund attributable to Class B shares and Class C shares,
respectively, constitutes a distribution fee designed to compensate the
Underwriter for advertising, marketing and distributing the Class B shares and
Class C shares of each Fund. In connection therewith, the Underwriter may
provide initial and ongoing sales compensation to its investment executives and
other broker-dealers for sales of Class B shares and Class C shares and may pay
for other advertising and promotional expenses in connection with the
distribution of Class B shares and Class C shares. The distribution fee
attributable to Class B shares and Class C shares is designed to permit an
investor to purchase such shares through investment executives of the
Underwriter and other broker-dealers without the assessment of an initial sales
charge and at the same time to permit the Underwriter to compensate its
investment executives and other broker-dealers in connection with the sale of
such shares.
CUSTODIAN; DIVIDEND DISBURSING, TRANSFER, ADMINISTRATIVE AND ACCOUNT
SERVICES AGENT
Norwest Bank Minnesota, N.A. serves as the custodian of each Fund's portfolio
securities and cash.
Voyageur acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent to perform dividend-paying
functions, to calculate each Fund's daily share price, to maintain shareholder
records and to perform certain regulatory and compliance related services for
the Funds. The fees paid for these services are based on each Fund's assets and
include reimbursement of out-of-pocket expenses. Voyageur receives a monthly fee
from each Fund equal to the sum of (a) $1.33 per shareholder account per month,
(b) a monthly fee ranging from $1,000 to $1,500 based on the average daily net
assets of the Fund and (c) a percentage of average daily net assets which ranges
from 0.11% to 0.02% based on the average daily net assets of the Fund. See "The
Investment Adviser and Underwriter--Expenses of the Funds" in the Statement of
Additional Information.
Certain institutions may act as sub-administrators for one or more of
the Funds pursuant to contracts with Voyageur, whereby the institutions will
provide shareholder services to their customers. Voyageur will pay such
sub-administrators' fees out of its own assets. The fee paid by Voyageur to any
sub-administrator will be a matter of negotiation between the institution and
Voyageur based on the extent and quality of the services provided.
EXPENSES OF THE FUNDS
Voyageur is contractually obligated to pay the operating expenses (excluding
interest expense, taxes, brokerage fees, commissions and Rule 12b-1 fees and,
with respect to the Insured Funds, premiums with respect to Portfolio Insurance
or Secondary Market Insurance) of each Fund which exceed 1% of such Fund's
average daily net assets on an annual basis up to certain limits as set forth in
detail in the Statement of Additional Information. In addition, Voyageur and the
Underwriter reserve the right to voluntarily waive their fees in whole or part
and to voluntarily absorb certain other of the Funds' expenses.
Each Fund's expenses include, among others, fees of directors, expenses
of directors' and shareholders' meetings, insurance premiums, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Underwriter), expenses of printing and mailing stock
certificates and shareholder statements, association membership dues, charges of
such Fund's custodian, bookkeeping, auditing and legal expenses, the fees and
expenses of registering such Fund and its shares with the Securities and
Exchange Commission and registering or qualifying its shares under state
securities laws and expenses of preparing and mailing prospectuses and reports
to existing shareholders.
PORTFOLIO TRANSACTIONS
No Fund will effect any brokerage transactions in its portfolio securities with
any broker-dealer affiliated directly or indirectly with Voyageur unless such
transactions, including the frequency thereof, the receipt of commissions
payable in connection therewith and the selection of the affiliated
broker-dealer effecting such transactions, are not unfair or unreasonable to the
shareholders of such Fund. It is not anticipated that any Fund will effect any
brokerage transactions with any affiliated broker-dealer, including the
Underwriter, unless such use would be to such Fund's advantage. Voyageur may
consider sales of shares of the Funds as a factor in the selection of
broker-dealers to execute the Funds' securities transactions.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of Fund shares is determined once daily, Monday through
Friday, as of 3:00 p.m. Minneapolis time (the primary close of trading on the
Exchange) on each business day the Exchange is open for trading.
For each Fund, the net asset value per share of each class is
determined by dividing the value of the securities, cash and other assets of the
Fund attributable to such class less all liabilities attributable to such class
by the total number of shares of such class outstanding. For purposes of
determining the net assets of each Fund, tax exempt securities are stated on the
basis of valuations provided by a pricing service, approved by the Board of
Directors, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. Market quotations
are used when available. Non-tax exempt securities for which market quotations
are readily available are stated at market value which is currently determined
using the last reported sale price, or, if no sales are reported, as in the case
of most securities traded over-the-counter, the last reported bid price, except
that U.S. Government securities are stated at the mean between the last reported
bid and asked prices. Short-term notes having remaining maturities of 60 days or
less are stated at amortized cost which approximates market. All other
securities and other assets are valued in good faith at fair value by Voyageur
in accordance with procedures adopted by the Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
The present policy of each Fund is to declare a distribution from net investment
income on each day that the Fund is open for business. Net investment income
consists of interest accrued on portfolio investments of a Fund, less accrued
expenses. Distributions of net investment income are paid monthly. Short-term
capital gains distributions are taxable to shareholders as ordinary income. Net
realized long term capital gains, if any, are distributed annually, after
utilization of any available capital loss carryovers. Distributions paid by the
Funds, if any, with respect to Class A, Class B and Class C shares will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount, except that the higher Rule 12b-1 fees applicable to Class B
and Class C shares will be borne exclusively by such shares. The per share
distributions on Class B and Class C shares will be lower than the per share
distributions on Class A shares as a result of the higher Rule 12b-1 fees
applicable to Class B and Class C shares.
Shareholders receive distributions from investment income and capital
gains in additional shares of the Fund and class owned by such shareholders at
net asset value, without any sales charge, unless they elect otherwise. Each
Fund sends to its shareholders no less than quarterly statements with details of
any reinvested dividends.
TAXES
FEDERAL INCOME TAXATION
Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund qualified during its last taxable year and each Fund intends to qualify
during its current taxable year as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). Each Fund also intends
to take all other action required to ensure that no federal income taxes will be
payable by the Fund and that the Fund can pay exempt-interest dividends.
Distributions of net interest income from tax exempt obligations that
are designated by a Fund as exempt-interest dividends are excludable from the
gross income of the Fund's shareholders. Distributions paid from other interest
income and from any net realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Distributions paid from long-term capital gains (and designated as such)
are taxable as long-term capital gains for federal income tax purposes, whether
received in cash or shares, regardless of how long a shareholder has held shares
in a Fund.
Exempt-interest dividends attributable to interest income on certain
tax exempt obligations issued after August 7, 1986 to finance private activities
are treated as an item of tax preference for purposes of computing the
alternative minimum tax for individuals, estates and trusts. Each Fund may
invest up to 20% of its total assets in securities which generate interest which
is treated as an item of tax preference and subject to federal and state AMT,
except that Minnesota Insured Fund may invest without limit in such securities
and Minnesota Tax Free Fund may not invest in obligations which generate
interest subject to federal and state AMT.
The following is a summary of certain information regarding state
taxation. See "Taxes" in the Statement of Additional Information.
ARIZONA STATE TAXATION
The portion of exempt-interest dividends that is derived from interest income on
Arizona Tax Exempt Obligations is excluded from the Arizona taxable income of
individuals, estates, trusts, and corporations. Dividends qualifying for federal
income tax purposes as capital gain dividends are to be treated by shareholders
as long-term capital gains under Arizona law.
CALIFORNIA STATE TAXATION
Individual shareholders of the California Funds who are subject to California
personal income taxation will not be required to include in their California
gross income that portion of their federally tax exempt dividends which a Fund
clearly identifies as directly attributable to interest earned on California
state or municipal obligations, and dividends which a Fund clearly identifies as
directly attributable to interest earned on obligations of the United States,
the interest on which is exempt from California personal income tax pursuant to
federal law, provided that at least 50% of the value of the Fund's total assets
consists of obligations the interest on which is exempt from California personal
income taxation pursuant to federal or California law. Distributions to
individual shareholders derived from interest on state or municipal obligations
issued by governmental authorities in states other than California, short-term
capital gains and other taxable income will be taxed as dividends for purposes
of California personal income taxation. Each Fund's long term capital gains for
federal income tax purposes will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from an exchange or redemption of
shares will be recognized in the year of the change or redemption.
COLORADO STATE TAXATION
To the extent that dividends are derived from interest income on Colorado Tax
Exempt Obligations, such dividends will also be exempt from Colorado income
taxes for individuals, trusts, estates, and corporations. Dividends qualifying
for federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains under Colorado law.
FLORIDA STATE TAXATION
Florida does not currently impose a tax on the income of individuals, and
individual shareholders of the Florida Funds will thus not be subject to income
tax in Florida on distributions from the Florida Funds or upon the sale of
shares held in such Funds. Florida does, however, impose a tax on intangible
personal property held by individuals as of the first day of each calendar year.
Under a rule promulgated by the Florida Department of Revenue, shares in the
Florida Funds will not be subject to the intangible property tax so long as, on
the last business day of each calendar year, all of the assets of each Fund
consist of obligations of the U. S. government and its agencies,
instrumentalities and territories, and the State of Florida and its political
subdivisions and agencies. If any Florida Fund holds any other types of assets
on that date, then the entire value of the shares in such Fund (except for the
portion of the value of the shares attributable to U. S. government obligations)
will be subject to the intangible property tax. Each Florida Fund must sell any
non-exempt assets held in its portfolio during the year and reinvest the
proceeds in exempt assets prior to December 31. Transaction costs involved in
converting the portfolio's assets to such exempt assets would likely reduce the
Florida Funds' investment return and might, in extraordinary circumstances,
exceed any increased investment return such Funds had achieved by investing in
non-exempt assets during the year. Corporate shareholders in the Florida Funds
may be subject to the Florida income tax imposed on corporations, depending upon
the domicile of the corporation and upon the extent to which income received
from such Fund constitutes "nonbusiness income" as defined by applicable Florida
law.
IDAHO STATE TAXATION
The Idaho Fund has received a ruling from the Idaho Department of Revenue that
provides that dividends paid by the Idaho Fund that are attributable to (a)
interest earned on bonds issued by the State of Idaho, its cities and political
subdivisions, and (b) interest earned on obligations of the U.S. government or
its territories and possessions will not be included in the income of Fund
shareholders subject to either the Idaho personal income tax or the Idaho
corporate franchise tax. All other dividends paid by the Idaho Fund will be
subject to the Idaho personal or corporate income tax. Capital gain dividends
qualifying as long-term capital gains for federal tax purposes will be treated
as long-term capital gains for Idaho income tax purposes. Idaho taxes long-term
capital gains at the same rates as ordinary income, while imposing limitations
on the deductibility of capital losses similar to those under federal law.
IOWA STATE TAXATION
The Iowa Fund has received a ruling from the Iowa Department of Revenue and
Finance dated May 21, 1993 to the effect that dividends paid by the Iowa Fund
that are attributable to (a) interest earned on bonds issued by the State of
Iowa, its political subdivisions, agencies and instrumentalities, the interest
on which is exempt from taxation by Iowa statute, and (b) interest earned on
obligations of the U.S. government or its territories and possessions will not
be included in the income of the Fund shareholders subject to either the Iowa
personal or the Iowa corporate income tax, except in the case of shareholders
that are financial institutions subject to the tax imposed by Iowa Code ss.
422.60. All other dividends paid by the Iowa Fund will be subject to the Iowa
personal or corporate income tax. Capital gain dividends qualifying as long-term
capital gains for federal tax purposes will be treated as long-term capital
gains for Iowa income tax purposes.
KANSAS STATE TAXATION
Individuals, trusts, estates and corporations will not be subject to Kansas
income tax on the portion of dividends derived from interest on obligations of
Kansas and its political subdivisions issued after December 31, 1987, and
interest on specified obligations of Kansas and its political subdivisions
issued before January 1, 1988. The Fund intends to invest only in Kansas
obligations the interest on which is excludable from Kansas taxable income. All
remaining dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts, estates, and corporations. Dividends qualifying for
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Kansas taxes long-term capital gains at
the same rates as ordinary income, while restricting the deductibility of
capital losses. Dividends received by shareholders will be exempt from the tax
on intangibles imposed by certain counties, cities and townships.
MINNESOTA STATE TAXATION
Minnesota taxable net income is based generally on federal taxable income. The
portion of exempt-interest dividends that is derived from interest income on
Minnesota Tax Exempt Obligations is excluded from the Minnesota taxable net
income of individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all shareholders
represents 95 percent or more of the exempt-interest dividends paid by the
respective Fund. Exempt-interest dividends are not excluded from the Minnesota
taxable income of corporations and financial institutions. Dividends qualifying
for federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Minnesota has repealed the favorable
treatment of long-term capital gains, while retaining restrictions on the
deductibility of capital losses. Exempt interest dividends subject to the
federal alternative minimum tax will also be subject to the Minnesota
alternative minimum tax imposed on individuals, estates and trusts.
The 1995 Minnesota Legislature has enacted a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota income
tax purposes if a court determines that Minnesota's exemption of such interest
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is so included. This
provision applies to taxable years that begin during or after the calendar year
in which any such court decision becomes final, irrespective of the date on
which the obligations were issued. The Minnesota Limited Term Tax Free Fund, the
Minnesota Insured Fund, and the Minnesota Tax Free Fund are not aware of any
decision in which a court has held that a state's exemption of interest on its
own bonds or those of its political subdivisions or Indian tribes, but not of
interest on the bonds of other states or their political subdivisions or Indian
tribes, unlawfully discriminates against interstate commerce or otherwise
contravenes the United States Constitution. Nevertheless, the Funds cannot
predict the likelihood that interest on the Minnesota Tax Exempt Obligations
held by the Funds would become taxable under this Minnesota statutory provision.
MISSOURI STATE TAXATION
The portion of exempt interest dividends that is derived from interest on
Missouri Tax Exempt Obligations is excluded from the taxable income of
individuals, trusts, and estates and of corporations subject to the Missouri
corporate income tax. All remaining dividends (except dividends attributable to
interest on obligations of the United States, its territories and possessions),
including dividends derived from capital gains, will be includable in the
taxable income of individuals, trusts, estates and corporations. Dividends
qualifying for federal income tax purposes as capital gain dividends are to be
treated by shareholders as long-term capital gains. Missouri taxes long-term
capital gains at the same rates as ordinary income, while restricting the
deductibility of capital losses.
NEW YORK STATE AND CITY TAXATION
The portion of exempt-interest dividends that is derived from interest income on
New York Tax-Exempt Obligations is excluded from the New York State and New York
City gross income of individuals, estates and trusts; the remaining portion of
such dividends, and dividends that are not tax-exempt interest dividends, are
included in the New York State and New York City gross income of individuals,
estates, and trusts. Exempt-interest dividends are not excluded from the New
York State and New York City gross income of corporations and banks, and
dividends from the Fund will not qualify for the New York State or New York City
dividends-received deduction for corporations and banks.
NEW MEXICO STATE TAXATION
The portion of exempt interest dividends that is derived from interest on New
Mexico Tax Exempt Obligations is excluded from the taxable income of
individuals, trusts, and estates, and of corporations subject to the New Mexico
corporate income tax. The Fund will provide shareholders with an annual
statement identifying income paid to shareholders by source. All remaining
dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts, estates and corporations. Dividends qualifying for
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. New Mexico taxes long-term capital
gains at the same rates as ordinary income, while restricting the deductibility
of capital losses.
NORTH DAKOTA STATE TAXATION
North Dakota taxable income is based generally on federal taxable income. The
portion of exempt interest dividends that is derived from interest income on
North Dakota Tax Exempt Obligations is excluded from the North Dakota taxable
income of individuals, estates, trusts and corporations. Exempt interest
dividends are not excluded from the North Dakota taxable income of banks.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains under North Dakota
law.
OREGON STATE TAXATION
The portion of exempt interest dividends that is derived from interest on Oregon
Tax Exempt Obligations is excluded from the taxable income of individuals,
trusts and estates. All remaining dividends (except for dividends, if any,
derived from interest paid on obligations of the United States, its territories
and possessions), including dividends derived from capital gains, will be
includable in the taxable income of individuals, trusts and estates.
Furthermore, all dividends, including exempt interest dividends, will be
includable in the taxable income of corporations subject to the Oregon
corporation excise tax. Dividends qualifying for federal income tax purposes as
capital gain dividends are to be treated by shareholders as long-term capital
gains. Oregon taxes long-term capital gains at the same rates as ordinary
income, while restricting the deductibility of capital losses.
UTAH STATE TAXATION
All exempt interest dividends, whether derived from interest on Utah Tax Exempt
Obligations or the Tax Exempt Obligations of any other state, are excluded from
the taxable income of individuals, trusts, and estates. Any remaining dividends
(except for dividends, if any, derived from interest paid on obligations of the
United States, its territories and possessions), including dividends derived
from capital gains, will be includable in the taxable income of individuals,
trusts, and estates. Furthermore, all dividends, including exempt interest
dividends, will be includable in the taxable income of corporations subject to
the Utah corporate franchise tax. Dividends qualifying for federal income tax
purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains. Utah taxes long-term capital gains at the same rates as
ordinary income, while restricting the deductibility of capital losses.
WASHINGTON STATE TAXATION
Washington does not currently impose an income tax on individuals or
corporations. Therefore, dividends paid to shareholders will not be subject to
tax in Washington.
WISCONSIN STATE TAXATION
The Wisconsin Fund has received a ruling from the Wisconsin Department of
Revenue dated July 7, 1993 to the effect that dividends paid by the Wisconsin
Fund that are attributable to (a) interest earned on certain higher education
bonds issued by the State of Wisconsin, certain bonds issued by the Wisconsin
Housing and Economic Development authority, Wisconsin Housing Finance Authority
bonds, and public housing authority bonds and redevelopment authority bonds
issued by Wisconsin municipalities, the interest on which is exempt from
taxation by Wisconsin statute, and (b) interest earned on obligations of the U.
S. government or its territories and possessions will not be included in the
income of the Fund shareholders subject to the Wisconsin personal income tax.
Capital gain dividends qualifying as long-term capital gains for federal tax
purposes will be treated as long-term capital gains for Wisconsin income tax
purposes.
The foregoing discussion relates to federal and state taxation as of
the date of the Prospectus. See "Taxes" in the Statement of Additional
Information. Distributions from the Funds, including exempt-interest dividends,
may be subject to tax in other states. This discussion is not intended as a
substitute for careful tax planning. You are urged to consult your tax adviser
with specific reference to your own tax situation.
INVESTMENT PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements and other sales literature for the Funds may refer to "yield,"
"taxable equivalent yield," "average annual total return" and "cumulative total
return" and may compare such performance quotations with published indices and
comparable quotations of other funds. Performance quotations are computed
separately for Class A, Class B and Class C shares of the Funds. All such
figures are based on historical earnings and performance and are not intended to
be indicative of future performance. Additionally, performance information may
not provide a basis for comparison with other investments or other mutual funds
using a different method of calculating performance. The investment return on
and principal value of an investment in any of the Funds will fluctuate, so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
The advertised yield of each Fund will be based on a 30-day period
stated in the advertisement. Yield is calculated by dividing the net investment
income per share deemed earned during the period by the maximum offering price
per share on the last day of the period. The result is then annualized using a
formula that provides for semiannual compounding of income.
Taxable equivalent yield is calculated by applying the stated income
tax rate only to that portion of the yield that is exempt from taxation. The tax
exempt portion of the yield is divided by the number 1 minus the stated income
tax rate (e.g., 1-28% = 72%). The result is then added to that portion of the
yield, if any, that is not tax exempt.
Average annual total return is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. In calculating average annual total return, the maximum sales
charge is deducted from the hypothetical investment and all dividends and
distributions are assumed to be reinvested.
Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the ending redeemable value of such payment (at
the end of the relevant advertised period), dividing such difference by $1,000
and multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales load is deducted.
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Funds'
shares, including data from Lipper Analytical Services, Inc. and Morningstar.
For Fund performance information and daily net asset value quotations,
investors may call 612-376-7010 or 800-525-6584. For additional information
regarding the calculation of a Fund's yield, taxable equivalent yield, average
annual total return and cumulative total return, see "Calculation of Performance
Data" in the Statement of Additional Information.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Each Fund sends to its shareholders six-month unaudited and annual audited
financial statements.
The shares of the Funds constitute separate series of the parent
entities listed below. Certain of these parent entities are organized as
Minnesota corporations, and the shares of the series thereof are transferable
common stock, $.01 par value per share, of such corporations. Other parent
entities are organized as business trusts under the laws of the Commonwealth of
Massachusetts, and the shares of the series thereof represent transferable
common shares of beneficial interest. All shares of each corporation and,
subject to the statement below regarding shareholder liability, of each trust,
are non assessable and fully transferable when issued and paid for in accordance
with the terms thereof and possess no cumulative voting, preemptive or
conversion rights. The Board of each corporation and trust is empowered to issue
other series of common stock or common shares of beneficial interest without
shareholder approval. Set forth below is a listing of the parent entities and
constituent series, form of organization and date of organization of the parent.
<TABLE>
<CAPTION>
PARENT FORM OF ORGANIZATION DATE ORGANIZED
- --------------------------------------------------------------------------------------------
<S> <C> <C>
VOYAGEUR TAX FREE FUNDS, INC. Minnesota Corporation November 10, 1983
Minnesota Tax Free
North Dakota Tax Free
VOYAGEUR INTERMEDIATE TAX FREE FUNDS, INC. Minnesota Corporation January 21, 1985
Arizona Limited Term Tax Free
California Limited Term Tax Free
Colorado Limited Term Tax Free
Minnesota Limited Term Tax Free
National Limited Term Tax Free
VOYAGEUR INSURED FUNDS, INC. Minnesota Corporation January 6, 1987
Arizona Insured Tax Free
Colorado Insured Tax Free
Minnesota Insured
National Insured Tax Free
VOYAGEUR INVESTMENT TRUST Massachusetts Business Trust September 16, 1991
California Insured Tax Free
Florida Insured Tax Free
Florida Tax Free
Kansas Tax Free
Missouri Insured Tax Free
New Mexico Tax Free
Oregon Insured Tax Free
Utah Tax Free
Washington Insured Tax Free
VOYAGEUR INVESTMENT TRUST II Massachusetts Business Trust November 16, 1993
Florida Limited Term Tax Free
VOYAGEUR MUTUAL FUNDS, INC. Minnesota Corporation April 14, 1993
Arizona Tax Free
California Tax Free
Idaho Tax Free
Iowa Tax Free
Wisconsin Tax Free
National Tax Free
New York Tax Free
VOYAGEUR MUTUAL FUNDS II, INC. Minnesota Corporation January 13, 1987
Colorado Tax Free
- -------------------------------------------------------------------------------------------
</TABLE>
The Funds currently offer their shares in multiple classes, each with
different sales arrangements and bearing different expenses. Class A, Class B
and Class C shares each represent interests in the assets of the respective
Funds and have identical voting, dividend, liquidation and other rights on the
same terms and conditions except that expenses related to the distribution of
each class are borne solely by such class and each class of shares has exclusive
voting rights with respect to provisions of a Fund's Rule 12b-1 distribution
plan which pertain to a particular class and other matters for which separate
class voting is appropriate under applicable law.
Fund shares are freely transferable, subject to applicable securities
laws, are entitled to dividends as declared by the Board, and, in liquidation of
a Fund, are entitled to receive the net assets, if any, of such Fund. The Funds
do not generally hold annual meetings of shareholders and will do so only when
required by law.
Each share of a series has one vote irrespective of the relative net
asset value of the shares. On some issues, such as the election of Board
members, all shares of a corporation or trust vote together as one series of
such corporation or trust. On an issue affecting only a particular series or
class, the shares of the affected series or class vote as a separate series or
class. An example of such an issue would be a fundamental investment restriction
pertaining to only one series.
The assets received by a corporation or trust for the issue or sale of
shares of each series or class thereof, and all income, earnings, profits and
proceeds thereof, subject only to the rights of creditors, are allocated to such
series, and in the case of a class, allocated to such class, and constitute the
underlying assets of such series or class. The underlying assets of each series
or class thereof, are required to be segregated on the books of account, and are
to be charged with the expenses in respect to such series or class thereof, and
with a share of the general expenses of such corporation or trust. Any general
expenses of a corporation or trust not readily identifiable as belonging to a
particular series or class shall be allocated among the series or classes
thereof, based upon the relative net assets of the series or class at the time
such expenses were accrued. Each corporation's Articles of Incorporation and
trust's Declaration of Trust limit the liability of the respective Board members
to the fullest extent permitted by law. For a further discussion of the above
matters, see "Additional Information" in the Statement of Additional
Information.
In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined Prospectus may possibly subject all of the Funds to a
certain amount of liability for any losses arising out of any statement or
omission in this Prospectus regarding a particular Fund. In the opinion of the
Funds' executive officers, however, the risk of such liability is not materially
increased by the use of a combined Prospectus.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR VOYAGEUR FUND DISTRIBUTORS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
MINNESOTA HIGH YIELD MUNICIPAL BOND FUND
[GRAPHIC OMITTED]
[LOGO] VOYAGEUR
- --------------------------------------------------------------------------------
VOYAGEUR MINNESOTA HIGH YIELD MUNICIPAL BOND FUND
VOYAGEUR FUNDS (NOT PART OF PROSPECTUS); DATED APRIL 28, 1997
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
3 FEES AND EXPENSES
- --------------------------------------------------------------------------------
4 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
4 INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
13 RISKS AND SPECIAL INVESTMENT CONSIDERATIONS
- --------------------------------------------------------------------------------
16 INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
17 HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
22 HOW TO SELL SHARES
- --------------------------------------------------------------------------------
24 REINSTATEMENT PRIVILEGE
- --------------------------------------------------------------------------------
25 EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
25 MANAGEMENT
- --------------------------------------------------------------------------------
28 DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
28 DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
- --------------------------------------------------------------------------------
30 INVESTMENT PERFORMANCE
- --------------------------------------------------------------------------------
31 GENERAL INFORMATION
- --------------------------------------------------------------------------------
VOYAGEUR FUNDS (NOT PART OF PROSPECTUS); DATED APRIL 28, 1997
PROSPECTUS
Dated April 28, 1997
- --------------------------------------------------------------------------------
Voyageur Minnesota High Yield Municipal Bond Fund (the "Fund") is a series of
Voyageur Mutual Funds, Inc., an open end management investment company, commonly
referred to as a mutual fund. The investment objective of the Fund is to seek a
high level of current income exempt from federal income tax and from Minnesota
personal income tax primarily through investment in a portfolio of medium- and
lower-grade Municipal Obligations. The weighted average maturity of the
investment portfolio of the Fund is expected to be approximately 15 to 25 years.
There is no assurance that the Fund will achieve its investment objective.
The Fund's investment adviser is Voyageur Fund Managers, Inc.
("Voyageur"). The address of Voyageur and the Fund is 90 South Seventh Street,
Suite 4400, Minneapolis, Minnesota 55402.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE
UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER FEDERAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL DUE TO FLUCTUATIONS IN
THE FUND'S NET ASSET VALUE.
ON JANUARY 15, 1997, DOUGHERTY FINANCIAL GROUP, INC. ("DFG"), THE
PARENT COMPANY OF VOYAGEUR FUND MANGERS, INC. ("VOYAGEUR" OR THE "ADVISER")
EXECUTED AN AGREEMENT AND PLAN OF MERGER ("AGREEMENT") WITH LINCOLN NATIONAL
CORPORATION ("LNC") PURSUANT TO WHICH A SUBSIDIARY OF LNC WILL BE MERGED WITH
AND INTO DFG CAUSING DFG TO BECOME A WHOLLY OWNED SUBSIDIARY OF LNC. THE FUNDS'
BOARDS OF DIRECTORS AND SHAREHOLDERS HAVE APPROVED THE MERGER AT A SPECIAL
MEETING OF SHAREHOLDERS.
LNC, HEADQUARTERED IN FORT WAYNE, INDIANA, OWNS AND OPERATES INSURANCE
AND INVESTMENT MANAGEMENT BUSINESSES, INCLUDING DELAWARE MANAGEMENT HOLDINGS,
INC. ("DMH"). AFFILIATES OF DMH SERVE AS ADVISER AND DISTRIBUTOR FOR THE
DELAWARE GROUP OF INVESTMENT COMPANIES, WHICH CURRENTLY INCLUDES 16 OPEN-END
FUNDS AND 2 CLOSED-END FUNDS (COMPRISING 48 SEPARATE INVESTMENT PORTFOLIOS).
DMH, THROUGH ITS SUBSIDIARIES, IS RESPONSIBLE FOR THE MANAGEMENT OF
APPROXIMATELY $32 BILLION.
CONSUMMATION OF THE MERGER WILL CAUSE A CHANGE IN CONTROL OF VOYAGEUR.
UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THIS WILL RESULT IN AN
"ASSIGNMENT" AND AUTOMATIC TERMINATION OF THE FUNDS' INVESTMENT ADVISORY AND
DISTRIBUTION AGREEMENTS WITH VOYAGEUR. THE FUNDS' BOARDS OF DIRECTORS HAVE
APPROVED NEW INVESTMENT ADVISORY AND DISTRIBUTION AGREEMENTS CONTAINING THE SAME
TERMS AND FEES AS THE FORMER AGREEMENTS AND SHAREHOLDERS HAVE ALSO APPROVED SUCH
AGREEMENTS AND OTHER MATTERS RELATED TO THE MERGER. THE MERGER IS EXPECTED TO BE
FINAL ON OR ABOUT APRIL 30, 1997.
This Prospectus sets forth certain information about the Fund that a
prospective investor ought to know before investing. Investors should read and
retain this Prospectus for future reference. The Fund has filed a Statement of
Additional Information (dated April 28, 1997) with the Securities and Exchange
Commission. The Statement of Additional Information is available free of charge
by telephone (800-553-2143) and is incorporated by reference herein in its
entirety.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Fund offers investors a choice among classes of shares which offer
different sales charges and bear different expenses. These alternatives permit
an investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances.
CLASS A SHARES
An investor who purchases Class A shares pays a sales charge at the time of
purchase. As a result, Class A shares are not subject to any charges when they
are redeemed (except for sales at net asset value in excess of $1 million or
sales subject to special promotions identified from time to time by Voyageur
which in either case are subject to a contingent deferred sales charge). The
initial sales charge may be reduced or waived for certain purchases. Class A
shares are subject to a Rule 12b-1 fee payable at an annual rate of .25% of the
Fund's average daily net assets attributable to Class A shares. See "How to
Purchase Shares--Class A Shares."
CLASS B SHARES
Class B shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5% if redeemed within six years of
purchase. Class B shares are also subject to a higher Rule 12b-1 fee than Class
A shares. The Rule 12b-1 fee for Class B shares will be paid at an annual rate
of 1% of the Fund's average daily net assets attributable to Class B shares.
Class B shares will automatically convert to Class A shares at net asset value
approximately eight years after purchase. Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made but until conversion will have a higher expense ratio and pay
lower dividends than Class A shares due to the higher Rule 12b-1 fee. See "How
to Purchase Shares--Class B Shares."
CLASS C SHARES
Class C shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of 1% if redeemed within one year of purchase.
Class C shares are also subject to a higher Rule 12b-1 fee than Class A shares.
The Rule 12b-1 fee for Class C shares of the Fund will be paid at an annual rate
of 1% of the Fund's average daily net assets attributable to Class C shares.
Class C shares provide an investor the benefit of putting all of the investor's
dollars to work from the time the investment is made, but will have a higher
expense ratio and pay lower dividends than Class A shares due to the higher Rule
12b-1 fee. See "How to Purchase Shares--Class C Shares." Class C shares do not
convert to any other class of shares.
The decision as to which class of shares provides a more suitable
investment for an investor depends on a number of factors, including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Other investors might
consider Class B or Class C shares because all of the purchase price is invested
immediately. Voyageur will treat orders for Class B shares for $250,000 or more
as orders for Class A shares or such orders will be declined. Sales personnel
may receive different compensation depending on which class of shares they sell.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MINNESOTA HIGH YIELD MUNICIPAL BOND FUND CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 3.75% N/A(2) N/A(2)
Deferred Sales Load
(as a percentage of original purchase price
or redemption proceeds, as applicable) 1.00(1) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee (after voluntary fee waiver) .00 .00 .00
Rule 12b-1 Fee .24 .95 .99
Other Expenses
(after voluntary expense reimbursement) .00 .00 .00
----- ----- -----
Total Fund Operating Expenses
(after voluntary fee waivers and expense reimbursements) .24% .95% .99%
===== ===== =====
Total Fund Operating Expenses
(without voluntary waiver and reimbursement)(3) 1.25% 2.00% 2.00%
===== ===== =====
EXAMPLE
An investor in the Fund would pay the following expenses on a $1,000 investment
assuming a 5% annual return and:
Redemption at the end of each period
1 Year $40 $60 $20
3 Years 45 70 32
5 Years 51 73 55
10 Years 67 96 121
No redemption
1 Year 40 10 10
3 Years 45 30 32
5 Years 51 53 55
10 Years 67 96 121
</TABLE>
1 A contingent deferred sales charge of 1% is imposed on certain redemptions
of Class A shares that were purchased without an initial sales charge as
part of an investment of $1 million or more.
2 Class B and Class C shares are sold without a front-end sales charge, but
their Rule 12b-1 fees may cause long term shareholders to pay more than the
economic equivalent of the maximum permitted front-end sales charges.
3 The Fund's management fee without waivers would be 0.65%.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose
of the above Fees and Expenses table is to assist the investor in understanding
the various costs and expenses that investors in the Fund will bear directly or
indirectly. The information set forth above under the heading "Total Fund
Operating Expenses (after voluntary fee waivers and expense reimbursements)"
reflects expenses incurred during the period ended December 31, 1996, after
voluntary expense waivers and fee reimbursements. Absent such fee and expense
waivers, Total Fund Operating Expenses for such period would be equivalent to
the corresponding percentages disclosed above in "Total Fund Operating Expenses
Without Voluntary Waiver and Reimbursement."
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table shows certain per share data and selected information for a
share of capital stock outstanding during the indicated periods for the Fund.
This performance has been audited by KPMG Peat Marwick LLP, independent
auditors, and should be read in conjunction with the financial statements of the
Fund contained in its annual report. An annual report of the Fund can be
obtained without charge by contacting the Fund at 800-553-2143. In addition to
financial statements, the annual report contains further information about
performance of the Fund.
<TABLE>
<CAPTION>
Period ended December 31, 1996
------------------------------
Class A(1) Class B(2) Class C(3)
<S> <C> <C> <C>
Net Asset value:
Beginning of period.................................... $10.00 $9.78 $9.99
Operations:
Net Investment Income.................................. .35 .29 .30
Net Realized and Unrealized Gain (Loss)
on Securities....................................... .18 .41 .19
----- ----- -----
Total............................................. .53 .70 .49
----- ----- -----
Distributions to shareholders:
From Net Investment Income............................. (.35) (.29) (.30)
Net Asset Value End of Period............................. 10.18 10.19 10.18
====== ====== ======
Total Investment Return(5)................................ 5.40% 7.29% 5.02%
Net Assets End of Period (000s)........................... 6,068 2,738 900
Ratios:
Ratio of Expenses to Average Net Assets(6)............. .24%(4) .95%(4) .99%(4)
Ratio of Net Investment Income to
Average Net Assets.................................. 5.78%(4) 5.14%(4) 4.90%(4)
Portfolio Turnover Rate................................ 14.97% 14.97% 14.97%
Ratio of Expenses to Average Net Assets
(assuming no voluntary waivers and reimbursements)..... 1.25%(4) 2.00%(4) 2.00%(4)
</TABLE>
NOTES TO FINANCIAL HIGHLIGHTS
1 Period from June 4, 1996 (commencement of operations) to December 31, 1996.
2 Period from June 12, 1996 (commencement of operations) to December 31, 1996.
3 Period from June 7, 1996 (commencement of operations) to December 31, 1996.
4 Annualized.
5 Total investment return is based on the change in net asset value as a share
during the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
6 The expense ratio reflects the effect of gross expenses attributable to
earnings credits on uninvested cash received by the Fund.
THE FUND
- --------------------------------------------------------------------------------
The Fund is a separate series of Voyageur Mutual Funds, Inc., a parent corporate
entity which was incorporated in the State of Minnesota on April 14, 1993. The
Fund is non-diversified, as such term is defined in the Investment Company Act
of 1940, as amended (the "1940 Act"). As a non-diversified investment company,
the Fund will be able to invest, subject to certain federal tax requirements, a
relatively higher percentage of its assets in the securities of a limited number
of issuers which may result in the Fund's securities being more susceptible to
any single economic, political or regulatory occurrence than the securities of a
diversified Fund. The investment objective and policies of the Fund are
described below.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to seek a high level of current income
exempt from federal income tax and from Minnesota personal income tax primarily
through investment in a portfolio of medium and lower grade Municipal
Obligations. The Fund does not purchase insurance on its portfolio securities.
The Fund will attempt to invest 100% (and as a matter of fundamental policy
during normal circumstances will invest at least 80%) of the value of its net
assets in Municipal Obligations the interest on which is exempt from regular
federal income tax and from Minnesota personal income tax. The Fund may invest
without limit in securities that generate interest that is an item of tax
preference for purposes of federal and state alternative minimum tax ("AMT"). In
normal circumstances the weighted average maturity of the investment portfolio
of the Fund is expected to be approximately 15 to 25 years. However, if the
Adviser determines that market conditions warrant a shorter average maturity,
the Fund's investments will be adjusted accordingly. During times of adverse
market conditions when a defensive investment posture is warranted, the Fund may
temporarily select investments without regard to the foregoing policies.
There are risks in any investment program, and there is no assurance
that the Fund's investment objective will be achieved. The value of the Fund's
shares will fluctuate with changes in the market value of its investments. The
Fund's investment objective and certain other investment policies explicitly
designated herein as such are fundamental, which means that they cannot be
changed without the vote of the Fund's shareholders as provided in the 1940 Act.
The Fund will invest at least 65% of its total assets, except under abnormal
market or economic situations, in medium- and lower-grade Municipal Obligations
rated, at the time of investment, between BBB and B- (inclusive) by Standard &
Poor's Ratings Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors
Service, Inc. ("Moody's"), and BBB and B- (inclusive) by Fitch Investors
Service, LP ("Fitch"), and Municipal Obligations determined by Voyageur to be of
comparable quality.
Medium-grade Municipal Obligations are rated BBB by S&P or
Fitch, Baa by Moody's or determined by the Adviser to be of comparable quality.
Municipal Obligations rated BBB by S&P or Fitch generally are regarded by S&P or
Fitch as having an adequate capacity to pay interest and repay principal;
adverse economic conditions or changing circumstances are, however, more likely
in S&P's or Fitch's view to lead to a weakened capacity to pay interest and
repay principal as compared with higher rated Tax Exempt Obligations. Municipal
Obligations rated Baa by Moody's generally are considered by Moody's as
medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. In Moody's view, interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. In Moody's view,
such securities lack outstanding investment characteristics and have speculative
characteristics as well.
The Fund may invest in lower-grade Municipal Obligations rated, at the
time of investment, no lower than B- by S&P or Fitch or B3 by Moody's,
and in municipal securities determined by Voyageur to be of comparable quality.
Municipal Obligations rated B by S&P or Fitch generally are regarded by S&P or
Fitch, on balance, as predominantly speculative with respect to capacity to pay
interest or repay principal in accordance with the terms of the obligations.
While such securities will likely have some quality and protective
characteristics, in S&P's or Fitch's view these are outweighed by large
uncertainties or major risk exposure to adverse conditions. Securities rated B
by Moody's are viewed by Moody's as generally lacking characteristics of the
desirable investment. In Moody's view, assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
The Fund will not make initial investments in Municipal Obligations
rated, at the time of investment, below B- by S&P or Fitch or below B3 by
Moody's, or in Municipal Obligations determined by Voyageur to be of comparable
quality. The Fund may retain Municipal Obligations which are downgraded after
investment. There is no minimum rating with respect to securities that the Fund
may hold if downgraded after investment. See Appendix A to the Statement of
Additional Information for a description of Municipal Obligations ratings.
Investment in medium- and lower-grade securities involves special risks
as compared with investment in higher-grade securities, including potentially
greater sensitivity to a general economic downturn or to a significant increase
in interest rates, greater market price volatility and less liquid secondary
market trading. See "Risks and Special Investment Considerations." There can be
no assurance that the Fund will achieve its investment objective, and the Fund
may not be an appropriate investment for all investors. Furthermore, interest on
certain "private activity" obligations in which the Fund may invest is treated
as a preference item for the purpose of calculating the federal and state
alternative minimum tax and, accordingly, a portion of the income produced by
the Fund may be taxable under the federal and state alternative minimum tax. The
Fund may not be a suitable investment for investors who are already subject to
the alternative minimum tax or who would become subject to the alternative
minimum tax as a result of an investment in the Fund. See "Taxation."
At times Voyageur may judge that conditions in the markets for medium
and lower grade Municipal Obligations make pursuing the Fund's basic investment
strategy of investing primarily in such Municipal Obligations inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher grade Municipal Obligations and in Municipal
Obligations determined by Voyageur to be of comparable quality. Although such
higher grade Municipal Obligations generally entail less credit risk, such
higher grade Municipal Obligations may have a lower yield than medium and lower
grade Municipal Obligations and investment in such higher grade Municipal
Obligations may result in a lower yield to Fund shareholders. Voyageur may also
judge that conditions in the markets for long- and intermediate-term Municipal
Obligations in general make pursuing the Fund's basic investment strategy
inconsistent with the best interests of the Fund's shareholders. At such times,
the Fund may pursue strategies primarily designed to reduce fluctuations in the
value of the Fund's assets, including investing the Fund's assets in
high-quality, short-term Municipal Obligations and in high-quality, short-term
taxable securities. See "Taxation."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MOODY'S RATING Aaa Aa A Baa Ba B UNRATED
(S&P RATING) (AAA) (AA) (A) (BBB) (BB) (B) BONDS TOTAL
- ------------------------------------------------------------------------------------------------
VOYAGEUR MINNESOTA HIGH YIELD
MUNICIPAL BOND FUND 9% 7% 16% 17% 3% 7% 41% 100%
- ------------------------------------------------------------------------------------------------
</TABLE>
The Fund may invest without limitation in short term Municipal
Obligations or in taxable obligations on a temporary, defensive basis due to
market conditions or, with respect to taxable obligations, for liquidity
purposes. Such taxable obligations, whether purchased for liquidity purposes or
on a temporary, defensive basis, may include: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
within the three highest grades by either Moody's, Fitch or S&P; commercial
paper rated in the highest grade by any of such rating services (Prime-1, F-1+
or A-1, respectively); certificates of deposit and bankers' acceptances of
domestic banks which have capital, surplus and undivided profits of over $100
million; high-grade taxable municipal bonds; and repurchase agreements with
respect to any of the foregoing investments. The Fund also may hold its assets
in cash and in securities of tax-exempt money market mutual funds.
MUNICIPAL OBLIGATIONS
As used in this Prospectus, the term "Municipal Obligations" refers to debt
obligations issued by or on behalf of a state or territory or its agencies,
instrumentalities, municipalities and political subdivisions. The term
"Municipal Obligations" also includes Derivative Municipal Obligations as
defined below.
Municipal Obligations are primarily debt obligations issued to obtain
funds for various public purposes such as constructing public facilities and
making loans to public institutions. The two principal classifications of
Municipal Obligations are general obligation bonds and revenue bonds. General
obligation bonds are generally secured by the full faith and credit of an issuer
possessing general taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source.
Revenue bonds are payable only from the revenues derived from a particular
source or facility, such as a tax on particular property or revenues derived
from, for example, a municipal water or sewer utility or an airport. Municipal
Obligations that benefit private parties in a manner different than members of
the public generally (so-called private activity bonds or industrial development
bonds) are in most cases revenue bonds, payable solely from specific revenues of
the project to be financed. The credit quality of private activity bonds is
usually directly related to the creditworthiness of the user of the facilities
(or the creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Municipal Obligations, there
is a variety of types of municipal securities. Certain Municipal Obligations may
carry variable or floating rates of interest whereby the rate of interest is not
fixed but varies with changes in specified market rates or indexes, such as a
bank prime rate or a tax-exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Municipal Obligations are zero coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
Municipal Obligations also include state or municipal leases and
participation interests therein. The Fund may invest in these types of
obligations without limit. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered illiquid by the staff of the
Securities and Exchange Commission. Municipal lease obligations held by the Fund
will be treated as illiquid unless they are determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors. Under these guidelines,
Voyageur will consider factors including, but not limited to (1) whether the
lease can be canceled, (2) what assurance there is that the assets represented
by the lease can be sold, (3) the municipality's general credit strength (e.g.,
its debt, administrative, economic and financial characteristics), (4) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
non-appropriation"), and (5) the legal recourse in the event of failure to
appropriate. Additionally, the lack of an established trading market for
municipal lease obligations may make the determination of fair market value more
difficult. See "Investment Policies and Restrictions--Municipal Obligations" in
the Statement of Additional Information.
The Fund may also acquire Derivative Municipal Obligations, which are
custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain Municipal Obligations. The underwriter of these certificates or
receipts typically purchases and deposits the securities in an irrevocable trust
or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt, the Fund typically would be authorized to assert its rights
directly against the issuer of the underlying obligation, the Fund could be
required to assert through the custodian bank those rights as may exist against
the underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, the Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which
the underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, it would be subject
to state income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to the Fund and its
shareholders would be reduced by the amount of taxes paid. Furthermore, amounts
paid by the trust or custodial account to the Fund would lose their tax-exempt
character and become taxable, for federal and state purposes, in the hands of
the Fund and its shareholders. However, the Fund will only invest in custodial
receipts which are accompanied by a tax opinion stating that interest payable on
the receipts is tax-exempt. If the Fund invests in custodial receipts, it is
possible that a portion of the discount at which the Fund purchases the receipts
might have to be accrued as taxable income during the period that the Fund holds
the receipts.
The principal and interest payments on the Derivative Municipal
Obligations underlying custodial receipts may be allocated in a number of ways.
For example, payments may be allocated such that certain custodial receipts may
have variable or floating interest rates and others may be stripped securities
which pay only the principal or interest due on the underlying Municipal
Obligations. The Fund may also invest in custodial receipts which are "inverse
floating obligations" (also sometimes referred to as "residual interest bonds").
These securities pay interest rates that vary inversely to changes in the
interest rates of specified short term Municipal Obligations or an index of
short-term Municipal Obligations. Thus, as market interest rates increase, the
interest rates on inverse floating obligations decrease. Conversely, as market
rates decline, the interest rates on inverse floating obligations increase. Such
securities have the effect of providing a degree of investment leverage, since
the interest rates on such securities will generally change at a rate which is a
multiple of the change in the interest rates of the specified Municipal
Obligations or index. As a result, the market values of inverse floating
obligations will generally be more volatile than the market values of other
Municipal Obligations and investments in these types of obligations will
increase the volatility of the net asset value of shares of the Fund.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities. A
security is considered illiquid if it cannot be sold in the ordinary course of
business within seven days at approximately the price at which it is valued.
Illiquid securities may offer a higher yield than securities which are more
readily marketable, but they may not always be marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. The Fund may be restricted in its ability to sell such securities at a
time when Voyageur deems it advisable to do so. In addition, in order to meet
redemption requests, the Fund may have to sell other assets, rather than such
illiquid securities, at a time which is not advantageous.
Certain securities in which the Fund may invest, including municipal
lease obligations, certain restricted securities and commercial paper issued
pursuant to the private placement exemption of Section 4(2) of the Securities
Act of 1933, historically have been considered illiquid by the staff of the
Securities and Exchange Commission. In accordance with more recent staff
positions, however, the Fund will treat such securities as liquid and not
subject to the above 15% limitation when they have been determined to be liquid
by Voyageur subject to the oversight of and pursuant to procedures adopted by
the Fund's Board of Directors. See "Investment Policies and
Restrictions--Illiquid Investments" in the Statement of Additional Information.
MISCELLANEOUS INVESTMENT PRACTICES
FORWARD COMMITMENTS
New issues of Municipal Obligations and other securities are often purchased
on a "when issued" or delayed delivery basis, with delivery and payment for the
securities normally taking place 15 to 45 days after the date of the
transaction. The payment obligation and the interest rate that will be received
on the securities are each fixed at the time the buyer enters into the
commitment. The Fund may enter into such "forward commitments" if it holds, and
maintains until the settlement date in a segregated account, cash or high-grade
liquid debt obligations in an amount sufficient to meet the purchase price.
There is no percentage limitation on the Fund's total assets which may be
invested in forward commitments. Municipal Obligations purchased on a
when-issued basis and the securities held in the Fund's portfolio are subject to
changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Municipal Obligations
purchased on a when-issued basis may expose the Fund to risk because they may
experience such fluctuations prior to their actual delivery. Purchasing
Municipal Obligations on a when-issued basis can involve the additional risk
that the yield available in the market when the delivery takes place actually
may be higher than that obtained in the transaction itself. Any significant
commitment by the Fund to the purchase of securities on a when-issued basis may
increase the volatility of the Fund's net asset value. Although the Fund will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio, it may dispose of a commitment prior to settlement
if the Fund's investment manager deems it appropriate to do so. The Fund may
realize short-term profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to not more
than 10% of its total assets (taken at current value), except when investing for
defensive purposes during times of adverse market conditions. The Fund may enter
into repurchase agreements with respect to any securities which it may acquire
consistent with its investment policies and restrictions.
A repurchase agreement involves the purchase by the Fund of securities
with the condition that, after a stated period of time, the original seller (a
member bank of the Federal Reserve System or a recognized securities dealer)
will buy back the same securities ("collateral") at a predetermined price or
yield. Repurchase agreements involve certain risks not associated with direct
investments in securities. In the event the original seller defaults on its
obligation to repurchase, as a result of its bankruptcy or otherwise, the Fund
will seek to sell the collateral, which action could involve costs or delays. In
such case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, the Fund could suffer a
loss. See "Investment Policies and Restrictions--Taxable Obligations" in the
Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS
The Fund may engage in "reverse repurchase agreements" with banks and securities
dealers with respect to not more than 10% of its total assets. Reverse
repurchase agreements are ordinary repurchase agreements in which the Fund is
the seller of, rather than the investor in, securities and agrees to repurchase
them at an agreed upon time and price. Use of a reverse repurchase agreement may
be preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. Because certain of the
incidents of ownership of the security are retained by the Fund, reverse
repurchase agreements are considered a form of borrowing by the Fund from the
buyer, collateralized by the security. At the time the Fund enters into a
reverse repurchase agreement, cash, U. S. Government securities or other liquid
debt obligations having a value sufficient to make payments for the securities
to be repurchased will be segregated, and will be marked to market daily and
maintained throughout the period of the obligation. Reverse repurchase
agreements may be used as a means of borrowing for investment purposes subject
to the 10% limitation set forth above. This speculative technique is referred to
as leveraging. Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs which may or may not be
recovered by income from or appreciation of the securities purchased. Because
the Fund does not currently intend to utilize reverse repurchase agreements in
excess of 10% of total assets, the Fund believes the risks of leveraging due to
use of reverse repurchase agreements to principal are reduced. Voyageur believes
that the limited use of leverage may facilitate the Fund's ability to provide
high current income.
OPTIONS AND FUTURES
The Fund may utilize put and call transactions and may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See "Investment Policies and Restrictions--Options and Futures Transactions" in
the Statement of Additional Information. Options and futures may be used to
attempt to protect against possible declines in the market value of the Fund's
portfolio resulting from downward trends in the debt securities markets
(generally due to a rise in interest rates), to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio or to establish a position in the securities markets as
a temporary substitute for purchasing particular securities. The use of options
and futures is a function of market conditions. Other transactions may be used
by the Fund in the future for hedging purposes as they are developed to the
extent deemed appropriate by the Board.
OPTIONS ON SECURITIES
The Fund may write (i.e., sell) covered put and call options and purchase put
and call options on the securities in which it may invest and on indices of
securities in which it may invest, to the extent such put and call options are
available.
A put option gives the buyer of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the purchaser of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price.
In purchasing a call option, the Fund would be in a position to realize
a gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the period
by more than the amount of the premium. In purchasing a put option, the Fund
would be in a position to realize a gain if, during the option period, the price
of the security declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained the same or
did not decrease during that period by more than the amount of the premium. If a
put or call option purchased by the Fund were permitted to expire without being
sold or exercised, its premium would be lost by the Fund.
If a put option written by the Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by the Fund were exercised, the Fund would be obligated to sell
the underlying security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value of the
underlying security caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold to the Fund at a higher price than its current market value. The risk
involved in writing a call option is that there could be an increase in the
market value of the underlying security caused by declining interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction as described in Appendix B to the Statement of Additional
Information. The Fund retains the premium received from writing a put or call
option whether or not the option is exercised.
Over-the-counter options are purchased or written by the Fund in
privately negotiated transactions. Such options are illiquid, and it may not be
possible for the Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when Voyageur believes it
would be advantageous to do so. Over-the-counter options are subject to the
Fund's 15% illiquid investment limitation. See Appendix B to the Statement of
Additional Information for a further discussion of the general characteristics
and risks of options.
Participation in the options market involves investment risks and
transaction costs to which the Fund would not be subject absent the use of this
strategy. If Voyageur's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include (1) dependence on Voyageur's
ability to predict correctly movements in the direction of interest rates and
securities prices; (2) imperfect correlation between the price of options and
movements in the prices of the securities being hedged; (3) the fact that the
skills needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; and (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences. See
"Investment Policies and Restrictions-- Risks of Transactions in Futures
Contracts and Options" in the Statement of Additional Information for further
discussion and see Appendix B for a discussion of closing transactions and other
risks.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may enter into contracts for the purchase or sale for future delivery
of fixed income securities or contracts based on financial indices including any
index of securities in which the Fund may invest ("futures contracts") and may
purchase and write put and call options to buy or sell futures contracts
("options on futures contracts"). A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. The purchaser of a
futures contract on an index agrees to take or make delivery of an amount of
cash equal to the difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current contract value") and
the price at which the contract was originally struck. Options on futures
contracts to be written or purchased by the Fund will be traded on exchanges or
over the counter. The successful use of such instruments draws upon Voyageur's
experience with respect to such instruments and usually depends upon Voyageur's
ability to forecast interest rate movements correctly. Should interest rates
move in an unexpected manner, the Fund may not achieve the anticipated benefits
of futures contracts or options on futures contracts or may realize losses and
would thus be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the prices of the securities
hedged or used for cover will not be perfect.
The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements. To the extent
required to comply with applicable Securities and Exchange Commission releases
and staff positions, when purchasing a futures contract or writing a put option,
the Fund will maintain in a segregated account cash, U. S. Government securities
or other liquid high grade debt securities equal to the value of such contracts,
less any margin on deposit. In addition, the rules and regulations of the
Commodity Futures Trading Commission currently require that, in order to avoid
"commodity pool operator" status, the Fund must use futures and options
positions (a) for "bona fide hedging purposes" (as defined in the regulations)
or (b) for other purposes so long as aggregate initial margins and premiums
required in connection with non- hedging positions do not exceed 5% of the
liquidation value of the Fund's portfolio. There are no other numerical limits
on the Fund's use of futures contracts and options on futures contracts. For a
discussion of the tax treatment of futures contracts and options on futures
contracts, see "Taxes" in the Statement of Additional Information. For a further
discussion of the general characteristics and risks of futures, see Appendix B
to the Statement of Additional Information.
CONCENTRATION POLICY
As a fundamental policy, the Fund may not invest 25% or more of its total assets
in the securities of any industry, although, for purposes of this limitation,
tax-exempt securities and U.S. Government obligations are not considered to be
part of any industry. The Fund may invest 25% or more of its total assets in
industrial development revenue bonds. In addition, it is possible that the Fund
from time to time will invest 25% or more of its total assets in a particular
segment of the municipal bond market, such as housing, health care, utility,
transportation, education or industrial obligations. In such circumstances,
economic, business, political or other changes affecting one bond (such as
proposed legislation affecting the financing of a project; shortages or price
increases of needed materials; or a declining market or need for the project)
might also affect other bonds in the same segment, thereby potentially
increasing market or credit risk. For a discussion of these segments of the
municipal bond market, see "Investment Policies and Restrictions--Concentration
Policy" in the Statement of Additional Information.
The Fund's Board may change any of the foregoing policies that are not
specifically designated fundamental.
RISKS AND SPECIAL INVESTMENT CONSIDERATIONS
- --------------------------------------------------------------------------------
GENERAL
The yields on Municipal Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and monetary
conditions, conditions in the relevant market, the size of a particular issue,
maturity of the obligation and the rating of the issue. Generally, the value of
Municipal Obligations will tend to fall as interest rates rise and will tend to
increase as interest rates decrease. In addition, Municipal Obligations of
longer maturity generally produce higher current yields than Municipal
Obligations with shorter maturities but are subject to greater price fluctuation
due to changes in interest rates, tax laws and other general market factors.
Lower rated Municipal Obligations generally produce a higher yield than higher
rated Municipal Obligations due to the perception of a greater degree of risk as
to the payment of principal and interest. Certain Municipal Obligations held by
the Fund may permit the issuer at its option to "call," or redeem, its
securities. If an issuer were to redeem securities held by the Fund during a
time of declining interest rates, the Fund might not be able to reinvest the
proceeds in securities providing the same investment return as the securities
redeemed.
SPECIAL RISK CONSIDERATIONS REGARDING
MEDIUM- AND LOWER-GRADE MUNICIPAL OBLIGATIONS
The Fund invests in medium- and lower-grade Municipal Obligations. Municipal
Obligations which are in the medium and lower grade categories generally offer a
higher current yield than is offered by higher-grade Municipal Obligations but
they also generally involve greater price volatility and greater credit and
market risk. Credit risk relates to the issuer's ability to make timely payment
of interest and principal when due. Market risk relates to the changes in market
value that occur as a result of variation in the level of prevailing interest
rates and yield relationships in the municipal securities market. Debt
securities rated BB or below by S&P or Fitch and B or below by Moody's are
commonly referred to as "junk bonds." Although the Fund primarily will invest in
medium- and lower-grade Municipal Obligations, the Fund may invest in
higher-grade Municipal Obligations for temporary defensive purposes. Such
investments may result in lower current income than if the Fund were fully
invested in medium and lower-grade securities.
The value of the Fund's portfolio securities can be expected to
fluctuate over time. When interest rates decline, the value of a portfolio
invested in fixed-income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-income securities generally can be expected to decline. However, the
secondary market prices of medium- and lower-grade Municipal Obligations are
less sensitive to changes in interest rates and are more sensitive to adverse
economic changes or individual issuer developments than are the secondary market
prices of higher-grade debt securities. Such events also could lead to a higher
incidence of defaults by issuers of medium- and lower-grade Municipal
Obligations as compared with historical default rates. In addition, changes in
interest rates and periods of economic uncertainty can be expected to result in
increased volatility in the market price of the Municipal Obligation in the
Fund's portfolio and thus in the net asset value of the Fund. Also, adverse
publicity and investor perceptions, whether or not based on rational analysis,
may affect the value and liquidity of medium- and lower-grade Municipal
Obligations. The secondary market value of Municipal Obligations structured as
zero coupon securities and payment-in-kind securities may be more volatile in
response to changes in interest rates than debt securities which pay interest
periodically in cash. Investment in such securities also involves certain tax
considerations.
Increases in interest rates and changes in the economy may adversely
affect the ability of issuers of medium- and lower-grade Municipal Obligations
to pay interest and to repay principal, to meet projected financial goals and to
obtain additional financing. In the event that an issuer of securities held by
the Fund experiences difficulties in the timely payment of principal or interest
and such issuer seeks to restructure the terms of its borrowings, the Fund may
incur additional expenses and may determine to invest additional assets with
respect to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the fund may be
unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of
the medium- or lower-grade Municipal Obligations in which the Fund may invest,
trading in such securities may be relatively inactive. Voyageur has contracted
with Muller Data Corporation as pricing agent and Voyageur is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Directors. During periods of reduced market liquidity and in the
absence of readily available market quotations for medium- and lower-grade
Municipal Obligations held in the Fund's portfolio, the ability of the pricing
agent to value the Fund's securities becomes more difficult and the pricing
agent's use of judgment may play a greater role in the valuation of the Fund's
securities due to the reduced availability of reliable objective data. The
effects of adverse publicity and investor perceptions may be more pronounced for
securities for which no established retail market exists as compared with the
effects on securities for which such a market does exist. Further, the Fund may
have more difficulty selling such securities in a timely manner and at their
stated value than would be the case for securities for which an established
retail market does exist.
The Fund may invest in zero-coupon and payment-in-kind Municipal
Obligations. Zero-coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified date
when the securities begin paying current interest. They are issued and traded at
discount from their face amounts or par value, which discount varies depending
on the time remaining until cash payments begin, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
Internal Revenue Code of 1986, as amended, requires that regulated investment
companies distribute at least 90% of their net investment income each year,
including tax-exempt and non-cash income. Accordingly, although the Fund will
receive no coupon payments on zero-coupon securities prior to their maturity,
the Fund is required, in order to maintain its desired tax treatment, to include
in its distributions to shareholders in each year any income attributable to
zero-coupon securities that is in excess of 10% of the Fund's net investment
income in that year. The Fund may be required to borrow or to liquidate
portfolio securities at a time that it otherwise would not have done so in order
to make such distributions. Payment-in-kind securities are securities that pay
interest through the issuance of additional securities. Such securities
generally are more volatile in response to changes in interest rates and are
more speculative investments than are securities that pay interest periodically
in cash.
Voyageur seeks to minimize the risks involved in investing in medium-
and lower-grade Municipal Obligations through multiple portfolio holdings,
careful investment analysis, and attention to current developments and trends in
the economy and financial and credit markets. The Fund will rely on Voyageur's
judgement, analysis and experience in evaluating the creditworthiness of an
issue. In its analysis, Voyageur will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulator matters. Voyageur may consider the credit ratings of Moody's, Fitch,
and S&P in evaluating Municipal Obligations, although it does not rely primarily
on these ratings. Such ratings evaluate only the safety of principal and
interest payments, not market value risk. Additionally, because the
creditworthiness of an issuer may change more rapidly than is able to be timely
reflected in changes in credit ratings, Voyageur continuously monitors the
issuers of Municipal Obligations held in the Fund's portfolio.
Municipal Obligations generally are not listed for trading on any
national securities exchange, and many issuers of medium- and lower-grade
Municipal Obligations choose not to have a rating assigned to their obligations
by any nationally recognized statistical rating organization. The amount of
information available about the financial condition of an issuer of unlisted or
unrated securities generally is not as extensive as that which is available with
respect to issuers of listed or rated securities. Because of the nature of
medium- and lower- rated Municipal Obligations, achievement by the Fund of its
investment objective may be more dependent on the credit analysis of Voyageur
than is the case for an investment company which invests primarily in exchange
listed higher-grade securities.
STATE CONSIDERATIONS
The value of Municipal Obligations owned by the Fund may be adversely affected
by local political and economic conditions and developments within Minnesota.
Adverse conditions in an industry significant to the local economy could have a
correspondingly adverse effect on the financial condition of local issuers.
Other factors that could affect Municipal Obligations include a change in the
local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example, legislation or court decisions reducing state aid to local
governments or mandatory additional services). A description of certain factors
affecting and statistics describing issuers of Municipal Obligations in
Minnesota is set forth in the Statement of Additional Information. Generally,
the structure of the State's economy parallels the structure of the United
States economy as a whole. There are, however, employment concentrations in
durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. The Minnesota Department of Finance February 1996
Forecast has projected that, under current laws, the State will complete its
current biennium June 30, 1997 with a $15 million surplus, plus a $350 million
cash flow account balance, plus a $220 million budget reserve. Currently
Minnesota's general obligation bonds are rated Aaa by Moody's, AA+ by S&P and
AAA by Fitch. See "Special Factors Affecting the Fund" in the Statement of
Additional Information.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted certain investment restrictions in addition to those set
forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the restriction providing
that the Fund may not borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% of the value of its total assets (the
Fund may also borrow money in the form of reverse repurchase agreements up to
10% of total assets). See "Investment Policies and Restrictions--Investment
Restrictions" in the Statement of Additional Information.
The Fund also has a number of non-fundamental investment restrictions
which may be changed by the Fund's Board without shareholder approval. These
include restrictions providing that the Fund may not (i) invest more than 5% of
its total assets in securities of any single investment company, (ii) invest
more than 10% of its total assets in securities of two or more investment
companies, (iii) invest more than 15% of its net assets in illiquid securities
or (iv) pledge, hypothecate, mortgage or otherwise encumber its assets in excess
of 10% of net assets. If the Fund invests in securities of other investment
companies, the return on any such investments will be reduced by the operating
expenses, including investment advisory and administrative fees, of such
investment companies.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers investors the choice among three classes of shares which offer
different sales charges and bear different expenses. These alternatives permit
an investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. Page 2 of the Prospectus contains a
summary of these alternative purchase arrangements.
A broker-dealer may receive different levels of compensation depending
on which class of shares is sold. In addition, the Underwriter from time to time
pays certain additional cash incentives of up to $100 and/or non cash incentives
such as vacations or merchandise to its investment executives and other
broker-dealers and financial institutions in consideration of their sales of
Fund shares. In some instances, the Underwriter pays amounts not to exceed 1.25%
of the Fund's net assets (such as payments related to retention of shares by a
particular broker-dealer or financial institution for a specified period of
time), which may be made available only to broker-dealers and financial
institutions who meet certain objective standards developed by the Underwriter.
GENERAL PURCHASE INFORMATION
The minimum initial investment in the Fund is $1,000, and the minimum additional
investment is $100. The Fund's shares may be purchased at the public offering
price from the Underwriter, from other broker-dealers who are members of the
National Association of Securities Dealers, Inc. and who have selling agreements
with the Underwriter, and from certain financial institutions that have selling
agreements with the Underwriter.
When orders are placed for shares of the Fund, the public offering
price used for the purchase will be the net asset value per share next
determined after receipt of the order, plus the applicable sales charge, if any.
If an order is placed with the Underwriter or other broker-dealer, the
broker-dealer is responsible for promptly transmitting the order to the Fund.
The Fund reserves the right, in its absolute discretion, to reject any order for
the purchase of shares.
Shares of the Fund may be purchased by opening an account either by
mail or by phone. Dividend income begins to accrue as of the opening of the New
York Stock Exchange (the "Exchange") on the day that payment is received. If
payment is made by check, payment is considered received on the day the check is
received if the check is drawn upon a member bank of the Federal Reserve System
within the Ninth Federal Reserve District (Michigan's Upper Peninsula,
Minnesota, Montana, North Dakota, South Dakota and northwestern Wisconsin). In
the case of other checks, payment is considered received when the check is
converted into "Federal Funds," i.e., monies of member banks within the Federal
Reserve System that are on deposit at a Federal Reserve Bank, normally within
two days after receipt.
An investor who may be interested in having shares redeemed shortly
after purchase should consider making unconditional payment by certified check
or other means approved in advance by the Underwriter. Payment of redemption
proceeds will be delayed as long as necessary to verify by expeditious means
that the purchase payment has been or will be collected. Such period of time
typically will not exceed 15 days.
AUTOMATIC INVESTMENT PLAN
Investors may make systematic investments in fixed amounts automatically on a
monthly basis through the Fund's Automatic Investment Plan. Additional
information is available from the Underwriter by calling 800-545-3863.
PURCHASES BY MAIL
To open an account by mail, complete the general authorization form attached to
this Prospectus, designate an investment dealer or other financial institution
on the form, and mail it, along with a check payable to the Fund, to:
NW 9369
P.O. BOX 1450
MINNEAPOLIS, MN 55485-9369
PURCHASES BY TELEPHONE
To open an account by telephone, call 612-376-7014 or 800-545-3863 to obtain an
account number and instructions. Information concerning the account will be
taken over the phone. The investor must then request a commercial bank with
which he or she has an account and which is a member of the Federal Reserve
System to transmit Federal Funds by wire to the appropriate Fund as follows:
NORWEST BANK MINNESOTA, N.A., ABA #091000019
FOR CREDIT OF: VOYAGEUR MINNESOTA HIGH YIELD MUNICIPAL BOND FUND
CHECKING ACCOUNT NO.: 872-458
ACCOUNT NUMBER: (ASSIGNED BY TELEPHONE)
Information on how to transmit Federal Funds by wire is available at
any national bank or any state bank that is a member of the Federal Reserve
System. The bank may charge the shareholder for the wire transfer. If the phone
order and Federal Funds are received before the close of trading on the
Exchange, the order will be deemed to become effective at that time. Otherwise,
the order will be deemed to become effective as of the close of trading on the
Exchange on the next day the Exchange is open for trading. The investor will be
required to complete the general authorization form attached to this Prospectus
and mail it to the Fund after making the initial telephone purchase.
CLASS A SHARES--FRONT END SALES CHARGE ALTERNATIVE
The public offering price of Class A shares of the Fund is the net asset value
of the Fund's shares plus the applicable front end sales charge ("FESC"), which
will vary with the size of the purchase. The Fund receives the net asset value.
The FESC varies depending on the size of the purchase and is allocated between
the Underwriter and other broker-dealers.
The current sales charges are:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SALES CHARGE SALES CHARGE DEALER DISCOUNT
AS % OF AS % OF AS % OF
AMOUNT OF PURCHASE NET ASSET VALUE OFFERING PRICE OFFERING PRICE(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.90% 3.75% 3.25%
$50,000 but less than $100,000 3.63 3.50 3.00
$100,000 but less than $250,000 2.83 2.75 2.50
$250,000 but less than $500,000 2.04 2.00 1.75
$500,000 but less than $1,000,000 1.78 1.75 1.75
$1,000,000 or more NAV(3) NAV(3) 1.00(2)
- --------------------------------------------------------------------------------------------
</TABLE>
1 Brokers and dealers who receive 90% or more of the sales charge may be
considered to be underwriters under the Securities Act of 1933, as amended.
2 The Underwriter intends to pay its investment executives and other
broker-dealers and banks that sell Fund shares, out of its own assets, a
fee of 1% of the offering price of sales of $1,000,000 or more, other than
on sales not subject to a contingent deferred sales charge.
3 Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge at the time of redemption. See "--Contingent Deferred Sales
Charge."
In connection with the distribution of the Fund's Class A shares, the
Underwriter is deemed to receive all applicable sales charges. The Underwriter,
in turn, pays its investment executives and other broker-dealers selling such
shares a "dealer discount," as set forth above. In the event that shares are
purchased by a financial institution acting as agent for its customers, the
Underwriter or the broker-dealer with whom such order was placed may pay all or
part of its dealer discount to such financial institution in accordance with
agreements between such parties.
SPECIAL PURCHASE PLANS--REDUCED SALES CHARGES
Certain investors (or groups of investors) may qualify for reductions in the
sales charges shown above. Investors should contact their broker-dealer or the
Fund for details about the Fund's Combined Purchase Privilege, Cumulative
Quantity Discount and Letter of Intention plans. Descriptions are also included
with the general authorization form and in the Statement of Additional
Information. These special purchase plans may be amended or eliminated at any
time by the Underwriter without notice to existing Fund shareholders.
RULE 12b-1 FEES
Class A shares are subject to a Rule 12b-1 fee payable at an annual rate of .25%
of the average daily net assets of the Fund attributable to Class A shares. All
or a portion of such fees are paid quarterly to financial institutions and
service providers with respect to the average daily net assets attributable to
shares sold or serviced by such institutions and service providers. For
additional information about this fee, see "Management--Plan of Distribution"
below.
CONTINGENT DEFERRED SALES CHARGE
Although there is no initial sales charge on purchases of Class A shares of
$1,000,000 or more, the Underwriter pays investment dealers, out of its own
assets, a fee of 1% of the offering price of such shares. If these shares are
redeemed within two years, the redemption proceeds will be reduced by a
contingent deferred sales charge ("CDSC") of 1%. For additional information, see
"How to Sell Shares--Contingent Deferred Sales Charge."
WAIVER OF SALES CHARGES
A limited group of institutional and other investors may qualify to purchase
Class A shares at net asset value, with no front end or deferred sales charges.
The investors qualifying to purchase such shares are: (1) officers and directors
of the Fund; (2) officers, directors and full-time employees of Dougherty
Financial Group, Inc. and Pohlad Companies, and officers, directors and
full-time employees of parents and subsidiaries of the foregoing companies; (3)
officers, directors and full-time employees of investment advisers of other
mutual funds subject to a sales charge and included in any other family of
mutual funds that includes any Voyageur Fund as a member ("Other Load Funds"),
and officers, directors and full-time employees of parents, subsidiaries and
corporate affiliates of such investment advisers; (4) spouses and lineal
ancestors and descendants of the officers, directors/trustees and employees
referenced in clauses (1), (2) and (3), and lineal ancestors and descendants of
their spouses; (5) investment executives and other employees of banks and
dealers that have selling agreements with the Underwriter and parents, spouses
and children under the age of 21 of such investment executives and other
employees; (6) trust companies and bank trust departments for funds held in a
fiduciary, agency, advisory, custodial or similar capacity; (7) any state or any
political subdivision thereof or any instrumentality, department, authority or
agency of any state or political subdivision thereof; (8) partners and full-time
employees of the Fund's counsel; (9) managed account clients of Voyageur,
clients of investment advisers affiliated with Voyageur and other registered
investment advisers and their clients (the Fund may be available through a
broker-dealer which charges a transaction fee for purchases and sales) and (10)
"wrap accounts" for the benefit of clients of financial planners adhering to
certain standards established by Voyageur.
Class A shares will also be issued at net asset value, without a front
end or deferred sales charge, if the purchase of such shares is funded by the
proceeds from the redemption of shares of any unrelated open-end investment
company that charges a front end sales charge, and, in certain circumstances, a
contingent deferred sales charge. In order to exercise this privilege, the
purchase order must be received by the Fund within 60 days after the redemption
of shares of the unrelated investment company.
CLASS B SHARES--CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE
The public offering price of Class B shares of the Fund is the net asset value
of the Fund's shares. Class B shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC of up to 5% will be imposed if shares are redeemed within six years of
purchase. For additional information, see "How to Sell Shares--Contingent
Deferred Sales Charge." In addition, Class B shares are subject to higher Rule
12b-1 fees as described below. The CDSC will depend on the number of years since
the purchase was made according to the following table:
CDSC PERIOD CDSC AS A% OF AMOUNT REDEEMED*
- ----------------------------------------------------------------------------
1st year after purchase 5%
2nd year after purchase 4
3rd year after purchase 4
4th year after purchase 3
5th year after purchase 2
6th year after purchase 1
Thereafter 0
- ----------------------------------------------------------------------------
* The CDSC will be calculated on an amount equal to the lesser of the net
asset value of the shares at the time of purchase or the net asset value at
the time of redemption.
Proceeds from the CDSC are paid to the Underwriter and are used to defray
expenses of the Underwriter related to providing distribution-related services
to the Fund in connection with the sale of Class B shares, such as the payment
of compensation to selected broker dealers and for selling Class B shares. The
combination of the CDSC and the Rule 12b-1 fee enables the Fund to sell the
Class B shares without deduction of a sales charge at the time of purchase.
Although Class B shares are sold without an initial sales charge, the
Underwriter pays to brokers who sell Class B shares a sales commission equal to
4% of the amount invested and an ongoing annual servicing fee of .15% (paid
quarterly) calculated on the net assets attributable to sales made by such
broker-dealers.
RULE 12b-1 FEES
Class B shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of the Fund attributable to Class B shares. The
higher 12b-1 fee will cause Class B shares to have a higher expense ratio and to
pay lower dividends than Class A shares. For additional information about this
fee, see "Fees and Expenses" and "Management--Plan of Distribution."
CONVERSION FEATURE
On the first business day of the month eight years after the purchase date,
Class B shares will automatically convert to Class A shares and will no longer
be subject to a higher Rule 12b-1 fee. Such conversion will be on the basis of
the relative net asset values of the two classes. Class A shares issued upon
such conversion will not be subject to any FESC or CDSC. Class B shares acquired
by exchange from Class B shares of another Voyageur Fund will convert into Class
A shares based on the time of the initial purchase. Similarly, Class B shares
acquired by exercise of the Reinstatement Privilege will convert into Class A
shares based on the time of the original purchase of Class B shares. See
"Reinstatement Privilege" below. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date of issuance of
such shares.
CLASS C SHARES--LEVEL LOAD ALTERNATIVE
The public offering price of Class C shares of the Fund is the net asset value
of the Fund's shares. Class C shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC of 1% will be imposed if shares are redeemed within one year of purchase.
For additional information see "How to Sell Shares--Contingent Deferred Sales
Charge." In addition, Class C shares are subject to higher annual Rule 12b-1
fees as described below.
RULE 12b-1 FEES
Class C shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of the Fund attributable to Class C shares. The
higher Rule 12b-1 fee will cause Class C shares to have a higher expense ratio
and to pay lower dividends than Class A shares. For additional information about
this fee, see "Fees and Expenses" and "Management--Plan of Distribution."
Proceeds from the CDSC are paid to the Underwriter and are used to
defray expenses of the Underwriter related to providing distribution-related
services to the Fund in connection with the sale of Class C shares, such as the
payment of compensation to selected broker-dealers and for selling Class C
shares. The combination of the CDSC and the Rule 12b-1 fee enables the Fund to
sell the Class C shares without deduction of a sales charge at the time of
purchase. Although Class C shares are sold without an initial sales charge, the
Underwriter pays to brokers who sell Class C shares a sales commission equal to
1% of the samount invested and an ongoing annual servicing fee of .90% (paid
quarterly commencing in the thirteenth month after the sale of such shares)
calculated on the net assets attributable to sales made by such broker-dealers.
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
The Fund will redeem its shares in cash at the net asset value next determined
after receipt of a shareholder's written request for redemption in good order
(see below). If shares for which payment has been collected are redeemed,
payment must be made within seven days. Shareholders will not earn any income on
redeemed shares on the redemption date. The Fund may suspend this right of
redemption and may postpone payment only when the Exchange is closed for other
than customary weekends or holidays, or if permitted by the rules of the
Securities and Exchange Commission during periods when trading on the Exchange
is restricted or during any emergency which makes it impracticable for the Fund
to dispose of its securities or to determine fairly the value of its net assets
or during any other period permitted by order of the Commission for the
protection of investors.
The Fund reserves the right and currently plans to redeem Fund shares
and mail the proceeds to the shareholder if at any time the value of Fund shares
in the account falls below a specified value, currently set at $250.
Shareholders will be notified and will have 60 days to bring the account up to
the required value before any redemption action will be taken by the Fund.
CONTINGENT DEFERRED SALES CHARGE
The CDSC will be calculated on an amount equal to the lesser of the net asset
value of the shares at the time of purchase or their net asset value at the time
of redemption. No charge will be imposed on increases in net asset value above
the initial purchase price. In addition, no charge will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
In determining whether a CDSC is payable with respect to any
redemption, the calculation will be determined in the manner that results in the
lowest rate being charged. Therefore, it will be assumed that shares that are
not subject to the CDSC are redeemed first, shares subject to the lowest level
of CDSC are redeemed next, and so forth. If a shareholder owns Class A and
either Class B or Class C shares, then absent a shareholder choice to the
contrary, Class B or Class C shares not subject to a CDSC will be redeemed in
full prior to any redemption of Class A shares not subject to a CDSC.
The CDSC does not apply to: (1) redemptions of Class B shares in
connection with the automatic conversion to Class A shares; (2) redemptions of
shares when a Fund exercises its right to liquidate accounts which are less than
the minimum account size; and (3) redemptions in the event of the death or
disability of the shareholder within the meaning of Section 72(m)(7) of the
Internal Revenue Code.
If a shareholder exchanges Class A, Class B or Class C shares subject
to a CDSC for Class A, Class B or Class C shares, respectively, of a different
Voyageur Fund, the transaction will not be subject to a CDSC. However, when
shares acquired through the exchange are redeemed, the shareholder will be
treated as if no exchange took place for the purpose of determining the CDSC.
Fund shares are exchangeable for shares of any money market fund available
through Voyageur. No CDSC will be imposed at the time of any such exchange;
however, the shares acquired in any such exchange will remain subject to the
CDSC and the period during which such shares represent shares of the money
market fund will not be included in determining how long the shares have been
held. Any CDSC due upon a redemption of Fund shares will be reduced by the
amount of any Rule 12b-1 payments made by such money market fund with respect to
such shares.
The Underwriter, upon notification, intends to provide, out of its own
assets, a pro rata refund of any CDSC paid in connection with a redemption of
Class A, Class B, or Class C shares of the Fund (by crediting such refunded CDSC
to such shareholder's account) if, within 90 days of such redemption, all or any
portion of the redemption proceeds are reinvested in shares of the same class in
any of the Voyageur Funds. Any reinvestment within 90 days of a redemption to
which the CDSC was paid will be made without the imposition of a FESC but will
be subject to the same CDSC to which such amount was subject prior to the
redemption. The amount of the CDSC will be calculated from the original
investment date.
EXPEDITED REDEMPTIONS
The Fund offers several expedited redemption procedures, described below, which
allow a shareholder to redeem Fund shares at net asset value determined on the
same day that the shareholder places the request for redemption of those shares.
Pursuant to these expedited redemption procedures, the Fund will redeem its
shares at their net asset value next determined following the Fund's receipt of
the redemption request. The Fund reserves the right at any time to suspend or
terminate the expedited redemption procedures or to impose a fee for this
service. There is currently no additional charge to the shareholder for use of
the Fund's expedited redemption procedures.
EXPEDITED TELEPHONE REDEMPTION
Shareholders redeeming at least $1,000 and no more than $50,000 (for which
certificates have not been issued) may redeem by telephoning the Fund directly
at 612-376-7014 or 800-545-3863. The applicable section of the general
authorization form must have been completed by the shareholder and filed with
the Fund before the telephone request is received. The proceeds of the
redemption will be paid by check mailed to the shareholder's address of record
or, if requested at the time of redemption, by wire to the bank designated on
the general authorization form. The Fund will employ reasonable procedures to
confirm that telephone instructions are genuine, including requiring that
payment be made only to the shareholder's address of record or to the bank
account designated on the authorization form and requiring certain means of
telephonic identification. The Fund's Adviser and Distributor will not be liable
for following instructions which are reasonably believed to be genuine.
EXPEDITED REDEMPTIONS THROUGH CERTAIN BROKER DEALERS
Certain broker-dealers who have sales agreements with the Underwriter may allow
their customers to effect a redemption of shares of the Fund purchased through
such broker-dealer by notifying the broker-dealer of the amount of shares to be
redeemed. The broker-dealer is then responsible for promptly placing the
redemption request with the Fund on the customer's behalf. Payment will be made
to the shareholder by check or wire sent to the broker-dealer. Broker-dealers
offering this service may impose a fee or additional requirements for such
redemptions.
GOOD ORDER
"Good order" means that stock certificates, if issued, must accompany the
written request for redemption and must be duly endorsed for transfer, or must
be accompanied by a duly executed stock power. If no stock certificates have
been issued, a written request to redeem must be made. Stock certificates will
not be issued for Class B or Class C shares. In any case, the shareholder must
execute the redemption request exactly as the shares are registered. If the
redemption proceeds are to be paid to the registered holder(s), a signature
guarantee is not normally required. A signature guarantee is required in certain
other circumstances, for example, to redeem more than $50,000 or to have a check
mailed other than to the shareholder's address of record. See "Other
Information" in the Statement of Additional Information. The Adviser may waive
certain of these redemption requirements at its own risk, but also reserves the
right to require signature guarantees on all redemptions, in contexts perceived
by the Adviser to subject the Fund to an unusual degree of risk.
MONTHLY CASH WITHDRAWAL PLAN
An investor who owns or buys shares of the Fund valued at $10,000 or more at the
current offering price may open a Withdrawal Plan and have a designated sum of
money paid monthly to the investor or another person. Deferred sales charges may
apply to monthly redemptions of Class B or Class C shares. See "Monthly Cash
Withdrawal Plan" in the Statement of Additional Information.
REINSTATEMENT PRIVILEGE
- --------------------------------------------------------------------------------
An investor in the Fund whose shares have been redeemed and who has not
previously exercised the Reinstatement Privilege as to the Fund may reinvest the
proceeds of such redemption in shares of the same class of any Voyageur Fund
eligible for sale in the shareholder's state of residence. Reinvestment will be
at the net asset value of Fund shares next determined after the Underwriter
receives a check along with a letter requesting reinstatement. The Underwriter
must receive the letter requesting reinstatement within 365 days following the
redemption. Investors who desire to exercise the Privilege should contact their
broker-dealer or the Fund.
Exercise of the Reinstatement Privilege does not alter the income tax
treatment of any capital gains realized on a sale of shares of the Fund, but to
the extent that any shares are sold at a loss and the proceeds are reinvested
within 30 days in shares of the Fund, some or all of the loss may not be allowed
as a deduction, depending upon the number of shares reacquired.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Except as described below, shareholders may exchange some or all of their Fund
shares for shares of another Voyageur Fund, provided that the shares to be
acquired in the exchange are eligible for sale in the shareholder's state of
residence. Class A shareholders may exchange their shares for Class A shares of
other Voyageur Funds. Class B shareholders may exchange their shares for the
Class B shares of other Voyageur Funds and Class C shareholders may exchange
their shares for the Class C shares of other Voyageur Funds. Shares of each
class may also be exchanged for shares of any money market fund available
through Voyageur.
The minimum amount which may be exchanged is $1,000. The exchange will
be made on the basis of the relative net asset values next determined after
receipt of the exchange request, plus the amount, if any, by which the
applicable sales charge exceeds the sum of all sales charges previously paid in
connection with the prior investment. For a discussion of issues relating to the
contingent deferred sales charge upon such exchanges, see "How to Sell
Shares--Contingent Deferred Sales Charge." There is no specific limitation on
exchange frequency; however, the Fund is intended for long term investment and
not as a trading vehicle. Voyageur reserves the right to prohibit excessive
exchanges (more than four per quarter). Voyageur also reserves the right, upon
60 days' prior notice, to restrict the frequency of, or otherwise modify,
condition, terminate or impose charges upon, exchanges. An exchange is
considered to be a sale of shares on which the investor may realize a capital
gain or loss for income tax purposes. Exchange requests may be placed directly
with the Fund, through Voyageur or through other broker-dealers. An investor
considering an exchange should obtain a prospectus of the Fund to be acquired
and should read such prospectus carefully. Contact the Fund, Voyageur or any of
such other broker-dealers for further information about the exchange privilege.
MANAGEMENT
- --------------------------------------------------------------------------------
The Board of Directors of the Fund is responsible for managing the business and
affairs of the Fund. The names, addresses, principal occupations and other
affiliations of Directors and executive officers of the Fund are set forth in
the Statement of Additional Information.
INVESTMENT ADVISER; PORTFOLIO MANAGEMENT
Voyageur has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as the Fund's investment adviser, subject to the authority of
the Board of Directors. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group, Inc. ("DFG"), which is
owned approximately 49% by Michael E. Dougherty, 49% by Pohlad Companies and
less than 1% by certain retirement plans for the benefit of DFG employees. Mr.
Dougherty co-founded the predecessor of DFG in 1977 and has served as DFG's
Chairman of the Board and Chief Executive Officer since inception. Pohlad
Companies is a holding company owned in equal parts by each of James O. Pohlad,
Robert C. Pohlad and William M. Pohlad. As of March 31, 1996, Voyageur served as
the manager to six closed-end and ten open-end investment companies (comprising
32 separate investment portfolios), administered numerous private accounts and
managed approximately $9 billion in assets. Voyageur's principal business
address is 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402.
The Fund pays Voyageur a monthly investment advisory and management fee
equivalent on an annual basis to .65% of its average daily net assets.
Elizabeth H. Howell has day-to-day portfolio management responsibility
for the Fund. Since 1991, Ms. Howell has had day-to-day portfolio management
responsibility for the Voyageur Minnesota Tax Free Fund, Voyageur Minnesota
Limited Term Tax Free Fund, and Voyageur Minnesota Insured Fund, as well as,
since inception, the Voyageur Idaho Tax Free Fund, Voyageur Kansas Tax Free
Fund, Voyageur Missouri Insured Tax Free Fund, Voyageur Oregon Insured Tax Free
Fund, and Voyageur Washington Insured Tax Free Fund. Ms. Howell is a Vice
President and Senior Tax-Exempt Portfolio Manager for Voyageur, where she has
been employed since 1991 and is a Vice President of each of the Voyageur Funds.
Ms. Howell has over ten years experience as a securities analyst and portfolio
manager.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution under the 1940 Act (the "Plan") and
has entered into a Distribution Agreement with Voyageur Fund Distributors, Inc.
(the "Underwriter"). Pursuant to the Fund's Plan, the Fund pays the Underwriter
a Rule 12b-1 fee, at an annual rate of .25% of the Fund's average daily net
assets attributable to Class A shares and 1% of the Fund's average daily net
assets attributable to each of Class B and Class C shares for servicing of
shareholder accounts and distribution related services. Payments made under the
Plan are not tied exclusively to expenses actually incurred by the Underwriter
and may exceed or be less than expenses actually incurred by the Underwriter.
All of the Rule 12b-1 fee attributable to Class A shares, and a portion
of the fee equal to .25% of the average daily net assets of the Fund
attributable to each of Class B shares and Class C shares constitutes a
shareholder servicing fee designed to compensate the Underwriter for the
provision of certain services to the shareholders. The services provided may
include personal services provided to shareholders, such as answering
shareholder inquiries regarding the Fund and providing reports and other
information, and services related to the maintenance of shareholder accounts.
The Underwriter may use such Rule 12b-1 fee or portion thereof to make payments
to qualifying broker-dealers and financial institutions that provide such
services.
That portion of the Rule 12b-1 fee equal to .75% of the average daily
net assets of the Fund attributable to Class B shares and Class C shares,
respectively, constitutes a distribution fee designed to compensate the
Underwriter for advertising, marketing and distributing the Class B shares and
Class C shares of the Fund. In connection therewith, the Underwriter may provide
initial and ongoing sales compensation to its investment executives and other
broker-dealers for sales of Class B shares and Class C shares and may pay for
other advertising and promotional expenses in connection with the distribution
of Class B shares and Class C shares. The distribution fee attributable to Class
B shares and Class C shares is designed to permit an investor to purchase such
shares through investment executives of the Underwriter and other broker-dealers
without the assessment of an initial sales charge and at the same time to permit
the Underwriter to compensate its investment executives and other broker-dealers
in connection with the sale of such shares.
CUSTODIAN; DIVIDEND DISBURSING,
TRANSFER, ADMINISTRATIVE AND ACCOUNT SERVICES AGENT
Norwest Bank Minnesota, N.A. serves as the custodian of the Fund's portfolio
securities and cash.
Voyageur acts as the Fund's dividend disbursing, transfer,
administrative and accounting services agent to perform dividend-paying
functions, to calculate the Fund's daily share price, to maintain shareholder
records and to perform certain regulatory and compliance related services for
the Fund. The fees paid for these services are based on the Fund's assets and
include reimbursement of out-of-pocket expenses. Voyageur receives a monthly fee
from the Fund equal to the sum of (1) $1.33 per shareholder account per month,
(2) a monthly fee ranging from $1,000 to $1,500 based onthe average daily net
assets of the Fund and (3) a percentage of average daily net assets which ranges
from 0.11% to 0.02% based on the average daily net assets of the Fund. See "The
Investment Adviser and Underwriter--Expenses of the Fund" in the Statement of
Additional Information.
Certain institutions may act as sub-administrators for the Fund
pursuant to contracts with Voyageur, whereby the institutions will provide
shareholder services to their customers. Voyageur will pay the
sub-administrators' fees out of its own assets. The fee paid by Voyageur to any
sub-administrator will be a matter of negotiation between the institution and
Voyageur based on the extent and quality of the services provided.
EXPENSES OF THE FUND
Voyageur is contractually obligated to pay the operating expenses (excluding
interest expense, taxes, brokerage fees, commissions and Rule 12b-1 fees) of the
Fund which exceed 1% of the Fund's average daily net assets on an annual basis
up to certain limits as set forth in detail in the Statement of Additional
Information. In addition, Voyageur and the Underwriter reserve the right to
voluntarily waive their fees in whole or part and to voluntarily absorb certain
other of the Fund's expenses. Voyageur and the Underwriter have agreed to waive
fees or absorb expenses for the fiscal year ending December 31, 1996 in such a
manner as will result in the Fund being charged fees and expenses that
approximate those set forth in the section "Fees and Expenses." After December
31, 1996, such voluntary fee and expense waivers may be discontinued or modified
by Voyageur and the Underwriter in their sole discretion.
The Fund's expenses include, among others, fees of directors, expenses
of directors' and shareholders' meetings, insurance premiums, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Underwriter), expenses of printing and mailing stock
certificates and shareholder statements, association membership dues, charges of
the Fund's custodian, bookkeeping, auditing and legal expenses, the fees and
expenses of registering the Fund and its shares with the Securities and Exchange
Commission and registering or qualifying its shares under state securities laws
and expenses of preparing and mailing prospectuses and reports to existing
shareholders.
PORTFOLIO TRANSACTIONS
The Fund will not effect any brokerage transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with Voyageur unless
such transactions, including the frequency thereof, the receipt of commissions
payable in connection therewith and the selection of the affiliated
broker-dealer effecting such transactions, are not unfair or unreasonable to the
shareholders of the Fund. It is not anticipated that the Fund will effect any
brokerage transactions with any affiliated broker-dealer, including the
Underwriter, unless such use would be to the Fund's advantage. Voyageur may
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's securities transactions.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of Fund shares is determined once daily, Monday through
Friday, as of 3:00 p.m. Minneapolis time (the primary close of trading on the
Exchange) on each business day the Exchange is open for trading.
The net asset value per share of each class is determined by dividing
the value of the securities, cash and other assets of the Fund attributable to
such class less all liabilities attributable to such class by the total number
of shares of such class outstanding. For purposes of determining the net assets
of the Fund, tax-exempt securities are stated on the basis of valuations
provided by a pricing service, approved by the Board of Directors, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. Market quotations are used when available.
Non-tax-exempt securities for which market quotations are readily available are
stated at market value which is currently determined using the last reported
sale price, or, if no sales are reported, as in the case of most securities
traded over-the-counter, the last reported bid price, except that U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. Short-term notes having remaining maturities of 60 days or less
are stated at amortized cost which approximates market. All other securities and
other assets are valued in good faith at fair value by Voyageur in accordance
with procedures adopted by the Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
The present policy of the Fund is to declare a distribution from net investment
income on each day that the Fund is open for business. Net investment income
consists of interest accrued on portfolio investments of the Fund, less accrued
expenses. Distributions of net investment income are paid monthly. Short-term
capital gains distributions are taxable to shareholders as ordinary income. Net
realized long term capital gains, if any, are distributed annually, after
utilization of any available capital loss carryovers. Distributions paid by the
Fund, if any, with respect to Class A, Class B and Class C shares will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount, except that the higher Rule 12b-1 fees applicable to Class B
and Class C shares will be borne exclusively by such shares. The per share
distributions on Class B and Class C shares will be lower than the per share
distributions on Class A shares as a result of the higher Rule 12b-1 fees
applicable to Class B and Class C shares.
Shareholders receive distributions from investment income and capital
gains in additional shares of the class of the Fund owned by such shareholders
at net asset value, without any sales charge, unless they elect otherwise. The
Fund sends to its shareholders no less than quarterly statements with details of
any reinvested dividends.
TAXES
FEDERAL INCOME TAXATION
The Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to qualify during its current taxable year as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund also intends to take all other action required to ensure that
no federal income taxes will be payable by the Fund and that the Fund can pay
exempt-interest dividends.
Distributions of net interest income from tax-exempt obligations that
are designated by the Fund as exempt-interest dividends are excludable from the
gross income of the Fund's shareholders. Distributions paid from other interest
income and from any net realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Distributions paid from long-term capital gains (and designated as such)
are taxable as long-term capital gains for federal income tax purposes, whether
received in cash or shares, regardless of how long a shareholder has held shares
in the Fund.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986 to finance private activities
are treated as an item of tax preference for purposes of computing the
alternative minimum tax for individuals, estates and trusts.
MINNESOTA STATE TAXATION
Minnesota taxable net income is based generally on federal taxable income. The
portion of exempt-interest dividends that is derived from interest income on
Minnesota Municipal Obligations is excluded from the Minnesota taxable net
income of individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all shareholders
represents 95 percent or more of the exempt-interest dividends paid by the Fund.
Exempt-interest dividends are not excluded from the Minnesota taxable income of
corporations and financial institutions. Dividends qualifying for federal income
tax purposes as capital gain dividends are to be treated by shareholders as
long-term capital gains. Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility of
capital losses. Exempt-interest dividends subject to the federal alternative
minimum tax will also be subject to the Minnesota alternative minimum tax
imposed on individuals, estates and trusts.
The 1995 Minnesota Legislature enacted a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota income
tax purposes if a court determines that Minnesota's exemption of such interest
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is so included. This
provision applies to taxable years that begin during or after the calendar year
in which any such court decision becomes final, irrespective of the date on
which the obligations were issued. The Fund is not aware of any decision in
which a court has held that a state's exemption of interest on its own bonds or
those of its political subdivisions or Indian tribes, but not of interest on the
bonds of other states or their political subdivisions or Indian tribes,
unlawfully discriminates against interstate commerce or otherwise contravenes
the United States Constitution. Nevertheless, the Fund cannot predict the
likelihood that interest on the Minnesota Municipal Obligations held by the Fund
would become taxable under this Minnesota statutory provision.
The foregoing discussion relates to federal and state taxation as of
the date of the Prospectus. See "Taxes" in the Statement of Additional
Information. This discussion is not intended as a substitute for careful tax
planning. You are urged to consult your tax adviser with specific reference to
your own tax situation.
INVESTMENT PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements and other sales literature for the Fund may refer to "yield,"
"taxable equivalent yield," "average annual total return" and "cumulative total
return" and may compare such performance quotations with published indices and
comparable quotations of other funds. Performance quotations are computed
separately for Class A, Class B and Class C shares of the Fund. All such figures
are based on historical earnings and performance and are not intended to be
indicative of future performance. Additionally, performance information may not
provide a basis for comparison with other investments or other mutual funds
using a different method of calculating performance. The investment return on
and principal value of an investment in the Fund will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The advertised yield of the Fund will be based on a 30-day period
stated in the advertisement. Yield is calculated by dividing the net investment
income per share deemed earned during the period by the maximum offering price
per share on the last day of the period. The result is then annualized using a
formula that provides for semiannual compounding of income.
Taxable equivalent yield is calculated by applying the stated income
tax rate only to that portion of the yield that is exempt from taxation. The
tax-exempt portion of the yield is divided by the number 1 minus the stated
income tax rate (e.g., 1-28% = 72%). The result is then added to that portion of
the yield, if any, that is not tax-exempt.
Average annual total return is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. In calculating average annual total return, the maximum sales
charge is deducted from the hypothetical investment and all dividends and
distributions are assumed to be reinvested.
Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the ending redeemable value of such payment (at
the end of the relevant advertised period), dividing such difference by $1,000
and multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales load is deducted.
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Fund's
shares, including data from Lipper Analytical Services, Inc. and Morningstar.
For Fund performance information and daily net asset value quotations,
investors may call 612-376-7014 or 800-545-3863. For additional information
regarding the calculation of the Fund's yield, taxable equivalent yield, average
annual total return and cumulative total return, see "Calculation of Performance
Data" in the Statement of Additional Information.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Fund sends to its shareholders six-month unaudited and annual audited
financial statements.
The shares of the Fund constitute a separate series of Voyageur Mutual
Funds, Inc. (the "Company"), a Minnesota corporation which issues shares of
common stock with a $.01 par value per share. All shares of the Company are
non-assessable and fully transferable when issued and paid for in accordance
with the terms thereof and possess no cumulative voting, preemptive or
conversion rights. The Board of Directors is empowered to issue other series of
common stock without shareholder approval.
The Fund currently offers its shares in multiple classes, each with
different sales arrangements and bearing different expenses. Class A, Class B
and Class C shares each represent interests in the assets of the Fund and have
identical voting, dividend, liquidation and other rights on the same terms and
conditions except that expenses related to the distribution of each class are
borne solely by such class and each class of shares has exclusive voting rights
with respect to provisions of the Fund's Rule 12b-1 distribution plan which
pertain to a particular class and other matters for which separate class voting
is appropriate under applicable law.
Fund shares are freely transferable, subject to applicable securities
laws, are entitled to dividends as declared by the Board, and, in liquidation,
are entitled to receive the net assets, if any, of the Fund. The Fund does not
generally hold annual meetings of shareholders and will do so only when required
by law.
Each share of a series has one vote irrespective of the relative net
asset value of the shares. On some issues, such as the election of Board
members, all shares vote together as one series of the Company. On an issue
affecting only a particular series or class, the shares of the affected series
or class vote as a separate series or class. An example of such an issue would
be a fundamental investment restriction pertaining to only one series.
The assets received by the Company for the issue or sale of shares of
each series or class thereof, and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are allocated to such series,
and in the case of a class, allocated to such class, and constitute the
underlying assets of such series or class. The underlying assets of each series,
or class thereof, are required to be segregated on the books of account, and are
to be charged with the expenses in respect to such series or class thereof, and
with a share of the general expenses of the Company. Any general expenses of the
Company not readily identifiable as belonging to a particular series or class
are allocated among the series or classes thereof, based upon the relative net
assets of the series or class at the time such expenses were accrued. The
Company's Articles of Incorporation limit the liability of the Board members to
the fullest extent permitted by law. For a further discussion of the above
matters, see "Additional Information" in the Statement of Additional
Information.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
VOYAGEUR FUND DISTRIBUTORS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
NATIONAL HIGH YIELD MUNICIPAL BOND FUND
[GRAPHIC OMITTED]
[LOGO] VOYAGEUR
- -------------------------------------------------------------------------------
VOYAGEUR NATIONAL HIGH YIELD MUNICIPAL BOND FUND
VOYAGEUR FUNDS (NOT PART OF PROSPECTUS); DATED APRIL 28, 1997
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
3 FEES AND EXPENSES
- --------------------------------------------------------------------------------
5 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
6 THE FUND
- --------------------------------------------------------------------------------
6 INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
15 RISKS AND SPECIAL INVESTMENT CONSIDERATIONS
- --------------------------------------------------------------------------------
18 INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
18 HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
23 HOW TO SELL SHARES
- --------------------------------------------------------------------------------
26 REINSTATEMENT PRIVILEGE
- --------------------------------------------------------------------------------
26 EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
27 MANAGEMENT
- --------------------------------------------------------------------------------
29 DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
30 DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
- --------------------------------------------------------------------------------
31 INVESTMENT PERFORMANCE
- --------------------------------------------------------------------------------
31 GENERAL INFORMATION
- --------------------------------------------------------------------------------
VOYAGEUR FUNDS (NOT PART OF PROSPECTUS); DATED APRIL 28, 1997
PROSPECTUS
Dated April 28, 1997
- --------------------------------------------------------------------------------
Voyageur National High Yield Municipal Bond Fund (the "Fund") is a series of
Voyageur Mutual Funds, Inc., an open end management investment company, commonly
referred to as a mutual fund. The investment objective of the Fund is to seek a
high level of current income exempt from federal income tax primarily through
investment in a portfolio of medium- and lower-grade Municipal Obligations. The
weighted average maturity of the investment portfolio of the Fund is expected to
be approximately 15 to 25 years. There is no assurance that the Fund will
achieve its investment objective.
The Fund's investment adviser is Voyageur Fund Managers, Inc.
("Voyageur"). The address of Voyageur and the Fund is shown below.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE
UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER FEDERAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL DUE TO FLUCTUATIONS IN
THE FUND'S NET ASSET VALUE.
ON JANUARY 15, 1997, DOUGHERTY FINANCIAL GROUP, INC. ("DFG"), THE
PARENT COMPANY OF VOYAGEUR FUND MANGERS, INC. ("VOYAGEUR" OR THE "ADVISER")
EXECUTED AN AGREEMENT AND PLAN OF MERGER ("AGREEMENT") WITH LINCOLN NATIONAL
CORPORATION ("LNC") PURSUANT TO WHICH A SUBSIDIARY OF LNC WILL BE MERGED WITH
AND INTO DFG CAUSING DFG TO BECOME A WHOLLY OWNED SUBSIDIARY OF LNC. THE FUNDS'
BOARDS OF DIRECTORS AND SHAREHOLDERS HAVE APPROVED THE MERGER AT A SPECIAL
MEETING OF SHAREHOLDERS.
LNC, HEADQUARTERED IN FORT WAYNE, INDIANA, OWNS AND OPERATES INSURANCE
AND INVESTMENT MANAGEMENT BUSINESSES, INCLUDING DELAWARE MANAGEMENT HOLDINGS,
INC. ("DMH"). AFFILIATES OF DMH SERVE AS ADVISER AND DISTRIBUTOR FOR THE
DELAWARE GROUP OF INVESTMENT COMPANIES, WHICH CURRENTLY INCLUDES 16 OPEN-END
FUNDS AND 2 CLOSED-END FUNDS (COMPRISING 48 SEPARATE INVESTMENT PORTFOLIOS).
DMH, THROUGH ITS SUBSIDIARIES, IS RESPONSIBLE FOR THE MANAGEMENT OF
APPROXIMATELY $32 BILLION.
CONSUMMATION OF THE MERGER WILL CAUSE A CHANGE IN CONTROL OF VOYAGEUR.
UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THIS WILL RESULT IN AN
"ASSIGNMENT" AND AUTOMATIC TERMINATION OF THE FUNDS' INVESTMENT ADVISORY AND
DISTRIBUTION AGREEMENTS WITH VOYAGEUR. THE FUNDS' BOARDS OF DIRECTORS HAVE
APPROVED NEW INVESTMENT ADVISORY AND DISTRIBUTION AGREEMENTS CONTAINING THE SAME
TERMS AND FEES AS THE FORMER AGREEMENTS AND SHAREHOLDERS HAVE ALSO APPROVED SUCH
AGREEMENTS AND OTHER MATTERS RELATED TO THE MERGER. THE MERGER IS EXPECTED TO BE
FINAL ON OR ABOUT APRIL 30, 1997.
This Prospectus sets forth certain information about the Fund that a
prospective investor ought to know before investing. Investors should read and
retain this Prospectus for future reference. The Fund has filed a Statement of
Additional Information (dated April 28, 1997) with the Securities and Exchange
Commission. The Statement of Additional Information is available free of charge
by telephone and at the mailing address below and is incorporated by reference
into this Prospectus in accordance with the Commission's rules.
- --------------------------------------------------------------------------------
Voyageur National High Yield Municipal Bond Fund
- --------------------------------------------------------------------------------
90 SOUTH SEVENTH STREET, SUITE 4400
MINNEAPOLIS, MINNESOTA 55402.
612.376.7000 OR 800.553.2143
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Fund offers investors a choice among classes of shares which offer
different sales charges and bear different expenses. These alternatives permit
an investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances.
CLASS A SHARES
An investor who purchases Class A shares pays a sales charge at the time of
purchase. As a result, Class A shares are not subject to any charges when they
are redeemed (except for sales at net asset value in excess of $1 million which
are subject to a contingent deferred sales charge). The initial sales charge may
be reduced or waived for certain purchases. Class A shares are subject to a Rule
12b-1 fee payable at an annual rate of .25% of the Fund's average daily net
assets attributable to Class A shares. See "How to Purchase Shares--Class A
Shares."
CLASS B SHARES
Class B shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5% if redeemed within six years of
purchase. Class B shares are also subject to a higher Rule 12b-1 fee than Class
A shares. The Rule 12b-1 fee for Class B shares will be paid at an annual rate
of 1% of the Fund's average daily net assets attributable to Class B shares.
Class B shares will automatically convert to Class A shares at net asset value
approximately eight years after purchase. Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made but until conversion will have a higher expense ratio and pay
lower dividends than Class A shares due to the higher Rule 12b-1 fee. See "How
to Purchase Shares--Class B Shares."
CLASS C SHARES
Class C shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of 1% if redeemed within one year of purchase.
Class C shares are also subject to a higher Rule 12b-1 fee than Class A shares.
The Rule 12b-1 fee for Class C shares of the Fund will be paid at an annual rate
of 1% of the Fund's average daily net assets attributable to Class C shares.
Class C shares provide an investor the benefit of putting all of the investor's
dollars to work from the time the investment is made, but will have a higher
expense ratio and pay lower dividends than Class A shares due to the higher Rule
12b-1 fee. See "How to Purchase Shares--Class C Shares." Class C shares do not
convert to any other class of shares.
Investors making investments that qualify for reduced sales charges
might consider Class A shares. Other investors might consider Class B or Class C
shares because all of the purchase price is invested immediately. Orders for
Class B shares for $100,000 or more will be treated as orders for Class A shares
or such orders will be declined. Sales personnel may receive different
compensation depending on which class of shares they sell.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL HIGH YIELD MUNICIPAL BOND FUND CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 3.75% N/A(2) N/A(2)
Maximum Deferred Sales Load
(as a percentage of original purchase price
or redemption proceeds, as applicable) 1.00(1) 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee (after voluntary fee waiver)(3) .36 .36 .36
Rule 12b-1 Fees .21 1.00 1.00
Other Expenses .30 .09 .30
----- ---- -----
Total Fund Operating Expenses
(after voluntary fee waivers and expense reimbursements) .87% 1.45% 1.66%
====== ===== =====
Total Fund Operating Expenses
(without voluntary fee waivers and expense reimbursement)(3) 1.07% 1.66% 1.80%
====== ===== =====
EXAMPLE
An investor in the Fund would pay the following expenses on a $1,000 investment
assuming a 5% annual return and:
Redemption at the end of each period
1 Year $46 $65 $27
3 Years 64 86 52
5 Years 84 99 90
10 Years 141 158 197
No redemption
1 Year $46 15 17
3 Years 64 46 52
5 Years 84 79 90
10 Years 141 150 197
- ----------------------------------------------------------------------------------------------
</TABLE>
1 A contingent deferred sales charge of 1% is imposed on certain redemptions
of Class A shares that were purchased without an initial sales charge as
part of an investment of $1 million or more. See "How to Purchase
Shares--Class A Shares."
2 Class B and Class C shares are sold without a front-end sales charge, but
their Rule 12b-1 fees may cause long term shareholders to pay more than the
economic equivalent of the maximum permitted front-end sales charges.
3 The Fund's management fee without voluntary fee waivers would have been
0.65%.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose
of the above Fees and Expenses table is to assist the investor in understanding
the various costs and expenses that investors in the Fund will bear directly or
indirectly. The information set forth above under the heading "Total Fund
Operating Expenses (after voluntary fee waivers and expense reimbursements)"
reflects expenses incurred during the period ended December 31, 1996, after
voluntary expense waivers and fee reimbursements. Absent such fee and expense
waivers, Total Fund Operating Expenses for such period would be equivalent to
the corresponding percentages disclosed above in "Total Fund Operating Expenses
Without Voluntary Waiver and Reimbursement."
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights show certain per share data for Class A
Shares and selected information for a share of capital stock of Class A shares
outstanding during the indicated periods for the Fund. This information has been
audited by KPMG Peat Marwick LLP, independent auditors, and should be read in
conjunction with the financial statements of the Fund contained in its annual
report. An annual report of the Fund is available without charge by contacting
the Fund at 800-525-6584 toll free. In addition to financial statements, the
Fund's annual and semi-annual reports contain further information about
performance.
Effective with the close of business on November 8, 1996, the Fund
acquired the assets and assumed all identified liabilities of Great Hall
National Tax-Exempt Fund, in a tax-free exchange by issuing new shares. The Fund
had no assets or liabilities prior to the acquisition. Consequently, the
information presented for the Fund represents the financial history of Great
Hall National Tax-Exempt Fund.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------------------
Period Year Ended July 31,
from Aug 1 -------------------------------------------------------------------------
to Dec. 31, Class B
1996(7) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(1) 1996(5)
------ ------ ------ ------ ------ ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, begining of year $10.19 $10.17 $10.17 $10.50 $10.22 $9.65 $9.63 $9.68 $9.25 $9.31 $9.60 $10.37
------ ------ ------ ------ ------ ----- ----- ----- ----- ----- ----- ------
Operations:
Net investment income 0.260 0.625 0.648 0.624 0.652 0.703 0.697 0.669 0.692 0.714 0.653 0.010
Realized and unrealized gains
(losses) on investments, net 0.210 0.148 0.045 (0.313) 0.280 0.570 0.020 (0.050) 0.430 (0.060)(0.290) 0.030
------ ------ ------ ------ ------ ----- ----- ----- ----- ----- ----- ------
Total from operations 0.470 0.773 0.693 0.311 0.932 1.273 0.717 0.619 1.122 0.654 0.363 0.040
------ ------ ------ ------ ------ ----- ----- ----- ----- ----- ----- ------
Distributions to shareholders:
From investment income (0.260) (0.625) (0.648) (0.624)(0.652) (0.703)(0.697) (0.669) (0.692) (0.714)(0.653) (0.01)
From net realized gains -- (0.128) (0.045) (0.017) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ----- ----- ----- ----- ----- ----- ------
Net asset value, end of year $10.40 10.19 10.17 10.17 10.50 10.22 9.65 9.63 9.68 9.25 9.31 10.40
------ ====== ====== ====== ====== ====== ===== ===== ===== ===== ===== ======
Total return(3) 4.52% 7.78% 7.16% 2.99% 9.45% 13.84% 7.76% 6.69% 12.55% 7.35% 3.66% 0.43%
Net assets at end of
year (000s omitted) $59,105 $63,460 $66,357 $72,172 $58,048 $43,166 $46,812 $36,439 $34,519 $23,190 $16,833 $88
Ratio of expenses to average
daily net assets(2),(6) 0.87%(4) 0.85% 0.79% 0.91% 1.01% 0.84% 0.96% 1.23% 1.02% 0.68% 0.26%(4) 1.45(4)
Ratio of net investment income
to average daily net assets(2) 6.06%(4) 6.10% 6.45% 5.98% 6.32% 7.15% 7.26% 6.99% 7.36% 7.71% 6.76%(4) 4.65%(4)
Portfolio turnover rate 7.51% 0.00% 8.45% 27.88% 16.36% 14.50% 13.52% 33.49% 15.76% 20.40% 11.33% 7.51%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 For the period September 22, 1986 (commencement of operation of the Fund)
through July 31, 1987.
2 Various Fund fees and expenses were voluntarily waived or absorbed during
the periods referred to above. Had the Fund paid all expenses, the Class A
ratios of expenses and net investment income to average daily net assets
would have been 1.07%/5.86% for the period ended December 31, 1996, and for
periods ended July 31, as follows: 0.96%/5.99% in 1996, 0.90%/6.34% in 1995,
1.01%/5.88% in 1994, 1.24%/6.09% in 1993, 1.14%/6.85% in 1992, 1.26%/6.96%
in 1991, 1.23%/6.99% in 1990, 1.20%/7.18% in 1989, 1.21%/7.18% in 1988 and
1.06%/5.96% in 1987. For Class B these ratios would have been 1.66%/4.44%
for the period ended December 31, 1996.
3 Total return does not reflect payment of a sales charge.
4 Annualized.
5 For the period December 18, 1996 (commencement of operations) through
December 31, 1996.
6 Beginning in the year ended December 31, 1996, the expense ratio reflects
the effect of gross expenses attributable to earnings credits on uninvested
cash balances received by the Fund.
7 On November 6, 1996 the Fund's shareholders approved a change of investment
adviser from I.F.G. Asset Management Services, Inc. to Voyageur Fund
Managers, Inc.
THE FUND
- --------------------------------------------------------------------------------
The Fund is a separate series of Voyageur Mutual Funds, Inc., the parent
corporate entity, which was incorporated in the State of Minnesota on April 14,
1993. The Fund is non-diversified, as such term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). As a non-diversified
investment company, the Fund will be able to invest, subject to certain federal
tax requirements, a relatively higher percentage of its assets in the securities
of a limited number of issuers which may result in the Fund's securities being
more susceptible to any single economic, political or regulatory occurrence than
the securities of a diversified Fund. The investment objective and policies of
the Fund are described below.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to seek a high level of current income
exempt from federal income tax primarily through investment in a portfolio of
medium- and lower-grade Municipal Obligations. The Fund will attempt to invest
100% (and as a matter of fundamental policy during normal circumstances will
invest at least 80%) of the value of its net assets in Municipal Obligations the
interest on which is exempt from regular federal income tax. The Fund may invest
without limit in securities that generate interest that is an item of tax
preference for purposes of federal alternative minimum tax ("AMT"). In normal
circumstances the weighted average maturity of the investment portfolio of the
Fund is expected to be approximately 15 to 25 years. However, if Voyageur
determines that market conditions warrant a shorter average maturity, the Fund's
investments will be adjusted accordingly. During times of adverse market
conditions when a defensive investment posture is warranted, the Fund may
temporarily select investments without regard to the foregoing policies.
There are risks in any investment program, and there is no assurance
that the Fund's investment objective will be achieved. The value of the Fund's
shares will fluctuate with changes in the market value of its investments. The
Fund's investment objective and certain other investment policies explicitly
designated herein as such are fundamental, which means that they cannot be
changed without the vote of the Fund's shareholders as provided in the 1940 Act.
In normal market or economic situations, the Fund will invest at least 65% of
its total assets in medium-and lower-grade Municipal Obligations rated, at the
time of investment, between BBB and B- (inclusive) by Standard & Poor's Ratings
Services ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service, Inc.
("Moody's"), or BBB and B- (inclusive) by Fitch Investors Service LP ("Fitch"),
or Municipal Obligations determined by Voyageur to be of comparable quality.
Medium-grade Municipal Obligations are rated BBB by S&P or Fitch, Baa
by Moody's or determined by the Adviser to be of comparable quality. Municipal
Obligations rated BBB by S&P or Fitch generally are regarded by S&P or Fitch as
having an adequate capacity to pay interest and repay principal; adverse
economic conditions or changing circumstances are, however, more likely in S&P's
or Fitch's view to lead to a weakened capacity to pay interest and repay
principal as compared with higher rated Tax-exempt Obligations. Municipal
Obligations rated Baa by Moody's generally are considered by Moody's as
medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. In Moody's view, interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. In Moody's view,
such securities lack outstanding investment characteristics and have speculative
characteristics as well.
The Fund may invest in lower-grade Municipal Obligations rated, at the
time of investment, no lower than B- by S&P or Fitch or B3 by Moody's, or in
municipal securities determined by Voyageur to be of comparable quality.
Municipal Obligations rated B by S&P or Fitch generally are regarded by S&P or
Fitch, on balance, as predominantly speculative with respect to capacity to pay
interest or repay principal in accordance with the terms of the obligations.
While such securities will likely have some quality and protective
characteristics, in S&P's or Fitch's view these are outweighed by large
uncertainties or major risk exposure to adverse conditions. Securities rated B
by Moody's are viewed by Moody's as generally lacking characteristics of the
desirable investment. In Moody's view, assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
The Fund will not make initial investments in Municipal Obligations
rated, at the time of investment, below B- by S&P or Fitch or below B3 by
Moody's, or in Municipal Obligations determined by Voyageur to be of comparable
quality. The Fund may retain Municipal Obligations which are downgraded after
investment. There is no minimum rating with respect to securities that the Fund
may hold if downgraded after investment. See Appendix A to the Statement of
Additional Information for a description of Municipal Obligations ratings.
Investment in medium- and lower-grade securities involves special risks
as compared with investment in higher-grade securities, including potentially
greater sensitivity to a general economic downturn or to a significant increase
in interest rates, greater market price volatility and less liquid secondary
market trading. See "Risks and Special Investment Considerations." There can be
no assurance that the Fund will achieve its investment objective, and the Fund
may not be an appropriate investment for all investors. Furthermore, interest on
certain "private activity" obligations in which the Fund may invest is treated
as a preference item for the purpose of calculating the federal alternative
minimum tax and, accordingly, a portion of the income produced by the Fund may
be taxable under the federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the alternative
minimum tax or who would become subject to the alternative minimum tax as a
result of an investment in the Fund. See "Taxation."
At times Voyageur may judge that conditions in the markets for medium-
and lower-grade Municipal Obligations make pursuing the Fund's basic investment
strategy of investing primarily in such Municipal Obligations inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher grade Municipal Obligations and in Municipal
Obligations determined by Voyageur to be of comparable quality. Although such
higher grade Municipal Obligations generally entail less credit risk, such
higher grade Municipal Obligations may have a lower yield than medium and lower
grade Municipal Obligations and investment in such higher grade Municipal
Obligations may result in a lower yield to Fund shareholders. Voyageur may also
judge that conditions in the markets for long- and intermediate-term Municipal
Obligations in general make pursuing the Fund's basic investment strategy
inconsistent with the best interests of the Fund's shareholders. At such times,
the Fund may pursue strategies primarily designed to reduce fluctuations in the
value of the Fund's assets, including investing the Fund's assets in
high-quality, short-term Municipal Obligations and in high-quality, short-term
taxable securities. See "Taxation."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MOODY'S RATING Aaa Aa A Baa Ba B UNRATED TOTAL
(S&P RATING) (AAA) (AA) (A) (BBB) (BB) (B) BONDS
- ------------------------------------------------------------------------------------------------
VOYAGEUR NATIONAL HIGH YIELD 0% 2% 2% 5% 6% -- 85% 100%
MUNICIPAL BOND FUND
- ------------------------------------------------------------------------------------------------
</TABLE>
The Fund may invest without limitation in short-term Municipal
Obligations or in taxable obligations on a temporary, defensive basis due to
market conditions or, with respect to taxable obligations, for liquidity
purposes. Such taxable obligations, whether purchased for liquidity purposes or
on a temporary, defensive basis, may include: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
within the three highest grades by either Moody's, Fitch or S&P; commercial
paper rated in the highest grade by any of such rating services (Prime-1, F-1+
or A-1, respectively); certificates of deposit and bankers' acceptances of
domestic banks which have capital, surplus and undivided profits of over $100
million; high-grade taxable municipal bonds; and repurchase agreements with
respect to any of the foregoing investments. The Fund also may hold its assets
in cash and in securities of tax-exempt money market mutual funds.
MUNICIPAL OBLIGATIONS
As used in this Prospectus, the term "Municipal Obligations" refers to debt
obligations issued by or on behalf of a state or territory or its agencies,
instrumentalities, municipalities and political subdivisions. The term
"Municipal Obligations" also includes Derivative Municipal Obligations as
defined below.
Municipal Obligations are primarily debt obligations issued to obtain
funds for various public purposes such as constructing public facilities and
making loans to public institutions. The two principal classifications of
Municipal Obligations are general obligation bonds and revenue bonds. General
obligation bonds are generally secured by the full faith and credit of an issuer
possessing general taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source.
Revenue bonds are payable only from the revenues derived from a particular
source or facility, such as a tax on particular property or revenues derived
from, for example, a municipal water or sewer utility or an airport. Municipal
Obligations that benefit private parties in a manner different than members of
the public generally (so-called private activity bonds or industrial development
bonds) are in most cases revenue bonds, payable solely from specific revenues of
the project to be financed. The credit quality of private activity bonds is
usually directly related to the creditworthiness of the user of the facilities
(or the creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Municipal Obligations, there
is a variety of types of municipal securities. Certain Municipal Obligations may
carry variable or floating rates of interest whereby the rate of interest is not
fixed but varies with changes in specified market rates or indexes, such as a
bank prime rate or a tax-exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Municipal Obligations are zero coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
Municipal Obligations also include state or municipal leases and
participation interests therein. The Fund may invest in these types of
obligations without limit. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered illiquid by the staff of the
Securities and Exchange Commission. Municipal lease obligations held by the Fund
will be treated as illiquid unless they are determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors. Under these guidelines,
Voyageur will consider factors including, but not limited to (a) whether the
lease can be canceled, (b) what assurance there is that the assets represented
by the lease can be sold, (c) the municipality's general credit strength (e.g.,
its debt, administrative, economic and financial characteristics), (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
non-appropriation"), and (e) the legal recourse in the event of failure to
appropriate. Additionally, the lack of an established trading market for
municipal lease obligations may make the determination of fair market value more
difficult. See "Investment Policies and Restrictions--Municipal Obligations" in
the Statement of Additional Information.
The Fund may also acquire Derivative Municipal Obligations, which are
custodial receipts or trust certificates ("custodial receipts") underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain Municipal Obligations. The underwriter of
these certificates or receipts typically purchases and deposits the securities
in an irrevocable trust or custodial account with a custodian bank, which then
issues receipts or certificates that evidence ownership of the periodic
unmatured coupon payments and the final principal payment on the obligations.
Although under the terms of a custodial receipt or trust certificate, the Fund
may be authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund could be required to assert through the
custodian bank those rights as may exist against the underlying issuer. Thus, in
the event the underlying issuer fails to pay principal and/or interest when due,
the Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Fund had purchased a direct
obligation of the issuer.
In addition, in the event that the trust or custodial account in which
the underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, it would be subject
to state income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to the Fund and its
shareholders would be reduced by the amount of taxes paid. Furthermore, amounts
paid by the trust or custodial account to the Fund would lose their tax-exempt
character and become taxable, for federal and state purposes, in the hands of
the Fund and its shareholders. However, the Fund will only invest in custodial
receipts which are accompanied by a tax opinion stating that interest payable on
the receipts is tax-exempt. If the Fund invests in custodial receipts, it is
possible that a portion of the discount at which the Fund purchases the receipts
might have to be accrued as taxable income during the period that the Fund holds
the receipts.
The principal and interest payments on the Derivative Municipal
Obligations underlying custodial receipts or trust certificates may be allocated
in a number of ways. For example, payments may be allocated such that certain
custodial receipts or trust certificates may have variable or floating interest
rates and others may be stripped securities which pay only the principal or
interest due on the underlying Municipal Obligations. The Fund may also invest
in custodial receipts or trust certificates which are "inverse floating
obligations" (also sometimes referred to as "residual interest bonds"). These
securities pay interest rates that vary inversely to changes in the interest
rates of specified short term Municipal Obligations or an index of short-term
Municipal Obligations. Thus, as market interest rates increase, the interest
rates on inverse floating obligations decrease. Conversely, as market rates
decline, the interest rates on inverse floating obligations increase. Such
securities have the effect of providing a degree of investment leverage, since
the interest rates on such securities will generally change at a rate which is a
multiple of the change in the interest rates of the specified Municipal
Obligations or index. As a result, the market values of inverse floating
obligations will generally be more volatile than the market values of other
Municipal Obligations and investments in these types of obligations will
increase the volatility of the net asset value of shares of the Fund.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities. A
security is considered illiquid if it cannot be sold in the ordinary course of
business within seven days at approximately the price at which it is valued.
Illiquid securities may offer a higher yield than securities which are more
readily marketable, but they may not always be marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. The Fund may be restricted in its ability to sell such securities at a
time when Voyageur deems it advisable to do so. In addition, in order to meet
redemption requests, the Fund may have to sell other assets, rather than such
illiquid securities, at a time which is not advantageous.
Certain securities in which the Fund may invest, including municipal
lease obligations, certain restricted securities and commercial paper issued
pursuant to the private placement exemption of Section 4(2) of the Securities
Act of 1933, historically have been considered illiquid by the staff of the
Securities and Exchange Commission. In accordance with more recent staff
positions, however, the Fund will treat such securities as liquid and not
subject to the above 15% limitation when they have been determined to be liquid
by Voyageur subject to the oversight of and pursuant to procedures adopted by
the Fund's Board of Directors. See "Investment Policies and
Restrictions--Illiquid Investments" in the Statement of Additional Information.
MISCELLANEOUS INVESTMENT PRACTICES
FORWARD COMMITMENTS
New issues of Municipal Obligations and other securities are often purchased on
a "when issued" or delayed delivery basis, with delivery and payment for the
securities normally taking place 15 to 45 days after the date of the
transaction. The payment obligation and the interest rate that will be received
on the securities are each fixed at the time the buyer enters into the
commitment. The Fund may enter into such "forward commitments" if it holds, and
maintains until the settlement date in a segregated account, cash or high-grade
liquid debt obligations in an amount sufficient to meet the purchase price.
There is no percentage limitation on the Fund's total assets which may be
invested in forward commitments. Municipal Obligations purchased on a
when-issued basis and the securities held in the Fund's portfolio are subject to
changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Municipal Obligations
purchased on a when-issued basis may expose the Fund to risk because they may
experience such fluctuations prior to their actual delivery. Purchasing
Municipal Obligations on a when-issued basis can involve the additional risk
that the yield available in the market when the delivery takes place actually
may be higher than that obtained in the transaction itself. Any significant
commitment by the Fund to the purchase of securities on a when-issued basis may
increase the volatility of the Fund's net asset value. Although the Fund will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio, it may dispose of a commitment prior to settlement
if the Fund's investment manager deems it appropriate to do so. The Fund may
realize short-term profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to not more than 10%
of its total assets (taken at current value), except when investing for
defensive purposes during times of adverse market conditions. The Fund may enter
into repurchase agreements with respect to any securities which it may acquire
consistent with its investment policies and restrictions.
A repurchase agreement involves the purchase by the Fund of securities
with the condition that, after a stated period of time, the original seller (a
member bank of the Federal Reserve System or a recognized securities dealer)
will buy back the same securities ("collateral") at a predetermined price or
yield. Repurchase agreements involve certain risks not associated with direct
investments in securities. In the event the original seller defaults on its
obligation to repurchase, as a result of its bankruptcy or otherwise, the Fund
will seek to sell the collateral, which action could involve costs or delays. In
such case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, the Fund could suffer a
loss. See "Investment Policies and Restrictions--Taxable Obligations" in the
Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS
The Fund may engage in "reverse repurchase agreements" with banks and securities
dealers with respect to not more than 10% of its total assets. Reverse
repurchase agreements are ordinary repurchase agreements in which the Fund is
the seller of, rather than the investor in, securities and agrees to repurchase
them at an agreed upon time and price. Use of a reverse repurchase agreement may
be preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. Because certain of the
incidents of ownership of the security are retained by the Fund, reverse
repurchase agreements are considered a form of borrowing by the Fund from the
buyer, collateralized by the security. At the time the Fund enters into a
reverse repurchase agreement, cash, U. S. Government securities or other liquid
debt obligations having a value sufficient to make payments for the securities
to be repurchased will be segregated, and will be marked to market daily and
maintained throughout the period of the obligation. Reverse repurchase
agreements may be used as a means of borrowing for investment purposes subject
to the 10% limitation set forth above. This speculative technique is referred to
as leveraging. Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs which may or may not be
recovered by income from or appreciation of the securities purchased. Because
the Fund does not currently intend to utilize reverse repurchase agreements in
excess of 10% of total assets, the Fund believes the risks of leveraging due to
use of reverse repurchase agreements to principal are reduced. Voyageur believes
that the limited use of leverage may facilitate the Fund's ability to provide
high current income.
OPTIONS AND FUTURES
The Fund may utilize put and call transactions and may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See "Investment Policies and Restrictions--Options and Futures Transactions" in
the Statement of Additional Information. Options and futures may be used to
attempt to protect against possible declines in the market value of the Fund's
portfolio resulting from downward trends in the debt securities markets
(generally due to a rise in interest rates), to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio or to establish a position in the securities markets as
a temporary substitute for purchasing particular securities. The use of options
and futures is a function of market conditions. Other transactions may be used
by the Fund in the future for hedging purposes as they are developed to the
extent deemed appropriate by the Board.
OPTIONS ON SECURITIES
The Fund may write (i.e., sell) covered put and call options and purchase put
and call options on the securities in which it may invest and on indices of
securities in which it may invest, to the extent such put and call options are
available.
A put option gives the buyer of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the purchaser of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price.
In purchasing a call option, the Fund would be in a position to realize
a gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the period
by more than the amount of the premium. In purchasing a put option, the Fund
would be in a position to realize a gain if, during the option period, the price
of the security declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained the same or
did not decrease during that period by more than the amount of the premium. If a
put or call option purchased by the Fund were permitted to expire without being
sold or exercised, its premium would be lost by the Fund.
If a put option written by the Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by the Fund were exercised, the Fund would be obligated to sell
the underlying security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value of the
underlying security caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold to the Fund at a higher price than its current market value. The risk
involved in writing a call option is that there could be an increase in the
market value of the underlying security caused by declining interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction as described in Appendix B to the Statement of Additional
Information. The Fund retains the premium received from writing a put or call
option whether or not the option is exercised.
Over-the-counter options are purchased or written by the Fund in
privately negotiated transactions. Such options are illiquid, and it may not be
possible for the Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when Voyageur believes it
would be advantageous to do so. Over-the-counter options are subject to the
Fund's 15% illiquid investment limitation. See Appendix B to the Statement of
Additional Information for a further discussion of the general characteristics
and risks of options.
Participation in the options market involves investment risks and
transaction costs to which the Fund would not be subject absent the use of this
strategy. If Voyageur's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include (a) dependence on Voyageur's
ability to predict correctly movements in the direction of interest rates and
security prices; (b) imperfect correlation between the price of options and
movements in the prices of the securities being hedged; (c) the fact that the
skills needed to use these strategies are different from those needed to select
portfolio securities; (d) the possible absence of a liquid secondary market for
any particular instrument at any time; and (e) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences. See
"Investment Policies and Restrictions-- Risks of Transactions in Futures
Contracts and Options" in the Statement of Additional Information for further
discussion and see Appendix B for a discussion of closing transactions and other
risks.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may enter into contracts for the purchase or sale for future delivery
of fixed income securities or contracts based on financial indices including any
index of securities in which the Fund may invest ("futures contracts") and may
purchase and write put and call options to buy or sell futures contracts
("options on futures contracts"). A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. The purchaser of a
futures contract on an index agrees to take or make delivery of an amount of
cash equal to the difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current contract value") and
the price at which the contract was originally struck. Options on futures
contracts to be written or purchased by the Fund will be traded on exchanges or
over-the-counter. The successful use of such instruments draws upon Voyageur's
experience with respect to such instruments and usually depends upon Voyageur's
ability to forecast interest rate movements correctly. Should interest rates
move in an unexpected manner, the Fund may not achieve the anticipated benefits
of futures contracts or options on futures contracts or may realize losses and
would thus be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the prices of the securities
hedged or used for cover will not be perfect.
The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements. To the extent
required to comply with applicable Securities and Exchange Commission releases
and staff positions, when purchasing a futures contract or writing a put option,
the Fund will maintain in a segregated account cash, U. S. Government securities
or other liquid high grade debt securities equal to the value of such contracts,
less any margin on deposit. In addition, the rules and regulations of the
Commodity Futures Trading Commission currently require that, in order to avoid
"commodity pool operator" status, the Fund must use futures and options
positions (a) for "bona fide hedging purposes" (as defined in the regulations)
or (b) for other purposes so long as aggregate initial margins and premiums
required in connection with non-hedging positions do not exceed 5% of the
liquidation value of the Fund's portfolio. There are no other numerical limits
on the Fund's use of futures contracts and options on futures contracts. For a
discussion of the tax treatment of futures contracts and options on futures
contracts, see "Taxes" in the Statement of Additional Information. For a further
discussion of the general characteristics and risks of futures, see Appendix B
to the Statement of Additional Information.
CONCENTRATION POLICY
As a fundamental policy, the Fund may not invest 25% or more of its total assets
in the securities of any industry, although, for purposes of this limitation,
tax-exempt securities and U.S. Government obligations are not considered to be
part of any industry. The Fund may invest 25% or more of its total assets in
industrial development revenue bonds. In addition, it is possible that the Fund
from time to time will invest 25% or more of its total assets in a particular
segment of the municipal bond market, such as housing, health care, utility,
transportation, education or industrial obligations. In such circumstances,
economic, business, political or other changes affecting one bond (such as
proposed legislation affecting the financing of a project; shortages or price
increases of needed materials; or a declining market or need for the project)
might also affect other bonds in the same segment, thereby potentially
increasing market or credit risk. For a discussion of these segments of the
municipal bond market, see "Investment Policies and Restrictions--Concentration
Policy" in the Statement of Additional Information.
The Fund's Board may change any of the foregoing policies that are not
specifically designated fundamental.
RISKS AND SPECIAL INVESTMENT CONSIDERATIONS
- --------------------------------------------------------------------------------
GENERAL
The yields on Municipal Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and monetary
conditions, conditions in the relevant market, the size of a particular issue,
maturity of the obligation and the rating of the issue. Generally, the value of
Municipal Obligations will tend to fall as interest rates rise and will tend to
increase as interest rates decrease. In addition, Municipal Obligations of
longer maturity generally produce higher current yields than Municipal
Obligations with shorter maturities but are subject to greater price fluctuation
due to changes in interest rates, tax laws and other general market factors.
Lower rated Municipal Obligations generally produce a higher yield than higher
rated Municipal Obligations due to the perception of a greater degree of risk as
to the payment of principal and interest. Certain Municipal Obligations held by
the Fund may permit the issuer at its option to "call," or redeem, its
securities. If an issuer were to redeem securities held by the Fund during a
time of declining interest rates, the Fund might not be able to reinvest the
proceeds in securities providing the same investment return as the securities
redeemed.
SPECIAL RISKS CONSIDERATIONS REGARDING
MEDIUM- AND LOWER-GRADE MUNICIPAL OBLIGATIONS
The Fund invests in medium- and lower-grade Municipal Obligations. Municipal
Obligations which are in the medium and lower grade categories generally offer a
higher current yield than is offered by higher-grade Municipal Obligations but
they also generally involve greater price volatility and greater credit and
market risk. Credit risk relates to the issuer's ability to make timely payment
of interest and principal when due. Market risk relates to the changes in market
value that occur as a result of variation in the level of prevailing interest
rates and yield relationships in the municipal securities market. Debt
securities rated BB or below by S&P or Fitch and B or below by Moody's are
commonly referred to as "junk bonds." Although the Fund primarily will invest in
medium- and lower-grade Municipal Obligations, the Fund may invest in
higher-grade Municipal Obligations for temporary defensive purposes. Such
investments may result in lower current income than if the Fund were fully
invested in medium and lower-grade securities.
The value of the Fund's portfolio securities can be expected to
fluctuate over time. When interest rates decline, the value of a portfolio
invested in fixed-income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-income securities generally can be expected to decline. However, the
secondary market prices of medium- and lower-grade Municipal Obligations are
less sensitive to changes in interest rates and are more sensitive to adverse
economic changes or individual issuer developments than are the secondary market
prices of higher-grade debt securities. Such events also could lead to a higher
incidence of defaults by issuers of medium- and lower-grade Municipal
Obligations as compared with historical default rates. In addition, changes in
interest rates and periods of economic uncertainty can be expected to result in
increased volatility in the market price of the Municipal Obligation in the
Fund's portfolio and thus in the net asset value of the Fund. Also, adverse
publicity and investor perceptions, whether or not based on rational analysis,
may affect the value and liquidity of medium- and lower-grade Municipal
Obligations. The secondary market value of Municipal Obligations structured as
zero coupon securities and payment-in-kind securities may be more volatile in
response to changes in interest rates than debt securities which pay interest
periodically in cash. Investment in such securities also involves certain tax
considerations.
Increases in interest rates and changes in the economy may adversely
affect the ability of issuers of medium- and lower-grade Municipal Obligations
to pay interest and to repay principal, to meet projected financial goals and to
obtain additional financing. In the event that an issuer of securities held by
the Fund experiences difficulties in the timely payment of principal or interest
and such issuer seeks to restructure the terms of its borrowings, the Fund may
incur additional expenses and may determine to invest additional assets with
respect to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the fund may be
unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of
the medium- or lower-grade Municipal Obligations in which the Fund may invest,
trading in such securities may be relatively inactive. Voyageur has contracted
with Muller Data Corporation as pricing agent and Voyageur is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Directors. During periods of reduced market liquidity and in the
absence of readily available market quotations for medium- and lower-grade
Municipal Obligations held in the Fund's portfolio, the ability of the pricing
agent to value the Fund's securities becomes more difficult and the pricing
agent's use of judgment may play a greater role in the valuation of the Fund's
securities due to the reduced availability of reliable objective data. The
effects of adverse publicity and investor perceptions may be more pronounced for
securities for which no established retail market exists as compared with the
effects on securities for which such a market does exist. Further, the Fund may
have more difficulty selling such securities in a timely manner and at their
stated value than would be the case for securities for which an established
retail market does exist.
The Fund may invest in zero-coupon and payment-in-kind Municipal
Obligations. Zero-coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified date
when the securities begin paying current interest. They are issued and traded at
discount from their face amounts or par value, which discount varies depending
on the time remaining until cash payments begin, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
Internal Revenue Code of 1986, as amended, requires that regulated investment
companies distribute at least 90% of their net investment income each year,
including tax-exempt and non-cash income. Accordingly, although the Fund will
receive no coupon payments on zero-coupon securities prior to their maturity,
the Fund is required, in order to maintain its desired tax treatment, to include
in its distributions to shareholders in each year any income attributable to
zero-coupon securities that is in excess of 10% of the Fund's net investment
income in that year. The Fund may be required to borrow or to liquidate
portfolio securities at a time that it otherwise would not have done so in order
to make such distributions. Payment-in-kind securities are securities that pay
interest through the issuance of additional securities. Such securities
generally are more volatile in response to changes in interest rates and are
more speculative investments than are securities that pay interest periodically
in cash.
Voyageur seeks to minimize the risks involved in investing in medium-
and lower-grade Municipal Obligations through multiple portfolio holdings,
careful investment analysis, and attention to current developments and trends in
the economy and financial and credit markets. The Fund will rely on Voyageur's
judgement, analysis and experience in evaluating the creditworthiness of an
issue. In its analysis, Voyageur will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulator matters. Voyageur may consider the credit ratings of Moody's, Fitch,
and S&P in evaluating Municipal Obligations, although it does not rely primarily
on these ratings. Such ratings evaluate only the safety of principal and
interest payments, not market value risk. Additionally, because the
creditworthiness of an issuer may change more rapidly than is able to be timely
reflected in changes in credit ratings, Voyageur monitors the issuers of
Municipal Obligations held in the Fund's portfolio on an ongoing basis.
Municipal Obligations generally are not listed for trading on any
national securities exchange, and many issuers of medium- and lower-grade
Municipal Obligations choose not to have a rating assigned to their obligations
by any nationally recognized statistical rating organization. The amount of
information available about the financial condition of an issuer of unlisted or
unrated securities generally is not as extensive as that which is available with
respect to issuers of listed or rated securities. Because of the nature of
medium- and lower-rated Municipal Obligations, achievement by the Fund of its
investment objective may be more dependent on the credit analysis of Voyageur
than is the case for an investment company which invests primarily in exchange
listed higher-grade securities.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted certain investment restrictions in addition to those set
forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the restriction providing
that the Fund may not borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% of the value of its total assets (the
Fund may also borrow money in the form of reverse repurchase agreements up to
10% of total assets). See "Investment Policies and Restrictions--Investment
Restrictions" in the Statement of Additional Information.
The Fund also has a number of non-fundamental investment restrictions
which may be changed by the Fund's Board without shareholder approval. These
include restrictions providing that the Fund may not (a) invest more than 5% of
its total assets in securities of any single investment company, (b) invest more
than 10% of its total assets in securities of two or more investment companies,
(c) invest more than 15% of its net assets in illiquid securities or (d) pledge,
hypothecate, mortgage or otherwise encumber its assets in excess of 10% of net
assets. If the Fund invests in securities of other investment companies, the
return on any such investments will be reduced by the operating expenses,
including investment advisory and administrative fees, of such investment
companies.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers investors the choice among three classes of shares which offer
different sales charges and bear different expenses. These alternatives permit
an investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. Page 2 of the Prospectus contains a
summary of these alternative purchase arrangements.
A broker-dealer may receive different levels of compensation depending
on which class of shares is sold. In addition, the Underwriter pays certain
additional cash incentives of up to $100 and/or non-cash incentives such as
vacations or merchandise to its investment executives and other broker-dealers
and financial institutions in consideration of their sales of Fund shares. In
some instances, the Underwriter pays amounts not to exceed 1.25% of the Fund's
net assets (such as payments related to retention of shares sold by a particular
broker-dealer or financial institution for a specified period of time) to
broker-dealers and financial institutions who meet certain objective standards
developed by the Underwriter.
GENERAL PURCHASE INFORMATION
The minimum initial investment in the Fund is $1,000, and the minimum additional
investment is $100. The Fund's shares may be purchased at the public offering
price from the Underwriter, from other broker-dealers who are members of the
National Association of Securities Dealers, Inc. and who have selling agreements
with the Underwriter, and from certain financial institutions that have selling
agreements with the Underwriter.
When orders are placed for shares of the Fund, the public offering
price used for the purchase will be the net asset value per share next
determined after receipt of the order, plus the applicable sales charge, if any.
If an order is placed with the Underwriter or other broker-dealer, the
broker-dealer is responsible for promptly transmitting the order to the Fund.
The Fund reserves the right, in its absolute discretion, to reject any order for
the purchase of shares.
Shares of the Fund may be purchased by opening an account either by
mail or by phone. Dividend income begins to accrue as of the opening of the New
York Stock Exchange (the "Exchange") on the day that payment is received. If
payment is made by check, payment is considered received on the day the check is
received if the check is drawn upon a member bank of the Federal Reserve System
within the Ninth Federal Reserve District (Michigan's Upper Peninsula,
Minnesota, Montana, North Dakota, South Dakota and northwestern Wisconsin). In
the case of other checks, payment is considered received when the check is
converted into "Federal Funds," i.e., monies of member banks within the Federal
Reserve System that are on deposit at a Federal Reserve Bank, normally within
two days after receipt.
An investor who may be interested in having shares redeemed shortly
after purchase should consider making unconditional payment by certified check
or other means approved in advance by the Underwriter. Payment of redemption
proceeds will be delayed as long as necessary to verify by expeditious means
that the purchase payment has been or will be collected. Such period of time
typically will not exceed 15 days.
AUTOMATIC INVESTMENT PLAN
Investors may make systematic investments in fixed amounts automatically on a
monthly basis through the Fund's Automatic Investment Plan. Additional
information is available from the Underwriter by calling 800-545-3863.
PURCHASES BY MAIL
To open an account by mail, complete the general authorization form attached to
this Prospectus, designate an investment dealer or other financial institution
on the form, and mail it, along with a check payable to the Fund, to:
NW 9369
P.O. BOX 1450
MINNEAPOLIS, MN 55485-9369
PURCHASES BY TELEPHONE
To open an account by telephone, call 612-376-7014 or 800-545-3863 to obtain an
account number and instructions. Information concerning the account will be
taken over the phone. The investor must then request a commercial bank with
which he or she has an account and which is a member of the Federal Reserve
System to transmit Federal Funds by wire to the appropriate Fund as follows:
NORWEST BANK MINNESOTA, N.A., ABA #091000019
FOR CREDIT OF: VOYAGEUR NATIONAL HIGH YIELD MUNICIPAL BOND FUND
CHECKING ACCOUNT NO.: 872-458
ACCOUNT NUMBER: (ASSIGNED BY TELEPHONE)
Information on how to transmit Federal Funds by wire is available at
any national bank or any state bank that is a member of the Federal Reserve
System. The bank may charge the shareholder for the wire transfer. If the phone
order and Federal Funds are received before the close of trading on the
Exchange, the order will be deemed to become effective at that time. Otherwise,
the order will be deemed to become effective as of the close of trading on the
Exchange on the next day the Exchange is open for trading. The investor will be
required to complete the general authorization form attached to this Prospectus
and mail it to the Fund after making the initial telephone purchase.
CLASS A SHARES--FRONT END SALES CHARGE ALTERNATIVE
The public offering price of Class A shares of the Fund is the net asset value
of the Fund's shares plus the applicable front end sales charge ("FESC"), which
will vary with the size of the purchase. The Fund receives the net asset value.
The FESC varies depending on the size of the purchase and is allocated between
the Underwriter and other broker-dealers.
The current sales charges are:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SALES CHARGE SALES CHARGE DEALER DISCOUNT
AS % OF AS % OF AS % OF
AMOUNT OF PURCHASE NET ASSET VALUE OFFERING PRICE OFFERING PRICE(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.90% 3.75% 3.25%
$50,000 but less than $100,000 3.63 3.50 3.00
$100,000 but less than $250,000 2.83 2.75 2.50
$250,000 but less than $500,000 2.04 2.00 1.75
$500,000 but less than $1,000,000 1.78 1.75 1.75
$1,000,000 or more NAV(3) NAV(3) 1.00(2)
- -----------------------------------------------------------------------------------------------
</TABLE>
1 Brokers and dealers who receive 90% or more of the sales charge may be
considered to be underwriters under the Securities Act of 1933, as amended.
2 The Underwriter intends to pay its investment executives and other
broker-dealers and banks that sell Fund shares, out of its own assets, a fee
of 1% of the offering price of sales of $1,000,000 or more, other than on
sales not subject to a contingent deferred sales charge.
3 Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge at the time of redemption. See "--Contingent Deferred Sales
Charge."
In connection with the distribution of the Fund's Class A shares, the
Underwriter is deemed to receive all applicable sales charges. The Underwriter,
in turn, pays its investment executives and other broker-dealers selling such
shares a "dealer discount," as set forth above. In the event that shares are
purchased by a financial institution acting as agent for its customers, the
Underwriter or the broker-dealer with whom such order was placed may pay all or
part of its dealer discount to such financial institution in accordance with
agreements between such parties.
SPECIAL PURCHASE PLANS--REDUCED SALES CHARGES
Certain investors (or groups of investors) may qualify for reductions in the
sales charges shown above. Investors should contact their broker-dealer or the
Fund for details about the Fund's Combined Purchase Privilege, Cumulative
Quantity Discount and Letter of Intention plans. Descriptions are also included
with the general authorization form and in the Statement of Additional
Information. These special purchase plans may be amended or eliminated at any
time by the Underwriter without notice to existing Fund shareholders.
RULE 12b-1 FEES
Class A shares are subject to a Rule 12b-1 fee payable at an annual rate of .25%
of the average daily net assets of the Fund attributable to Class A shares. All
or a portion of such fees are paid quarterly to financial institutions and
service providers with respect to the average daily net assets attributable to
shares sold or serviced by such institutions and service providers. For
additional information about this fee, see "Management--Plan of Distribution"
below.
CONTINGENT DEFERRED SALES CHARGE
Although there is no initial sales charge on purchases of Class A shares of
$1,000,000 or more, the Underwriter pays investment dealers, out of its own
assets, a fee of 1% of the offering price of such shares. If these shares are
redeemed within two years after purchase, the redemption proceeds will be
reduced by a contingent deferred sales charge ("CDSC") of 1%. For additional
information, see "How to Sell Shares--Contingent Deferred Sales Charge."
WAIVER OF SALES CHARGES
A limited group of institutional and other investors may qualify to purchase
Class A shares at net asset value, with no front end or deferred sales charges.
The investors qualifying to purchase such shares are: (a) officers and directors
of the Fund; (b) officers, directors and full-time employees of Dougherty
Financial Group, Inc. and Pohlad Companies, and officers, directors and
full-time employees of parents and subsidiaries of the foregoing companies; (c)
officers, directors and full-time employees of investment advisers of other
mutual funds subject to a sales charge and included in any other family of
mutual funds that includes any Voyageur Fund as a member ("Other Load Funds"),
and officers, directors and full-time employees of parents, subsidiaries and
corporate affiliates of such investment advisers; (d) spouses and lineal
ancestors and descendants of the officers, directors/trustees and employees
referenced in clauses (a), (b) and (c), and lineal ancestors and descendants of
their spouses; (e) investment executives and other employees of banks and
dealers that have selling agreements with the Underwriter and parents, spouses
and children under the age of 21 of such investment executives and other
employees; (f) trust companies and bank trust departments for funds held in a
fiduciary, agency, advisory, custodial or similar capacity; (g) any state or any
political subdivision thereof or any instrumentality, department, authority or
agency of any state or political subdivision thereof; (h) partners and full-time
employees of the Fund's counsel; (i) managed account clients of Voyageur,
clients of investment advisers affiliated with Voyageur and other registered
investment advisers and their clients (the Fund may be available through a
broker-dealer which charges a transaction fee for purchases and sales) and (j)
"wrap accounts" for the benefit of clients of financial planners adhering to
certain standards established by Voyageur.
Class A shares will also be issued at net asset value, without a front
end or deferred sales charge, if the purchase of such shares is funded by the
proceeds from the redemption of shares of any unrelated open-end investment
company that charges a front end sales charge, and, in certain circumstances, a
contingent deferred sales charge. In order to exercise this privilege, the
purchase order must be received by the Fund within 60 days after the redemption
of shares of the unrelated investment company.
CLASS B SHARES--CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE
The public offering price of Class B shares of the Fund is the net asset value
of the Fund's shares. Class B shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC of up to 5% will be imposed if shares are redeemed within six years of
purchase. For additional information, see "How to Sell Shares--Contingent
Deferred Sales Charge." In addition, Class B shares are subject to higher Rule
12b-1 fees as described below. The CDSC will depend on the number of years since
the purchase was made according to the following table:
CDSC PERIOD CDSC AS A% OF AMOUNT REDEEMED(1)
- ------------------------------------------------------------------------------
1st year after purchase 5%
2nd year after purchase 4
3rd year after purchase 4
4th year after purchase 3
5th year after purchase 2
6th year after purchase 1
Thereafter 0
- ------------------------------------------------------------------------------
1 The CDSC will be calculated on an amount equal to the lesser of the net
asset value of the shares at the time of purchase or the net asset value at
the time of redemption.
Proceeds from the CDSC are paid to the Underwriter and are used to
defray expenses of the Underwriter related to providing distribution-related
services to the Fund in connection with the sale of Class B shares, such as the
payment of compensation to selected broker dealers and for selling Class B
shares. The combination of the CDSC and the Rule 12b-1 fee enables the Fund to
sell the Class B shares without deduction of a sales charge at the time of
purchase. Although Class B shares are sold without an initial sales charge, the
Underwriter pays to brokers who sell Class B shares a sales commission equal to
4% of the amount invested and an ongoing annual servicing fee of .15% (paid
quarterly) calculated on the net assets attributable to sales made by such
broker-dealers.
RULE 12b-1 FEES
Class B shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of the Fund attributable to Class B shares. The
higher 12b-1 fee will cause Class B shares to have a higher expense ratio and to
pay lower dividends than Class A shares. For additional information about this
fee, see "Fees and Expenses" and "Management--Plan of Distribution."
CONVERSION FEATURE
On the first business day of the month eight years after the purchase date,
Class B shares will automatically convert to Class A shares and will no longer
be subject to a higher Rule 12b-1 fee. Such conversion will be on the basis of
the relative net asset values of the two classes. Class A shares issued upon
such conversion will not be subject to any FESC or CDSC. Class B shares acquired
by exchange from Class B shares of another Voyageur Fund will convert into Class
A shares based on the time of the initial purchase. Similarly, Class B shares
acquired by exercise of the Reinstatement Privilege will convert into Class A
shares based on the time of the original purchase of Class B shares. See
"Reinstatement Privilege" below. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date of issuance of
such shares.
CLASS C SHARES--LEVEL LOAD ALTERNATIVE
The public offering price of Class C shares of the Fund is the net asset value
of the Fund's shares. Class C shares are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
CDSC of 1% will be imposed if shares are redeemed within one year of purchase.
For additional information see "How to Sell Shares--Contingent Deferred Sales
Charge." In addition, Class C shares are subject to higher annual Rule 12b-1
fees as described below.
RULE 12b-1 FEES
Class C shares are subject to a Rule 12b-1 fee payable at an annual rate of 1%
of the average daily net assets of the Fund attributable to Class C shares. The
higher Rule 12b-1 fee will cause Class C shares to have a higher expense ratio
and to pay lower dividends than Class A shares. For additional information about
this fee, see "Fees and Expenses" and "Management--Plan of Distribution."
Proceeds from the CDSC are paid to the Underwriter and are used to
defray expenses of the Underwriter related to providing distribution-related
services to the Fund in connection with the sale of Class C shares, such as the
payment of compensation to selected broker-dealers and for selling Class C
shares. The combination of the CDSC and the Rule 12b-1 fee enables the Fund to
sell the Class C shares without deduction of a sales charge at the time of
purchase. Although Class C shares are sold without an initial sales charge, the
Underwriter pays to brokers who sell Class C shares a sales commission equal to
1% of the amount invested and an ongoing annual servicing fee of .90% (paid
quarterly commencing in the thirteenth month after the sale of such shares)
calculated on the net assets attributable to sales made by such broker-dealers.
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
The Fund will redeem its shares in cash at the net asset value next determined
after receipt of a shareholder's written request for redemption in good order
(see below). If shares for which payment has been collected are redeemed,
payment must be made within seven days. Shareholders will not earn any income on
redeemed shares on the redemption date. The Fund may suspend this right of
redemption and may postpone payment only when the Exchange is closed for other
than customary weekends or holidays, or if permitted by the rules of the
Securities and Exchange Commission during periods when trading on the Exchange
is restricted or during any emergency which makes it impracticable for the Fund
to dispose of its securities or to determine fairly the value of its net assets
or during any other period permitted by order of the Commission for the
protection of investors.
The Fund reserves the right and currently plans to redeem Fund shares
and mail the proceeds to the shareholder if at any time the value of Fund shares
in the account falls below a specified value, currently set at $250.
Shareholders will be notified and will have 60 days to bring the account up to
the required value before any redemption action will be taken by the Fund.
CONTINGENT DEFERRED SALES CHARGE
The CDSC will be calculated on an amount equal to the lesser of the net asset
value of the shares at the time of purchase or their net asset value at the time
of redemption. No charge will be imposed on increases in net asset value above
the initial purchase price. In addition, no charge will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
In determining whether a CDSC is payable with respect to any
redemption, the calculation will be determined in the manner that results in the
lowest rate being charged. Therefore, it will be assumed that shares that are
not subject to the CDSC are redeemed first, shares subject to the lowest level
of CDSC are redeemed next, and so forth. If a shareholder owns Class A and
either Class B or Class C shares, then absent a shareholder choice to the
contrary, Class B or Class C shares not subject to a CDSC will be redeemed in
full prior to any redemption of Class A shares not subject to a CDSC.
The CDSC does not apply to: (a) redemptions of Class B shares in
connection with the automatic conversion to Class A shares; (b) redemptions of
shares when a Fund exercises its right to liquidate accounts which are less than
the minimum account size; and (c) redemptions in the event of the death or
disability of the shareholder within the meaning of Section 72(m)(7) of the
Internal Revenue Code.
If a shareholder exchanges Class A, Class B or Class C shares subject
to a CDSC for Class A, Class B or Class C shares, respectively, of a different
Voyageur Fund, the transaction will not be subject to a CDSC. However, when
shares acquired through the exchange are redeemed, the shareholder will be
treated as if no exchange took place for the purpose of determining the CDSC.
Fund shares are exchangeable for shares of any money market fund available
through Voyageur. No CDSC will be imposed at the time of any such exchange;
however, the shares acquired in any such exchange will remain subject to the
CDSC and the period during which such shares represent shares of the money
market fund will not be included in determining how long the shares have been
held. Any CDSC due upon a redemption of Fund shares will be reduced by the
amount of any Rule 12b-1 payments made by such money market fund with respect to
such shares.
The Underwriter, upon notification, intends to provide, out of its own
assets, a pro rata refund of any CDSC paid in connection with a redemption of
Class A, Class B, or Class C shares of the Fund (by crediting such refunded CDSC
to such shareholder's account) if, within 90 days of such redemption, all or any
portion of the redemption proceeds are reinvested in shares of the same class in
any of the Voyageur Funds. Any reinvestment within 90 days of a redemption to
which the CDSC was paid will be made without the imposition of a FESC but will
be subject to the same CDSC to which such amount was subject prior to the
redemption. The amount of the CDSC will be calculated from the original
investment date.
EXPEDITED REDEMPTIONS
The Fund offers several expedited redemption procedures, described below, which
allow a shareholder to redeem Fund shares at net asset value determined on the
same day that the shareholder places the request for redemption of those shares.
Pursuant to these expedited redemption procedures, the Fund will redeem its
shares at their net asset value next determined following the Fund's receipt of
the redemption request. The Fund reserves the right at any time to suspend or
terminate the expedited redemption procedures or to impose a fee for this
service. There is currently no additional charge to the shareholder for use of
the Fund's expedited redemption procedures.
EXPEDITED TELEPHONE REDEMPTION
Shareholders redeeming at least $1,000 and no more than $50,000 (for which
certificates have not been issued) may redeem by telephoning the Fund directly
at 612-376-7014 or 800-545-3863. The applicable section of the general
authorization form must have been completed by the shareholder and filed with
the Fund before the telephone request is received. The proceeds of the
redemption will be paid by check mailed to the shareholder's address of record
or, if requested at the time of redemption, by wire to the bank designated on
the general authorization form. The Fund will employ reasonable procedures to
confirm that telephone instructions are genuine, including requiring that
payment be made only to the shareholder's address of record or to the bank
account designated on the authorization form and requiring certain means of
telephonic identification. Voyageur and the Distributor will not be liable for
following instructions which are reasonably believed to be genuine.
EXPEDITED REDEMPTIONS THROUGH CERTAIN BROKER DEALERS
Certain broker-dealers who have sales agreements with the Underwriter may allow
their customers to effect a redemption of shares of the Fund purchased through
such broker-dealer by notifying the broker-dealer of the amount of shares to be
redeemed. The broker-dealer is then responsible for promptly placing the
redemption request with the Fund on the customer's behalf. Payment will be made
to the shareholder by check or wire sent to the broker-dealer. Broker-dealers
offering this service may impose a fee or additional requirements for such
redemptions.
GOOD ORDER
"Good order" means that stock certificates, if issued, must accompany the
written request for redemption and must be duly endorsed for transfer, or must
be accompanied by a duly executed stock power. If no stock certificates have
been issued, a written request to redeem must be made. Stock certificates will
not be issued for Class B or Class C shares. In any case, the shareholder must
execute the redemption request exactly as the shares are registered. If the
redemption proceeds are to be paid to the registered holder(s), a signature
guarantee is not normally required. A signature guarantee is required in certain
other circumstances, for example, to redeem more than $50,000 or to have a check
mailed other than to the shareholder's address of record. See "Other
Information" in the Statement of Additional Information. Voyageur may waive
certain of these redemption requirements at its own risk, but also reserves the
right to require signature guarantees on all redemptions, in contexts perceived
by Voyageur to subject the Fund to an unusual degree of risk.
MONTHLY CASH WITHDRAWAL PLAN
An investor who owns or buys shares of the Fund valued at $10,000 or more at the
current offering price may open a Withdrawal Plan and have a designated sum of
money paid monthly to the investor or another person. Deferred sales charges may
apply to monthly redemptions of Class B or Class C shares. See "Monthly Cash
Withdrawal Plan" in the Statement of Additional Information.
REINSTATEMENT PRIVILEGE
- --------------------------------------------------------------------------------
An investor in the Fund whose shares have been redeemed and who has not
previously exercised the Reinstatement Privilege as to the Fund may reinvest the
proceeds of such redemption in shares of the same class of any Voyageur Fund
eligible for sale in the shareholder's state of residence. Reinvestment will be
at the net asset value of Fund shares next determined after the Underwriter
receives a check along with a letter requesting reinstatement. The Underwriter
must receive the letter requesting reinstatement within 365 days following the
redemption. Investors who desire to exercise the Privilege should contact their
broker-dealer or the Fund. Exercise of the Reinstatement Privilege does not
alter the income tax treatment of any capital gains realized on a sale of shares
of the Fund, but to the extent that any shares are sold at a loss and the
proceeds are reinvested within 30 days in shares of the Fund, some or all of the
loss may not be allowed as a deduction, depending upon the number of shares
reacquired.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Except as described below, shareholders may exchange some or all of their Fund
shares for shares of another Voyageur Fund, provided that the shares to be
acquired in the exchange are eligible for sale in the shareholder's state of
residence. Class A shareholders may exchange their shares for Class A shares of
other Voyageur Funds. Class B shareholders may exchange their shares for the
Class B shares of other Voyageur Funds and Class C shareholders may exchange
their shares for the Class C shares of other Voyageur Funds. Shares of each
class may also be exchanged for shares of any money market fund available
through Voyageur.
The minimum amount which may be exchanged is $1,000. The exchange will
be made on the basis of the relative net asset values next determined after
receipt of the exchange request. For a discussion of issues relating to the
contingent deferred sales charge upon such exchanges, see "How to Sell
Shares--Contingent Deferred Sales Charge." There is no specific limitation on
exchange frequency; however, the Fund is intended for long term investment and
not as a trading vehicle. Voyageur reserves the right to prohibit excessive
exchanges (more than four per quarter). Voyageur also reserves the right, upon
60 days' prior notice, to restrict the frequency of, or otherwise modify,
condition, terminate or impose charges upon, exchanges. An exchange is
considered to be a sale of shares on which the investor may realize a capital
gain or loss for income tax purposes. Exchange requests may be placed directly
with the Fund through Voyageur or through other broker-dealers. An investor
considering an exchange should obtain a prospectus of the Fund to be acquired
and should read such prospectus carefully. Contact the Fund, Voyageur or any of
such other broker-dealers for further information about the exchange privilege.
MANAGEMENT
- --------------------------------------------------------------------------------
The Board of Directors of the Fund is responsible for managing the business and
affairs of the Fund. The names, addresses, principal occupations and other
affiliations of Directors and executive officers of the Fund are set forth in
the Statement of Additional Information.
INVESTMENT ADVISER; PORTFOLIO MANAGEMENT
Voyageur has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as the Fund's investment adviser, subject to the authority of
the Board of Directors. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group, Inc. ("DFG"), which is
owned approximately 49% by Michael E. Dougherty, 49% by Pohlad Companies and
less than 1% by certain retirement plans for the benefit of DFG employees. Mr.
Dougherty co-founded the predecessor of DFG in 1977 and has served as DFG's
Chairman of the Board and Chief Executive Officer since inception. Pohlad
Companies is a holding company owned in equal parts by each of James O. Pohlad,
Robert C. Pohlad and William M. Pohlad. As of October 1, 1996, Voyageur served
as the manager to six closed-end and ten open-end investment companies
(comprising 33 separate investment portfolios), administered numerous private
accounts and together with its affiliates, managed approximately $11.5 billion
in assets. Voyageur's principal business address is 90 South Seventh Street,
Suite 4400, Minneapolis, Minnesota 55402.
The Fund pays Voyageur a monthly investment advisory and management fee
equivalent on an annual basis to .65% of its average daily net assets. Voyageur
has agreed to limit fees and expenses to the extent set forth above under "Fees
and Expenses."
Steven P. Eldredge has day-to-day portfolio management responsibility
of the Fund. Since July 1995, Mr. Eldredge has managed Voyageur Florida Insured
Tax Free Fund, Voyageur Florida Limited Term Tax Free Fund, Voyageur National
Tax Free Fund, Voyageur National Limited Term Tax Free Fund, Voyageur Iowa Tax
Free Fund, and Voyageur Wisconsin Tax Free Fund. Mr. Eldredge is a Senior Tax
Exempt Portfolio Manager for Voyageur where he has been employed since 1995.
Prior to joining Voyageur, Mr. Eldredge was a portfolio manager for ABT Mutual
Funds, Palm Beach, Florida, from 1989 through 1995. Mr. Eldredge has over 18
years experience in portfolio management.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution under the 1940 Act (the "Plan") and
has entered into a Distribution Agreement with Voyageur Fund Distributors, Inc.
(the "Underwriter"). Pursuant to the Fund's Plan, the Fund pays the Underwriter
a Rule 12b-1 fee, at an annual rate of .25% of the Fund's average daily net
assets attributable to Class A shares and 1% of the Fund's average daily net
assets attributable to each of Class B and Class C shares for servicing of
shareholder accounts and distribution related services. Payments made under the
Plan are not tied exclusively to expenses actually incurred by the Underwriter
and may exceed or be less than expenses actually incurred by the Underwriter.
All of the Rule 12b-1 fee attributable to Class A shares, and a portion
of the fee equal to .25% of the average daily net assets of the Fund
attributable to each of Class B shares and Class C shares constitutes a
shareholder servicing fee designed to compensate the Underwriter for the
provision of certain services to the shareholders. The services provided may
include personal services provided to shareholders, such as answering
shareholder inquiries regarding the Fund and providing reports and other
information, and services related to the maintenance of shareholder accounts.
The Underwriter may use such Rule 12b-1 fee or portion thereof to make payments
to qualifying broker-dealers and financial institutions that provide such
services.
That portion of the Rule 12b-1 fee equal to .75% of the average daily
net assets of the Fund attributable to Class B shares and Class C shares,
respectively, constitutes a distribution fee designed to compensate the
Underwriter for advertising, marketing and distributing the Class B shares and
Class C shares of the Fund. In connection therewith, the Underwriter may provide
initial and ongoing sales compensation to its investment executives and other
broker-dealers for sales of Class B shares and Class C shares and may pay for
other advertising and promotional expenses in connection with the distribution
of Class B shares and Class C shares. The distribution fee attributable to Class
B shares and Class C shares is designed to permit an investor to purchase such
shares through investment executives of the Underwriter and other broker-dealers
without the assessment of an initial sales charge and at the same time to permit
the Underwriter to compensate its investment executives and other broker-dealers
in connection with the sale of such shares.
CUSTODIAN; DIVIDEND DISBURSING, TRANSFER, ADMINISTRATIVE AND ACCOUNT
SERVICES AGENT
Norwest Bank Minnesota, N.A. serves as the custodian of the Fund's portfolio
securities and cash.
Voyageur acts as the Fund's dividend disbursing, transfer,
administrative and accounting services agent to perform dividend-paying
functions, to calculate the Fund's daily share price, to maintain shareholder
records and to perform certain regulatory and compliance related services for
the Fund. The fees paid for these services are based on the Fund's assets and
include reimbursement of out-of-pocket expenses. Voyageur receives a monthly fee
from the Fund equal to the sum of (a) $1.33 per shareholder account per month,
(b) a monthly fee ranging from $1,000 to $1,500 based onthe average daily net
assets of the Fund and (c) a percentage of average daily net assets which ranges
from 0.02% to 0.11% based on the average daily net assets of the Fund. See "The
Investment Adviser and Underwriter--Expenses of the Fund" in the Statement of
Additional Information.
Certain institutions may act as sub-administrators for the Fund
pursuant to contracts with Voyageur, whereby the institutions will provide
shareholder services to their customers. Voyageur will pay the
sub-administrators' fees out of its own assets. The fee paid by Voyageur to any
sub-administrator will be a matter of negotiation between the institution and
Voyageur based on the extent and quality of the services provided.
EXPENSES OF THE FUND
Voyageur is contractually obligated to pay the operating expenses (excluding
interest expense, taxes, brokerage fees, commissions and Rule 12b-1 fees) of the
Fund which exceed 1% of the Fund's average daily net assets on an annual basis
up to certain limits as set forth in detail in the Statement of Additional
Information. In addition, Voyageur and the Underwriter reserve the right to
voluntarily waive their fees in whole or part and to voluntarily absorb certain
other of the Fund's expenses. Voyageur and the Underwriter have agreed to waive
fees or absorb expenses through the fiscal year ending December 31, 1998 in such
a manner as will result in the Fund being charged fees and expenses that
approximatethose set forth in the section "Fees and Expenses." After December
31, 1998, such voluntary fee and expense waivers may be discontinued or modified
by Voyageur and the Underwriter in their sole discretion.
The Fund's expenses include, among others, fees of directors, expenses
of directors' and shareholders' meetings, insurance premiums, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Underwriter), expenses of printing and mailing stock
certificates and shareholder statements, association membership dues, charges of
the Fund's custodian, bookkeeping, auditing and legal expenses, the fees and
expenses of registering the Fund and its shares with the Securities and Exchange
Commission and registering or qualifying its shares under state securities laws
and expenses of preparing and mailing prospectuses and reports to existing
shareholders.
PORTFOLIO TRANSACTIONS
The Fund will not effect any brokerage transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with Voyageur unless
such transactions, including the frequency thereof, the receipt of commissions
payable in connection therewith and the selection of the affiliated
broker-dealer effecting such transactions, are not unfair or unreasonable to the
shareholders of the Fund. It is not anticipated that the Fund will effect any
brokerage transactions with any affiliated broker-dealer, including the
Underwriter, unless such use would be to the Fund's advantage. Voyageur may
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's securities transactions.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of Fund shares is determined once daily, Monday through
Friday, as of 3:00 p.m. Minneapolis time (the primary close of trading on the
Exchange) on each business day the Exchange is open for trading.
The net asset value per share of each class is determined by dividing
the value of the securities, cash and other assets of the Fund attributable to
such class less all liabilities attributable to such class by the total number
of shares of such class outstanding. For purposes of determining the net assets
of the Fund, tax-exempt securities are stated on the basis of valuations
provided by a pricing service, approved by the Board of Directors, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. Market quotations are used when available.
Non-tax-exempt securities for which market quotations are readily available are
stated at market value which is currently determined using the last reported
sale price, or, if no sales are reported, as in the case of most securities
traded over-the-counter, the last reported bid price, except that U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. Short-term notes having remaining maturities of 60 days or less
are stated at amortized cost which approximates market. All other securities and
other assets are valued in good faith at fair value by Voyageur in accordance
with procedures adopted by the Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
The present policy of the Fund is to declare a distribution from net investment
income on each day that the Fund is open for business. Net investment income
consists of interest accrued on portfolio investments of the Fund, less accrued
expenses. Distributions of net investment income are paid monthly. Short-term
capital gains distributions are taxable to shareholders as ordinary income. Net
realized long term capital gains, if any, are distributed annually, after
utilization of any available capital loss carryovers. Distributions paid by the
Fund, if any, with respect to Class A, Class B and Class C shares will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount, except that the higher Rule 12b-1 fees applicable to Class B
and Class C shares will be borne exclusively by such shares. The per share
distributions on Class B and Class C shares will be lower than the per share
distributions on Class A shares as a result of the higher Rule 12b-1 fees
applicable to Class B and Class C shares.
Shareholders receive distributions from investment income and capital
gains in additional shares of the class of the Fund owned by such shareholders
at net asset value, without any sales charge, unless they elect otherwise. The
Fund sends to its shareholders no less than quarterly statements with details of
any reinvested dividends.
TAXES
The Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to qualify during its current taxable year as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund also intends to take all other action required to ensure that
no federal income taxes will be payable by the Fund and that the Fund can pay
exempt-interest dividends.
Distributions of net interest income from tax-exempt obligations that
are designated by the Fund as exempt-interest dividends are excludable from the
gross income of the Fund's shareholders. Distributions paid from other interest
income and from any net realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Distributions paid from long-term capital gains (and designated as such)
are taxable as long-term capital gains for federal income tax purposes, whether
received in cash or shares, regardless of how long a shareholder has held shares
in the Fund.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986 to finance private activities
are treated as an item of tax preference for purposes of computing the
alternative minimum tax for individuals, estates and trusts.
The foregoing discussion relates to federal taxation as of the date of
the Prospectus. See "Taxes" in the Statement of Additional Information. This
discussion is not intended as a substitute for careful tax planning. You are
urged to consult your tax adviser with specific reference to your own tax
situation.
INVESTMENT PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements and other sales literature for the Fund may refer to "yield,"
"taxable equivalent yield," "average annual total return" and "cumulative total
return" and may compare such performance quotations with published indices and
comparable quotations of other funds. Performance quotations are computed
separately for Class A, Class B and Class C shares of the Fund. All such figures
are based on historical earnings and performance and are not intended to be
indicative of future performance. Additionally, performance information may not
provide a basis for comparison with other investments or other mutual funds
using a different method of calculating performance. The investment return on
and principal value of an investment in the Fund will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The advertised yield of the Fund will be based on a 30-day period
stated in the advertisement. Yield is calculated by dividing the net investment
income per share deemed earned during the period by the maximum offering price
per share on the last day of the period. The result is then annualized using a
formula that provides for semiannual compounding of income.
Taxable equivalent yield is calculated by applying the stated income
tax rate only to that portion of the yield that is exempt from taxation. The
tax-exempt portion of the yield is divided by the number 1 minus the stated
income tax rate (e.g., 1-28% = 72%). The result is then added to that portion of
the yield, if any, that is not tax-exempt.
Average annual total return is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. In calculating average annual total return, the maximum sales
charge is deducted from the hypothetical investment and all dividends and
distributions are assumed to be reinvested.
Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the ending redeemable value of such payment (at
the end of the relevant advertised period), dividing such difference by $1,000
and multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales load is deducted.
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Fund's
shares, including data from Lipper Analytical Services, Inc. and Morningstar.
For Fund performance information and daily net asset value quotations,
investors may call 612-376-7014 or 800-545-3863. For additional information
regarding the calculation of the Fund's yield, taxable equivalent yield, average
annual total return and cumulative total return, see "Calculation of Performance
Data" in the Statement of Additional Information.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Fund sends to its shareholders six-month unaudited and annual audited
financial statements.
The shares of the Fund constitute a separate series of Voyageur Mutual
Funds, Inc. (the "Company"), a Minnesota corporation which issues shares of
common stock with a $.01 par value per share. All shares of the Company are
non-assessable and fully transferable when issued and paid for in accordance
with the terms thereof and possess no cumulative voting, preemptive or
conversion rights. The Board of Directors is empowered to issue other series of
common stock without shareholder approval.
The Fund currently offers its shares in multiple classes, each with
different sales arrangements and bearing different expenses. Class A, Class B
and Class C shares each represent interests in the assets of the Fund and have
identical voting, dividend, liquidation and other rights on the same terms and
conditions except that expenses related to the distribution of each class are
borne solely by such class and each class of shares has exclusive voting rights
with respect to provisions of the Fund's Rule 12b-1 distribution plan which
pertain to a particular class and other matters for which separate class voting
is appropriate under applicable law.
Fund shares are freely transferable, subject to applicable securities
laws, are entitled to dividends as declared by the Board, and, in liquidation,
are entitled to receive the net assets, if any, of the Fund. The Fund does not
generally hold annual meetings of shareholders and will do so only when required
by law.
Each share of a series has one vote irrespective of the relative net
asset value of the shares. On some issues, such as the election of Board
members, the shares of all series and classes vote together as one. On an issue
affecting only a particular series or class, the shares of the affected series
or class vote as a separate series or class. An example of such an issue would
be a fundamental investment restriction pertaining to only one series.
The assets received by the Company for the issue or sale of shares of
each series or class thereof, and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are allocated to such series,
and in the case of a class, allocated to such class, and constitute the
underlying assets of such series or class. The underlying assets of each series,
or class thereof, are required to be segregated on the books of account, and are
to be charged with the expenses in respect to such series or class thereof, and
with a share of the general expenses of the Company. Any general expenses of the
Company not readily identifiable as belonging to a particular series or class
are allocated among the series or classes thereof, based upon the relative net
assets of the series or class at the time such expenses were accrued. The
Company's Articles of Incorporation limit the liability of the Board members to
the fullest extent permitted by law. For a further discussion of the above
matters, see "Additional Information" in the Statement of Additional
Information.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
VOYAGEUR FUND DISTRIBUTORS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
PART B
VOYAGEUR ARIZONA LIMITED TERM TAX FREE FUND
VOYAGEUR ARIZONA INSURED TAX FREE FUND
VOYAGEUR ARIZONA TAX FREE FUND
VOYAGEUR CALIFORNIA LIMITED TERM TAX FREE FUND
VOYAGEUR CALIFORNIA TAX FREE FUND
VOYAGEUR CALIFORNIA INSURED TAX FREE FUND
VOYAGEUR COLORADO LIMITED TERM TAX FREE FUND
VOYAGEUR COLORADO TAX FREE FUND
VOYAGEUR COLORADO INSURED TAX FREE FUND
VOYAGEUR FLORIDA LIMITED TERM TAX FREE FUND
VOYAGEUR FLORIDA TAX FREE FUND
VOYAGEUR FLORIDA INSURED TAX FREE FUND
VOYAGEUR IDAHO TAX FREE FUND
VOYAGEUR IOWA TAX FREE FUND
VOYAGEUR KANSAS TAX FREE FUND
VOYAGEUR MINNESOTA LIMITED TERM TAX FREE FUND
VOYAGEUR MINNESOTA TAX FREE FUND
VOYAGEUR MINNESOTA INSURED FUND
VOYAGEUR MISSOURI INSURED TAX FREE FUND
VOYAGEUR NATIONAL LIMITED TERM TAX FREE FUND
VOYAGEUR NATIONAL INSURED TAX FREE FUND
VOYAGEUR NATIONAL TAX FREE FUND
VOYAGEUR NEW MEXICO TAX FREE FUND
VOYAGEUR NEW YORK TAX FREE FUND
VOYAGEUR NORTH DAKOTA TAX FREE FUND
VOYAGEUR OREGON INSURED TAX FREE FUND
VOYAGEUR UTAH TAX FREE FUND
VOYAGEUR WASHINGTON INSURED TAX FREE FUND
VOYAGEUR WISCONSIN TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with each Fund's Prospectus dated April 28, 1997.
A copy of the Prospectus or this Statement of Additional Information may be
obtained free of charge by contacting the Funds at 90 South Seventh Street,
Suite 4400, Minneapolis, Minnesota 55402. Telephone: (612) 376-7000 or (800)
553-2143.
TABLE OF CONTENTS
Page
Investment Policies and Restrictions......................................B-2
Special Factors Affecting the Funds.......................................B-15
Insurance.................................................................B-58
Board Members and Executive Officers of the Funds.........................B-60
The Investment Adviser and Underwriter....................................B-62
Taxes ...................................................................B-73
Special Purchase Plans ...................................................B-77
Net Asset Value and Public Offering Price.................................B-79
Calculation of Performance Data...........................................B-83
Monthly Cash Withdrawal Plan..............................................B-95
Additional Information....................................................B-96
Appendix A - Descriptions of Bond Ratings.................................A-1
Appendix B - General Characteristics and Risks of Options and Futures ....B-1
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated April 28, 1997, and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Funds. This Statement of Additional Information does not constitute an
offer to sell securities in any state or jurisdiction in which such offering may
not lawfully be made. The delivery of this Statement of Additional Information
at any time shall not imply that there has been no change in the affairs of any
of the Funds since the date hereof.
Dated April 28, 1997
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions of the open-end
series investment companies on the first page of this Statement of Additional
Information (collectively, the "Funds") are set forth in the combined
prospectus. Certain additional investment information is set forth below. All
capitalized terms not defined herein have the same meanings as set forth in the
prospectus.
TAX EXEMPT OBLIGATIONS
The term "Tax Exempt Obligations" refers to debt obligations issued by
or on behalf of a state or territory or its agencies, instrumentalities,
municipalities and political subdivisions, the interest payable on which is, in
the opinion of bond counsel, excludable from gross income for purposes of
federal income taxation (except, in certain instances, the alternative minimum
tax, depending upon the shareholder's tax status) and with respect to the Funds
other than the three national funds, personal income tax of the state specified
in the Fund's name, if any. Tax-Exempt Obligations are generally issued to
obtain funds for various public purposes, including the construction or
improvement of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Tax Exempt Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, Tax Exempt Obligations may be issued by or on behalf of
public bodies to obtain funds to provide for the construction, equipping, repair
or improvement of housing facilities, convention or trade show facilities,
airport, mass transit, industrial, port or parking facilities and certain local
facilities for water supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Funds may invest, including Tax Exempt
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Tax Exempt Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Tax Exempt Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Tax Exempt Obligations for investment by the
Funds and the value of each Fund's portfolio. In such event, management of the
Funds may discontinue the issuance of shares to new investors and may reevaluate
each Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") for Tax Exempt
Obligations may change as a result of changes in such organizations or their
rating systems, the Funds will attempt to use comparable ratings as standards
for their investments in accordance with the investment policies contained in
the Funds' Prospectus and this Statement of Additional Information. The ratings
of Moody's and S&P represent their opinions as to the quality of the Tax Exempt
Obligations which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings provide an initial criterion for selection of portfolio
investments, Voyageur Fund Managers, Inc. ("Voyageur"), the Funds' investment
manager, will subject these securities to other evaluative criteria prior to
investing in such securities.
Floating and Variable Rate Demand Notes. The Funds may purchase
floating and variable rate demand notes. Generally, such notes are secured by
letters of credit or other credit support arrangements provided by banks. Such
notes normally have a stated long-term maturity but permit the holder to tender
the note for purchase and payment of principal and accrued interest upon a
specified number of days' notice. The issuer of floating and variable rate
demand notes normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the note plus accrued
interest upon a specified number of days' notice to the noteholders. The
interest rate on a floating rate demand note is based on a specified interest
index, such as a bank's prime rate, and is adjusted automatically each time such
index is adjusted. The interest rate on a variable rate demand note is adjusted
at specified intervals, based upon current market conditions. Voyageur monitors
the creditworthiness of issuers of floating and variable rate demand notes in
each Fund's portfolio.
Escrow Secured Bonds or Defeased Bonds. Escrow secured bonds or
defeased bonds are created when an issuer refunds in advance of maturity (or
pre-refunds) some of its outstanding bonds and it becomes necessary or desirable
to set aside funds for redemption or payment of the bonds at a future date or
dates. 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 of the advance refunded bond. Escrow
secured bonds will often receive a triple A rating from S&P and Moody's. The
Insured Tax Free Funds will purchase escrow secured bonds without additional
insurance only where the escrow is invested in securities of the U.S. government
or agencies or instrumentalities of the U.S. Government.
State or Municipal Lease Obligations. Municipal leases may take the
form of a lease with an option to purchase, an installment purchase contract, a
conditional sales contract or a participation certificate in any of the
foregoing. In determining leases in which the Funds will invest, Voyageur will
evaluate the credit rating of the lessee and the terms of the lease.
Additionally, Voyageur may require that certain municipal leases be secured by a
letter of credit or put arrangement with an independent financial institution.
State or municipal lease obligations frequently have the special risks described
below which are not associated with general obligation or revenue bonds issued
by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "nonappropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "nonappropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for nonappropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
Concentration Policy. As set forth in the Funds' Prospectus, although
each Fund may invest 25% or more of its total assets in limited obligation
bonds, no Fund will invest 25% or more of its total assets in limited obligation
bonds payable only from revenues derived from facilities or projects within a
single industry, except that the Funds may invest without limitation, in
circumstances in which other appropriate available investments may be in limited
supply, in housing, health care and/or utility obligations. Arizona Limited Term
Tax Free Fund, Arizona Tax Free Fund, California Limited Term Tax Free Fund,
California Tax Free Fund, Colorado Limited Term Tax Free Fund, Colorado Insured
Tax Free Fund, Florida Limited Term Tax Free Fund, Florida Tax Free Fund, Idaho
Tax Free Fund, New York Tax Free Fund, National Limited Term Fund and National
Tax Free Fund also may, under such circumstances, invest without limit in
transportation, education and/or industrial obligations. Appropriate available
investments may be in limited supply, from time to time in the opinion of
Voyageur, due to, among other things, each Fund's investment policy of investing
primarily in obligations of its state (and the state's municipalities, other
political subdivisions and public authorities) and of investing primarily in
investment grade (high grade, with respect to the Insured Tax Free Funds)
securities. Additionally, the insurance policies of the Insured Tax Free Funds
may affect the appropriate available investment supply from time to time in the
opinion of Voyageur. Certain of the risks set forth below may be reduced or
eliminated to the extent a Fund invests in insured Tax Exempt Obligations.
HOUSING OBLIGATIONS. Each Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
HEALTH CARE OBLIGATIONS. Each Fund may invest, from time to time, 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance hospital or health care facilities
or equipment. The ability of any health care entity or hospital to make payments
in amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
UTILITY OBLIGATIONS. Each Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
TRANSPORTATION OBLIGATIONS. Certain Funds may, from time to time,
invest 25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance airports and highway,
bridge and toll road facilities. The major portion of an airport's gross
operating income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for airport use,
occupancy of certain terminal space, service fees and leases. Airport operating
income may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The revenues of issuers which derive their payments from bridge, road or tunnel
toll revenues could be adversely affected by competition from toll-free
vehicular bridges and roads and alternative modes of transportation. Such
revenues could also be adversely affected by a reduction in the availability of
fuel to motorists or significant increases in the costs thereof.
EDUCATION OBLIGATIONS. Certain Funds may, from time to time, invest 25%
or more of their total assets in obligations of issuers which are, or which
govern the operation of, schools, colleges and universities and whose revenues
are derived mainly from tuition, dormitory revenues, grants and endowments.
General problems of such issuers include the prospect of a declining percentage
of the population consisting of college aged individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
INDUSTRIAL REVENUE OBLIGATIONS. Certain Funds may, from time to time,
invest 25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
OTHER RISKS. The exclusion from gross income for purposes of federal
income taxes and the personal income taxes of certain states for certain
housing, health care, utility, transportation, education and industrial revenue
bonds depends on compliance with relevant provisions of the Code. The failure to
comply with these provisions could cause the interest on the bonds to become
includable in gross income, possibly retroactively to the date of issuance,
thereby reducing the value of the bonds, subjecting shareholders to
unanticipated tax liabilities and possibly requiring the Funds to sell the bonds
at the reduced value. Furthermore, such a failure to meet these ongoing
requirements may not enable the holder to accelerate payment of the bond or
require the issuer to redeem the bond.
TAXABLE OBLIGATIONS
As set forth in the Funds' prospectus, the Funds may invest to a
limited extent in obligations and instruments, the interest on which is
includable in gross income for purposes of federal and state income taxation.
Government Obligations. The Funds may invest in securities issued or
guaranteed by the U. S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally have
maturities of one year or less; Treasury Notes generally have maturities of one
to ten years; and Treasury Bonds generally have maturities of greater than ten
years. Some obligations issued or guaranteed by U. S. Government agencies and
instrumentalities, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U. S. Treasury;
other obligations, such as those of the Federal Home Loan Banks, are secured by
the right of the issuer to borrow from the Treasury; other obligations, such as
those issued by the Federal National Mortgage Association, are supported by the
discretionary authority of the U. S. Government to purchase certain obligations
of the agency or instrumentality; and other obligations, such as those issued by
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality itself. Although the U. S. Government provides financial support
to such U. S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law. The
Funds will invest in such securities only when Voyageur is satisfied that the
credit risk with respect to the issuer is minimal.
Repurchase Agreements. The Funds may invest in repurchase agreements.
The Funds' custodian will hold the securities underlying any repurchase
agreement or such securities will be part of the Federal Reserve Book Entry
System. The market value of the collateral underlying the repurchase agreement
will be determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the obligor under the agreement will promptly
furnish additional collateral to the Funds' custodian (so the total collateral
is an amount at least equal to the repurchase price plus accrued interest).
Other Taxable Investments. The Funds also may invest in certificates of
deposit, bankers' acceptances and other time deposits. Certificates of deposit
are certificates representing the obligation of a bank to repay the funds
deposited (plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. With respect to Colorado Fund, investments in time deposits
generally are limited to London branches of domestic banks that have total
assets in excess of one billion dollars.
OPTIONS AND FUTURES TRANSACTIONS
To the extent set forth in the prospectus, each Fund may buy and sell
put and call options on the securities in which they may invest, and certain
Funds may enter into futures contracts and options on futures contracts with
respect to fixed-income securities or based on financial indices including any
index of securities in which the Fund may invest. Futures and options will be
used to facilitate allocation of a Fund's investments among asset classes, to
generate income or to hedge against changes in interest rates or declines in
securities prices or increases in prices of securities proposed to be purchased.
Different uses of futures and options have different risk and return
characteristics. Generally, selling futures contracts, purchasing put options
and writing (i.e. selling) call options are strategies designed to protect
against falling securities prices and can limit potential gains if prices rise.
Purchasing futures contracts, purchasing call options and writing put options
are strategies whose returns tend to rise and fall together with securities
prices and can causes losses if prices fall. If securities prices remain
unchanged over time option writing strategies tend to be profitable, while
option buying strategies tend to decline in value.
Writing Options. The Funds may write (i.e. sell) covered put and call
options with respect to the securities in which they may invest. By writing a
call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.
"Covered options" means that so long as a Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). A Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains with its custodian cash, U. S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option.
Through the writing of call or put options, a Fund may obtain a greater
current return than would be realized on the underlying securities alone. A Fund
receives premiums from writing call or put options, which it retains whether or
not the options are exercised. By writing a call option, a Fund might lose the
potential for gain on the underlying security while the option is open, and by
writing a put option, a Fund might become obligated to purchase the underlying
security for more than its current market price upon exercise.
Purchasing Options. The Funds may purchase put options in order to
protect portfolio holdings in an underlying security against a decline in the
market value of such holdings. Such protection is provided during the life of
the put because a Fund may sell the underlying security at the put exercise
price, regardless of a decline in the underlying security's market price. Any
loss to a Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit a Fund realizes on the sale of the security
will be reduced by the premium paid for the put option less any amount for which
the put is sold.
A Fund may wish to protect certain portfolio securities against a
decline in market value at a time when no put options on those particular
securities are available for purchase. The Fund may therefore purchase a put
option on securities other than those it wishes to protect even though it does
not hold such other securities in its portfolio.
Each of the Funds may also purchase call options. During the life of
the call option, the Fund may buy the underlying security at the call exercise
price regardless of any increase in the underlying security's market price. In
order for a call option to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
and transaction costs. By using call options in this manner, a Fund will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Securities Index Option Trading. The Funds may purchase and write put
and call options on securities indexes. Options on securities indexes are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated to make delivery of
this amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in a Fund's portfolio
correlate with price movements of the index selected. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular security, whether a Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in the
level of prices in the relevant underlying securities markets generally or, in
the case of certain indexes, in an industry market segment, rather than
movements in the price of a particular security. Accordingly, successful use by
a Fund of options on security indexes will be subject to Voyageur's ability to
predict correctly movements in the direction of the stock market or interest
rates market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. In the event Voyageur is unsuccessful in predicting the movements of
an index, a Fund could be in a worse position than had no hedge been attempted.
Because exercises of index options are settled in cash, a Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When a Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker as collateral for the option, cash,
high-grade liquid debt securities or "qualified securities" with a market value
determined on a daily basis of not less than 100% of the current market value of
the option.
Options purchased and written by a Fund may be exchange traded or may
be options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by Voyageur. OTC options are illiquid and it may not be possible for the Fund to
dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when Voyageur believes it would be advantageous
to do so.
Futures Contracts and Options on Futures Contracts. Certain Funds may
enter into futures contracts and purchase and write options on these contracts,
including but not limited to interest rate and securities index contracts and
put and call options on these futures contracts. These contracts will be entered
into on domestic and foreign exchanges and boards of trade, subject to
applicable regulations of the Commodity Futures Trading Commission. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes.
In connection with transactions in futures contracts and writing
related options, each Fund will be required to deposit as "initial margin" a
specified amount of cash or short-term, U. S. Government securities. The initial
margin required for a futures contract is set by the exchange on which the
contract is traded. It is expected that the initial margin would be
approximately 1-1/2% to 5% of a contract's face value. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract. No Fund will purchase or
sell futures contracts or related options if, as a result, the sum of the
initial margin deposit on that Fund's existing futures and related options
positions and premiums paid for options or futures contracts entered into for
other than bona fide hedging purposes would exceed 5% of the Fund's assets.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded, a
Fund will incur brokerage fees when it purchases or sells futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS.
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in indexes of securities and movements
in the prices of futures contracts, even a correct forecast of general market
trends may not result in a successful hedging transaction over a very short
period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by a Fund is subject to the ability
of Voyageur to predict correctly movements in the direction of interest rates or
the relevant underlying securities market. If a Fund has hedged against the
possibility of an increase in interest rates adversely affecting the value of
fixed-income securities held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its security which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
LIQUIDITY OF FUTURES CONTRACTS. A Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISK OF OPTIONS. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium, which may
partially offset a decline in the value of a Fund's portfolio assets. By writing
a call option, the Fund becomes obligated to sell an underlying instrument or a
futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option generates a premium, but the Fund
becomes obligated to purchase the underlying instrument or futures contract,
which may have a value lower than the exercise price. Thus, the loss incurred by
a Fund in writing options may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on a Fund's ability to terminate options positions at a time when
Voyageur deems it desirable to do so. Although a Fund will enter into an option
position only if Voyageur believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
A Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by Voyageur, which
could prove to be inaccurate. Even if the expectations of Voyageur are correct,
there may be an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; a Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Certain Funds may purchase put options to hedge against a decline in
the value of their portfolios. By using put options in this way, such Funds will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
Certain Funds may purchase call options to hedge against an increase in
price of securities that the Funds anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Funds to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when Voyageur believes it would be advantageous to do so. Accordingly, OTC
options are subject to each Fund's limitation that a maximum of 15% of its net
assets be invested in illiquid securities. In the event of the bankruptcy of the
writer of an OTC option, a Fund could experience a loss of all or part of the
value of the option. Voyageur anticipates that options on Tax Exempt Obligations
will consist primarily of OTC options.
ILLIQUID INVESTMENTS
Each Fund is permitted to invest up to 15% of its net assets in
illiquid investments. For certain Funds, this policy is fundamental. See
"Investment Restrictions" below. An investment is generally deemed to be
"illiquid" if it cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the investment company is
valuing the investment. "Restricted securities" are securities which were
originally sold in private placements and which have not been registered under
the Securities Act of 1933 (the "1933 Act"). Such securities generally have been
considered illiquid by the staff of the Securities and Exchange Commission (the
"SEC"), since such securities may be resold only subject to statutory
restrictions and delays or if registered under the 1933 Act. However, the
Securities and Exchange Commission has acknowledged that a market exists for
certain restricted securities (for example, securities qualifying for resale to
certain "qualified institutional buyers" pursuant to Rule 144A under the 1933
Act, certain forms of interest-only and principal-only, mortgaged-backed U.S.
Government securities and commercial paper issued pursuant to the private
placement exemption of Section 4(2) of the 1933 Act). As a fundamental policy,
the Funds may invest without limitation in these forms of restricted securities
if such securities are deemed by Voyageur to be liquid in accordance with
standards established by the Funds' Board. Under these guidelines, Voyageur must
consider, among other things, (a) the frequency of trades and quotes for the
security, (b) the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, (c) dealer undertakings to make a
market in the security, and (d) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer.)
At the present time, it is not possible to predict with accuracy how
the markets for certain restricted securities will develop. Investing in
restricted securities could have the effect of increasing the level of a Fund's
illiquidity to the extent that qualified purchasers of the securities become,
for a time, uninterested in purchasing these securities.
As more fully described in the Funds' prospectus, the Funds are
permitted to invest in municipal leases. Traditionally, municipal leases have
been viewed by the Securities and Exchange Commission staff as illiquid
investments. However, subject to Board standards similar to the standards
applicable to restricted securities (as discussed above), Voyageur may treat
certain municipal leases as liquid investments and not subject to the policy
limiting illiquid investments.
DIVERSIFICATION
Each Fund designated as such on the cover of the prospectus operates as
a "diversified" management investment company, as defined in the Investment
Company Act of 1940 (the "1940 Act"), which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables),
Government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
such Fund and to not more than 10% of the outstanding voting securities of such
issuer. The other Funds are "non-diversified," as defined in the 1940 Act. See
the prospectus regarding certain considerations relating to "non-diversified"
status.
For purposes of such diversification, the identification of the issuer
of Tax Exempt Obligations depends on the terms and conditions of the security.
If a State or a political subdivision thereof pledges its full faith and credit
to payment of a security, the State or the political subdivision, respectively,
is deemed the sole issuer of the security. If the assets and revenues of an
agency, authority or instrumentality of a State or a political subdivision
thereof are separate from those of the State or political subdivision and the
security is backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond
is backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by one of the
Funds exceeds 10% of the value of such Fund's total assets, the guarantee is
considered a separate security and is treated as an issue of the guarantor.
Investments in municipal obligations refunded with escrowed U. S. Government
securities will be treated as investments in U. S. Government securities for
purposes of determining a Fund's compliance with the 1940 Act diversification
requirements.
In order to qualify as a regulated investment company, each Fund must
limit its investments so that, at the close of each quarter of the taxable year,
with respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Internal Revenue Code of 1986, as amended (the "Code") requires that not more
than 25% in value of each Fund's total assets may be invested in the securities
of a single issuer at the close of each quarter of the taxable year. Each Fund
intends to conduct its operations so that it will comply with diversification
requirements and qualify under the Code as a "regulated investment company."
PORTFOLIO TURNOVER
Portfolio turnover for a Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by such Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of a Fund's portfolio
securities for a particular year were equal to the average monthly value of the
portfolio securities owned by the Fund during the year. The portfolio turnover
rate for each of the Funds (other than for Funds which have not commenced
investment operations as of the date of this Statement of Additional
Information) is set forth in the prospectus under "Financial Highlights."
INVESTMENT RESTRICTIONS
The Funds have adopted certain investment restrictions set forth below
which, together with the investment objectives of each Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the 1940 Act, this means the lesser of
the vote of (1) 67% of the shares of a Fund at a meeting where more than 50% of
the outstanding shares of a Fund are present in person or by proxy or (2) more
than 50% of the outstanding shares of a Fund. The following investment
restrictions apply to Arizona Insured Tax Free Fund, California Insured Tax Free
Fund, Colorado Tax Free Fund, Florida Insured Tax Free Fund, Kansas Tax Free
Fund, Minnesota Insured Fund, Minnesota Limited Term Tax Free Fund, Minnesota
Tax Free Fund, Missouri Insured Tax Free Fund, National Insured Tax Free Fund,
New Mexico Tax Free Fund, North Dakota Tax Free Fund, Oregon Insured Tax Free
Fund, Utah Tax Free Fund, and Washington Insured Tax Free Fund. No such Fund
will:
(1) Borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% (10% for Colorado Tax Free
Fund) of the value of such Fund's total assets, including the amount
borrowed. The Funds may not borrow for leverage purposes, and
securities will not be purchased while borrowings are outstanding.
Interest paid on any money borrowed will reduce such Fund's net income.
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of its total assets (taken at the lower of cost
or current value) and then only to secure borrowings permitted by
restriction (1) above.
(3) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and sales of
securities.
(4) Make short sales of securities or maintain a short
position for the account of such Fund unless at all times when a short
position is open it owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as,
and equal in amount to, the securities sold short.
(5) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(6) Purchase or sell real estate, although it may purchase
securities which are secured by or represent interests in real estate.
(7) Purchase or sell commodities or commodity contracts
(including futures contracts).
(8) Make loans, except by purchase of debt obligations in
which such Fund may invest consistent with its investment policies, and
through repurchase agreements.
(9) Invest in securities of any issuer if, to the knowledge of
such Fund, officers and directors (or trustees) of such Fund or
officers and directors of such Fund's investment adviser who
beneficially own more than 1/2 of 1% of the securities of that issuer
together own more than 5% of such securities.
(10) Invest 25% or more of its assets in the securities of
issuers in any single industry, except that the Funds may invest
without limitation, in circumstances in which other appropriate
available investments may be in limited supply, in housing, health care
and utility obligations; provided that there shall be no limitation on
the purchase of Tax Exempt Obligations and, for defensive purposes,
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. (Note: For purposes of this investment
restriction, Voyageur interprets "Tax Exempt Obligations" to exclude
limited obligation bonds payable only from revenues derived from
facilities or projects within a single industry.)
(11) Invest more than 15% of its net assets in illiquid
investments.
The following fundamental investment restrictions apply to Iowa Tax
Free Fund and Wisconsin Tax Free Fund. These Funds will not:
(1) Borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% of the value of such Fund's
total assets, including the amount borrowed. The Funds may not borrow
for leverage purposes, and securities will not be purchased while
borrowings are outstanding. Interest paid on any money borrowed will
reduce such Fund's net income.
(2) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(3) Purchase or sell real estate, although it may purchase
securities which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in
which such Fund may invest consistent with its investment policies, and
through repurchase agreements.
(5) Invest 25% or more of its assets in the securities of
issuers in any single industry , except that it may invest without
limitation, in circumstances in which other appropriate available
investments may be in limited supply, in housing, health care and/or
utility obligations; provided that there shall be no limitation on the
purchase of Tax Exempt Obligations and, for defensive purposes,
obligations issued or guaranteed by U.S. Government, its agencies or
instrumentalities. (Note: For purposes of this investment restriction,
Voyageur interprets "Tax Exempt Obligations" to exclude limited
obligations bonds payable only from revenues derived from facilities or
projects within a single industry.)
(6) Issue any senior securities (as defined in the 1940 Act),
except as set forth in investment restriction number (1) above, and
except to the extent that purchasing or selling on a when-issued or
forward commitment basis may be deemed to constitute issuing a senior
security.
(7) Purchase or sell commodities or commodity contracts
(including futures contracts).
(8) Make short sales of securities or maintain a short
position for the account of such Fund unless at all times when a short
position is open it owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as,
and equal in amount to, the securities sold short.
The following restrictions apply to Arizona Limited Term Tax Free Fund,
Arizona Tax Free Fund, California Limited Term Tax Free Fund, California Tax
Free Fund, Colorado Limited Term Tax Free Fund, Colorado Insured Tax Free Fund,
Florida Limited Term Tax Free Fund, Florida Tax Free Fund, Idaho Tax Free Fund,
New York Tax Free Fund, National Limited Term Tax Free Fund and National Tax
Free Fund. No such Fund will:
(1) Borrow money (provided that such Fund may enter into
reverse repurchase agreements), except from banks for temporary or
emergency purposes in an amount not exceeding 20% of the value of the
Fund's total assets, including the amount borrowed. The Funds may not
borrow for leverage purposes, provided that such Funds may enter into
reverse repurchase agreements for such purposes, and securities will
not be purchased while outstanding borrowings exceed 5% of the value of
such Fund's total assets.
(2) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of portfolio
investments, such Fund may be deemed to be an underwriter under federal
securities laws.
(3) Purchase or sell real estate, although it may purchase
securities which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in
which the Fund may invest consistent with its investment policies, and
through repurchase agreements.
(5) Invest 25% or more of its assets in the securities of
issuers in any single industry (except that it may invest without
limitation, in circumstances in which other appropriate available
investments may be in limited supply, in housing, health care, utility,
transportation, education and/or industrial obligations); provided that
there shall be no limitation on the purchase of Tax Exempt Obligations
and, for defensive purposes, obligations issued or guaranteed by the U.
S. government, its agencies or instrumentalities. (Note: For purposes
of this investment restriction, Voyageur interprets "Tax Exempt
Obligations" to exclude limited obligations bonds payable only from
revenues derived from facilities or projects within a single industry.)
(6) Issue any senior securities (as defined in the 1940 Act),
except as set forth in investment restriction number (1) above, and
except to the extent that using options, futures contracts and options
on futures contracts, purchasing or selling on a when-issued or forward
commitment basis or using similar investment strategies may be deemed
to constitute issuing a senior security.
(7) Purchase or sell commodities or futures or options
contracts with respect to physical commodities. This restriction shall
not restrict the Fund from purchasing or selling, on a basis consistent
with any restrictions contained in its then-current Prospectus, any
financial contracts or instruments which may be deemed commodities
(including, by way of example and not by way of limitation, options,
futures, and options on futures with respect, in each case, to interest
rates, currencies, stock indices, bond indices or interest rate
indices).
(8) With respect to Florida Limited Term Tax Free Fund only,
pledge, hypothecate, mortgage or otherwise incumber its assets in
excess of 10% of its total assets (taken at the lower of cost or
current value). For the purposes of this restriction, collateral
arrangements for margin deposits on futures contracts with respect to
the writing of options, with respect to reverse repurchase agreements
or with respect to similar investment techniques are not deemed to be a
pledge of assets.
The following non-fundamental investment restrictions may be changed by
the Board of each Fund at any time. None of the Funds will:
(1) Invest more than 5% of its total assets in securities of
any single investment company, nor more than 10% of its total assets in
securities of two or more investment companies, except as part of a
merger, consolidation or acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(3) With respect to the National Funds, such Funds will not
write puts if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover such puts.
(4) With respect to Arizona Limited Term Tax Free Fund,
Arizona Tax Free Fund, California Limited Term Tax Free Fund,
California Tax Free Fund, Colorado Limited Term Tax Free Fund, Colorado
Insured Tax Free Fund, Florida Limited Term Tax Free Fund, Florida Tax
Free Fund, Idaho Tax Free Fund, New York Tax Free Fund, National
Limited Term Tax Free Fund and National Tax Free Fund, such Funds will
not make short sales of securities or maintain a short position for the
account of such Fund, unless at all times when a short position is open
it owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
SPECIAL FACTORS AFFECTING THE FUNDS
The following information is a brief summary of particular state
factors effecting the Funds and does not purport to be a complete description of
such factors. The financial condition of a state, its public authorities and
local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of the
respective state Fund, or result in the default of existing obligations,
including obligations which may be held by a Fund. Further, each state faces
numerous forms of litigation seeking significant damages which, if awarded, may
adversely affect the financial situation of such state or issuers located in
such state. It should be noted that the creditworthiness of obligations issued
by local issues may be unrelated to the creditworthiness of a state, and there
is no obligation on the part of a state to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by a state.
Bond ratings received on a state's general obligation bonds, if any,
are discussed below. Moody's, S&P and/or Fitch Investors Service, Inc. provide
an assessment/rating of the creditworthiness of an obligor. The debt rating is
not a recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor. The
ratings are based on current information furnished by the issuer or obtained by
the rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstance. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised or
withdrawn entirely by any such rating agencies, if in their respective
judgments, circumstances so warrant. The ratings are based, in varying degrees,
on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of, and provisions of, the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement(s) under the laws
of bankruptcy and other laws affecting creditors rights.
A revision or withdrawal of any such credit rating could have an effect
on the market price of the related debt obligations. An explanation of the
significance and status of such credit ratings may be obtained from the rating
agencies furnishing the same. In addition, a description of Moody's and S&P's
bond ratings is set forth in Appendix A hereto.
The information contained below is based primarily upon information
derived from state official statements, Certified Annual Financial Reports,
state and industry trade publications, newspaper articles, other public
documents relating to securities offerings of issuers of such states, and other
historically reliable sources. It has not been independently verified by the
Funds. The Funds make no representation or warranty regarding the completeness
or accuracy of such information. The market value of shares of any Fund may
fluctuate due to factors such as changes in interest rates, matters affecting a
particular state, or for other reasons.
FACTORS AFFECTING ARIZONA FUNDS
General Economic Conditions. Progressing from its traditional reliance
on a cyclical construction industry, Arizona's economic base is maturing and
diversifying.
One of the nation's leaders in employment growth, Arizona created close
to 335,000 jobs during 1990-95. After climbing by 6.2% in 1994, during which the
state's economy produced the second-highest number of jobs of any year in
Arizona history, job creation in Arizona is leveling off with employment growth
of 4.2% in 1995-96, although this compares favorably with the national figure of
2.3%. Arizona's wage and salary employment grew 5.4% in 1995 and is forecast to
increase by 4.3% in 1996, 3.7% in 1997 (adding more than 153,000 new jobs since
1995) and 3.0% in 1998.
Arizona ranked third in the nation in personal income growth during
1990-95. Personal income growth is estimated at 8% in 1996, 6.7% in 1997, and
6.1% in 1998.
Overall, Arizona's forecast is for continued but moderate rates of
growth in employment and personal income. The numbers suggest a positive
outlook, although less so in 1996 and 1997 than in 1994 and 1995. By 1997
employment growth is expected by Arizona to be less than half of Arizona's 1994
growth rate.
Continued job growth is forecast by Arizona to be accompanied by strong
population growth. During the last ten years, Arizona's population grew at an
average rate of 3.5% to a total of 4.1 million people. Arizona's population grew
by an estimated 2.8% in 1994 and 3.5% in 1995. That rate is expected by Arizona
to drop back to 2.5% in 1996 and 2.6% between January of 1997 and January of
1998.
Budgetary Process. Annually, no later than five days after the regular
Legislative session convenes, the Governor must submit a budget to the
Legislature. Before July 1 the budget is enacted through the passage of a
General Appropriations Act, a Capital Outlay Bill and various Omnibus
Reconciliation Bills (ORBs). The reconciliation bills are used for statutory
adjustments that must be implemented to carry out the adopted budget. Upon
presentation, the Governor has five days to sign the bills into law, veto it in
its entirety, line-item veto individual items of appropriations, or allow the
bill to become law without his signature. The Legislature may, with a two-thirds
vote, override a veto or line-item veto.
The Budget Reform Act of 1993 initiated a one-and two-year budget
review process for State agencies beginning with the FY 1996/FY 1997. Agencies
selected for annual review and appropriation are designated as Major Budget
Units (MBUs). MBUs can be described as agencies with difficult issues requiring
frequent and critical reviews and, ultimately, more resources. The 16 MBUs
account for over 90% of the total General Fund expenditures. Agencies selected
for biennial review and appropriation are designated as Other Budget Units
(OBUs). In 1996, combined MBU and OBU in the General Fund totaled $4.38 billion,
and is estimated at $4.77 billion in 1997.
Revenues and Expenditures. The General Fund closed fiscal year 1996
with a $399.9 million ending balance, setting a new record for the state, and
the Executive plan for fiscal year 1997 anticipates a $254.9 million balance.
Overall, fiscal year 1996 revenues exceeded the spring 1996 forecast by about
$95.3 million. While there were many offsetting changes in the various revenue
sources, the most notable were in corporate and individual income taxes.
Revertments were anticipated to be about $75 million in spring 1996. The final
closing of the books revealed total revertments of $112 million - a $37 million
increase. However, some revertments will be administratively adjusted during
fiscal year 1997 to pay bills.
Fiscal Year 1997. In April 1996, when the fiscal year 1997 budget was
adopted, the consensus revenue estimate was $4.72 billion. The current Executive
forecast for fiscal year 1997 is $60 million higher, at $4.78 billion.
The major revenue source remaining essentially unchanged from the
spring 1996 forecast is transaction privilege taxes, still forecast to produce
$2.21 billion for fiscal year 1997. As of November 1996, fiscal year 1997 YTD
revenue collections were up 3.4% over the previous year and support the present
Executive General Fund forecast. All three major revenue categories - individual
income taxes, corporate income taxes and transaction privilege taxes - showed
gains on a year-over-year basis. The most significant impact on fiscal year 1997
revenues will be the $200 million property tax reduction enacted in 1996, which
has decreased revenues by some 3.2%. Overall, the Executive anticipates a 3.4%
or $163.2 billion increase in base revenues of the current FY 1997 estimate.
This compares to the 2.4%, or $112.5 million increase in base revenues between
fiscal year 1996 and fiscal year 1997.
Fiscal Year 1998. The Executive is recommending a base operating budget
of $4.94 billion for fiscal year 1998, an increase of approximately $168.7
million. The majority of recommended expenditures for fiscal year 1998 are in
the area of education. The K-12 budget (Department of Education) and the higher
education budgets (Community Colleges and University system) account for 57%
(over $2.8 billion) of the General Fund operating budget. Additionally, the
health and welfare area accounts for over 23% (more than $1.1 billion), the
protection and safety area accounts for over 12% ($579 million), and other areas
of government account for less than 8% of the General Fund operating budget.
The Executive fiscal plan for fiscal year 1998 is based on revenue
estimates, yet still provides for Executive-initiated program changes of $59.6
million; a $100 million income tax reduction to continue the Governor's
phase-out of that revenue source; an $84.7 million capital program; and a $28.0
million employee compensation package. The Executive projects a fiscal year 1998
ending balance of $11.2 million.
Significant Litigation. In response to the court's ruling in the
Roosevelt v. Bishop case in 1994, the Executive recommended $30 million for the
first-year implementation of a capital assistance program for Arizona's schools.
The program is designed to help school districts that lack bonding capacity due
to low value or rapid growth. It requires an application that includes
documentation of need and is submitted to a capital equity board. Income is
provided for in a Capital Equity Fund which contains monies appropriated by the
Legislature and $30 million annually from the Common School Land Fund (Permanent
State School Fund). The Permanent State School Fund consists of revenues from
the proceeds of the sale of natural resources or property from lands that have
been granted by the United States to the State of Arizona for the support of
common schools. In future years, the Capital Equity Fund may contain monies
remitted by school districts for the repayment of loans. Funds are used to
assist school districts with capital needs. For fiscal year 1999, the Governor
recommends $40.5 million be appropriated from the Permanent State School Fund,
which includes the $30 million appropriated to the Capital Equity Fund.
Debt Administration and Limitation. The State is not permitted to issue
general obligation debt. The particular source of payment and security for each
of the Arizona Tax Exempt Obligations is detailed in the debt instruments
themselves and in related offering materials. There can be no assurances with
respect to whether the market value or marketability of any of the Arizona Tax
Exempt Obligations issued by an entity other than the State of Arizona will be
affected by financial or other conditions of the State or of any entity located
within the State. In addition, it should be noted that the State of Arizona, as
well as counties, municipalities, political subdivisions and other public
authorities of the State, are subject to limitations imposed by Arizona's
Constitution with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the State legislature cannot appropriate revenues in
excess of 7% of the total personal income of the State in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
Although most of the Arizona Tax Exempt Obligations are revenue
obligations of local governments or authorities in the State, there can be no
assurance that the fiscal and economic conditions referred to above will not
affect the market value or marketability of the Arizona Tax Exempt Obligations
or the ability of the respective obligors to pay principal of and interest on
the Arizona Tax Exempt Obligations when due.
FACTORS AFFECTING CALIFORNIA FUNDS
General Economic Conditions. California's economy is the largest among
the 50 states and one of the largest in the world. This diversified economy has
major components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total State gross domestic
product of $1 trillion in 1997 will be larger than all but seven nations in the
world and California will become the first state to produce over one trillion
dollars worth of goods and services in a single year.
After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. In 1996, California had eight
consecutive months of record high employment levels. Employment grew over
330,000 non-farm jobs in 1996, and is expected to add another 330,000 jobs in
1997. The strongest growth has been in high technology and export-related
industries, including computer software, business services, electronics,
entertainment and tourism, all of which have offset the recession-related losses
which were heaviest in aerospace and defense-related industries (which accounted
for two-thirds of the job losses), and finance and insurance. Residential
housing construction, with new permits rising from 94,000 units in 1996 to
110,000 in 1997, is weaker than in previous recoveries, but has been growing
slowly since 1993.
The State's July 1, 1994 population of 32.1 million represented over
12% of the total United States population. California's population is
concentrated in metropolitan areas. As of July 1, 1994, the 5-county Los Angeles
area accounted for 48% of the State's population, with 15.6 million residents,
and the 10-county San Francisco Bay Area represented 21% with a population of
6.7 million. The June 1996 population projection forecasts 33.9 million
California residents in July 1998.
California enjoys a large and diverse labor force. For the year 1996,
the total civilian labor force was 15,496,000 with 14,372,000 individuals
employed and 1,124,000, or 7.3%, unemployed. In comparison, the unemployment
rate for the United States during the same time was 5.4%.
Budgetary Process. The State's fiscal year begins on July 1 and ends on
June 30. The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Under the State Constitution, money may be drawn from the Treasury only through
an appropriation made by law. The primary source of the annual expenditure
authorizations is the Budget Act as approved by the Legislature and signed by
the Governor. The Budget Act must be approved by a two-thirds majority vote of
each House of the Legislature. The Governor may reduce or eliminate specific
line items in the Budget Act or any other appropriations bill without vetoing
the entire bill. Such individual line-item vetoes are subject to override by a
two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except K-14 education) must be
approved by a two-thirds majority vote in each House of the Legislature and be
signed by the Governor. Bills containing K-14 education appropriations only
require a simple majority vote. Continuing appropriations, available without
regard to fiscal year, may also be provided by statute or the State
Constitution. Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
Revenues and Expenditures. The moneys of the State are segregated into
the General Fund and approximately 600 Special Funds. The General Fund consists
of revenues received by the State Treasury and not required by law to be
credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
Moneys on deposit in the State's Centralized Treasury System are
invested by the Treasurer in the Pooled Money Investment Account ("PMIA"). As of
January 31, 1996, the PMIA held approximately $17.31 billion of State moneys,
and $10.60 billion of moneys invested for 2,366 local governmental entities
through the Local Agency Investment Fund ("LAIF"). The total assets of the PMIA
as of January 31, 1996 were $27,912,100,000. The Treasurer does not invest in
leveraged products or inverse floating rate securities. The investment policy
permits the use of reverse repurchase agreements subject to limits of no more
than 10% of PMIA. All reverse repurchase agreements are cash matched either to
the maturity of the reinvestment or an adequately positive cash flow date which
is approximate to the maturity date. The average life of the investment
portfolio of the PMIA as of January 31, 1996 was 233 days.
Special Fund for Economic Uncertainties. The Special Fund for Economic
Uncertainties ("SFEU") is funded with General Fund revenues and was established
to protect the State from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the State
Controller as necessary to meet cash needs of the General Fund. The State
Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. For
budgeting and accounting purposes, any appropriation made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the State Controller is required to add the balance in the SFEU to the balance
in the General Fund so as to show the total moneys then available for General
Fund purposes. Inter-fund borrowing has been used for many years to meet
temporary imbalances of receipts and disbursements in the General Fund. As of
June 30, 1995, the General Fund did not have any outstanding loans from Special
Funds (but did have $4 billion of external loans represented by the 1994 Revenue
Anticipation Warrant, Series C and D which matured on April 25, 1996). As of
June 30, 1996, the General Fund Reserve for Economic Uncertainties was $234.6
million.
Proposition 13. The primary units of local government in California are
the counties. Counties are responsible for the provision of many basic services,
including indigent health care, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 unincorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. A recent California Supreme Court decision has upheld the
constitutionality of an initiative statute, previously held invalid by lower
courts, which requires voter approval for "general" as well as "special" taxes
at the local level. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, yet have been required to
maintain many services.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds. Article XIII B
prohibits the State from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. "Appropriations subject to limitation," with
respect to the State, are authorizations to spend "proceeds of taxes," which
consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state subventions to
local governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
Orange County, CA. On December 6, 1994, Orange County, together with
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and Orange County. More than 200 other public entities, most of which,
but not all, are located in Orange County, were also depositors in the Pools.
Orange County has reported the Pools' loss at about $1.69 billion, or about 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including Orange County, faced interim
and/or extended cash flow difficulties because of the bankruptcy filing and may
be required to reduce programs or capital projects. Orange County has embarked
on a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
Litigation Generally. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
Fiscal Year 1996-1997. On January 10, 1996, the Governor released his
proposed budget for the fiscal year 1996-97. The Governor requested total
General Fund appropriations of about $45.2 billion, based on projected revenues
and transfers of about $45.6 billion, which would leave a budget reserve in the
SFEU at June 30, 1997 of about $400 million. The Governor renewed a proposal,
which had been rejected by the Legislature in 1995, for a 15% phased cut in
individual and corporate tax rates over three years (the budget proposal assumes
this will be enacted, reducing revenues in 1996-97 by about $600 million). There
was also a proposal to restructure trial court funding in a way which would
result in a $300 million decrease in General Fund revenues. The Governor
requested legislation to make permanent a moratorium on cost of living increases
for welfare payments, and suspension of a renters tax credit, which otherwise
would go back into effect in the 1996-97 fiscal year. The Governor further
proposed additional cuts in certain health and welfare programs, and assumed
that cuts previously approved by the Legislature will receive federal approval.
Other proposals included an increase in funding for K-12 schools under
Proposition 98, for state higher education systems (with a second year of no
student fee increases), and for corrections. The Governor's Budget projected
external cash flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
Revised estimates were published in the Governor's Budget Summary for fiscal
year 1997-98. These estimates and projections are based upon various assumptions
which may be affected by numerous factors, including future economic conditions
in the State and the nation, and there can be no assurance that the estimates
will be achieved.
Preliminary General Fund revenues and transfers for fiscal year 1996-97
are $48.4 billion, a 4.56% increase from the prior year. Expenditures are
estimated at $48.4 billion, a 6.6% increase. The Governor's Budget Summary for
fiscal year 1997-98 projects a positive balance of $197 million in the budget
reserve, the SFEU, at June 30, 1997. Special Fund revenues are estimated at
$13.54 billion and appropriated Special Fund expenditures at $13.59 billion. As
of June 30, 1996, the General Fund balance was $685.4 million. The estimate for
June 30, 1997 is $648 million.
Overall, General Fund revenues and transfers represent about 78% of
total revenues. The remaining 22% are special funds, dedicated to specific
programs. The three largest revenue sources (personal income, sales, and bank
and corporation) account for about 73% of total revenues.
Several important tax changes were enacted in 1996. The bank and
corporation tax was reduced by 5%, and a number of targeted business tax
incentives were put into place.
1997-98 Fiscal Year. The Governor's proposed budget for fiscal year
1997-98 keeps General Fund spending below revenues. The budget provides for
General Fund revenues and transfers of $50.7 billion, a 4.65% increase from
1996-97, and expenditures of $50.3 billion, a 4% increase. The budget provides
for a General Fund Reserve for Economic Uncertainties of $553 million. The
balance in the General Fund at the end of fiscal year 1998 is forecast at $1,004
million. Special Fund revenues are estimated to be $14 billion and appropriated
Special Fund expenditures are projected at $14.3 billion.
K-12 education remains the state's top funding priority -- nearly 42
cents of every General Fund dollar is spent on K-12 education. Education, public
safety, and health and welfare expenditures constitute nearly 93% of all state
General Fund expenditures. General Fund expenditures for 1997-98 are proposed in
the following amounts and programs: $20.9 billion or 41.6% for K-12 education,
$14.6 billion or 28.9% for health and welfare, $6.5 billion or 12.9% for higher
education, and $4.3 billion, or 8.5% for youth and correctional programs. The
remaining expenditures are in areas such as business, transportation, housing,
and environmental protection.
The following are principal features of the Governor's 1997-98 budget proposal:
For fiscal year 1997-98, the Governor's budget proposes a further 10%
reduction in the bank and corporation tax rate phased in over a two-year period
beginning with the 1998 tax year. This would implement the balance of the
Governor's proposal last year for a 15% bank and corporation tax reduction. In
addition, the Governor's Budget proposes that the State conform with recent
federal changes in the allowable number of Subchapter S shareholders. Combined,
these tax reduction proposals are estimated to reduce taxes by $93 million
during 1997-98, and $336 million during 1998-1999.
The Governor has proposed a $200 million bond to capitalize an
Infrastructure Bank to help finance infrastructure projects related to business
development. The budget also proposes $939,000 to create three new offices --
two in Asia and one in South America -- to provide California companies with
representation and assistance in these emerging markets.
Building on the 1996 class-size reduction initiative, the Budget
proposes $304 million to reduce class size in an additional grade, and funding
is provided to meet facilities-related costs of class size reduction in 1996-97.
An additional $57 million is proposed for improved reading instruction in grades
four through eight.
The Budget includes the second year of the Citizens' Option for Public
Safety Program, through which $100 million will be provided to local governments
to increase frontline law enforcement.
The Budget provides a $35 million Infant Health Protection Initiative,
designed to protect children from abuse or neglect from substance-abusing
parents. The budget also provides $15.3 million to increase immunizations for
low-income children.
Debt Administration and Limitation. The State Treasurer is responsible
for the sale of debt obligations of the State and its various authorities and
agencies. The State Constitution prohibits the creation of indebtedness of the
State unless a bond law is approved by a majority of the electorate voting at a
general election or a direct primary. General obligation bond acts provide that
debt service on general obligation bonds shall be appropriated annually from the
General Fund and all debt service on general obligation bonds is paid from the
General Fund. Under the State Constitution, debt service on general obligation
bonds is the second charge to the General Fund after the application of moneys
in the General Fund to the support of the public school system and public
institutions of higher education. Certain general obligation bond programs
receive revenues from sources other than the sale of bonds or the investment of
bond proceeds. The State had $17,913,271,000 aggregate principal amount of
general obligation bonds outstanding, and $8,383,864,000 authorized and
unissued, as of December 31, 1996. Outstanding lease revenue bonds totaled
$5.845 billion as of June 30, 1996, and are estimated to total $6.398 billion as
of June 30, 1997.
From July 1, 1995 to December 15, 1995, the State issued approximately
$461 million in general obligation bonds and $44 million in revenue bonds.
Refunding bonds, which are used to refinance existing debt, accounted for $81
million of the general obligation bonds and the entire $44 million of the
revenue bonds. The Legislature placed two general obligation bond measures
totaling $5 billion on the March, 1996 statewide ballot. Additional bond
measures may be placed on the November 1996 ballot.
General Fund general obligation debt service expenditures for fiscal
year 1995-96 were $1.911 billion, and are estimated at $1.953 billion and $1.979
billion for fiscal years 1996-97 and 1997-98, respectively.
The State's general obligation bonds have received ratings of "A1" by
Moody's Investors Service, "A" by Standard & Poor's Ratings Group and "A+" by
Fitch Investors Service, Inc.
FACTORS AFFECTING COLORADO FUNDS
General Economic Conditions. Colorado entered the Union on August 1,
1876, and was called the "Centennial State" in honor of the 100th anniversary of
the Declaration of Independence. It is the eighth largest state in the nation,
with an area of 104,247 square miles. The main feature of the state's geography
is the Continental Divide, extending northeast to southwest and roughly
bisecting Colorado into the Eastern and Western Slopes. The major rivers of
Colorado are the Arkansas, Platte, Rio Grande, and Colorado. Colorado enjoys an
average of nearly 300 days of sunshine per year. Precipitation varies from 8
inches per year in lower elevations to 23 inches in the mountains, with a yearly
statewide average of 16.5 inches.
The U.S. Bureau of Census estimates Colorado's population in 1996 at
3.821 billion. This represents a 2.0% increase over the 1995 estimate of 3.747
billion. Colorado's population growth is predicted at 1.9% in 1997 and 1.8% in
1998, both years higher than the 1.2% estimated national rate for 1997 and 1998.
A large part of Colorado's current growth is related to growth in the West and
to decentralization trends that emanate from California.
As the primary services center for the Rocky Mountain region, the state
suffered a sharp recession in the mid-to-late 1980s because of retrenchment in
the energy sector. Real estate values dropped sharply, with evidence of
overbuilding in commercial and residential sectors. Office vacancy rates in the
Denver area soared, and the state lost significant jobs in mining and
construction.
Colorado's economic vitality returned and was evident through the
1991-1992 national recession and more recent recovery. Wage and salary
employment growth topped 5.1% in 1994, but dropped to 4.7% in 1995 and an
estimated 2.5% in 1996. Personal income grew 8% in 1995 but dropped to an
estimated 6.3% in 1996. The state has added nearly 318,500 jobs during
1990-1995, mostly in service, trade, and government with an additional 45,200
estimated for 1996, a 2.5% increase from 1995, but lower than the 5.1% and 4.7%
increases in 1994 and 1995, respectively. Construction employment has been
strong, bolstered by the recently completed Denver International Airport
construction, but activity has shifted to other public infrastructure projects
and single-family homes. Estimates for 1996 show employment is now diversified
among service (29.7%), trade (24.5%), government (16.2%), and manufacturing
(10.5%). Housing starts have dramatically increased from 14,100 units permitted
in 1991 to an estimated 41,400 in 1996. Conversely, the state's mining sector
has recorded the loss of about 6,200 jobs since 1990. Transportation,
communications and public utilities, as well as retail trade has been strong,
growing 9% and 7.1%, respectively, in 1995. Income levels, while below their
early 1980s peak, are rising, with per capita personal income at 103% of the
national average.
The Colorado economy will continue to chalk up gains in 1997 but not at
the pace of the last three years. Absorbing the job cuts at Union Pacific
Railroad, USWEST, and Fitzsimmon's Army Medical Center will curtail growth. The
Colorado economy has now achieved more sustainable growth rates, but employment
will begin to tail off at the turn of the century. While construction job losses
at the airport largely have been absorbed into other public infrastructure
projects and residential housing, the construction sector is likely to lose jobs
as population growth slows. Projections of 2.4% employment growth and 6.4%
growth in personal income for 1997 are still strong by national standards, but
represent a slowdown from recent growth. The state unemployment rate should stay
below the national rate.
Significant Litigation. On June 19, 1995, the Colorado Supreme Court
affirmed the December 1993 Arapahoe County District Court decision in favor of
the Littleton School District. The Bolt v. Littleton School District case was a
class action lawsuit brought by three taxpayers residing in the District.
Plaintiffs argued that Littleton School District's 1993 property tax millage
rate increase violated Amendment 1. The Amendment states that all Districts must
obtain voter approval in advance of any new tax, tax rate increase, or mill levy
above that for the prior year, unless annual District revenue is less than
annual payments on G.O. bonds, pensions, and final court judgments, with certain
exceptions. The School District increased its 1993 mill levy to pay debt service
on its Series 1985 G.O. bonds. In affirming the Trial Court's ruling in favor of
the District, the Supreme Court reasoned that the increase in the District's
bond redemption mill levy for 1993 did not violate the provisions of Amendment 1
because the District already received voter approval for the tax rate increase
when the Bonds originally were authorized by voters at an election in 1984. The
ruling has significance for the Colorado municipal bond market because it
upholds the right of Municipalities to increase property tax millage rates to
pay debt service on G.O. bonds issued before Amendment 1.
The Littleton ruling follows another important ruling by the Colorado
Supreme Court in September, 1995 in the case of Bickel v. City and County of
Boulder and Boulder Valley School District. In that case the court upheld the
right of Municipalities to request and obtain voter approval to issue G.O. bonds
after passage of Amendment 1. Together, the Boulder and Littleton cases settle
two of the most controversial Amendment 1 issues and should lead to a more
orderly primary and secondary market for Colorado municipal bonds.
Budgetary Process. The financial operations of the legislative,
judicial, and executive branches of the state's government, with the exception
of custodial funds or federal moneys not requiring matching state funds, are
controlled by annual appropriation made by the General Assembly. The
Transportation Department's portion of the Highway Fund is appropriated to the
State Transportation Commission. Within the legislative appropriation, the
Commission may appropriate the specific projects and other operations of the
Department. In addition, the Commission may appropriate available fund balance
from their portion of the Highway Fund.
The legislative appropriation is constitutionally limited to the
unrestricted funds held at the beginning of the year plus revenues estimated to
be received during the year as determined by the modified accrual basis of
accounting. The Governor has line item veto authority over the Long
Appropriations Bill, but the General Assembly may override each individual line
item veto by a two-thirds majority vote in each house. For budgetary purposes,
cash funds are all funds received by the state that are neither general purpose
revenues, nor revenues received from the federal government. General and cash
fund appropriations, with the exception of capital construction, lapse at
year-end unless executive action is taken to roll-forward all or part of the
remaining unspent budget authority. Appropriations that meet the strict criteria
for roll-forward are reserved at year-end. Capital construction appropriations
are generally available for three years after appropriations.
Revenues and Expenditures. Audited GAAP financial statements for the
year-ended June 30, 1996 report an unreserved general fund balance of $368.5
million, or about 8.4% of general fund expenditures, and after setting aside
reserve monies, as required by statute, the ending fund balance was $211.8
million. This is in contrast to the unreserved general fund balance of just
$16.3 million in 1991 but lower than $488.5 million in 1995. In fiscal 1996,
challenged to deliver on a 1988 plan to increase the state's contribution toward
primary and secondary education, the state budget provided approximately $1.6
billion to K-12 education. Revenue growth was 6.8% in 1996, and 6.9% estimated
in 1997, with sales tax collections growing 8.1% in fiscal 1996 and an estimated
5.0% in 1997, while individual income taxes grew 10.1% in fiscal 1996 and are
projected to grow 9.1% in 1997.
For fiscal year 1996, general fund expenditures exceeded revenues by
$142.5 million due to actions taken during the 1996 legislative session. There
has been a change in managing the TABOR (Article X) Reserve: the state
controller transferred $196 million to the Controlled Maintenance Trust Fund
(CMTF) at the end of fiscal year 1996, with the balance in this fund satisfying
the state's Article X reserve requirement. Also, the legislature increased the
amount of the General Fund transfer to the Capital Construction Fund (up to $159
million from $120.3 million in fiscal year 1995).
For fiscal year 1997, appropriations are right at the 6% expenditure
limit of $4,151.9 million, or $235 million more than current-year spending.
Factoring in the first year of the Governor's revenue spending plan for
highways, the ending fund balance, after reserves, is estimated to increase by
$27.8 million to $396.3 million. After set-asides for required reserves, the
ending fund balance is projected to be $230.2 million, more than 5% of total
expenditures.
The Amendment 1 constitutional revenue and spending limit will not
affect the fiscal 1997 or 1998 budget, because projected revenues and
expenditures fall below limits. With slower population growth, the long-term
projections suggest a convergence of revenues with the amendment's limits.
General fund revenues for fiscal year 1997-98 are estimated to grow by
4.5%, or $207.2 million, compared to the projected 6.9% growth rate for 1996-97.
This lower growth rate is primarily due to the Governor's proposal to eliminate
intergovernmental transfers from the state's largest hospitals. After reserve
set-asides, the state is estimated to have an ending fund balance of $159.7
million.
The State Controller may allow certain over expenditures of the legal
appropriation with the approval of the Governor. If the State Controller
restricts the subsequent year appropriation, the agency is required to seek a
supplemental appropriation from the General Assembly or reduce their subsequent
year's expenditures. As provided by statute, there is unlimited authority for
Medicaid over expenditures. The Department of Human Services is allowed $1
million in over expenditures not related to Medicaid and unlimited over
expenditures for self-insurance of its workers' compensation plan. An additional
$1 million over expenditure is allowed for the Judicial Branch. State statute
also allows over expenditures up to $1 million in total for the remainder of the
executive branch.
Debt Administration and Limitation. The Constitution prohibits Colorado
from incurring G.O. debt, and most long-term financing takes the form of lease
purchase obligations. The state relies on general fund appropriations for
pay-as-you-go capital projects, with $159 million transferred to the capital
construction fund in 1996 and $116 million estimated in 1997. Since 1988, the
State's master lease purchase program primarily has been used to finance new
correctional facilities. Lottery revenues are intended for repayment on these
obligations, but deficiencies are appropriated from the general fund. In
November 1992, Colorado voters approved an amendment that redirects lottery
revenues to outdoor recreation. After 1998, alternate general fund resources
will need to be allocated for future lease payments, but the annual lease
payment obligation by then is only about $2.5 million. The State supports
affordable housing through the Colorado Housing Finance Authority, whose G.O.s
ultimately are secured by the State's moral obligation pledge.
The Funds Management Act (the "Act") was enacted to allow the State to
provide for temporary cash flow deficits caused by fluctuations in revenues and
expenditures. Under the Act the State Treasurer is authorized to sell Tax and
Revenue Anticipation Notes which are payable from the future anticipated pledged
revenues. The law directs the State Auditor to review information relating to
the Notes and report this information to the General Assembly. On July 6, 1996,
the State Treasurer issued General Fund Tax Revenue Anticipation Notes (the
"Notes") in the amount of $400 million. These Notes have a maturity date of June
27, 1997 and are not subject to redemption prior to maturity. The amount due at
maturity is $418,000,000 consisting of the Note principal of $400,000,000 and
interest of $18,000,000. To ensure the payment of the Notes, the Treasurer has
agreed to deposit pledged revenues into the Account so that the balance on June
15, 1997, will be no less than the amount to be repaid. The Note agreement also
provides remedies for holders of the Notes in the event of default.
Since the State of Colorado does not have G.O. debt, it does not have
S&P, Moody's or Fitch ratings.
FACTORS AFFECTING FLORIDA FUNDS
General Economic Conditions. Florida is the twenty-second (22nd)
largest state with an area of 54,136 square miles and a water area of 4,424
square miles. The State is 447 miles long (St. Marys River to Key West) and 361
miles wide (Atlantic Ocean to Perdido River) and has tidal shoreline of almost
2,300 miles. Florida has grown dramatically since 1980 and in 1994, ranked
fourth among the fifty states with an estimated population of 13.9 million. By
1996, Florida's population increased to 14.4 million, with projections of 15
million by 1999. The State's strong population growth is one fundamental reason
why its economy has typically performed better than the nation as a whole. Since
1984, the United States has had an average population increase of about 1.0%
annually, while Florida's average annual rate of increase is around 2.3%.
However, during 1992-96, Florida's annual net migration increase averaged 1.82%
and is predicted at 1.8% for 1997-98. Yet, Florida has been, and continues to
be, the fastest growing of the eleven (11) largest states.
While many of the Nation's senior citizens choose Florida as their
place of retirement, the State is also recognized as attracting a significant
number of working age people. Since 1985, the prime working age population
(18-44) has grown at an average annual rate of 2.2%. Florida's economic assets,
such as competitive wages and low per capita taxes, have attracted new
businesses and consequently have created many new job opportunities. The share
of Florida's total working age population (18-59) to total population is
approximately 54%.
Over the years, Florida's personal income has grown and has generally
outperformed both the U.S. as a whole and the southeast in particular. The
reasons for this are two fold. First, Florida's population has expanded. Second,
the State's economy since the early seventies has diversified in such a way as
to provide a broader economic base. As a result, Florida's personal income has
tracked closely with the national average and, historically, above that of the
southeast. From 1985 through 1994, Florida's per capita income rose an average
of 5.2% per year, while the national per capita income increased an average of
5.1%. Real personal income increased 4.5% in 1995-96 and is estimated to
increase 4.2% in 1996-1997 and increase 4.4% in 1997-1998, while real income per
capita peaked at 2.6% in 1995-96 and is projected to grow at 2.3% in 1996-1997
and 2.6% in 1997-1998.
In recent years, the State's service sector employment has accounted
for approximately 85% of total nonfarm employment. While structurally the
southeast and the nation are endowed with a greater proportion of manufacturing
jobs, which tend to pay higher wages, service jobs, historically, tend to be
less sensitive to business cycle swings. Florida has a concentration of
manufacturing jobs in high-tech and high value-added sectors, such as electrical
and electronic equipment, as well as printing and publishing. The State's
manufacturing sector has kept pace with the U.S., at about 2.7% of total U.S.
manufacturing employment since the eighties.
Total non-farm employment is expected to increase 2.9% or 180,000 jobs
in 1996-97 and remain stable at 2.9% or 183,500 new jobs in 1997-98. The
strongest areas in job growth in Florida in fiscal year 1997-98 are expected to
be in services and a combination of retail and wholesale trade. Services are
forecast to lead the economy, growing 4.3% (93,500 jobs) in fiscal year 1997-98,
and accounting for about 51% of total new jobs in that year. Services are the
single largest source of employment in Florida, making up about 35% of the total
in fiscal year 1997-98.
Wholesale and retail trade is projected to increase 2.9% in fiscal year
1997-98 (47,100 new jobs), which parallels general economic growth. This sector
is the second largest, with about 25% of all jobs in the state, and is
anticipated to contribute about 26% of the new jobs created in fiscal year
1997-98. Construction will exhibit modest growth of 2.5% (7,800 new jobs)
reflecting stable construction activity supported by population growth.
Manufacturing, with slightly more than 7% of total jobs, will have the slowest
positive growth rate among the major sectors in fiscal year 1997-98, at less
than 1% (2,800 new jobs).
As the State's economic growth has slowed from its previous highs, the
unemployment rate has tracked above the national average. More recently,
Florida's unemployment rate has been below the national average. Florida's
unemployment rate was 5.5% in 1995 and as of November 1996, the rate was 4.8%,
giving an 11-month average of 5.3%. The national unemployment rate was 5.6% in
1995 and averaged 5.4% in 1996.
Tourism is one of Florida's most important industries. Approximately 41
million people visited the State in 1995. In terms of business activities and
State tax revenues, tourists in Florida effectively represented additional
residents, spending their dollars predominantly at eating and drinking
establishments, hotels and motels, and amusements and recreation parks. The
State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus, to a degree, reducing its seasonality.
Besides a sub-tropical climate and clean beaches that attract people in the
winter months, the State has added, among other attractions, a variety of
amusement and educational theme parks. This diversification has helped to reduce
the seasonal and cyclical character of the industry and has effectively
stabilized tourist related employment as a result. By the end of fiscal year
1996, 41.4 million domestic and international tourists are expected to have
visited the State. In 1997-1998, tourist arrival should reach a high of 43.9
million, representing 3.2% growth from 1996-97. The current Florida Economic
Consensus Estimating Conference forecast shows that the Florida economy is
expected to decelerate along with the nation, but will continue to outperform
the U.S. as a whole as a result of relatively rapid population growth.
Budgetary Process. The budgetary process is an integrated, continuous
system of planning, evaluation and controls. Individual state agencies prepare
and submit appropriation requests to the Office of Planning and Budgeting,
Executive Office of the Governor, no later than September 1 of the year next
preceding Legislative consideration. After an evaluation of the agencies'
requests, the Office of Planning and Budgeting, Executive Office of the
Governor, makes recommendations to the Governor that are within previously
established policy guidelines of the Governor and revenue estimate. Florida
Statutes provides that financial operations of the State covering all receipts
and expenditures be maintained through the use of three funds - the General
Revenue Fund, Trust Funds, and Working Capital Fund. The General Revenue Fund
receives the majority of State tax revenues. Monies for all funds are expended
pursuant to appropriations acts. The Trust Funds consist of monies received by
the State which under law or trust agreement are segregated for a purpose
authorized by law. Revenues in the General Fund which are in excess of the
amount needed to meet appropriations may be transferred to the Working Capital
Fund. The Florida Constitution adds a fourth fund, the Budget Stabilization
Fund. The Florida Constitution and Statutes mandate that the State budget as a
whole, and each separate fund within the State budget be kept in balance from
currently available revenues each State Fiscal year (July 1-June 30). The
Governor and Comptroller are responsible for insuring that sufficient revenues
are collected to meet appropriations and that no deficit occurs in any State
fund.
Revenues and Expenditures. Financial operations of the State of Florida
covering all receipts and expenditures are maintained through the above
described four fund types - General Revenue Fund, Trust Funds, Working Capital
Fund, and Budget Stabilization Fund. In fiscal year 1997-1998, an estimated 40%
of total direct revenues to these funds will be derived from State taxes and
fees. Federal funds and other special revenues account for the remaining
revenues. Major sources of tax revenues to the General Revenue Fund are the
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax, which are estimated to amount to 72%, 8%, 4%, and 3%,
respectively, of total General Revenue funds available.
State expenditures are categorized for budget and appropriation
purposes by type of fund and spending unit, which are further subdivided by line
item. For fiscal year 1997-1998, the Governor recommended appropriations from
the General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 52%, 26%, and 16%, respectively, of total General
Revenue funds available.
Estimated fiscal year 1996-97 General Revenue plus Working Capital and
Budget Stabilization funds available to the State total $16,601.7 million. Of
the total General Revenue plus Working Capital and Budget Stabilization funds
available to the State, $15,566.9 million of that is Estimated Revenues. With
effective General Revenues plus Working Capital Fund appropriations at $15,582.2
million, unencumbered reserves at the end of 1996-97 are estimated at $610.1
million. Estimated fiscal year 1997-98 General Revenue plus Working Capital and
Budget Stabilization funds available total $17,384.9 million, a 4.7% increase
over 1996-97. The $16,301.5 million in Estimated Revenues represents an increase
of 4.7% over the previous year's Estimated Revenues.
The State Treasurer is responsible for investing the General Revenue
Fund and trust fund monies. Authorized investments include certificates of
deposits in Florida banks and savings and loan associations, direct obligations
of the United States Treasury, commercial paper and banker's acceptances,
medium-term corporate notes and co-mingled and mutual funds. Among other
functions, the Treasurer also serves as administrator of the Florida Security
for Public Deposit Program. This program encompasses all governmental entities
in the State. Participating banks and savings and loan associations guarantee
government deposits and pledge collateral at levels varying between 50% and
125%. Acceptable collateral includes obligations of the United States Government
and its agencies, obligations of the State of Florida and its political
subdivisions, and obligations of several states.
Debt Administration. By law, the State of Florida is not authorized to
issue obligations to fund governmental operations. State bonds, pledging the
full faith and credit of the State of Florida may be issued only to finance or
refinance the cost of State fixed capital outlay projects upon approval by a
vote of the electors. Article III, Section 11(d) of the Florida Constitution
provides that revenue bonds may be issued by the State of Florida or its
agencies without a vote of the electors only to finance or refinance the cost of
State fixed capital outlay projects which shall be payable solely from funds
derived directly from sources other than State tax revenues.
Florida maintains a bond rating from Moody's Investors Services (Aa),
Standard and Poor's Corporation (AA) and Fitch Investors Service, Inc. (AA) on
all of its general obligation bonds. As of June 30, 1996, the state's net
outstanding debt totaled $9.2 billion. Approximately 67% of Florida's debt is
full faith and credit bonds while the remaining 33% is comprised of revenue
bonds pledging a specific tax or revenue. Debt was issued to finance capital
outlay for educational projects of local school districts, community colleges
and state universities, environmental protection and highway construction.
FACTORS AFFECTING IDAHO FUND
General Economic Conditions. State Government in Idaho originates from
the State Constitution adopted at the constitutional convention of August 6,
1889, and ratified by the people in November of the same year. Congress approved
the Constitution and admitted Idaho to the Union on July 3, 1890. Idaho, located
in the northwestern portion of the United States, is bordered by Washington,
Oregon, Nevada, Utah, Wyoming, Montana and Canada. Idaho's land area consists of
83,557 square miles of varied terrain including prairies, rolling hills and
mountains with altitudes ranging from 736 feet to 12,662 feet.
With close of 1996, Idaho completed the tenth consecutive year of
economic expansion, maintaining one of the fastest annual growth rates of
employment and income among all states; employment is estimated to increase
nearly 4% and personal income increased 6.3% during 1996. However, the rapid
employment increases enjoyed by the state for the last ten years have already
begun to slow and are anticipated to continue slowing to the 2.7% range. The
unemployment rate dropped from 5.4% in 1995 to 5.0% in 1996, its lowest level
since 1978. Personal income is expected to drop to 5.3% in 1997, but then begin
to grow at rates of 5.7% and 6.1% during 1998 and 1999, respectively. Idaho's
population growth, which peaked at 3.0% in 1994, is expected to taper gradually
to 2.2% over the next few years, which will have a dampering effect on the
state's housing industry.
Exports. Exports of agricultural and manufactured goods played an ever
increasingly important role in Idaho's economic performance. With Japan, the
United Kingdom, Canada, Singapore, and Taiwan as the state's biggest customers,
Idaho's export value rose from $1.9 billion in 1993 to $2.3 billion in 1994, a
21% increase; nonfarm exports rose 20% in that period to $1.32 billion, creating
an estimated 5,000 new jobs; exports climbed 187% from 1987 to 1993. Idaho
ranked thirty-second among the states in the total value of goods and services
exported in 1994. Japan was Idaho's best customer importing $263 million worth
of goods and services; the United Kingdom increased its imports from Idaho 31%
to $183 million and Canada came in third at $161 million for a 34% increase over
1993.
The jobs supported by Idaho's recent experiences in exports markets are
relatively evenly distributed between farm and manufacturing jobs. The return to
the state government from its investment in promoting Idaho products abroad is
elevated tax revenues. In 1996, the state tax revenues increased 5% to $1.35
billion, a decrease from the 10% gain in 1995; taxable sales rose 10.5% in 1994
to $10.5 billion, the third year of double digit growth. State tax revenues are
expected to grow only 1.7% in fiscal year 1997 to $1.374 billion, but increase
to $1.449 billion or 5.5% in 1998. Approximately 35.5% of the revenues for
fiscal year 1998 are expected to come from sales tax.
Importance of Water. Although located in the arid West, Idaho has large
water resources which have dominated its history and development and may prove
equally important to its future. There are 26,000 miles of rivers and streams
and more than 2,000 natural lakes. Three of Idaho's rivers--Clearwater, the
Kootenai and the Salmon--are more than half as large as the Colorado. The Snake
Plain Aquifer is one of the largest fractured basalt aquifers in the world.
Equally important to quantity is the quality of Idaho's waters, which remains
outstanding. The drop in elevation of rivers like the Snake allow valuable
hydropower production, allowing the State some of the lowest electricity rates
in the nation.
Agriculture. Idaho has traditionally been an agriculture state.
Livestock, beef, dairy cattle, and sheep are important to the economy, while the
major crops of Idaho's farmers include potatoes, wheat, barley, sugar beets,
peas, lentils, seed crops and fruit. According to recent estimates, agricultural
related products make up 16% of Idaho's Gross State Product, making them key
elements in Idaho's economic performance. The improvement in water conditions
will help Idaho farmers on the supply side of the market; the third wheat crop
of over 100 million bushels is predicted for 1995. The combination of improved
demand and supply conditions pushed wheat prices to well above the $4.00 level
during 1994. In Idaho's most famous agricultural market, potatoes, 1994
production rose 6.4% to 134.3 million cwt and for Idaho's largest cash crop,
beef, production rose 7%. When all market factors are taken into consideration,
including an expected reduction of 2% in the nation's wheat production, the
outlook for Idaho's agricultural industry improves in 1995, with the state's
beef production increasing at least 3% and wheat production matching or
exceeding previous records. The net result is growth in farm proprietor income
and agricultural employment. From December 1993 to December 1994 agricultural
employment increased 18.1% to 25,240 driven by a 39.2% increase in hired
workers. In recent years, the growth in agricultural employment has slowed. From
December 1995 to December 1996, total agricultural employment increased only
0.3% to 26,930 and the number of hired workers increased only 0.6%.
Service Producing Sector. By the most important economic measures, the
service producing sector is the heart of Idaho's economy; it accounts for 68% of
Gross State Product and 78% of all nonagricultural jobs. For 1996, and the next
three years, employment growth in the service producing sector is expected to
slow from its 1995 rate of 4.2% to 3.6% in 1996 and around 2.9% the next few
years. Within the service producing sector, the weakest performer is expected to
be the federal government, which will have stable employment with some decreases
due to downsizing of services and employees. The retail trade and services
sector recorded the largest gains in 1996, at 3.8% and 6.2%, respectively, with
such increases continuing in the 3.2% and 4.5% range, respectively. State and
local governments, including public education, are expected to expand at an
average of 2% per year over the forecast period in response to population
pressures. This is lower than the 3-4% growth rates in previous years. The
remaining components of the service producing sector, including the finance,
insurance, transportation, communication and public utility industries, are
expected to continue to have mixed experiences with employment; growth partly
offset by right-sizing. The net result is that these industries are expected to
average around 2.0% per year employment growth through 2000.
Goods Producing Sector. The goods producing sector, composed of
manufacturing, mining, and construction, had two of the star performers in the
state's ten years of economic expansion; electronics and construction. Both of
these industries have begun to slow and are expected to have substantially
slower growth rates in 1997; the goods producing sector will be a consistent
rather than spectacular performer. Metal mining employment has increased 25%
since 1994, with metal prices determining demand. Overall, this sector's
employment gains are expected to decline from the 4.7% level for 1996 to 0.2%
and 1.4% for 1997 and 1998, respectively. The causes of the dramatic shifts are
some restructuring in microelectronics, the economic hardships suffered in
resource based industries and a slowing in residential construction. Even with
offsetting job creation at some electronic firms in other goods producing
industries, this sector will have to wait until 2000 for employment to recover a
2% growth rate.
Budgetary Process. In the fall of each year, all agencies of the State
submit requests for appropriations to the Governor's Office, Division of
Financial Management, so a budget may be prepared for the upcoming legislative
session. The budget is generally prepared by agency, fund, program, and object.
The budget presentation includes information on the past year, current year
estimates, and requested appropriations for the next fiscal year.
The Governor's proposed budget is presented to the legislature for
review, change, and preparation of the annual appropriation acts for the various
agencies. The legislature enacts annual appropriations for the majority of funds
held in the state treasury. These budgets are adopted in accordance with State
statutes. Both houses of the legislature must pass the appropriation acts by a
simple majority vote. The appropriation acts become law upon the Governor's
signature, or 10 days after the end of the session if not signed by the
Governor.
For funds that are annually appropriated, the State's central
accounting and reporting system controls expenditures by appropriation
line-item. At no time can expenditures exceed appropriations, and financially
related legal compliance is assured. At fiscal year end, unexpended
appropriation balances may: (1) revert to unreserved fund equity balances and be
available for future appropriations; (2) be reappropriated as part of the
spending authority for the future year; or, (3) may be carried forward to
subsequent years as outstanding encumbrances with the approval of the Division
of Financial Management.
Revenues and Expenditures. Fiscal Year 1996. General Fund revenue in
fiscal year 1996 was $1,351.3 million. There was an additional $2.926 million
due to carryover from the prior fiscal year. Fund transfers reduced funds
available by $2.652 million. Net General Funds available in fiscal year 1996
totaled $1,349.3 million. Total General Fund revenue growth was $64.2 million,
or 5% in fiscal year 1996. Strongest growth was in sales tax and income tax.
Expenditures in fiscal year 1996 consisted of $1,348.8 million in
original appropriations, plus $4.71 million in supplementals and
reappropriations, less $16.2 million in reversions and holdbacks. Net
expenditures in fiscal year 1996 were $1,337.6 million. An ending balance of
$11.7 million was carried over into fiscal year 1997.
In response to the major flood in northern Idaho in 1996, the Governor
issued Executive Order 96-04 that authorized transfers from the Budget Reserve
Fund and the Water Pollution Control Fund to meet the state and local match
requirement of federal grants. Subsequently, $1 million from each fund was
transferred. In addition, the Legislature authorized a $.04 per gallon increase
on the gasoline tax with the first $6 million to be used as match on
infrastructure reconstruction and repair. As of November 30, 1996, state revenue
for this fund was $3.88 million and the total expended was $3.48 million.
Fiscal Year 1997. Total funds available to the General Fund in fiscal
year 1997 are estimated to be $1,405.3 million. This consists of an estimated
$11.7 million carryover from fiscal year 1996, plus $4.99 million transferred in
from other funds and $1,374 million in base revenues, less $2.65 million in
transfers to other funds. The Governor is recommending that the Legislature give
the State Board of Examiners the authority to transfer up to $17.25 million from
the Budget Reserve on June 30, 1997 in order to fund the fiscal year 1997
holdback of funds for public schools. General Fund expenditures and fund
transfers authorized for fiscal year 1997 are $1,405.3 million.
This leaves no General Fund carryover in fiscal year 1998.
The revised fiscal year 1997 Executive revenue forecast of $1,374
million reflects 1.7% growth over fiscal year 1996. The revised base General
Fund revenue forecast for fiscal year 1997 consists primarily of sales and
income tax receipts. Product taxes account for a little over 1% of General Fund
revenues, and miscellaneous receipts account for approximately 5% of General
Fund revenues.
General Fund expenditures in fiscal year 1997 consist of $1,412.6
million in original appropriations, plus $2.25 million in reappropriations, less
$17.71 million in executive branch holdbacks, plus $8.13 million in net
supplementals. The executive holdback does not include the public schools, the
state treasurer, or the Catastrophic Health Care Program. The majority of
supplementals go toward privatization of medical services, additional inmate
housing costs, and juvenile offender private placement costs.
Fiscal Year 1998. The amount of total funds available to the General
Fund in fiscal year 1998 is estimated to be $1,449.6 million. This consists
entirely of General Fund revenue from individual income tax, sales tax,
corporate income tax, and miscellaneous revenue. General Fund expenditures
authorized for fiscal year 1998 are $1,448.8 million. This leaves an estimated
free-fund balance of $771,000 in the General Fund at the end of fiscal year
1998.
The original Executive revenue forecast of $1,449.6 million for fiscal
year 1998 reflects 5.5% growth over fiscal year 1997. General Fund revenues
consist primarily of sales tax generating 35.5% or $514.3 million of total
revenue and income tax representing 50.5% or $732.3 million. The net growth rate
for total General Fund revenue in fiscal year 1998 is 3.2%.
Expenditures in fiscal year 1998 consist of $1,382.7 million in base
spending plus $66.1 million in salary increases, inflation adjustments and
non-standard adjustments, replacement capital outlays, annualizations, and
enhancements. Above base increases in public school expenditures are the largest
item of increase, with $15.53 million provided as a lump sum. A state worker
salary increase of 2% accounts for $7.8 million of increase above the base.
Replacement capital outlay and related operating expenditures are $6.1 million
and enhancements are $41.8 million. Inflationary adjustments for transportation
and medical costs, annualizations and other nonstandard adjustments total $14.2
million.
Debt Administration and Limitation. The State has no outstanding
general obligation bond debt. By law, if the General Fund cash flow shortages
exist for more than 30 days, the State Treasurer must issue a tax anticipation
note to correct the shortfall. The State Treasurer has issued internal tax
anticipation notes which are notes issued by the General Fund to borrow monies
from other available State funds or accounts. Internal tax anticipation notes
were not issued in fiscal years 1988 through 1994. In the past ten fiscal years
the State Treasurer has issued "External" tax anticipation notes which were sold
in the open market. All Notes issued by the State must mature not later than the
end of the then current fiscal year. Each Note when duly issued and paid for
will constitute a valid and binding obligation of the State of Idaho. The faith
and credit of the State of Idaho are solemnly pledged for the payment of the
Notes.
Series 1994 Notes. The State issued $200 million in Tax Anticipation
Notes ("TANs") on July 5, 1994, which mature on June 29, 1995. The 1994 Notes
were issued in anticipation of the income and revenues and taxes to be received
by the General Fund during the fourth quarter of the 1995 fiscal year. As
required by law, all income and revenues from the taxes collected during the
fourth quarter of the 1995 fiscal year shall be deposited into the Note Payment
Account as received until the monies therein together with investment earnings
shall be sufficient to pay principal and interest on the Notes at maturity.
Sufficient monies to redeem the Series 1994 Notes with full payment of interest
at maturity have been deposited into the Note Payment Account held by an escrow
agent. These monies will be transferred to the paying agent on June 29, 1995,
for payment of the Series 1994 Notes.
Series 1995 Notes. The $200 million TANs are being issued to fund the
State's anticipated cash flow shortfalls during the fiscal year ending June 30,
1996. The 1996 fiscal year General Fund cash flow (before borrowing) is
estimated to have a negative balance at the end of the months of July through
March and May with the greatest ending month cash deficit estimated to be
$244,670,000 at the end of November. However, each month's mid-month cash
deficit is estimated to be greater than the end-of-the-month deficit balance.
This situation occurs because only approximately 20% of the month's revenues are
received during the same period. The majority of taxes are received during the
second half of the month because of statutorily established dates for tax
payments. A primary factor in the heavy percentage of first half expenditures
are the required dates for General Fund transfers to the public schools. The
greatest projected mid-month deficit for the 1996 fiscal year is $296,613,000
occurring on November 15, 1995. Moody's Investors Service and Standard and
Poor's corporation have assigned the 1995 Notes the rating of MIG-1 and SP-1+
respectively.
FACTORS AFFECTING IOWA FUND
General Economic Conditions. For Iowans, 1996 was a year of continued
but slow growth and economic consolidation following several years of
substantial growth. Iowa's seasonally adjusted unemployment rate increased from
3.8% in December 1996, to 3.6% in January 1997, according to a report released
by the Iowa Department of Employment Services (DES). The statewide jobless rate
was also reported at 3.6% in January 1996. The State's Department of Employment
Services measures the number of individuals in non-farm payroll jobs from state
unemployment tax records. In January 1997, 17,300 more Iowans were working at
payroll jobs than one year earlier. Of this increase, 14,800 was in services,
3,400 was in transportation, 2,400 in durable goods, and 900 in construction.
The retail trade sector, after years of expansion, decreased 1,500 from January
1996 to January 1997, indicating signs of leveling-off. Manufacturing as a whole
decreased 300 over the year. According to the Iowa Economic Forecasting Council,
payroll employment is expected to grow by 10,290, or .7% in 1997, and by another
11,520 or 0.8% in 1998.
During the late-1980's and early 1990's Iowa became a major exporting
state. Despite its inland location, Iowa has been a major supplier to the
world's markets for industrial machinery, instruments and measurement devices,
electronics, specialized transportation equipment, chemicals and
pharmaceuticals, processed food products, farm commodities and livestock. During
the years 1991-1993, the value of Iowa's factory exports increased a compounded
rate of 9% per year. In 1994, factory exports increased 17% to $3.4 billion
while farm exports fell to $2.4 billion. The drop in farm exports in 1994 was
tied to the flood in 1993 and the diminished size of the crop that went into
storage. Even though the circumstances were unique, the facts were clear:
factory exports surpassed farm exports for the first time in Iowa's history. In
1995, the export of factory goods accounted for $4.1 billion, or 51% of the $8.1
billion total exports from Iowa. For the first half of 1996, the value of
factory exports grew by 17% over the value exported during the same period in
1995. At this rate of growth, 1996 factory exports could grow to $4.7 billion
for the year.
One of the issues addressed by the Governor and the General Assembly
during Fiscal Year 1995, was the increasing amount of property taxes levied to
support expenditures for mental health. Legislation was passed which provides
significant property tax relief through a process of managed care and through
increased State assistance which will ultimately finance 50% of the mental
health expenditures funded by property taxes. This legislation established a new
Mental Health/Developmental Disabilities Fund at the county level and provided
State appropriations for mental health property tax relief in the amount of $61
million, $78 million and $95 million for fiscal years 1996, 1997, and 1998
respectively. The amount of property taxes that may be levied in this fund is
limited and the property taxes must be reduced dollar for dollar for each dollar
of mental health property tax relief the counties receive. In addition to the
$17 million increase already enacted, in January of 1997, the Governor
recommended the appropriation for fiscal year 1998 be increased $6.2 million,
2.89% of net expenditures, and an additional $6.5 million for fiscal year 1999,
to adjust for inflation.
The second item of property tax relief was the elimination of property
taxes on industrial machinery, equipment and computers acquired after January 1,
1994, and a phase-out of the property taxes on existing industrial machinery,
equipment and computers. For fiscal years 1997 through 2006, county auditors may
file claims with the State for partial replacement of lost taxes.
For fiscal year 1998-99, the Governor proposed an across-the-board
reduction of personal income tax rates by 10%. This would allow Iowans to keep
an additional $200 million a year. The Governor proposed that, when passed in
the spring of 1997, tax rates be reduced to 5% retroactive to January 1, 1997,
with the remaining 5% effective January 1, 1998. The Governor also recommended a
15% income tax reduction for the Family Opportunity Plan unveiled in 1994.
Budgetary Process. The current statewide accounting system was
implemented in 1983 and has been periodically upgraded and modified. As part of
that implementation, and on an ongoing basis, emphasis has been placed on the
adequacy of internal and budgetary controls. Internal controls are in place to
provide reasonable, but not absolute, assurance that assets are safeguarded
against unauthorized use or disposition, and that financial records from all
appropriate sources are reliable for preparing financial statements and
maintaining accountability. All claims presented for payment must be certified
by the appropriate department that the expenditure is for a purpose intended by
law and a sufficient unexpended appropriation balance is available. The
automated statewide accounting system also performs various edits to assure
appropriation authorizations are not exceeded. For programs supported totally or
in part with federal or other funds, expenditures can not exceed the sum of
appropriations and additional dedicated revenue that is received. If dedicated
revenue is not received as expected, expenditures must be reduced in a like
manner.
Revenues and Expenditures. Most State operations are accounted for
through the following Governmental fund types: General, Special Revenue, and
Capital Projects. Total General Fund receipts for fiscal year 1996 were $4,404.5
million, a 6.03% increase from the prior year. Of this amount, $4,038.9 million
came from special taxes, with 49.5% from personal income tax and 30% from sales
tax. The Cash Reserve increased 5% from the previous fiscal year to $201.6
million. Total net refunds of taxes paid for fiscal year 1996 were $382.1
million.
Total General Fund appropriations for fiscal year 1996 were $3,855.4
million. Approximately 41.4% or $1.6 billion was for education, and 18.9% or
$727.7 million was for human services.
Total General Fund receipts for fiscal year 1997 are estimated at
$4,627 million, a 5% increase. Of this amount, $4,261.8 is predicted to come
from special taxes, with 49.5% from personal income tax and 29.9% from sales
tax. The cash reserve for fiscal year 1997 is estimated to increase 5% to $215
million. Total net refunds of taxes paid for fiscal year 1997 are estimated at
$387.9 million.
Total General Fund appropriations for fiscal year 1997 are estimated at
$4,134.7 million, a 7.2% increase from fiscal year 1996. Approximately 43% is
dedicated to education and 18.1% to human services. Ongoing spending is about 8%
less than total available revenue, leaving a $346 million unspent general fund
balance in fiscal year 1997, the largest in the nation.
Debt Administration and Limitation. The Constitution of the State of
Iowa prohibits the State from exceeding a maximum of $250 thousand in general
obligation debt without voter approval. However, State law authorizes the
issuance of Tax and Revenue Anticipation Notes (TRANS), provided that the total
issuance does not exceed anticipated revenue receipts for the fiscal year and
that the total issuance matures during the fiscal year. For the first time in
the last ten years, it was not necessary this year for the State to issue TRANS.
Revenue bonds issued by various authorities of the State totaled
$1,255.9 million outstanding at fiscal year-end 1995. This amount consisted of
$7.8 million of internal service revenue bonds, $559.9 million of component unit
- - proprietary funds revenue bonds (housing and higher education), $519.1 million
in revenue bonds issued by the three State universities (for facilities), and
$106.5 million and $62.5 million in various bonds issued by the Iowa Finance
Authority for the Underground Storage Tank Program and the Department of
Corrections, respectively.
Certificates of Participation (COPS), issued by the State and
outstanding at fiscal year-end, amounted to $135.2 million. COPS represents an
ownership interest of the certificate holder in a lease purchase agreement.
Other financing arrangements payable, excluding COPS, totaled $3.8 million at
June 30, 1995. State agencies, including the universities, have also entered
into capital leases and installment purchase agreements for various purposes.
Total long-term capital leases and installment purchases outstanding on June 30,
1995, was $38.2 million.
Since the State of Iowa does not have G.O. debt, it does not have S&P,
Moody's or Fitch ratings.
FACTORS AFFECTING KANSAS FUND
General Economic Conditions. Kansas is the 14th largest state in terms
of size with an area in excess of 82,000 square miles. It is rectangular in
shape and is 411 miles long from east to west and 208 miles wide. The geographic
center of the 48 contiguous states lies within its borders. Kansas became the
34th state in 1861 and Topeka was chosen to be the capitol later that year. The
population of the State of Kansas has grown from 2,477,588 in 1990 to 2,554,047
in 1994. This represents a percentage increase of 3.1%. In comparison, the
growth in population of the United States was 4.7%.
In 1996, jobs across Kansas were up 2.3%, for a net increase of 27,100
new jobs. There was a 3.8% growth rate from October 1995 to October 1996.
National job growth for the same period was 2.1%. Total non-farm employment as
of October 1996 was 1,233,200. This was 19,000 higher than the previous year.
Trade led growth with the addition of 8,700 new jobs. Manufacturing employment
rose by 4,600 over the year, primarily from increased production of aircraft and
parts. More business in special trade contracting and heavy construction added
3,600 construction jobs during the year. Services employment rose by 2,300, with
substantial increases in social, management, and business services.
Transportation-utilities added 2,100 jobs, primarily from growth in
communications firms. Gains in banking and insurance provided most of the 1,500
new jobs in the finance division. Mining edged up only 100 over the year.
Government had the only decrease, down 3,900 from October 1995.
During 1995 and 1996, the Kansas unemployment rate decreased from 4.4%
to an estimated 3.9%, respectively. This compares favorably with a national
unemployment rate in 1995 and 1996 of 5.6% and an estimated 5.4%, respectively.
Budgetary Process. The Governor is statutorily mandated to present
spending recommendations to the Legislature. "The Governor's Budget Report"
reflects expenditures for both the current and upcoming fiscal years and
identifies the sources of financing for those expenditures. The Legislature uses
"The Governor's Budget Report" as a guide as it appropriates the money necessary
for state agencies to operate. Only the Legislature can authorize expenditures
by the State of Kansas. The Governor recommends spending levels, while the
Legislature chooses whether to accept or modify those recommendations. The
Governor may veto legislative appropriations, although the Legislature may
override any veto by two-thirds majority vote.
The state "fiscal year" runs from July 1 to the following June 30 and
is numbered for the calendar year in which it ends. The "current fiscal year" is
the one which ends the coming June. The "actual fiscal year" is the year which
concluded the previous June. The "budget year" refers to the next fiscal year,
which begins the July following the Legislature's adjournment. In "The FY 1997
Governor's Budget Report," the actual fiscal year is fiscal year 1995, the
current fiscal year is fiscal year 1996, and the budget year is fiscal year
1997. By law, "The Governor's Budget Report" must reflect actual year spending,
the Governor's revised spending recommendations for the current fiscal year,
state agency spending requests for the budget year, and the Governor's spending
recommendations for the budget year. The budget recommendations cannot include
the expenditure of anticipated income attributable to proposed legislation.
Revenues and Expenditures. The State General Fund is the largest of the
"uncommitted" revenue sources available to the state. It is also the fund to
which most general tax receipts are credited. The Legislature may spend State
General Fund dollars for any purpose. All revenues coming into the state
treasury not specifically authorized by statute or the constitution to be placed
in a separate fund are deposited in the State General Fund.
Fiscal Year 1996. The Governor's fiscal year 1996 budget
recommendations total $7.9 billion from all funding sources and approximately
$3.47 billion from the State General Fund. The budget includes a total of
44,697.9 state employees, a reduction of 118.7 from the amount approved by the
1995 Legislature. These recommendations reflect significant changes to the
budget approved by the 1995 Legislature. In September 1995, the Governor
announced the need for a 1.5% across-the-board reduction to the budgets of most
agencies funded through the State General Fund. This action was necessary
because of a shortfall of approximately $25 million in estimated fiscal year
1995 receipts and resulting downward revisions to the consensus revenue estimate
made for fiscal year 1996. In addition to the 1.5% reduction, significant
savings were available in agency budgets because of a reduction in the funding
requirements for group health insurance rates for state employees and in the
funding necessary for the state share of local option school budgets. In total,
these adjustments allow the Governor to recommend a budget which maintains the
targeted 7.5% ending balance for fiscal year 1996 while providing only necessary
supplemental appropriations to maintain commitments to higher education and
public schools. In addition, the Governor directed all agencies under his
supervision to reduce their workforce by 2% in fiscal year 1996 through
attrition and retirements. The salary savings attributable to those reductions
will be identified at the end of the fiscal year.
Fiscal Year 1997. The fiscal year 1997 budget recommendations include
all funding source expenditures of $7.8 billion, a reduction of almost $100
million from fiscal year 1996. The largest single source of fiscal year 1997
receipts is the State General Fund, with 46.6% of the total receipts. Individual
income taxes account for the largest source of State General Fund revenue,
totaling $1.410 billion (39.9%) in fiscal year 1997. The next largest category,
sales and use taxes, is projected to generate $1.392 billion (39.5%) for the
State General Fund during fiscal year 1997. State General Fund expenditure
recommendations for fiscal year 1997 are $3.52 billion, an increase of 1.4%. The
Governor recommends that $1,923.7 million, or 54.6% of State General Fund
expenditures be used for aid to local units of government.
Federal grants represent 21.9% of total receipts from all funding
sources, with 42 state agencies receiving $1.7 billion in fiscal year 1997. Of
the $1.7 billion, 50.4% will go to the Department of Social and Rehabilitation
Services. This is followed by the Department of Transportation, 15.4%, the
Department of Education, 12%, the Regents institutions, 5.8%, and the Department
of Health and Environment, 4.3%. The remaining 12.1% is distributed to 29 other
agencies. Agency service charges include revenues received for services provided
by state agencies. This includes charges for inspections, examinations, and
audits; fees collected for tuition and fees at the Regents institutions; and
admissions to the Kansas State Fair. This revenue category represents 6.6% of
total receipts for fiscal year 1997.
Dedicated sales tax receipts represent revenues from four taxes that
are collected for a specific purpose and are deposited in special revenue funds,
rather than the State General Fund. Taxes on motor fuels and vehicle
registrations as well as a dedicated sales tax of one-quarter of a cent are
credited to the State Highway Fund. A statewide property tax of 1.5 mills is
assessed for construction and maintenance of state buildings at Regents
institutions and state hospitals. This revenue category represents 5.1% of total
receipts for fiscal year 1997.
Other special revenue receipts include license fees, interest earnings
on special revenue funds, non-federal grants, the sale of state property, and
numerous other miscellaneous revenue sources. This revenue category represents
8.9% of total receipts for fiscal year 1997. Non revenue receipts are
collections and reimbursements not considered revenue. Examples include
collections by the Department of Human Resources for the payment of unemployment
benefits and collections by KPERS for payment of retirement benefits.
Collections made by SRS from absent parents for child support are also included
in this category. This category represents 8.5% of total receipts for fiscal
year 1997. Lottery ticket sales account for the remaining 2.4% of total receipts
for fiscal year 1997 from all funding sources.
It was clear from the beginning of the fiscal year 1997 budget process
that the revenues available to state government could not support continuation
of existing levels of service for all agencies. A variety of factors contributed
to the austerity of the fiscal year 1997 budget. First and most important, for
the past two fiscal years, the State General Fund ending balance was
significantly above the 7.5% ending balance target, allowing expenditures to
exceed receipts in both fiscal years 1995 and 1996. In simple terms, fiscal year
1997 cannot exceed receipts while complying with the ending balance
requirements. The expenditures in fiscal year exceeded receipts by $106.6
million. In effect, the first claim on projected increases in State General Fund
receipts for fiscal year 1997 will be to correct this imbalance. Second, a
variety of factors required significant additional funding for the school
finance formula including enrollment growth, the second year of increased aid
requirements to offset motor vehicle tax reductions passed by the 1995
Legislature, the remainder of the Real Estate Settlement Procedures Act (RESPA)
adjustment, and growth in capital improvement aid. In addition, growth in inmate
populations required additional staff and funding for correctional institutions.
Further, caseload and cost increases in various populations served by SRS
seriously affected the fiscal year 1997 budget.
Debt Administration and Limitation. The State of Kansas finances a
portion of its capital expenditures with various debt instruments. Of capital
expenditures that are debt-financed, revenue bonds and loans from the Pooled
Money Investment Board finance most capital improvements for buildings, and
certificates of participation and "third-party" financing pay for most capital
equipment. The Kansas Constitution makes provision for the issuance of general
obligation bonds subject to certain restrictions; however, no bonds have been
issued under this provision for may years. No other provision of the
Constitution or state statute limits the amount of debt that can be issued. As
of June 30, 1995, the state had authorized but unissued debt of $27,230,000.
Although, the state has no General Obligation debt rating, it seeks an
underlying rating on specific issues of at least "AA-" from Standard & Poor's
and "A1" from Moodys. The ratings for the most recently issued fixed rate bonds
issued by the Kansas Department of Transportation were "Aa" and "AA" from Moody
and Standard & Poor's respectively. The Kansas Development Finance Authority is
currently working with the rating agencies to obtain a rating indicator for the
State of Kansas.
The Kansas Department of Transportation issues debt to finance highway
projects. The Comprehensive Highway Program began during fiscal year 1989. The
20-year bonds will be retired with motor fuel taxes, motor vehicle registration
fees, retail sales and compensating use taxes, and accrued interest. During
fiscal years 1994 and 1995, the state sold bonds totaling approximately $151
million and $167.1 million. respectively. Again, the largest use of the bond
proceeds was $125 million and $140 million for the Comprehensive Highway Program
for these two years, respectively.
Other State of Kansas debt is issued by the Kansas Development Finance
Authority (KDFA), an independent instrumentality of the state which was created
in 1987 for this purpose. The Governor's budget recommendations for Regents
institutions are a significant departure from the traditional way revenues from
the Educational Building Fund (EBF) have been used for construction projects at
the state's universities. Based on concerns for the aging buildings on the
state's campuses, the Governor recommends that KDFA issue bonds in fiscal year
1997 in the amount of $156.5 million to address a wide variety of rehabilitation
and repair projects at the universities. With interest earnings, the total
project costs would be an estimated $163.6 million. Debt service over the
15-year period will total $228.4 million, with each year's debt service payment
over the next 15 years totaling $15 million. No project paid with bond proceeds
will have a life-expectancy of less than 20 years, so as to "keep ahead" of the
bonded indebtedness. Because the current cost of borrowing money is less than
the projected cost of inflation for construction, it is more cost-effective to
perform the repairs now and leverage the EBF, rather than incurring higher
annual repair costs in the future. Rehabilitation and repair projects at the
campuses include compliance with the Americans with Disability Act Accessibility
Guidelines and life safety codes, energy conservation projects, and improvements
to classrooms, in addition to the typical repairs made to aging buildings.
Bonds totaling $4.4 million were issued by KDFA in November 1990 to
begin Energy Conservation Improvements Program authorized by the 1990
Legislature. The bonds are retired by utility cost savings from the energy
conservation improvements undertaken. Projects financed with the bond proceeds
consist of improvements at many of the state universities, the Department of
Administration, the Department of Social and Rehabilitation Services, the
Highway Patrol, and the Department of Corrections. An amount of $5,000 was
appropriated from the State General Fund to the Department of Administration,
the paying agent, for fiscal year 1992 to begin retirement of the debt service.
The second series of bonds, issued in June 1992, totaled $3.6 million. On
October 1, 1993, a third series of bonds totaling $4,370,000 under the Energy
Conservation Improvements Program was issued. In August 1995, the fourth series
of bond, totaling $2,734,000 was issued. For fiscal year 1997, the debt service
totals $1,785,007 from the State General Fund, $1,340,000 for principal and
$445,007 for interest. To date, $15.1 million in bonds has been issued by the
Kansas Development Finance Authority for these projects. A fifth bond issue
estimated to total $4.8 million is scheduled for early 1996.
FACTORS AFFECTING MINNESOTA FUNDS
General Economic Conditions. Diversity and a significant natural
resource base are two important characteristics of the Minnesota economy.
Generally, the structure of the State's economy parallels the structure of the
United States economy as a whole. There are, however, employment concentrations
in durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. During the period from 1980 to 1990, overall
employment growth in Minnesota lagged behind national employment growth, in
large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1996. Since 1980, Minnesota per capita income generally
has remained above the national average, but tightness in local labor markets
may reduce the rate of personal income growth below that of the national average
in the future. In 1995, Minnesota's per capita personal income exceeded the
national average by 3%. The State's annual unemployment rate has been less than
the national unemployment rate every year since 1985. In 1995 and 1996, the
Minnesota unemployment rate was 3.7% and 3.6%, respectively, compared to rates
of 5.6% and 5.4%, respectively, for the nation.
Revenue and Expenditures. The State relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve, imposing
a sales tax on purchases by local governmental units, and making other budgetary
adjustment. The Minnesota Department of Finance November 1996 Forecast has
projected that, under current laws, the State will complete its current biennium
June 30, 1997 with a $502.4 million budgetary balance, which consists of a $350
million cash flow account balance, plus a $261 million budget reserve. Total
General Fund expenditures and transfers for the biennium are projected to be
$18.8 billion. State expenditures for education finance (K-12), post-secondary
education, and human services in the biennium ending June 30, 1997 are not
anticipated to be sufficient to maintain program levels of the previous
biennium. The State is party to a variety of civil actions that could adversely
affect the State's General Fund. In addition, substantial portions of State and
local revenues are derived from federal expenditures, and reductions in federal
aid to the State and its political subdivisions and other federal spending cuts
may have substantial adverse effects on the economic and fiscal condition of the
State and its local governmental units. Risks are inherent in making revenue and
expenditure forecasts. Economic or fiscal conditions less favorable than those
reflected in State budget forecasts and planning estimates may create additional
budgetary pressures.
National economic growth for the remainder of the decade is predicted
to generate a corresponding growth in state revenues without increasing tax
rates. Minnesota's revenues are expected to grow by $1.4 billion, 7.4% in the
1998-99 biennium, and 8.1% in the following biennium. Since the state forecast
is based on a strong 2.4% annual growth rate, a return to a more moderate growth
rate, similar to the 2.0% rate of growth in 1995, would materially reduce
forecast revenues.
The state's budget reserve for the 1998-99 biennium is doubled to $522
million (an increase from $261 million in fiscal year 1997) or 5% of fiscal year
1999 spending to protect against economic uncertainty.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective obligors to make timely payment of the principal and interest on
Minnesota Tax Exempt Obligations that are held by a Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in federal
and State income tax laws, including rate reductions, could adversely affect the
value and marketability of Minnesota Municipal Tax Exempt Obligations that are
held by a Fund. See "Distributions to Shareholders and Taxes; Minnesota State
Taxation" in the Prospectus.
The state issued $439.6 million of new general obligation bonds, and
$170.6 million of general obligation bonds were redeemed during 1996, leaving an
outstanding balance of $2.2 billion. General obligation bonds authorized but
unissued as of June 30, 1996 were $1.101 billion.
The most recent ratings applicable to General Obligation bonds issued
by the State of Minnesota are as follows: "Aaa" by Moody's; "AA+" by S&P and
"AAA" by Fitch Investors Service.
FACTORS AFFECTING MISSOURI FUND
General Economic Conditions. Missouri was organized as a territory in
1812 and was admitted to the Union as the 24th state on August 10, 1821. The
State ranks 19th in size with a total area of approximately 69,697 square miles.
Missouri is a central mid-western state located near the geographic center of
the United States. Bordered by Iowa on the north, Arkansas on the south,
Illinois, Kentucky and Tennessee across the Mississippi River on the east, and
Nebraska, Kansas and Oklahoma on the west, Missouri is one of only two states
which shares it boundaries with as many as eight states.
As a major manufacturing, financial, and agricultural state, Missouri's
economic health is tied closely to that of the nation. The economic outlook is
for continued improvement in fiscal year 1997. Missouri's personal income, which
directly impacts individual income tax and sales tax, rose at a 5.4% rate during
fiscal year 1996. The Missouri economy has produced exceptional job growth over
the past three years. Missouri's employment stood at 2,768,620 as of November
1996, an increase of 13% or 300,000 since January of 1993. At the end of
November 1996, the state unemployment rate was 4.0% which compares favorably to
the national unemployment rate of 5.0%. The preliminary 1996 average
unemployment rate for Minnesota is 4.1% and for the U.S., 5.4%.
Budgetary Process. Annually, all State agencies submit budget requests
for the following appropriation year to the Division of Budget and Planning of
the Office of Administration. The Division Budget and Planning prepares the
Executive Budget and an estimate of general revenues. The Executive Budget
contains the budget amount which is recommended and submitted to the General
Assembly by the Governor within thirty days after the General Assembly convenes
in each regular session.
The General Assembly appropriates money after consideration of both the
Executive Budget and the revenue estimate. The legislative appropriations are
subject to the Governor's approval or veto, except for the funding of public
debt and public education which the Governor is prohibited by the Constitution
of Missouri from vetoing. The Governor may control the rate at which an
appropriation is expended by allotment or other means and may limit the
expenditures for any State agencies below their appropriations, whenever actual
revenues are less than the revenue estimated upon which the appropriations were
based. The Governor has line-item veto power, except for appropriations for
public debt and public education.
Revenues and Expenditures. Balancing Missouri's budget in fiscal year
1996 was achieved through sound financial management. The growing economy
produced general revenues that were better than projected. The Governor and
General Assembly adopted a conservative State budget meeting mandated
expenditure increases and providing limited funding for new and expanded
program. In future years, Missouri will focus on controlling the growth of
mandatory programs though welfare reform, managed care, and cost-effective
alternatives. Major funding priorities include education, corrections, economic
development, mental health, children's services, and repairs and upgrades to
existing state facilities.
The State of Missouri completed fiscal year 1996 in excellent financial
condition due to strong revenue collections and efficient management of State
programs. Net general revenue collections increased over fiscal year 1995 due to
a strong national and state economy. Expenditures were lower than anticipated in
fiscal year 1996 as prudent state agency managers did not use all available
spending authority. General revenue collections in fiscal year 1996 were $5,442
million, 7.5% above fiscal year 1995 collections. General Revenue expenditures
in fiscal year 1996 for the operating budget were $5,287.5 million. The fiscal
year 1997 budget is conservatively based upon general revenue collections of
$5,753.2 million.
Final calculations made pursuant to Article X of the Missouri
Constitution show that total state revenues for Fiscal Year 1996 exceeded the
total state revenue limit by $229.1 million. Therefore, in accordance with
Article X, the entire amount of excess revenues will be refunded to Missouri
income taxpayers in calendar year 1998. Litigation has delayed the refund of
$147.2 million triggered in Fiscal Year 1995. The Office of Administration
projects that total state revenues will exceed the total state revenue limit by
approximately $155 million in Fiscal Year 1997.
The State ended fiscal year 1996 with an ending balance (surplus) of
$335.4 million for the General Revenue Fund. The unreserved fund balance of the
General Fund improved due to revenue collection which were slightly better than
projections. The ending General Fund balance for fiscal year 1997 is projected
at $132.8 million.
Federal court-ordered payments for the St. Louis and Kansas City
desegregation plans were $289.6 million in fiscal year 1996 which is about 4.9%
of the State's general revenue budget. The estimate for fiscal year 1997 is
$257.9 million. Desegregation expenditures, court orders, and other developments
are continually monitored to provide the best possible anticipation and forecast
of future costs.
Debt Administration and Limitation. Pursuant to the Missouri State
Constitution, the General Assembly may issue general obligation bonds solely for
the purpose of (1) refunding outstanding bonds; or, (2) upon the recommendation
of the Governor, for a temporary liability by reason of unforeseen emergency or
of deficiency in revenue in an amount not to exceed $1 million for any one year
and to be paid in not more than five years or as otherwise specifically
provided. When the liability exceeds $1 million, the General Assembly, or the
people by initiative, may submit the proposition to incur indebtedness to the
voters of the State, and the bonds may be issued if approved by a majority of
those voting. Before any bonds so authorized are issued, the General Assembly
shall make adequate provisions for the payment of the principal and interest and
shall provide for an annual tax on all taxable property in an amount sufficient
for that purpose.
The State has had a clear debt payment record since 1869 when it
arranged for payment of railroad bond interest which had been in default from
1861 to 1867. Missouri did no other significant borrowing until 1922, after
which the debt climbed to $124,700,000 in 1936. Thereafter, the State's debt
declined through 1956. In 1956, the voters approved a constitutional amendment
authorizing $75 million principal amount of bonds for the purpose of repairing
existing buildings or constructing new buildings at the State's correctional
institutions, the State training schools, State hospitals and State schools and
other eleemosynary institutions and institutions of higher education. Missouri
voters have, subsequently, approved constitutional amendments providing for the
issuance of general obligation bonds used for a number of purposes.
The amount of general obligation debt that can be issued by the State
is limited to the amount approved by popular vote plus the amount of $1 million.
The State's debt limits at June 30, 1995, was $1,476,000,000 of which $396,505
was unissued. The general obligation debt position of the State at June 30, 1995
was: general obligation bonded debt (net of amount available in governmental
funds), $896,935,000; and, Debt per capita, $169.30. During fiscal year 1995,
$33,690,000 of the bonds were retired and $105 billion new bonds were issued. At
year end, the total general obligation debt outstanding was $933,745,000. The
interest rate range was .05-9.25%.
As of January 1, 1997, $198,620,000 principal remains outstanding of
the $200,000,000 issued fourth state building bonds (approved in August 1994);
and $137,315,000 principal remains outstanding of the $439,494,240 issued water
pollution control bonds (both amounts excluding refunding issuances). With the
final $75 million issuance on December 1, 1987, all $600 million in third state
building bonds authorized by Missouri voters in 1982 were issued.
In fiscal year 1996 Missouri invested a total of $339.6 million in its
capital assets with appropriations for maintenance and construction projects
throughout the State. Appropriations for fiscal year 1997 are estimated at
$257.5 million. Capital improvements of $521.7 million are recommended for
fiscal years 1998-99 biennial budget. Of this amount, $60.5 million is for vital
maintenance and repairs to state-owned facilities to initiate the voter-approved
maintenance funding mechanism, including $15.3 million to be transferred to the
facilities maintenance reserve fund. Also included is $461.2 million for
planning, major renovation, new construction, land acquisition, and other
improvements. Amounts are designated to prison construction, projects at
elementary and secondary education institutions, and facilities for veterans.
The State's general obligation bond issues received triple "A" ratings
from Moody's Investors Service, Inc., Standard & Poor's Rating Group, and Fitch
Investors Service, Inc.
FACTORS AFFECTING NEW MEXICO FUND
General Economic Conditions. The State of New Mexico, admitted as the
forty-seventh state on January 6, 1912, is the fifth largest state, containing
approximately 121,593 square miles. The State's climate is characterized by
sunshine and warm bright skies in both winter and summer. New Mexico has a
semiarid subtropical climate with light precipitation. At the time of the
official 1990 United States Census, the State's population was 1,515,069. In
1995, the population had increased to 1,685,401, or 11.2% since 1990.
Major industries in the State are energy resources, tourism, services,
construction, trade, agricultureagribusiness, government, manufacturing, and
mining. In 1994, the value of energy resources production (crude petroleum,
natural gas, uranium, and coal) was approximately $5.05 billion. From 1994-95,
the value of construction contracts increased $3.12 billion. Major federally
funded scientific research facilities at Los Alamos, Albuquerque and White Sands
are also a notable part of the State's economy.
The State has a thriving tourist industry. In 1994, there were
approximately 2.29 million visits to national parks and about 4.9 million visits
to State parks, in the State. According to a 1991 estimate by the U.S. Travel
Data Center, the State's tourist industry generated about $2.3 billion in
revenue and more than 38,370 jobs. However, 1995 was a slower year for tourism
and travel in New Mexico. Total gross receipts for hotels and other lodging
places dropped 1.4%, compared with a 5.6% gain in 1994. Air travel was also down
0.4%. In addition, visits to New Mexico's national parks and monuments, affected
partly by federal government shutdowns in the fall and winter, dropped 1.7%. One
of the State's most famous attractions is Carlsbad Cavern, which was made a
national monument in 1923 and designated a national park in 1930.
Agriculture is a major part of the State's economy, producing $1.521
billion in 1995. As a high, relatively dry region with extensive grasslands, the
State is ideal for raising cattle, sheep, and other livestock. Because of
irrigation and a variety of climatic conditions, the State's farmers are able to
produce a diverse assortment of quality products. The State's farmers are major
producers of alfalfa hay, wheat, chile peppers, cotton, fruits and pecans.
Agricultural businesses include chile canneries, wineries, alfalfa pellets,
chemical and fertilizer plants, farm machinery, feed lots, and commercial
slaughter plants.
Budgetary Process. The State's government consists of the three
branches characteristic of the American political system: executive, legislative
and judicial. The executive branch is headed by the Governor who is elected for
a four-year term and may succeed him(her)self in office once. Following a
reorganization plan implemented in 1978 to reduce and consolidate some 390
agencies, boards and commissions, the primary functions of the executive branch
are now carried out by sixteen cabinet departments, each headed by a cabinet
secretary appointed by the Governor.
The Board, in addition to other powers and duties provided by law, has
general supervisory authority over the fiscal affairs of the State and over the
safekeeping and depositing of all money and securities belonging to, or in the
custody of, the State. The Board has seven members consisting of the Governor,
the Lieutenant Governor, the Treasurer and four members appointed by the
Governor with the advice and consent of the Senate; no more than two such
appointed members may be from the same political party.
The Department of Finance and Administration, created in 1957 as part
of governmental reorganization measures of that year, is the principal financial
organization of State government and performs through its divisions the duties
and functions relating to State and local government financing and general
administration. On July 1, 1983, the Department of Finance and Administration
was reorganized into the DFA, which retained the prior name and handles the
State's financial functions, and the General Services Department, which now
handles the administrative functions. The executive and administrative head of
the DFA is the Secretary, who is appointed by the Governor with the advice and
consent of the Senate, and who also serves as Executive Officer of the Board. In
1983, a Board of Finance Division was created in the DFA, to staff and
coordinate the functions of the Board.
The Legislature convenes in regular session annually on the third
Tuesday in January. Regular sessions are constitutionally limited in length to
sixty calendar days in odd-numbered years and thirty calendar days in
evennumbered years. In addition, special sessions of the Legislature may be
convened by the Governor under certain limited circumstances.
All State agencies are required to submit their budget requests to the
Budget Division of the DFA by September 1 of each year. Budget hearings are
scheduled for the purpose of examining the merits of budget requests through the
fall and are usually completed by the middle of December. Statutes require the
Budget Division to present comprehensive budget recommendations to the Governor
annually by January 2.
By statute, the Governor is required to submit a budget for the
upcoming fiscal year to the Legislature by the 25th legislative day. The State
budget is contained in a General Appropriation Bill which is first referred to
the House Appropriations and Finance Committee for consideration. The General
Appropriation Act may also contain proposals for supplemental and deficiency
appropriations for the current fiscal year. The Senate and the Senate Finance
Committee consider the General Appropriation Act after its approval by the House
of Representatives. Upon Senate passage, the Governor may sign the General
Appropriation Act, veto it, veto line items or veto parts of it. After the
Governor has signed the General Appropriation Act, the Budget Division of the
DFA approves the agency budgets and monitors the expenditure of the funds
beginning on July 1, the fist day of the fiscal year.
Revenues and Expenditures. The State derives the bulk of its recurring
General Fund revenues from five major sources: general and selective sales
taxes, income taxes, the emergency school tax on oil and gas production, rents
and royalties from State and federal land, and interest earnings from its two
Permanent Funds. Effective July 1, 1981, the Legislature abolished all property
taxes for State operating purposes.
Declines in oil and gas prices and in gas production have contributed
to a major restructuring of the State's tax base by the 1986, 1987, 1988, 1990,
and 1993 Legislatures. Sales and income taxes were increased to offset declines
in severance tax and royalty revenue. However, economic growth in 1993 and 1994
was substantially greater than expected and large surpluses became available.
The 1994 Legislature rolled back approximately one-half of the 1993 increases.
Fiscal Year 1995-1996. For the Fiscal Year ending June 30, 1996,
recurring revenue totaled $2.809 billion, an increase of 6.3% over the previous
fiscal year. Total General Fund Revenue was $2.757 billion, up 4.9% from fiscal
year 1995. The fiscal year 1996 revenue was below a December 1995 estimate by
approximately $2 million, or 0.1%. In general, weakness in broad-based taxes was
offset by strength in revenue related to the production of natural gas and crude
oil. Strength relative to the estimate was also evident for interest earnings,
miscellaneous receipts and reversions.
Preliminary results for fiscal year 1996 show recurring appropriations
at $2.77 billion, up 5.7% from the previous fiscal year. Nonrecurring
appropriations for fiscal year 1996 were $22 million, down 76% from fiscal year
1995. The net transfer necessary from the operating reserve is $19.4 million and
is within the $30 million transfer authority authorized by the 1996 legislature.
The 1996 legislature also established the risk reserve fund within the
general fund. General fund balances including the risk reserve fund are
projected to total $144 million. Without the risk reserve, balances would be
$28.1 million. The fiscal year 1996 balance in the operating reserve is $21.6
million, or only 0.8% of fiscal year 1996 total revenue.
Disaster allotments from the appropriation contingency fund totaled
over $5.4 million, primarily due to the drought and the severe wildfires
experienced during 1996 and the ending balance in the appropriation contingency
fund is $500,000 due to a reversion.
Fiscal Year 1996-1997. For fiscal year 1997, the Governor proposed a
budget which took into consideration spending requirements in Medicaid (an 18.2%
increase, or $30.9 million) and in the criminal justice system (a 5.7% increase,
or $6.9 million), and placed a high priority on public school funding (a 2.0%
increase, or $26.2 million).
Estimated results for fiscal year 1997 show general fund total receipts
of $2.995 billion and recurring appropriations of $2.862 billion with
expenditures totaling $2.96 billion. The estimated fiscal year 1997 total ending
balance is $175 million, an increase of 23% over the preliminary 1996 results of
$144 million.
Debt Administration. The principal sources of funding for capital
projects by the State are surplus general fund balances, general obligation
bonds, and Severance Tax Bonds. Total funding of such capital projects for the
period 1983 to 1985 ranged from $170 million to $210 million per year. For the
period 1986 to 1990, capital appropriations were approximately $100 million per
year (except in 1987 when fund dropped to $57 million). The 1994 Legislature
authorized the largest capital program in the State's history, $383 million.
These authorizations fund a broad range of State and local capital needs for
various public school and higher education acquisitions as well as correction
facilities, museum and cultural facilities, health facilities, State building
repairs, water rights, wastewater and water systems, State parks, local roads,
and senior citizens facilities projects.
General Obligation Bonds. General obligation bonds of the State are
issued and the proceeds thereof appropriated to various purposes pursuant to an
act of the Legislature of the State. The State Constitution requires that any
law which authorizes general obligation debt of the State shall provide for an
annual tax levy sufficient to pay the interest and to provide a sinking fund to
pay the principal of the debts. General obligation bonds are general obligations
of the State for the payment of which the full faith and credit of the State are
pledged. The general obligation bonds are payable from "ad valorem" taxes levied
without limit as to rate or amount on all property in the State subject to
taxation for State purposes. For the fiscal year ended June 30, 1996, the total
amount outstanding on General Obligation Bonds was $193,660,867. Of this amount,
$31,325,867 is in interest.
The State of New Mexico General Obligation Capital Projects
Improvements Bonds Series 1995 in the principal amount of $66,265,000 are
authorized by the 1994 Capital Projects General Obligation Bond Act (the "Act")
passed by the State Legislature in 1994, have been approved by the voters in a
statewide election in November 1994 and will be issued pursuant to a resolution
of the State Board of Finance adopted on March 7, 1995. The proceeds of the
general obligation bonds will be used to pay the expenses incurred in the
preparation and sale of the general obligation bonds and to provide for certain
capital expenditures described in the Act. Proceeds will be distributed for the
following amounts and purposes: $3,674,732, certain senior citizen facility
improvements, equipment and vehicles; $59,851,200, certain State public
educational capital improvements and acquisitions; and, $2,500,000 for public
library acquisitions.
Severance Tax Bonds. Severance Tax Bonds are not general obligations of
the State and the State is prohibited by law from using the proceeds of property
taxes as a source of payment of revenue bonds, including Severance Tax Bonds.
The State Treasurer keeps separate accounts for all money collected as Severance
Taxes, and is directed by State statute to pay Severance Tax Bonds from monies
on deposit in the Bonding Fund. Most of the 1994 authorizations were issued in a
$16.8 million sale in 1994 to the New Mexico State Treasurer and $92.1 million
in a bond sale in August, 1994. For the fiscal year ended June 30, 1996, the
total amount outstanding on Severance Tax Bonds was $454,065,280. Of this
amount, $80,896,280 is in interest.
The Severance Tax Bonds, Series 1995A funds 55 projects for schools,
local governments, universities, and State agencies, including $1 million for
University of New Mexico medical equipment; $525,000 for Department of Health
laboratories; $400,000 for an overpass in Albuquerque; $800,000 for a local
water system; and, $250,000 for a wastewater treatment plant in Anthony, New
Mexico. Following the issuance of the Severance Tax Bonds, Series 1995A,
Severance Tax Bonds in the principal amount of $8.1 million remain authorized
but unissued (including pre- 1994 legislative authorizations). Total amount of
principal and interest due on Series 1995-B and Series 1996-A as of June 30,
1996 is $73,744,836 and $48,171,364, respectively.
Severance taxes have been collected by the State since the adoption of
the Severance Tax Act in 1937. Since 1959, certain severance tax receipts and
certain other monies determined by the Legislature have been deposited into the
Bonding Fund and used, in part, to retire bond issues which have funded a
variety of capital improvements in the State. The principle minerals extracted
from the State which contribute the largest portion of Severance Tax revenues
are natural gas, oil and coal. Severance Tax Collections on these three mineral
resources produced 98% of total fiscal year 1993-1994 Severance Tax Bonding Fund
tax collections. Severance Taxes from natural gas and oil together represent
approximately 80% of total fiscal year 1993-1994 Bonding Fund tax receipt.
Severance tax collections totaled $143 million in fiscal year 1996.
Moody's Investors Service, Inc. and Standard & Poors Corporation have
assigned the bond ratings of "Aa1" and "AA+," respectively to General Obligation
Bonds and "Aa" and "AA," respectively, to the Severance Tax Bonds, Series 1995A.
FACTORS AFFECTING NEW YORK FUND
The following information is a brief summary of New York State and New
York City factors affecting Voyageur Fund and does not purport to be a complete
description of such factors. As described above, except during temporary
defensive periods, the Voyageur Fund will invest at least 80% of the value of
its net assets in Tax-Exempt Obligations, the interest on which is exempt from
federal income, New York State and New York City personal income tax (except for
New York State and New York City franchise tax on corporations and financial
institutions, which is measured by income). Therefore, the financial condition
of New York State, its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of the Fund, or result in the default of existing
obligations, including obligations which may be held by the Fund. Further, New
York State and New York City face numerous forms of litigation seeking
significant damages which, if awarded, could adversely affect the financial
situation of New York State or New York City or issuers located in New York
State. It should be noted that the creditworthiness of obligations issued by
local issuers (including New York City) may be unrelated to the creditworthiness
of New York State, and that there is no obligation on the part of New York State
to make payment on such local obligations in the event of default in the absence
of a specific guarantee or pledge provided by New York State.
Bond ratings received on New York State's and New York City's general
obligation bonds are discussed below. Moody's Investors Service, Inc.
("Moody's") and/or Standard & Poor's Ratings Services ("S&P") provide an
assessment/rating of the creditworthiness of an obligor. The debt rating is not
a recommendation to purchase, sell, or hold a security, inasmuch as it does not
comment as to market price or suitability for a particular investor. The ratings
are based on current information furnished by the issuer or obtained by the
rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstance. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised or
withdrawn entirely by any such rating agencies, if in their respective
judgments, circumstances so warrant. The ratings are based, in varying degrees,
on the following considerations:
(1) Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation.
(2) Nature of, and provisions of, the obligation.
(3) Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement(s) under the laws of bankruptcy and other laws affecting
creditors rights.
A revision or withdrawal of any such credit rating could have an effect
on the market price of the related debt obligations. An explanation of the
significance and status of such credit ratings may be obtained from the rating
agencies furnishing the same. In addition, a description of Moody's and S&P's
bond ratings is set forth in Appendix A hereto.
The following information provides only a brief summary of the complex
factors affecting the financial situation in New York State and New York City,
is derived from sources that are generally available to investors and is
believed to be accurate. It is based on information drawn from the Annual
Information Statement of the State of New York dated June 23, 1995 and updates
thereto issued on July 28, 1995 and October 26, 1995, and from other official
statements and prospectuses issued by, and other information reported by, the
State of New York (the "State"), by its various public bodies (the "Agencies"),
and other entities located within the State, including the City of New York (the
"City"), in connection with the issuance of their respective securities.
THE FUND MAKES NO REPRESENTATION OR WARRANTY REGARDING THE COMPLETENESS
OR ACCURACY OF SUCH INFORMATION. THE MARKET VALUE OF SHARES OF THE FUND MAY
FLUCTUATE DUE TO FACTORS SUCH AS CHANGES IN INTEREST RATES, MATTERS AFFECTING
NEW YORK STATE OR NEW YORK CITY, OR FOR OTHER REASONS.
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. Travel and tourism constitute an important part of
New York's economy. Relative to the nation, the State has a smaller share of
manufacturing and construction and a larger share of service-related industries.
The State is likely to be less affected than the nation as a whole during an
economic recession that is concentrated in manufacturing and construction, but
likely to be more affected during a recession that is concentrated more in the
service-producing sector.
The State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the City.
During the calendar years 1984 through 1991, the State's rate of
economic expansion was somewhat slower than that of the nation. In the 1990-91
recession, the economy of the State, and that of the rest of the Northeast, was
more heavily damaged than that of the nation as a whole and has been slower to
recover. The total employment growth rate in the State has been below the
national average since 1984. The unemployment rate in the State dipped below the
national rate in the second half of 1981 and remained lower until 1991; since
then, it has been higher.
The State has had the second highest combined state and local tax
burden in the United States which has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the State.
However, the State's 1995-96 budget reflected significant actions to reduce the
burden of State taxation, including adoption of a 3-year, 20 percent reduction
in the State's personal income tax. During 1996-97, New York led the nation in
tax cuts, at 54.1%, bringing the total value of tax reductions in effect for the
1997 year to over $6 billion. When measured as a percentage of personal income,
state-imposed taxes in New York should be below the national median in 1997. The
budget for fiscal year 1997-98 reflects an additional $170 million in tax
reductions.
The State Financial Plan is based on a projection by State's Division
of the Budget ("DOB") of national and State economic activity. The national
economy began the current expansion in 1991 and has added over 7 million jobs
since early 1992. However, the recession lasted longer in the State and the
State's economic recovery has lagged behind the nation's. In the last few years,
New York has shown signs of economic resurgence. Since 1994, New York has jumped
from 15th to 6th in terms of total private sector employment growth compared to
other states, gaining 140,000 private sector jobs since December 1994, despite
banking layoffs and closure of a major automotive plant. Overall employment
growth was close to 0.7%, almost 60,000 jobs, for 1996. National employment
growth in 1996 was 2.0%. The New York economy in 1997 is expected to grow at
about the same rate as in 1996. Personal income is expected to increase 5.2% in
1996 and 4.5% in 1997.
1996-97 FISCAL YEAR. The State's current fiscal year commenced on April
1, 1996, and ends on March 31, 1997 (the "1996-97 fiscal year"). Prior to
adoption of the budget, the Legislature enacted appropriations for disbursements
considered to be necessary for State operations and other purposes, including
all necessary appropriations for debt service. The State Financial Plan for the
1996-97 fiscal year is based on the State's budget as enacted by the legislature
and signed into law by the Governor.
The 1996-97 General Fund Financial Plan continues to be balanced, with
a projected surplus of $1.3 billion. This will be the second consecutive
material budget surplus generated by the Governor's administration. Of this
amount, $250 million is being used to accelerate the last portion of the
Governor's personal income tax cut through changes to the 1997 withholding
tables. This raises taxpayers' current take-home pay rather than issuing larger
refunds in 1998. Of the remainder, $943 million is being used to help close the
projected 1997-98 budget gap, and $65 million is being deposited into the Tax
Stabilization Reserve Fund (the State's "rainy day" fund) as provided by the
Constitution. This is the maximum amount that can be deposited, and increases
the size of that fund to $332 million by the end of 1997-98, the highest balance
ever achieved.
The surplus results primarily from growth in projected receipts. As
compared to the enacted budget, revenues increased by more than $1 billion,
while disbursements fell by $228 million. These changes from original Financial
Plan projections reflect actual results through December 1996 as well as
modified economic and caseload projections for the balance of the fiscal year.
The General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds are projected
to be $32.966 billion, a decrease of $207 million from total receipts in the
prior fiscal year. Total General Fund disbursements and transfers to other funds
are projected to be $32.895 billion, a decrease of $149 million from the total
amount disbursed in the prior fiscal year.
The General Fund closing balance is expected to be $358 million at the
end of 1996-97. Of this amount, $317 million will be on deposit in the Tax
Stabilization Reserve Fund (TSRF), while another $41 million will remain on
deposit in the Contingency Reserve Fund (CRF). The TSRF has an opening balance
of $287 million, supplemented by a required payment of $15 million and an
extraordinary deposit of $65 million from surplus 1996-97 monies. The $9 million
on deposit in the Revenue Accumulation Fund will be drawn down as planned. The
previously planned deposit of $85 million to the CRF, projected earlier to be
received from contractual efforts to maximize Federal revenue, is not expected
to materialize this year.
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural gaps for the State. These gaps resulted from a significant disparity
between recurring revenues and the costs of maintaining or increasing the level
of support for State programs. As noted, the 1996-97 enacted budget combines
significant tax and program reductions which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
The 1995-96 State Financial Plan reflected actions that will directly
affect the State's 1996-97 fiscal year baseline receipts and disbursements. The
three-year plan to reduce State personal income taxes will decrease State tax
receipts by an estimated $1.7 billion in State fiscal year 1996-97, in addition
to the amount of reduction in State fiscal year 1995-96. Further significant
reductions in the personal income tax are scheduled for the 1997-98 State fiscal
year. Other tax reductions enacted in 1994 and 1995 are estimated to cause an
additional reduction in receipts of over $500 million in 1996-97, as compared to
the level of receipts in 1995-96. Similarly, many actions taken to reduce
disbursements in the State's 1995-96 fiscal year are expected to provide greater
reductions in State fiscal year 1996-97.
The 1997-98 budget gap is smaller than the previous two fiscal year
projections. The baseline budget forecast produced an estimated $2.3 billion
budget imbalance, before reflecting any actions taken by the Governor to produce
a balanced 1997-98 Financial Plan. Projections of baseline revenue growth showed
a decline of almost $2 billion, reflecting the loss of non-recurring receipts
used in 1996-97 and implementation of previously enacted tax reduction programs.
The 1996-97 surplus of $943 million reduced the 1997-98 budget gap to
$1.3 billion. Proposals included in the Executive Budget for 1997-98 close this
remaining gap, reducing State spending for the third straight year, and
permitting three new tax reduction proposals: the $1.7 billion, multi-year
property tax reduction portion of STAR (School Tax Relief initiative); a
three-year phased reduction in the estate and gift tax; and a $50 million
reserve for additional targeted job-creating tax reductions. The budget also
makes a significant investment in school aid -- a proposed increase of $302
million on a school year basis as the first step toward implementing the $1.7
billion school aid portion of STAR.
The 1997-98 Financial Plan includes approximately $66 million in
non-recurring resources, or only 0.2% of the General Fund budget -- the lowest
level in more than a decade. As compared to 1996-97, non-recurring resources are
a much smaller component of the budget: down over $1 billion from last year's
adopted budget. The loss of these resources in future years is more than offset
by recommendations which provide higher annualized savings in 1998-99 and
beyond.
Assuming these gap-closing actions, the Financial Plan projects
receipts of $32.9 billion and spending of $32.8 billion in fiscal year 1997-98,
with a required deposit of $15 million to the TSRF and an increase of $24
million in the CRF. The closing fund balance in the General Fund is projected to
be $332 million, the largest amount ever on deposit.
To address a potential imbalance in any given fiscal year, the State
would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
To correct recurring budgetary imbalances, the State would need to take
significant actions to align recurring receipts and disbursement in future
fiscal years. There can be no assurance, howeverthat the Legislature will enact
the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring receipts
and disbursements in future fiscal years.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the state. For example, a significant risk to the
1997-98 State Financial Plan arises from tax legislation pending in Congress.
Changes to Federal tax treatment of capital gains are likely to flow through
automatically to the State personal income tax. Such changes, depending upon
their precise character and timing, and upon taxpayer response, could produce
either revenue gains or losses during the balance of the State's fiscal year.
Uncertainties with respect to both the economy and potential decisions at the
Federal level add further pressure on future budget balance in New York State.
Specific budget proposals being discussed at the Federal level but not included
in the State's current economic forecast would (if enacted) have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states. Because of the uncertainty and
unpredictability of these potential changes, their impact is not included in the
assumptions underlying the State's projections.
The 1996-97 and 1997-98 State Financial Plans are based upon forecasts
by the DOB of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, the extent of corporate and governmental restructuring, Federal fiscal
and monetary policies, the level of interest rates, and the condition of the
world economy, which could have an adverse effect on the State. There can be no
assurances that the State economy will not experience results in the current
fiscal year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are
based on the State tax structure in effect during the fiscal year and on
assumptions relating to basic economic factors and their historical
relationships to State tax receipts. Projections of total State disbursements
are based on assumptions relating to economic and demographic factors, levels of
disbursements for various services provided by local governments (where the cost
is partially reimbursed by the State), and the results of various administrative
and statutory mechanisms in controlling disbursements for State operations.
Factors that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the Federal government, and changes in the demand for and use of State
services. There can be no assurance that the State's projections for tax and
other receipts for the 1996-97 fiscal year and 1997-98 fiscal year are not
overstated and will not be revised downward, or that disbursements will not be
in excess of the amounts projected. Such variances could adversely affect the
State's cash flow during the 1996-97 fiscal year or subsequent fiscal years, as
well as the State's ability to achieve a balanced budget on a cash basis for
such fiscal year or subsequent fiscal years.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Projections and estimates of receipts from taxes have
been subject to variance in recent fiscal years. The personal income tax, the
sales tax, and the corporation franchise tax have been particularly subject to
overestimation as a result of several factors, most recently the significant
slowdown in the national and regional economies and uncertainties in taxpayer
behavior as a result of actual and proposed changes in Federal tax laws. As a
result of the foregoing uncertainties and other factors, actual results could
differ materially and adversely from the projections discussed herein, and those
projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address cash flow needs and State Financial Plan shortfall,
and DOB believes it could take similar action should variances from its
projections occur in the current and/or subsequent fiscal years. Those variances
could, however, affect the State's ability to achieve a balanced budget on a
cash basis for the current and/or subsequent fiscal years.
There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years. There can be
no assurance, however, that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future years, nor can there be any assurance that budgetary
difficulties will not lead to further adverse consequences for the State and its
obligations.
As a result of changing economic conditions and information, public
statements or reports may be released by the Governor, members of the State
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the State's
financial condition, as reflected in the 1996-97 State Financial Plan, that may
vary materially and adversely from the information provided herein.
INDEBTEDNESS. As of March 31, 1995, the total amount of long-term State
general obligation debt authorized but unissued stood at $1.789 billion. As of
the same date, the State had approximately $5.181 billion in general obligation
debt, including $149.3 million in bond anticipation notes outstanding.
As of March 31, 1995, $17.980 billion of bonds, issued in connection
with lease-purchase and contractual-obligation financings of State capital
programs, were outstanding. The total amount of outstanding State-supported debt
as of March 31, 1995 was $27.913 billion. As of March 31, 1995, total
State-related debt (which includes the State-supported debt, moral obligation
and certain other financings and State-guaranteed debt) was $36.1 billion.
The State anticipates that its capital programs will be financed, in
part, through borrowings by the State and public authorities in the 1995-96
fiscal year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The State's commercial paper
program is expected to have an average of $287 million outstanding during
1997-98. The Legislature has also authorized the issuance of up to $33 million
in certificates of participation during the State's 1995-96 fiscal year for
equipment purchases and $14 million for capital purposes. The projection of the
State regarding its borrowings for the 1995-96 fiscal year may change if
circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, and has been authorized to issue its bonds to provide net proceeds of
up to $529 million during the State's 1995-96 fiscal year to redeem notes sold
in June 1995. The LGAC program was completed in 1995-96 with the issuance of the
last installment of authorized bond sales.
RATINGS. As of September 1995, Moody's rating of the State's general
obligation bonds stood at A, and S&P's rating stood at A-. Moody's lowered its
rating to A on June 6, 1990, its rating having been A1 since May 27, 1986. S&P
lowered its rating from A to A- on January 13, 1992. S&P's previous ratings were
A from March 1990 to January 1992, AA- from August 1987 to March 1990 and A+
from November 1982 to August 1987.
THE CITY AND THE MUNICIPAL ASSISTANCE CORPORATION ("MAC")
The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in numerous
ways.
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt, defaulted on
certain of its short-term notes. Shortly after the UDC default, the City entered
a period of financial crisis. Both the State Legislature and the United States
Congress enacted legislation in response to this crisis. During 1975, the State
Legislature (i) created MAC to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the State Financial
Control Board (the "Control Board") to review and approve the City's budgets and
four-year financial plans (the financial plans also apply to certain
City-related public agencies).
The national economic downturn which began in July 1990 adversely
affected the City economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and the City's economy
declined in those two years. Beginning in 1992, the improvement in the national
economy helped stabilize conditions in the City. Employment losses moderated and
the City's economy improved, boosted by strong wage gains. However, after
noticeable improvements in the City's economy during calendar year 1994, the
City's current four-year financial plan assumes that economic growth will slow
in calendar year 1996, with local employment increasing modestly. During the
1995 fiscal year, the City experienced substantial shortfalls in payments of
non-property tax revenues from those forecasted.
For each of the 1981 through 1993 fiscal years, the City achieved
balanced operating results as reported in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its recent fiscal years in order to maintain balanced operating
results. There can be no assurance that the City will continue to maintain a
balanced budget, or that it can maintain a balanced budget without additional
tax or other revenue increases or reductions in City services, which could
adversely affect the City economic base.
Pursuant to State law the City prepares a four-year annual financial
plan, which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections and outlines proposed
gap-closing programs for years with projected budget gaps. The current financial
plan extends through the 1999 fiscal year. The City is required to submit its
financial plans to review bodies, including the Control Board. If the City were
to experience certain adverse financial circumstances, including the occurrence
or the substantial likelihood of the occurrence of an annual operating deficit
of more than $100 million or the loss of access to the public credit markets to
satisfy the City's capital and seasonal financial requirements, the Control
Board would be required by State law to exercise certain powers, including prior
approval of City financial plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. The State's 1996-97
Financial Plan projects a balanced General Fund. If the State experiences
revenue shortfalls or spending increases during its 1996-97 fiscal year or
subsequent years, such developments could result in reductions in projected
State aid to the City. In addition, there can be no assurance that State budgets
in future fiscal years will be adopted by the April 1 statutory deadline and
that there will not be adverse effects on the City's cash flow and additional
City expenditures as a result of such delays.
The Mayor is responsible for preparing the City's four-year financial
plan, including the City's current financial plan for the 1996 through 1999
fiscal years. The City projections set forth in its financial plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in such financial plan, employment growth, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, the ability to complete revenue generating transactions, provision
of State and Federal aid and mandate relief, State legislative approval of
future State budgets, levels of education expenditures as may be required by
State law, adoption of future City budgets by the New York City Council,
approval by the Governor or the State Legislature and the cooperation of MAC
with respect to various other actions proposed in such financial plan, and the
impact on City revenues of proposals for Federal and State welfare reform.
Implementation of its financial plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1996 through 1999 contemplates the
issuance of $9.7 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The terms and
success of projected public sales of City general obligation bonds and notes
will be subject to prevailing market conditions, and no assurance can be given
that such sales will be completed. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its planned
capital and operating expenditures. Future developments concerning the City and
public discussion of such developments, the City's future financial needs and
other issues may affect the market for outstanding City general obligation bonds
or notes.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than those
forecast in the financial plan. In addition, the Control Board staff and others
have questioned whether the City has the capacity to generate sufficient
revenues in the future to provide the level of services included in the
financial plan. It is reasonable to expect that such reports and statements will
continue to be issued and to engender public comment.
1995 FISCAL YEAR. On July 21, 1995, the City submitted to the Control
Board a fourth quarter modification to the financial plan for the 1995 fiscal
year. The City projects a balanced budget in accordance with GAAP for the 1995
fiscal year after taking into account a transfer of $75 million.
1996-99 FINANCIAL PLAN. On July 11, 1995, the City submitted to the
Control Board the 1996-99 Financial Plan, which relates to the City, the Board
of Education and the City University of New York. The 1996-99 Financial Plan is
based on the City's expense and capital budgets for the City's 1996 fiscal year,
which were adopted on June 14, 1995, and sets forth proposed actions by the City
for the 1996 fiscal year to close substantial projected budget gaps resulting
from lower than projected tax receipts and other revenues and greater than
projected expenditures. In addition to substantial proposed agency expenditure
reductions and productivity, efficiency and labor initiatives negotiated with
the City's labor unions, the 1996-99 Financial Plan reflects a strategy to
substantially reduce spending for entitlements for the 1996 and subsequent
fiscal years.
The 1996-99 Financial Plan also sets forth projections for the 1997
through 1999 fiscal years and outlines a proposed gap-closing program to close
projected budget gaps of $888 million, $1.5 billion and $1.4 billion for the
1997, 1998 and 1999 fiscal years, respectively, after successful implementation
of the $3.1 billion gap-closing program for the 1996 fiscal year. The proposed
gap-closing actions, a substantial number of which are not specified in detail,
include various actions which may be subject to State or Federal approval.
On July 24, 1995, the City Comptroller issued a report on the 1996-99
Financial Plan. The report concluded that the 1996-99 Financial Plan includes
total risks of $749 million to $1.034 billion for the 1996 fiscal year. With
respect to the 1997-99 fiscal years, the report noted that the gap-closing
program in the 1996-99 Financial Plan does not include information about how the
City will implement the various gap-closing programs, and that the entitlement
cost containment and revenue initiatives will require approval of the State
legislature. The report estimated that the 1996-99 Financial Plan includes total
risks of $2.0 billion to $2.5 billion in the 1997 fiscal year, $2.8 billion to
$3.3 billion in the 1998 fiscal year, and $2.9 billion to $3.4 billion in the
1999 fiscal year.
In early December 1994, the City Comptroller issued a report which
noted that the City is currently seeking to develop and implement plans which
will satisfy the Federal Environmental Protection Agency that the water supplied
by the City watershed areas does not need to be filtered. The City Comptroller
noted that, if the City is ordered to build filtration plants, they could cost
as much as $4.75 billion to construct, with annual debt service and operating
costs of more than $500 million, leading to a water rate increase of 45%.
On December 16, 1994, the City Comptroller issued a report noting that
the capacity of the City to issue general obligation debt could be greatly
reduced in future years due to the decline in value of taxable real property.
The report concluded that the debt incurring power of the City would likely be
curtailed substantially in the 1997 and 1998 fiscal years.
On July 21, 1995, the staff of the Control Board issued a report on the
1996-99 Financial Plan which identified risks of $873 million, $2.1 billion,
$2.8 billion and $2.8 billion for the 1996 through 1999 fiscal years,
respectively.
On June 14, 1995, the staff of the Office of the State Deputy
Comptroller for the City of New York ("OSDC") issued a report on the financial
plan with respect to the 1995 fiscal year. The report noted that, during the
1995 fiscal year, the City faced adverse financial developments totaling over $2
billion resulting from the inability to initiate approximately 35% of the City's
gap-closing program, as well as newly-identified spending needs and revenue
shortfalls. The report noted that the City relied heavily on one-time actions to
offset adverse developments, using $2 billion in one-time resources in the 1995
fiscal year, or nearly double the 1994 amount.
On July 24, 1995, the staff of the OSDC issued a report on the 1996-99
Financial Plan. The report concluded that there remains a budget gap for the
1996 fiscal year of $392 million, largely because the City and its unions have
yet to reach an agreement on how to achieve $160 million in unspecified labor
savings and the remaining $100 million in recurring health insurance savings
from last year's agreement. The report further noted that growth in City
revenues is being constrained by the weak economy in the City, which is likely
to be compounded by the slowing national economy, and that there is a likelihood
of a national recession during the course of the 1996-99 Financial Plan.
Moreover, the report noted that State and Federal budgets are undergoing
tumultuous changes, and that the potential for far-reaching reductions in
intergovernmental assistance is clearly on the horizon, with greater uncertainty
about the impact on City finances and services.
LITIGATION. The City is a defendant in a significant number of
lawsuits. Such litigation includes, but is not limited to, actions commenced and
claims asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts, and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
of the proceedings and claims are not currently predictable, adverse
determinations in certain such proceedings and claims might have a material
adverse effect upon the City's ability to carry out its financial plan. As of
June 30, 1994, the City estimated its potential future liability in
respect of outstanding claims to be approximately $2.6 billion. The 1996-99
Financial Plan includes provisions for judgments and claims of $279 million,
$236 million, $251 million and $264 million for the 1996 through 1999 fiscal
years, respectively.
RATINGS. As of March 1996, the State had regained S&P's rating of A- on
the City's general obligation bonds. On July 10, 1995, S&P revised downward its
rating on City general obligation bonds from A- to BBB+ and removed City bonds
from CreditWatch. S&P stated that "structural budgetary balance remains elusive
because of persistent softness in the City's economy, highlighted by weak job
growth and a growing dependence on the historically volatile financial services
sector." Other factors identified by S&P in lowering its rating on City bonds
included a trend of using one-time measures, including debt refinancings, to
close projected budget gaps, dependence on unratified labor savings to help
balance financial plans, optimistic projections of additional Federal and State
aid or mandate relief, a history of cash flow difficulties caused by State
budget delays and continued high debt levels. Fitch Investors Service, Inc.
continues to rate the City general obligations bonds A-. Moody's rating for City
general obligation bonds is Baa1.
On February 11, 1991, Moody's had lowered its rating from A.
Previously, Moody's had raised its rating to A in May 1988, to Baa1 in December
1986, to Baa in November 1983 and to Ba1 in November 1981. S&P had raised its
rating to A- in November 1987, to BBB+ in July 1985 and to BBB in March 1981.
INDEBTEDNESS. As of June 30, 1995, the City and MAC had, respectively,
$23.258 billion and $4.033 billion of outstanding net long-term indebtedness.
THE STATE AGENCIES: Certain Agencies of the State, including the State
Housing Finance Agency ("HFA") and the UDC, have faced substantial financial
difficulties which could adversely affect the ability of such Agencies to make
payments of interest on, and principal amounts of, their respective bonds. The
difficulties have in certain instances caused the State (under so-called "moral
obligation" provisions, which are non-binding statutory provisions for State
appropriations to maintain various debt service reserve funds) to appropriate
funds on behalf of the Agencies. Moreover, it is expected that the problems
faced by these Agencies will continue and will require increasing amounts of
State assistance in future years. Failure of the State to appropriate necessary
amounts or to take other action to permit those Agencies having financial
difficulties to meet their obligations (including HFA and UDC) could result in a
default by one or more of the Agencies. Such default, if it were to occur, would
be likely to have a significant adverse effect on investor confidence in, and
therefore the market price of, obligations of the defaulting Agencies. In
addition, any default in payment on any general obligation of any Agency whose
bonds contain a moral obligation provision could constitute a failure of certain
conditions that must be satisfied in connection with Federal guarantees of City
and MAC obligations and could thus jeopardize the City's long-term financing
plans.
STATE LITIGATION: The State is a defendant in numerous legal
proceedings pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited to, claims
asserted against the State arising from alleged torts, alleged breaches of
contracts, condemnation proceedings and other alleged violations of State and
Federal laws. Included in the State's outstanding litigation are a number of
cases challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of contract and tort claims
wherein significant monetary damages are sought. Actions commenced by several
Indian nations claim that significant amounts of land were unconstitutionally
taken from the Indians in violation of various treaties and agreements during
the eighteenth and nineteenth centuries. The claimants seek recovery of
approximately six million acres of land as well as compensatory and punitive
damages.
Adverse developments in the foregoing proceedings or new proceedings
could adversely affect the financial condition of the State in the 1996-97
fiscal year or thereafter.
OTHER MUNICIPALITIES: Certain localities in addition to New York City
could have financial problems leading to requests for additional State
assistance and the need to reduce their spending or increase their revenues. The
potential impact on the State of such actions by localities is not included in
projections of State revenues and expenditures in the State's 1995-96 fiscal
year
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the Fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1993, the total indebtedness of all
localities in the State other than New York City was approximately $17.7
billion. State law requires the Comptroller to review and make recommendations
concerning the budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during the period that
such deficit financing is outstanding. Fifteen localities had outstanding
indebtedness for deficit financing at the close of their fiscal year ending in
1993.
From time to time, Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, New York City or any of the Agencies were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State, including notes or bonds in the Fund, could be adversely
affected. Localities also face anticipated and potential problems resulting from
certain pending litigation, judicial decisions, and long-range economic trends.
Long-range potential problems of declining urban population, increasing
expenditures, and other economic trends could adversely affect localities and
require increasing State assistance in the future.
FACTORS AFFECTING NORTH DAKOTA FUND
General Economic Conditions. North Dakota lies in the central portion
of the Northern Plains with a land area of 70,665 square miles. Elevation in the
northeast corner of the State is 750 feet above sea level and in the southwest
corner of the State is 3,506 feet. The North Dakota economy continues to grow at
a slow and steady pace. The production-based economy, which provides the basis
for this stable, slow growth, while sensitive to change, is not as susceptible
to recessionary impacts as the rest of the nation. Due to strong economic
conditions experienced in North Dakota, taxable sales and purchases are expected
to increase by 3.81% in 1997 and 5.7% annually over the next biennium, resulting
in increased sales tax collections of $43 million during 1997-99.
Agriculture is an important segment of the state's economy. As a major
producer of durum wheat, North Dakota is expected to benefit from high wheat
prices while cattle prices are expected to remain low. NAFTA and GATT are
expected to increase agricultural exports. In recent years, the state's farmers
have formed cooperatives that combine production and processing to create
manufacturing jobs and new markets for their goods. An example of North Dakota's
commitment to agriculture-related economic development is its recent success in
attracting the Pro-Gold corn processing plant which is under construction near
Wahpeton, North Dakota. The plant is expected to process 72,000 bushels of corn
per day, expanding to 320,000 bushels per day, raising corn prices in the area
by approximately one dollar per bushel.
The energy industry in North Dakota is projected to be robust during
the next biennium as a result of increased oil activity in the western part of
the state. Oil production in this state is currently averaging approximately
92,000 barrels per day, up 14.1% from last years production level of 80,600
barrels per day. Oil production is expected to increase to a level of over
100,000 barrels of oil per day during the next biennium while prices are
expected to be in the $19 per barrel range.
The labor force and employment situation for the state appears healthy.
Employment in the state has grown by 7,500 wage and salary jobs reflecting an
increase of 2.5% compared to one year earlier. About half of the increase has
been in the service industries with smaller gains in trade and finance.
Construction employment has also been a significant contributor to overall
growth, mainly attributed to the continuing construction of the ProGold corn
processing plant in Wahpeton. Manufacturing employment has shown little growth
in 1995 and 1996 and the current forecast projects manufacturing payroll growth
of 0.5% in 1997. Unemployment is significantly below national levels. North
Dakota's unemployment rate in 1995 and 1996 (preliminary) was 3.3% and 3.1%,
respectively. This is significantly lower than the national unemployment rates
of 5.6% and 5.4% for 1995 and 1996, respectively.
The 1995 Legislative Assembly funded the design, development and
implementation of a Welfare Reform Computer System. The demonstration, known as
the Training, Education, Employment, and Management (TEEM) Project, is
progressing with numerous waivers received from the federal government in
September, 1995. The TEEM demonstration provides for a uniform treatment of
income and assets, a uniform budget methodology, standard certification periods
and reporting requirements, and employment and training with adequate child care
as a means of helping participants to become self-sufficient, and incorporates
child support enforcement issues. Ten counties will be included in the TEEM
demonstration.
The 54th Legislative Assembly contained substantial workers
compensation reform. Legislators passed a number of bills which dealt directly
with the North Dakota Workers Compensation Bureau. Among the list of issues
addressed in the legislation were: fraud prevention; designated providers; first
report of injury; retirement; claims closure; rehabilitation; permanent partial
injury; worker adviser/ombudsman program; and, litigation/attorney fees.
Additionally, the North Dakota Workers Compensation Bureau is implementing a
number of other changes to improve customer service. The Fund is also expanding
its employer-based programs to get more employers actively involved in risk
management. These programs focus on intense communication between the injured
worker, medical providers and the employer.
Budgetary Process. The State operates through a biennial appropriation
which represents departmental appropriations recommended by the Governor and
presented to the General Assembly at the beginning of each legislative session.
The General Assembly enacts the budgets of the various State departments through
passage of specific appropriation bills. The Governor has line item veto powers
over all legislation subject to legislative override. Session laws that were
passed by the Legislature in 1993 authorize directors of various state agencies
to transfer appropriation authority among the various divisions of their
specific agency, subject to the Budget Section of the North Dakota Legislative
Council's approval. Unexpended appropriations lapse at the end of each biennium,
except certain capital expenditures covered under the North Dakota Code and
except for all unexpended general funds appropriation authority which must be
deposited in special revenue funds of the institutions in the University System
according to law. During the 1993-1995 biennium there were supplemental
appropriations of $105,573,249. The general fund appropriation authority was
increased by approximately $6.5 million. Of this amount $3.7 million was
carryover from the 1991-1993 biennium, $2.0 million was approved by the 54th
Legislative Assembly for Risk Management and $.8 million was for deficiencies
also approved by the 54th Legislative Assembly.
The beginning balance for the 1995-97 biennium was $31.1 million, $4.2
million more than had been projected for an ending balance when the 1995
Legislative Assembly adjourned. No one-time transfers were utilized in the
1995-97 budget, although $31.9 million of the transfers from the Bank of North
Dakota were moved from the 1993-95 biennium to the 1995-97 biennium. Although
the 1995 Legislative Forecast estimated transfers from the Bank of North Dakota
of $59.9 million, the November 1996 revenue forecast assumes $50.3 million will
be transferred. The June 30, 1997 ending balance is anticipated to be $63
million.
North Dakota implemented a new accounting standard, GASB Statement No
22 "Accounting for Taxpayer Assessed Tax Revenues in Governmental Funds." This
created a one time acceleration of revenue recognition for the State's major tax
types. The change resulted in a restatement of the general fund's 1994 balance,
increasing it from $64.3 million to $94.4 million. In fiscal year 1995 an
additional $75.6 million was recognized for taxes receivable in the general
fund. The increase in taxes receivable resulted in an additional $36 million
being recognized as revenue and $39.6 million as deferred revenue in fiscal year
1995 in the general fund. The general fund also had an $11 million increase in
accrued tax refunds payable which decreased revenues in the general fund for
fiscal year 1995.
Revenues and Expenditures. General governmental activities are
accounted for in four governmental fund types: general (GAAP) basis; special
revenue; capital projects; and, debt service funds. The November 1996 general
fund revenue forecast for the 1995-97 biennium is $1.37 billion, an increase of
approximately $40 million from the original estimate and 10% more than the
previous biennium. Oil tax revenue collections accounted for nearly $9 million
of the excess during the first fiscal year due to the increased oil activity in
the state. Of the total revenues, taxes accounted for over $1 billion. The
largest increase in taxes on a budgetary basis comes from sales and use taxes
with an estimated increase of $50.79 million for the biennium, resulting in
$523.1 million. The second largest source of general fund revenue, the
individual income tax, is estimated to increase $31.6 million to a total of
$311.4 million. On the other hand, corporate income taxes are expected to
slightly decrease approximately $388,000 to $94.37 million.
General fund appropriations are expected to total $1.35 billion for the
1995-97 biennium, an increase of 7.6% from the previous biennium. The three
leading expenditures are: education, $769.1 million, health and human services,
$327.9 million; and, general government and grants, $99.9 million.
Projected general fund revenues for the 1997-99 biennium, based on the
executive recommendation, are $1.44 billion. This is a $68 million or nearly 5%
increase over the revised revenue estimate for the 1995-97 biennium. The
projected ending balance at June 30, 1999 is approximately $10 million.
Claims/Judgments Payable are primarily Workers Compensation Claims
Incurred But Not Yet Reported (IBNR) by the claimants as well as claims related
to various litigation matters. Claims and judgments for governmental funds are
reflected entirely in the general long-term debt account group and not in
individual funds as the liability is not expected to be liquidated with
expendable available financial resources.
Debt Administration. The Constitution of North Dakota provides that the
State may issue or guarantee the payment of bonds provided that all bonds in
excess of $2 million are: secured by first mortgage upon property and no further
indebtedness may be incurred by the State unless evidenced by a bond issue;
authorized by law, for a certain purpose; provisioned to pay the interest
semiannually, and pay the principal within 30 years. The law authorizing the
bond issue must specifically appropriate the provisions to the payment of the
principal and interest of the bond. The State is currently in compliance with
the constitutional debt limitation. At June 30, 1995, the state had a number of
debt issues outstanding. These issued include:
General Obligation Bonds. General obligation bonds have been authorized
and issued to provide funds to the Bank of North Dakota. General obligation
bonds issued according to the constitution and enabling statutes are backed by
the full faith, credit and taxing power of the State of North Dakota. Debt
service requirements are provided by repayment of the real estate loans and
transfers from the Bank of North Dakota. The State's net general obligation debt
per capita is $36. General obligation bonds currently outstanding are the 1984
and 1986 Real Estate Series. At June 30, 1995, the balance was $39,046,000.
Revenue Bonds. Current State statutes empower certain State agencies to
issue bonds as part of their activities. This debt is not backed by the full
faith and credit of the State of North Dakota. The principal and interest on
such bonds shall be payable only from the applicable agencies' program income.
On June 30, 1995, total Revenue Bonds outstanding totaled $825,439. The Bonds
and balance were as follows: State Fair, $3,421,000; Student Loan Trust,
$199,320,000; Building Authority, $65,613,000; Housing Finance, $425,149,000;
University System, $65,571,000; and Municipal Bond Bank, $66,365,000.
Long-Term Notes. The Bank of North Dakota has long-term notes in the
amount of $53.5 million. The Fuji Bank, Ltd. Notes ($50 million) were issued in
December, 1986 and are due December, 1996. The rate of interest in 7.875% with
an effective interest rate of 7.94%. The bank has two advances from the Federal
Home Loan Bank in the amounts of $2.5 million and $1 million. The rates of
interest are 7.99% and 8.34%, respectively.
North Dakota continues to receive bond ratings from both Moody's
Investors Service (Aa) and Standard and Poor's Corporation (AA-) on general
obligation bond issues.
FACTORS AFFECTING OREGON FUND
General Economic Conditions. Similar to the nation as a whole, economic
growth in Oregon is likely to be restricted to its long-term trend rate by near
capacity labor markets and rising costs. Oregon's jobless rate is unlikely to
fall below its current 5.0% for any sustained period. The labor force is
expected to increase sufficiently to keep Oregon's employment growth well above
the national average but not enough to match the job growth rates of the 1994 to
1996 period. Overall, manufacturing employment is forecast to increase 0.3% in
1997 after averaging 3.0% growth for the 1994-1996 period. Construction
employment, which increased 11.4% from 1995 to 1996, is expected to show less
growth in 1997, yet at high levels. The state's service-producing sectors are
expected to continue growing but they too are likely to be constrained by labor
availability. The state's tight labor markets and expanding high technology
industries should continue to push Oregon's wages and per capita income up
toward the national average.
The rest of the state will benefit from a generally healthy agriculture
section (with the exception of the cattle industry), a stabilizing timber
harvest and increasing cost advantages relative to the Willamette Valley and
Portland metropolitan area. The statewide timber harvest is expected to be 4.2
billion board feet in 1997, matching the estimate for 1996. In the agricultural
industry, cash commodities include farm forest products, cattle and calves,
nursery crops, dairy, wheat, potatoes, alfalfa hay, and perennial rye grass
seed.
Non-farm employment is expected to grow 2.9% in 1997, a significant
decrease from the preliminary 4.1% pace recorded in 1996, yet more than double
the 1997 projected national rate of job growth. Job growth is expected to slow
further to 2.3% in 1998 as the high technology manufacturing sector winds down
and a shortage of available labor limits net job creation.
Budgetary Process. The Oregon budget is approved on a biennial basis by
separate appropriation measures. a biennium begins July 1 and ends June 30 of
odd-numbered years. Measures are passed for the approaching biennium during each
regular Legislative session, held beginning in January of odd-numbered years.
Because the Oregon Legislative Assembly meets in regular session for
approximately six months of each biennium, provision is made for interim funding
through the Legislative Emergency Board. The Emergency Board is authorized to
make allocations of General Fund monies to State agencies from the State
Emergency Fund. The Emergency Board may also authorize increases in expenditure
limitations from Other or Federal Funds (dedicated or continuously appropriated
funds), and may take other actions to meet emergency needs when the Legislative
Assembly is not in session. The most significant feature of the budgeting
process in Oregon is the constitutional requirement that the budget be in
balance at the end of each biennium. Because of this provision, Oregon may not
budget a deficit and is required to alleviate any revenue shortfalls within each
biennium.
Revenue and Expenditures. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: program
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. In its 1995 Regular
Session, the Oregon Legislative Assembly approved General Fund appropriations
totaling $7,372.6 million for the 1995-1997 biennium. This was a 15.2% increase
compared to estimated 1993-1995 expenditures.
General Fund revenue totaled $6,536.1 million for the 1993-1995
biennium. Revenue exceeded the May estimate by $16.7 million in the 1993 Close
of Session (COS) estimate by $330.6 million or 5.3%. Expenditures were $6,410.1
million for the biennium.
The December forecast for the 1995-97 General Fund revenue is $7,399.3
million, a 13.2% increase from the 1993-95 biennium. The 1995-97 estimate is
also an increase of $106.3 million from the September 1996 estimate and $437.8
million or 6.3% from the 1995 Close of Legislative Session (COS) forecast. The
beginning balance is estimated to be $496.3 million, leaving total General Fund
resources available for the 1995-97 biennium of $7,895.6 million. The General
Fund resources estimate is $450.9 million higher than the COS estimate.
General Fund revenue is projected to be $8,145.7 million for the
1997-99 biennium. The beginning balance is estimated to be $536.3 million for a
total General Fund resource estimate of $8,682 million. The December 1997-99
General Fund revenue estimate is $115.1 million higher than the September
forecast despite the anticipation of a larger 2% surplus kicker refund. The
overall General Fund resource projection is $243.8 million more than the
September forecast.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or may impair future revenue sources. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims filed against the State. Of those claims, 544 also have
been filed as court actions, and are pending against the State. These cases are
pending in State courts and are subject to the liability limitations stated in
the Tort Claims Act of $500,000 per occurrence, $200,000 per individual for
physical injuries, and $50,000 per occurrence for property damage. The
likelihood of an unfavorable outcome in these cases ranges from probable to
remote, but it is certain that these cases do not involve real exposure of $25
million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
In November of 1996, voters approved Ballot Measure 47, the property
tax cut and cap. It will reduce revenues to schools, cities and counties by as
much as $1 billion and put pressure on the General Fund to make up some or all
of the difference.
Debt Administration and Limitation. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for state agencies on proposed and outstanding debt. Statutes
contain management and reporting requirements for state agencies on proposed and
outstanding debt.
A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are normally
expressed as a percentage of statewide True Cash Value (TCV) of taxable
property. Revenue bonds usually are limited by the Legislative Assembly to a
specific dollar amount.
The State's constitution authorizes the issuance of general obligation
bonds for financing community colleges, highway construction, and pollution
control facilities. Higher education institutions and activities and community
colleges are financed through an appropriation from the General Fund. Facilities
acquired under the pollution control program are required to conservatively
appear to be at least 70% self-supporting and self-liquidating from revenues,
gifts, federal government grants, user charges, assessments, and other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. For the year ending June 30, 1996, the total
balance of general obligation bonds was $3.7 billion. The debt service
requirements for general obligation bonds, including interest of approximately
$2.75 billion, as of September 1, 1996, was $6.4 billion.
In addition to general obligation and direct revenue bonds, the State
of Oregon issues industrial development revenue bonds ("IDBs"), Oregon Mass
Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing request from local mass transit districts
and my authorize issuance of revenue bonds to finance eligible projects. The
State has no financial obligation for these bonds, which are secured solely by
payments from local transit districts.
The State is statutorily authorized to enter into financing agreements
through the issuance of certificates of participation. Certificates of
participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of Administrative Services, and the
Department of Higher Education. Also, certificates of participation have been
used for the acquisition or construction of buildings by the Department of
Administrative Services, Department of Fish and Wildlife, Department of
Corrections, State Police, and Department of Higher Education. Further,
certificates of participation were used in the acquisition of telecommunication
system by the Department of Administrative Services and the Adult & Family
Services Division. For the year ending June 30, 1996, the certificates of
participation debt totaled $443.4 million. The debt service requirements for
certificates of participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in 1991,
to assist with the assembling and financing of lands for health care, housing,
educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally taxable
bonds in those situations where securing a federal tax exemption is unlikely or
undesirable; regulate "current" as well as "advance" refunding bonds; enter into
financing agreements, including lease purchase agreements, installment sales
agreements and loan agreements to finance real or personal property and approve
certificates of participation with respect to the financing agreements. Amounts
payable by the State under a financing agreement are limited to funds
appropriated or otherwise made available by the Legislative Assembly for such
payment. The principal amount of such financing agreements are treated as bonds
subject to maximum annual bonding levels established by the Legislative Assembly
under Oregon statute.
Each of Fitch Investors Service, Moody's Investors Service and Standard
& Poor's Ratings Group has assigned their municipal bond ratings of "AA," "Aa,"
and "AA" respectively.
FACTORS AFFECTING PUERTO RICO
General Economic Conditions. Puerto Rico, the fourth largest of the
Caribbean islands, is located approximately 1,600 miles southeast of New City
and 1,000 miles east-southeast of Miami, Florida. It is approximately 100 miles
long and 35 miles wide. According to estimates of the Planning Board, the
population of Puerto Rico increased to 3,653,000 during fiscal 1994.
Puerto Rico came under United States sovereignty by the Treaty of
Paris, signed on December 10, 1898, terminating the Spanish-American War. Puerto
Ricans have been citizens of the United States since 1917. Puerto Rico's
constitutional status is that of a territory of the United States and the
ultimate source of power over Puerto Rico, pursuant to the Territories Clause of
the Federal Constitution, is the United States Congress. The Commonwealth
exercises virtually the same control over its internal affairs as do the fifty
states; however, it differs from the states in its relationship with the federal
government. The people of Puerto Rico are citizens of the United States but do
not vote in national elections. They are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives and limited voting
powers. Most federal taxes, except those such as social security taxes, are not
levied in Puerto Rico. No federal income tax is collected from Commonwealth
residents on ordinary income earned from sources in Puerto Rico, except for
certain federal employees who are subject to taxes on their salaries and for
income earned from sources outside Puerto Rico.
The Commonwealth has established policies and programs directed at the
development of manufacturing and the expansion and modernization of the island's
infrastructure. The investment of mainland United States, foreign and local
funds in new factories has been stimulated by selective tax exemption,
development loans, and other financial and tax incentives. Infrastructure
expansion and modernization have bee to a large extent financed by bonds and
notes issued by the Commonwealth, its public corporations and municipalities.
Economic progress has been aided by significant increases in the levels of
education and occupational skills of the island's population.
The economy of Puerto Rico is closely integrated with that of the
mainland United States. During fiscal 1994 approximately 87% of Puerto Rico's
exports went to the United States mainland, which was also the source of
approximately 67% of Puerto Rico's imports. In fiscal 1994, Puerto Rico
experienced a $4.3 billion positive adjusted merchandise trade balance. Gross
product in fiscal 1991 was $22.8 billion and gross product in fiscal 1995 was
$28.4 billion. This represents an increase in gross product of 24.4% from fiscal
1991 to 1995.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1991 through fiscal 1995. Almost
every sector of the economy was affected and record levels of employment were
achieved. Average employment in creased from 977,000 in fiscal 1991 to 1,051,300
in fiscal 1995. Average unemployment decreased from 15.2% in fiscal 1991 to
13.8% in fiscal 1995.
Puerto Rico has a diversified economy. During the fiscal years
1990-1994, the manufacturing and service sectors generated the largest portion
of gross domestic product. Three sectors of the economy provide the most
employment: Manufacturing, services, and government.
Gross product in fiscal 1991 was $22.8 billion and gross product in
fiscal 1995 was $28.4 billion. This represents an increase in gross product of
24.4% from fiscal 1991 to 1995. Since fiscal 1985, personal income, both
aggregate and per capita, has increased consistently each fiscal year. In fiscal
1994, aggregate personal income was $25.7 billion and personal income per capita
was $7,047. Personal income includes transfer payments to individuals in Puerto
Rico under various social program. Transfer payments to individual in fiscal
1994 were $5.7 billion, of which $3.9 billion, or 68.9% represent entitlements
to individuals who had previously performed services or made contributions under
programs such as Social Security, Veterans' Benefits, and Medicare.
Budgetary Process. The fiscal year of the Commonwealth begins on
July 1. The Governor is constitutionally required to submit to the Legislature
an annual balanced budget of capital improvements and operating expenses of the
Commonwealth for the ensuing fiscal year. Section 7 of Article VI of the
Constitution provides that, "The appropriations made for any fiscal year shall
not exceed the total revenues, including available surplus, estimated for said
fiscal year unless the imposition of taxes sufficient to cover said
appropriations as provided by law."
Revenues and Expenditures. In the fiscal 1995 budget revenues and other
resources of all budgetary funds total $8,381,444,000, excluding balances from
the previous fiscal year and general obligation bonds authorized. Current
expenses and capital improvements, other than those financed by bonds, of all
budgetary funds total $8,673,845,000, an increase of $1,160,550,000 from fiscal
1994. The general obligation bond authorization for the fiscal 1995 budget is
$325,000,000.
In the fiscal 1996 budget proposal revenues and other resources of all
budgetary funds total $8,269,848,000 excluding balances from the previous fiscal
year and general obligation bonds authorized. Current expenses and capital
improvements other than those financed by bonds, of all budgetary funds total
$8,546,543,000, a decrease of $127,303,000 from fiscal 1995. The general
obligation bond authorization for the fiscal 1996 budget is $355,000,000.
Tax Incentives. Much of the development of the manufacturing sector in
Puerto Rico can be attributed to various federal and Commonwealth tax incentive,
particularly Section 936 of the Internal Revenue Code, as amended (the "Code")
and the Commonwealth's Industrial Incentives Program.
Section 936. Under Section 936 of the Code, United States corporations
that meet certain requirements and elect its application ("Section 936
Corporations") are entitled to credit against their United States corporate
income tax the portion of such tax attributable to (I) income derived from the
active conduct of a trade or business within Puerto Rico ("active business
income") or from the sale of exchange of substantially all assets used in the
active conduct of such trade or business; and, (ii) qualified possession source
investment income ("passive income"). To qualify under Section 936 in any given
taxable year a corporation must derive (I) for the three-year period immediately
preceding the end of such taxable year 80% or more of its gross income from
sources within Puerto Rico; and, (ii) for taxable years beginning after December
31, 1986, 75% or more of its gross income from the active conduct of a trade or
business in Puerto Rico. A Section 936 Corporation may elect to compute its
active business income eligible for the Section 936 credit under one of three
formulas.
On November 17, 1995 the United States Congress adopted, as part of its
larger federal income tax legislative package, a ten-year phase out of the
current 936 credit for companies that are existing credit claimants and the
elimination of the credit for companies establishing new operation in Puerto
Rico and for existing companies that add a substantial new lime of business. The
credit based on the economic limitation will continue as under current law
without change until tax years beginning in 2002, during which years the
possession business income will be subject to a cap based on the corporation's
possession income for an average adjusted base period. The credit based on the
percentage limitation will continue as under current law until tax years
beginning in 1998. In that year and thereafter, the credit based on the
percentage limitation will be 40%, but the possession business income will be
subject to a cap based on the corporation's possession income for an average
adjusted base period. The 936 credit is eliminated for taxable years beginning
in 2006. However, the credit granted to passive income (QPSII) is eliminated for
taxable years beginning after December 31, 1995.
The President vetoed the legislation submitted by the United States
Congress on December 7, 1995. The Administration has proposed a modification to
the 936 credit that would phase out the credit based upon the percentage
limitation over a five year period beginning in 1997, retain the credit based
upon the economic limitation under current law, allow a five year carry forward
of excess credit based upon the economic limitation and retain the credit
granted to passive income (QPSII) under current law.
It is not possible at this time to determine the final legislative
changes that may be made to Section 936, or the effect on the long-term outlook
on the economy of Puerto Rico. The government of Puerto Rico does not believe
there will be short-term or medium-term material adverse effects on Puerto
Rico's economy as a result of the changes to Section 936 currently proposed by
Congress or the Administration. The Government of Puerto Rico further believes
that even if the Congressional proposal became law, sufficient time exists to
put additional incentive programs in place to safeguard Puerto Rico's
competitive position.
Industrial Incentives Program. Since 1948 Puerto Rico has had various
industrial incentives laws designed to stimulate industrial investment in the
island. On January 24, 1987, the Governor of Puerto Rico signed into law the
most recent industrial incentives law, known as the Puerto Rico Tax Incentive
Act (the "1987 Act"). The tax exemption benefits provided by the 1987 Act are
generally more favorable than those provided by its predecessor, the Industrial
Incentives Act of 1978 (the "1978 Act"). The activities eligible for exemption
under the 1987 Act include manufacturing, certain designated services for
markets outside Puerto Rico, the production of energy from local renewable
sources for consumption in Puerto Rico, and laboratories for scientific and
industrial research.
The 1987 Act provides a fixed 90% exemption from income and property
taxes and a 60% exemption from municipal license taxes during a 10, 15, 20 or 25
year period, depending on the zone where the operations are located. The 1987
Act also provides a special deduction equal to 15% of the production payroll for
companies whose net income from operations is less than $20,000 per production
job. This special benefit is designed to attract and maintain labor intensive
operations in Puerto Rico. The passive income from certain qualified investment
in Puerto Rico and the instruments evidencing such investments are fully exempt
from income tax. In addition, companies making such investments for fixed
periods of not less than five years are eligible to reduce the tollgate tax
imposed on dividend and liquidating distributions from a maximum rate of 10% to
5%, depending on the amount and term of the investment.
The bottom limit of 5% was approved in a recent amendment (December
1993) of the 1987 Act (the "1993 amendments"). The 1993 amendments also impose a
new 5% estimated tax on annual industrial development income, subject to
reduction in the event certain long-term qualified investments with such income
are made. The Department of Treasury is collecting an additional amount annually
as a result of the implementation of the bottom limit. As a result of the 1993
amendments, the Department of the Treasury has increased its ability to predict
tax revenues from corporations with greater accuracy. The 1993 amendments also
contain an option to pay a flat 14% tax on annual industrial development income,
which would allow eligible companies to repatriate profits free of tollgate
taxes. Under this option, if a company invests 25% or 50% of its profits in
qualified industrial development investments, the 14% rate drops to 11% or 9%,
respectively. The 1987 Act applies to newly established operations as well as to
existing operations that elect to convert their tax exemption grants to the
provision of the 1987 Act.
Since 1983 hotel operations have been covered by a special incentives
law, the Tourism Incentives Act of 1983, which provides exemptions from income,
property and municipal license taxes for a period of 10 years. In 1993,
legislation was enacted providing for an additional set of tax incentives for
new hotel development projects. In addition to providing for exemptions from
income, property and municipal license taxes for a period of up to 10 years, it
provides certain tax credits for qualifying investments in such projects.
Caribbean Basin Initiative. In August, 1983, the President of the
United States signed into law the Caribbean Basin Economic Recovery Act. The Tax
Reform Act of 1986 amended Section 936 to allow Puerto Rico financial
institutions to invest funds representing earnings accumulated under Section
936, in active business assets or development projects in a qualified Caribbean
Basin country. As of December 1994, 167 projects under the Puerto Rico Caribbean
Development Program have been promoted in fourteen Caribbean Basin countries,
representing 36,115 jobs and over $1,989 million in loan commitments, of which
$1,217 million of Section 936 funds have been disbursed.
Debt Administration and Limitation. Public sector debt comprises bonds
and notes of the Commonwealth and its municipalities and public corporations.
Direct debt of the Commonwealth is supported by Commonwealth taxes. Debt of
municipalities, other than bond anticipation notes, is supported by real and
personal property taxes and municipal license taxes. Debt of public
corporations, other than bond anticipation notes is generally supported by the
revenues of such corporations from charges for services or products. However,
certain debt of public corporations is supported, in whole or in part, directly
or indirectly, by Commonwealth appropriations or taxes.
Commonwealth Guaranteed Debt. Annual debt service on outstanding
Commonwealth guaranteed bonds issued by Urban Renewal and Housing Corporation
and assumed in fiscal year 1992 by Housing Bank and Finance Agency is
$13,254,048 in the fiscal year ending September 30, 1996, which constitutes the
maximum annual debt service on such bonds. The final maturity of such bonds is
October 1, 2001. As of September 30, 1995, $74,755,000 of Commonwealth
guaranteed bonds of Housing Bank and Finance Agency were outstanding. Annual
debt service on Commonwealth guaranteed bonds of Public Buildings Authority is
$114,777,000 in fiscal year ending June 30, 1996 with the final maturity on July
1, 2025. As of September 30, 1995, $1,335,611,000 of Commonwealth guaranteed
bonds of Public Buildings Authority were outstanding. No payments under the
Commonwealth guaranty have been required to date for bonds of Housing Bank and
Finance Agency or Public Buildings Authority.
As of September 30, 1995, $267,000,000 of Commonwealth guaranteed
obligations of Government Development Bank were outstanding. No payments under
the Commonwealth guaranty have been required for any obligations of Government
Development Bank to date.
Public Sector Debt. In Puerto Rico, many governmental or
quasi-governmental functions are performed by public corporations. These are
governmental entities of the Commonwealth created by the Legislature but with
varying degrees of independence from the central government. Most public
corporations obtain revenues from charges for services or products, but many are
subsidized to some extent by the central governments. Capital improvements of
most of the larger public corporations are financed by revenue bonds under trust
notes of certain of the public corporations as of September 30, 1995. Debt of
certain other public corporations is payable primarily from the Federal
Government or is payable from sources other than Commonwealth appropriations or
taxes or revenues of public corporations derived from services or products.
Historically, the Commonwealth has maintained a fiscal policy which
provides for a prudent relationship between the growth of public sector debt and
the growth of the economic base required to service that the debt. The
Commonwealth has also sought opportunities to realize debt service savings by
refunding outstanding debt with obligations bearing lower interest rates. Over
fiscal years 1991 to 1995, public sector debt increased by 24.7% while gross
product rose 24.4%. This slightly greater increase in the rate of public sector
debt relative to the rate of increase in gross product over the subject period
was principally the result of refinancing to achieve debt service savings. Short
term debt outstanding relative to total debt was 7.7% as of September 30, 1995.
Government Development Bank. The principal functions of Government
Development Bank are to act as financial advisor to, and fiscal agent for, the
Commonwealth, its municipalities and public corporations in connection with the
issuance of bonds and notes, to make loans and advances to public corporations
and municipalities, and to make loans to private enterprises to aid in the
economic development of Puerto Rico.
As of September 30, 1995, $1,540,948,000 of bonds and notes of
Government Development Bank were outstanding. Government Development Bank has
loaned $1,901,578,894 to Commonwealth public corporations and municipalities.
Act No. 12, approved May 9, 1975, as amended, provides that the payment of
principal of and interest on specified notes and other obligations of Government
Development Bank, not exceeding $550,000,000, may be guaranteed by the
Commonwealth, of which $267,000,000 were outstanding as of September 30, 1995.
Government Development Bank has the following principal subsidiaries: Higher
Education Assistance Corporation, Housing Finance Corporation, Tourism
Development Fund, Development Fund, Capital Fund, and Public Finance
Corporation.
FACTORS AFFECTING UTAH FUND
General Economic Conditions. On January 4, 1896, the State became the
forty-fifth state of the United States of America. Ranking eleventh among the
states in total area, the State contains approximately 82,168 square miles. It
ranges in elevation from a low of 2,500 feet above sea level in the south, to a
high of 13,500 feet above sea level in the north. The State is located in an
arid region (precipitation ranks as the forty-ninth lowest in the nation, ahead
of Nevada) and in the center of the Rocky Mountain region with excellent access
to major national and international markets. Home to deserts, plateaus, the
Great Basin and the Rocky Mountains, the State is known for its scenic beauty
and the diversity of its outdoor recreation areas. Approximately 20% of the
State is national park and forest land, 42% is Bureau of Land Management land
and 7% is State park land. Transportation infrastructure in the form of
interstate highways, railroad lines, and an international airport is in place to
provide efficient transportation for business and tourism.
The population forecast for 1996 is 2,002,359 indicating continued
growth. The 1995 estimate for Utah's population was approximately 1,959,025, a
2.2% increase. The U.S. Census Bureau estimates Utah was the third fastest
growing state in the country. Net in-migrations were approximately 13,882 people
in 1996. This is the sixth consecutive year Utah experienced strong net
in-migrations. The State's population continues to be concentrated in the
metropolitan area along the Wasatch mountains, with Salt Lake City as the hub.
Growth in the rural areas has picked up in the last few years and between 1995
and 1996, almost every county in Utah experienced population increases. The
State continues to face the challenge of bringing more economic development to
the rural areas of the State.
Utah's economy continues to experience sustained growth rates greater
than that of the national economy. Employment growth, an important economic
indicator, continues to look strong. Utah consistently ranked near the top of
the nation in job growth. In 1996, Utah's job growth rate was 5.3%, or an
additional 48,000 net new jobs, ranking second among all states. Utah's job
growth rate has now equaled or exceeded 3.0% for nine consecutive years and
exceeded 5% in four straight years. Projected job growth for 1997 is about 4.2%.
The strength of the State's economy over the past several years has
occurred at the same time that it has become more diversified. That is, the
distribution of the State's employment has become less specialized across
industries while the level of total employment has increased. The result of this
restructuring in the midst of economic growth is that sectors in which the
State's employment has been disproportionately concentrated in the past (such as
the federal government and extractive industries) have lost in employment share,
while sectors other than these (notably those affected by the expansion of
tourism, computer software, financial services, and biomedical technologies)
have increased in shares. The service industries continue to generate the
largest number of jobs in the State. During 1996, services created 17,100 new
jobs for a growth rate of over 7%. The major contributors to rapid expansion
were the high-tech computer services, business services, engineering/management
services, and personal/amusement services.
In light of Utah's economic growth and positive financial position, the
State continues to face many significant issues. The State must deal with the
increased demand for services associated with this growth. Education, economic
development, transportation, corrections, health, and human service needs
continue to be the major demands on state resources.
Budgetary Process. The Governor is required to submit a balanced budget
to the Legislature for each fiscal year. The budget is required to describe,
among other things, (I) a complete plan of proposed expenditures and estimated
revenues for the ensuing year, (ii) the revenues and expenditures for the next
preceding fiscal year, and (iii) current assets, liabilities and reserves, any
surplus or deficit and the debts and funds of the State. The budget is required
to include an itemized estimate of appropriations for payment and discharge of
the principal and interest of the indebtedness of the State, among other things.
Deficits or anticipated deficits must be included in the budget.
The State Constitution requires that budgeted expenditures should not
exceed estimated revenues and other sources of funding, including beginning fund
balances. The Legislature authorizes expenditures in annual state
"Appropriations Acts." The Acts also identify the sources of funding for
budgeted expenditures. In the event actual revenues are insufficient to cover
budgeted expenditures, the Governor must order budget reductions. Adjustments to
the budget may be made throughout the year for changes in department revenues or
fund revenues so that departments and funds will not end the fiscal year in a
deficit positions.
The State also has an appropriation limitation statute which limits the
growth in state appropriations. The law provides three basic limitations. First,
as population, personal income, and inflation increase, appropriations are
allowed to increase only at the same relative rate. Second, it limits
outstanding state general obligation debt to 20% of the appropriations limit.
Third, it freezes the state-mandated property tax rate, which funds a portion of
public education at the local level. These statutory limitations can be exceeded
only if a fiscal emergency is declared and approved by more than two-thirds of
both houses of the Legislature, or if approved by a vote of the people. However,
the spending limit statute may be amended by a majority in both houses of the
Legislature.
The State was $7.4 million below the appropriation limitation for the
fiscal year ended June 30, 1996. The State is currently below the fiscal year
1997 appropriation limitation by $15 million. Also, the State is currently $326
million below the debt limit established in the Constitution.
Revenues and Expenditures. The General Fund is the principal fund from
which appropriations are made for State operations. It is specifically
maintained to account for all financial resources and transactions not accounted
for in another fund. The General Fund receives all State sales taxes, which
comprise the largest source of this Fund's revenues. Other principal sources of
revenues include Federal contracts, grants and mineral lease payments, State
department collections and miscellaneous licenses, fees and taxes.
Each fund of the State maintains an equity position which is either
restricted by state law, restricted by contract, or is unreserved and available
for future appropriation. The equity position of the State's General Fund
Uniform School Fund, and Transportation Fund are:
The state ended fiscal year 1996 with a surplus in both the General and
Uniform School Funds totaling $9.1 million. In addition, fiscal year 1997
revenue is expected to exceed original estimates by $13.8 million with the total
General and Uniform School Fund at $2.8 billion. Other changes to available
dollars amount to $1.9 million. Altogether, there are $24.8 million available.
This allows the governor to recommend supplemental funding in fiscal year 1997
for needs that arose after the legislature met in 1996. The Governor is
recommending $6.7 million in General and Uniform School Fund supplementals.
The General Fund ending balance for fiscal year 1996 was $351,000,
which is 97.7% less than the previous fiscal year. Approximately $126.2 million
in the Uniform School Fund was reserved from fiscal year 1996 for fiscal year
1997, leaving a $0 ending balance in this fund at June 30, 1996. The balance in
the Rainy Day Fund was $71.5 million.
Actual revenue collections for the General Fund in fiscal year 1996
were $1.34 billion. Of this amount, 86.8% or $1.162 billion came from the sales
and use tax. Sales and use tax revenue increased 10.2% from the previous fiscal
year. Retail sales were estimated to have increased 11.8% in 1996, but are
projected to slow to 6.3% in 1997.
Actual revenue collections in the Uniform School Fund was $1.33
billion. Of this amount, approximately $1.14 billion or 85.8% was generated from
the individual income tax, an increase of 11% from fiscal year 1995. Revenue in
the Transportation Fund for fiscal year 1996 totaled $261 million, with 64% or
$163 million represented by the motor fuel tax which showed a 4.8% increase.
Expenditures in the General and Uniform School Funds for fiscal year
1996 totaled $2.595 billion. Prior to the lapsing of $14.1 million into these
Funds, the total appropriations were $2.609 billion. The majority of the
spending is toward public education, which consisted of 48% or $1.25 billion of
total expenditures. Higher education received $425 million or 16.2%. Corrections
appropriations amounted to 5.9% or $155 million, and human services were 5.5% or
$142 million of total appropriations.
Debt service appropriations from General and Uniform School Funds
totaled $77 million in fiscal year 1996 and are expected to increase to $81.5
million for fiscal year 1997. Appropriations for the Capital Budget in these
Funds were $72.4 million in fiscal year 1996 but are estimated to increase to
$209.1 million in fiscal year 1997. Total capital budget for all funds for
fiscal year 1996 was $388.3 million and total debt service was $94.4 million.
Debt Administration and Limitation. Utah's Constitution limits the
State to a total general obligation debt not to exceed, in the aggregate any one
time, an amount equal to 1.5% of the value of the taxable property of the State,
as shown by the last assessment for state purposes. The estimated fiscal year
1998 appropriation limit of $3.25 billion equates to an outstanding general
obligation debt limit of $650 million. Revenue bonds and certificates of
participation issued by the State are legally excluded from the debt
limitations.
During fiscal year 1995, the State issued $95 million in general
obligation bonds and $31 million in lease revenue bonds for construction and
renovation of various capital facilities. Shortly after fiscal year end, the
State issued general obligation bonds totaling $45 million for buildings
construction and purchases. The State also issued $93 million in lease revenue
bonds on August 15, 1995, to be used to purchase and construct state buildings.
The State is authorized to issue an additional $15 million in general obligation
bonds for construction and renovation of various capital facilities. The bonds
are not likely to be issued before July 1996.
The State issued $8.4 million in water revenue refunding notes on
October 4, 1995. The note proceeds and original bond reserve funds were used to
defease the 1989 Revolving Loan Recapitalization Program Revenue Bond of $7.7
million. The notes also provided an additional $2 million in capital for
revolving water loan programs.
As of June 30, 1995, the State's total general obligation debt
outstanding was $431 million, leaving available to the Sate $725 million of
additional general obligation borrowing capacity. As of October 31, 1995, the
outstanding debt was $413 million, with a remaining constitutional limit of $743
million. A statutory debt limit is established in the Utah Code Annotated. It
sets the maximum general obligation bonding authority at 20% of the
appropriation limitation. The estimated fiscal year 1998 appropriation limit of
$3.25 billion equates to an outstanding general obligation debt limit of $650
million. This amount, less approximately $297 million in outstanding debt and
$27 million in authorized but unissued debt, leaves a general obligation
borrowing capacity of $326 million in fiscal year 1998.
In fiscal year 1996, $44.33 million general obligation bonds were
authorized and another $31 million are authorized for fiscal year 1997.
Lease-purchase/revenue bond projects authorized for fiscal year 1997 are at
$50.6 million.
Funding for debt service on the State's general obligation bonds is
usually appropriated from the General Fund and transferred to the various bond
sinking funds within the Debt Service Fund. All State general obligation bond
and certain revenue bond principal and interest payments are made from
individual sinking funds within the Debt Service Fund. Investment earnings on
moneys held in the sinking funds (except as may be required by the proceedings
authorizing the issuance of particular series of bonds), transfers from the
General Fund or Special Revenue Funds and certain pledged revenues are the only
sources of funding for this fund.
The outstanding general obligation bonds of the State were rated "Aaa
by Moody's, "AAA" by Standard & Poor's, and "AAA" by Fitch as of July 1, 1995.
FACTORS AFFECTING WASHINGTON FUND
General Economic Conditions. The state of Washington was created by an
enabling act of Congress in 1889. The state is located on the Pacific Coast in
the northwestern corner of the continental United States. Washington comprises
68,139 square miles. On the west side of the state, high mountains rise above
coastal waters. The mild moist climate in western Washington makes this region
excellent for dairy farming and the production of flower bulbs. The forests of
the Olympic Peninsula are among the rainiest places in the world. Washington's
location makes it a gateway for land, sea, and air travel to Alaska and the
Pacific Rim countries. Its coastline has hundreds of bays and inlets that make
excellent harbors. East of the Cascade Mountain Range, farmers raise livestock
and wheat on large ranches. Washington leads the nation in apple production and
the state produces large amounts of lumber, pulp, paper, and other wood
products.
The State's population reached an estimated 5,516,800 in 1996, with an
annual growth rate of approximately 2% despite slower economic growth since
1990. In fiscal year 1995, Washington's population growth remained relatively
strong, with an estimated net migration of 57,400 people between April 1, 1994
and April 1, 1995. This was only slightly higher than the 55,700 increase
recorded in the previous fiscal year, but still substantially above the 30-year
historical average of approximately 40,000 net migrants per year. Net migration
between 1996 and 1997 is forecast at 55,800.
The City of Seattle, located in northwestern Washington, is the largest
city in the Pacific Northwest and serves as the King County seat. King County
and the adjacent counties to the north, Snohomish and Island Counties, comprise
the Seattle Primary Metropolitan Statistical Area ("PMSA"), which is the fourth
largest metropolitan center on the Pacific Coast and biggest single component of
the State's economy. The population in Seattle declined gradually to 488,200 in
1986 and since that time has increased to 531,400 in 1994. The percent of State
residents living east of the Cascades, which had remained stable at 25%
throughout the 1970's, declined to nearly 20% by 1990. Since 1990 the pace of
growth picked up in several eastern cities, including Spokane, as growth began
to slow in the Puget Sound area.
The economic base of the State includes manufacturing and service
industries as well as agricultural and timber production. As the State's largest
employer, the Boeing Company, is preeminent in aircraft manufacture and is
headquartered in Seattle. Boeing exerts a significant impact on overall State
production, employment and labor earnings. After six years of downsizing, Boeing
increased its work force by 3,800 employees in the last two quarters of fiscal
year 1996, with plans to hire 10,000 more by the end of calendar year 1996. This
marked a dramatic turn-around for the state's aerospace industry, which lost a
total of 25,000 jobs between the first quarter of 1993 and the second quarter of
1996. While the primary activity of Boeing is the manufacture of commercial
aircraft, Boeing has played leading roles in aerospace and military missile
programs for the United States and has undertaken a broad program of
diversification activities including Boeing Information and Support Services. In
1995, Boeing had $19.515 billion in sales and net earnings of $329 million, and
a backlog of orders totaling $72.3 billion. While Boeing has dominated
manufacturing employment, other manufacturers have experienced growth, thus
reducing Boeing's percentage of total manufacturing jobs in the State. The most
significant growth in manufacturing jobs, exclusive of aerospace, has occurred
in high technology-based companies.
The highest employment growth in the State between 1981 and the present
occurred in the services sector, although rate of growth has shown small but
consistent decline since 1990 from 7% to 3.5% forecast for 1994. As the
business, legal, and financial center of the State, Seattle ranks ninth in the
country in the number of downtown hotel rooms. The Washington State Convention
and Trade Center, occupying 370,000 square feet at an investment of $152 million
opened in June 1988. The convention facility has the capacity for events
involving as many as 11,000 people. The State's natural attractions include the
Olympic and Cascade Mountain Ranges, Mt. Rainier, Mt. St. Helens National
Volcanic Monument, Puget Sound and the ocean beaches. Tourists also enjoy the
State's wineries. Seven of the ten largest wine producers in the Pacific
Northwest are located in the State.
Natural forests cover more than 40% of the State's land area. Forest
products rank second behind aerospace in value of total production.
Approximately 2.6% of non-farm employment is in the forest products industry,
with The Weyerhaeuser Company being the largest employer. Productivity in the
State's forest products industry increased steadily from 1980 to 1990; however,
since 1991 recessionary influences have resulted in a production decline. Yet,
in 1994, the industry employed more than 58,000 people and produced
approximately $11.0 billion worth of products. A continued decline in overall
production during the next few years is expected due to federally imposed
limitations on the harvest of old-growth timber and the inability to maintain
the recent record levels of production increases. Although continued decline in
unemployment may be anticipated in certain regions, the impact is not expected
to significantly affect the State's overall economic performance.
Agriculture, combined with food processing, is the State's most
important industry. The State's major products, wheat, milk, apples and cattle,
comprise 55% of total production. Washington's food processing industries
employed approximately 40,000 workers at more than 750 plants in 1994,
generating products worth nearly $8 billion annually. Growth in agricultural
production, including potatoes and hay, was an integral factor in the State's
economic growth in the late 1980's and early 1990's.
On a combined basis, employment in the government sector represents
approximately 19% of all wage and salary employment in the State. Seattle is the
regional headquarters of a number of federal government agencies, and the State
receives an above-average share of defense expenditures. Major federal
installations include Navy bases at Bremerton, Whidbey Island and Bangor;
Everett is the site of a new Naval home port; an Air Force base (McChord) and an
Army base (Fort Lewis) are located in the Tacoma area. As part of the
President's plan to reduce the federal deficit, the Secretary of Defense has
proposed spending cuts that would include the Puget Sound Naval Shipyard and the
Bangor Trident Submarine Base in Kitsap County. None of the military
installations in the State are included among those bases proposed for closure
in 1995. Recent declines of naval and civilian personnel in Kitsap County have
been offset by increases in army personnel in Pierce County. During 1994, Army
unit reassignments to Fort Lewis from Europe and parts of the United States
increased troop strength by more than 5,000. At present no major additions or
reductions to troop strength at Fort Lewis have been made. The long term outlook
is for relative stability.
Budgetary Process. The Governor is required to submit a budget to the
state Legislature no later than December 20 of the year preceding odd-numbered
year sessions of the Legislature. The budget is a proposal for expenditures in
the ensuing biennial period based upon anticipated revenues from the sources and
rates existing by law at the time of submission of the budget. The appropriated
budget and any necessary supplemental budgets are legally required to be adopted
through the passage of biennial appropriation bills by the Legislature and
approved by the Governor. Biennial operating appropriations are generally made
at the fund/account and agency level, however, in a few cases, biennial
appropriations are made at the fund/account and agency/program level. Biennial
capital appropriations are generally made at the fund/account, agency, and
project level.
Biennial legislative appropriations are strict legal limits on
expenditures/expenses, and over expenditures are prohibited. All appropriated
and non-appropriated/allotted funds are further controlled by the executive
branch through the allotment process. This process allocates the
expenditure/expense plan into monthly allotments by program, source of funds,
and object of expenditures. According to statutes, except under limited
circumstances, the original biennial allotments are approved by the Governor and
may be revised only at the beginning of the second year of the biennium and must
be initiated by the Governor.
Proprietary funds earn revenues and incur expenses not covered by the
allotment process. Budget estimates are generally made outside the allotment
process according to prepared business plans. These proprietary fund business
plan estimates are adjusted only at the beginning of each fiscal year.
Additional fiscal control is exercised through various means. OFM is
authorized to make expenditure/expenses allotments based on availability of
unanticipated receipts, mainly federal government grant increases made during a
fiscal year. State law does not preclude the over expenditure of allotments
although, the statute requires that the Legislature be provided an explanation
of major variances.
Revenues and Expenditures. The General Fund accounts for all general
government financial resources and expenditures not required to be accounted for
in other funds. For the 1993-1995 biennium, revenues in the General Fund
increased 11.5%. Based on the November 1996 forecast by the ERFC, General
Fund-State revenues for the 1995-1997 Biennium are forecast to be about $18.3
billion, an increase of 6.2% over the previous biennium in nominal terms. In
real terms and on a constant rate and base, the revenue growth will be about
5.1%. Tax changes enacted during the 1995 legislative session reduced revenues
for the 1995-1997 Biennium by $228 million; additional changes during the 1996
legislative session and the special session further reduced revenues for the
1995- 1997 Biennium by $175 million. Without these legislative reductions, the
revenue growth for the 1995-1997 Biennium would have been 10%.
Governmental activities are accounted for in four governmental fund
types: the general, special revenue, debt service, and capital projects funds.
Revenues for all governmental funds are estimated to total $37.97 billion for
the 1995-97 biennium. This represents an increase of 5.9% over revenue for the
previous biennium. Taxes, the largest source of governmental revenue, are
expected to produce 55% of revenues. This percentage is a slight increase from
the previous biennium and is attributable to growth in the state's population
and personal income during the current biennium which increased retail sales and
use tax collections by $434 million or 5.3%. Also, during the current biennium,
the federal government grants-in-aid is expected to increase by $397 million or
5%. However, Washington is expected to lose $618.9 million in federal funding in
the 1997-99 biennium due to federal cost cutting measures signed into law in
August 1996. Of this amount, $474 million are in programs outside of the current
state budget. Yet, many of these reductions are expected to have a significant
impact on the state budget.
Claims and judgments payable is materially comprised of three
activities: workers' compensation, risk management, and state employees'
insurance. The Workers' Compensation Fund, an enterprise fund, establishes a
liability for both reported and incurred but not reported insured events, which
includes estimates of both future payments of losses and related claim
adjustment expenses. At June 30, 1995, $23.4 billion of unpaid claims and claim
adjustment expenses are presented at their net present value of $10.4 billions.
The $10.4 billion claims and claim adjustment liabilities as of June 30, 1995,
includes $4.7 billion for supplemental pension cost of living adjustments (COLA)
that by statute are not to be fully funded. The remaining $5.7 billion in claims
liabilities is fully funded by $6.7 billion in assets, including $6.2 billion of
long-term investments, held for payment of the claims.
The Risk Management Fund, an internal service fund, reports claims and
judgment liabilities when it becomes probable that a loss has occurred and the
amount of that loss can be reasonably estimated. The state and its component
public authorities are defendants in a significant number of lawsuits pertaining
to property and casualty matters. As of June 30, 1995, outstanding and
actuarially determined claims against the state and its public authorities were
$113.8 million for which the state has recorded a liability. At June 30, 1995,
the Risk Management Fund held $69.3 million in cash equivalents designated for
payment of these claims. Of this amount, $52.6 million has been accumulated
under the state's Self Insurance Liability Program initiated in 1990. This Self
Insurance Liability Program is intended to provide funds for the payment of all
claims resulting from accidents after June 30, 1990. The state is restricted by
law from accumulating funds in the Self Insurance Liability Program in excess of
50% of total outstanding and actuarially determined claims. Current projections
indicate that the state will reach this limit by June 30, 1996.
The State Employees' Insurance Fund, an internal service fund,
establishes a liability when it becomes probable that a loss has occurred and
the amount of that loss can be reasonably estimated. Liabilities include an
actuarially determined amount for claims that have been incurred but not
reported. Because actual claims liabilities depend on various complex factors,
the process used in computing claims liabilities does not necessarily result in
an exact amount. At June 30, 1995, the state held $31.1 million in investments
designated for payment of state employees' insurance claims.
Debt Administration. The State Constitution and enabling statutes
authorize the incurrence of state general obligation debt, to which the state's
full faith, credit, and taxing power are pledged, either by the Legislature or
by a body designated by statute (presently the State Finance Committee). Bonds
payable at June 30, 1995 consisted of bonds issued by the state of Washington
and accounted for in the General Long-Term Obligations Account Group, and
certain state agency bonds accounted for in proprietary funds. During Fiscal
Year 1995, the state of Washington maintained its "AA" rating from Fitch
Investors Service and Standard & Poor's Corporation, and its "Aa" rating from
Moody's Investors Service.
General Obligation Bonds. General obligation bonds have been authorized
and issued primarily to provide funds for acquisition and construction of
capital facilities for public and common schools, higher education, public and
mental health, corrections, conservation, and maintenance and construction of
highways, roads, and bridges. The state also issued bonds for assistance to
municipalities for construction of water and sewage treatment facilities and
corrections facilities. Additionally, bonds are authorized and issued to provide
for the advance refunding of general obligation bonds outstanding.
Zero Interest Rate General Obligation Bonds. Zero interest rate general
obligation bonds have been authorized and issued primarily to provide funds for
acquisition and construction of public administrative buildings and facilities,
and capital facilities for public and common schools and higher education. Total
debt service (principal and interest) requirements for zero interest rate
general obligation bonds to maturity as of June 30, 1995 was approximately $492
million. As of June 30, 1995, zero interest rate general obligation bonds
outstanding totaled $208 million while bonds authorized but unissued equaled
zero.
Limited Obligation Bond. Limited obligation bonds have been authorized
and issued to provide funds for public school plant facilities; state, county,
and city arterials; and state capital buildings and facilities. These bonds are
payable primarily from dedicated revenue of the state's motor vehicle fuel
excise tax and other miscellaneous dedicated revenue generated from assets such
as harbors and tidelands, park, and land grants. Total debt service (principal
and interest) requirements for limited obligation bonds to maturity at June 30,
1995 was approximately $8.1 million. As of November 30, 1996, limited obligation
bonds outstanding totaled $4.2 million while bonds authorized but unissued
equaled zero.
Revenue Bonds. Current state statutes empower certain state agencies to
issue bonds that are not supported, or are not intended to be supported, by the
full faith and credit of the state. These bonds pledge income derived from
acquired or constructed assets for retirement of the debt and payment of the
related interest. Revenue bonds issued by individual agencies are supported by
fees, rentals, and tolls assessed to users. Primary issuing agencies are the
State's Public Universities and various Community Colleges. Total debt service
(principal and interest) for revenue bonds to maturity at June 30, 1995 was
approximately $310 million. As of June 30, 1995, revenue bonds outstanding
totaled $162 million while bonds authorized but unissued equaled zero.
Certificates of Participation. The office of the State Treasurer
continued its administration of the state certificates of participation program
("COPs")which has been in existence since Fiscal Year 1990. This program enables
state agencies to finance the acquisition of real and personal property at tax
exempt interest rates realizing substantial savings over vendor financing. The
state's publicly-offered equipment certificates of participation have been rated
"A" by both rating agencies which rely on the centralized oversight of the State
Treasurer and the Office of Financial Management as a strong credit element in
the rating. In the real estate component of the financing program, certain
projects have been rated "A1" by Moody's Investors Service as a reflection of
their essentialness to state government operations. As of June 30, 1995, there
were outstanding $193 million in certificates of participation. Underlying this
amount were agency certificates originating from 73 agencies amounting to $178.5
million with the balance on deposit with the trustee either for use in the
program (unissued proceeds) or to satisfy reserve requirements. These programs
are currently funded using a combination of publicly offered securities and bank
financial services master installment agreements.
FACTORS AFFECTING WISCONSIN FUND
General Economic Conditions. Wisconsin provides a full range of
services which include education, health and social services, transportation,
law, justice, public safety, recreation and resource development, public
improvements and general administrative services. The State's economy remains
strong. Unemployment fell to 3.5% for all of 1996, the lowest rate since 1969.
This is well below the national rate of 5.4% and is estimated to be the fifth
lowest unemployment rate in the country. Manufacturing jobs in 1996 reached
599,900, eclipsing the old mark of 591,000 set in 1979. The strongest growth
occurred in the service sector, increasing by 14,900 jobs to a total 645,600.
Total non-farm employment increased to 2,586,200, setting a new record. However,
in 1996, Wisconsin's jobs increased 1.2% which is much lower than the 2.6%
growth in 1995 and the 2.0% growth nationally. Looking ahead, strong gains in
employment will be more difficult. Employment growth is expected to remain at
1.2% in 1997 and rise slightly to 1.6% in 1998. Manufacturing employment growth
is expected to dip into negative territory briefly in 1997, but then resume
growth near 1% for 1998 and 1999. That will again place manufacturing employment
growth in Wisconsin nearly 1% above the national average. The strongest gains in
employment will be trade and services.
Wisconsin's personal income growth will be affected by the slowdown in
employment growth. Personal income increased 6.1% in 1995. However, the slowdown
in job growth will restrain income gains to increases below the rest of the
country for 1996, 4.9%. In 1997 and 1998, income gains should match the pace of
national income growth, about 4.8%.
In 1995, the State continued its efforts to expand existing State
business and attract new businesses to Wisconsin. In 1995, $11.4 million was
awarded in grants and loans from the Wisconsin Development Fund for major
economic development projects, customized labor training and technology
development. In addition, the State operates a variety of programs that target
minority business development, development zones and community-based economic
development. For the 1997-99 biennium, the Governor recommended $4 million be
provided to the Wisconsin Development Reserve Fund to support guarantees for
private bank loans of up to $500,000 for land redevelopment. The State expended
$8.2 million in 1995 to market Wisconsin as a tourism destination. In Calendar
Year 1994, the tourism industry created directly and indirectly 147,149 jobs and
$5.6 billion in expenditures. For the 1997-99 biennium, the Governor recommended
maintaining tourism promotion funding at $7.7 million annually.
Wisconsin's Clean Water Fund program provides financial assistance to
municipalities for the planning, design and construction of pollution abatement
facilities - primarily for wastewater treatment. Funding is provided from the
federal state revolving fund grant authorized through the Water Quality Act, and
through four State programs backed by State revenue and general obligation
bonds. In fiscal year 1995, the Clean Water Fund reached agreements with
municipalities amounting to $116.7 million, bringing the total amount of loans
and grants awarded by the program to $761.7 million since its inception in 1991.
For fiscal years 1997-99, the Governor recommended $20 million be authorized in
the Clean Water Fund for subsidized loans to municipalities along with $43,800
to support loan-processing activities.
Welfare reform initiatives moved forward in Wisconsin in fiscal year
1995 with the implementation of the Parental and Family Responsibility program
and the Two-Tier Demonstration project, each in four counties on July 1, 1994.
In addition, the Work Not Welfare initiative, one of the first programs in the
nation to test time-limited benefits, began in January 1995 in two counties. On
April 25, 1996, "Wisconsin Works" was enacted into law as an effort to make
people more self-sufficient by making beneficial changes for child care, AFDC
families, and increasing grant amounts for subsidized employment. As a result of
ongoing welfare reform efforts and a strong economy the AFDC caseload dropped
from approximately 68,000 in October 1995 to approximately 48,000 in October
1996, a reduction of almost 30% and the lowest level since the early 1980's.
In fiscal year 1995, the legislature and Governor acted to fulfill
their commitment to increase the State's share of school costs to 66.7% in
fiscal year 1997. To facilitate reaching this goal, $171 million was added to
the $103 million fiscal year 1995 school aid increase originally approved in the
1993-95 biennial budget, bringing the total fiscal year 1995 State school aid
increase to $274 million. This $274 million increase is the largest dollar
increase in school aid in the State's history and resulted in a statewide 1994
school property tax increase of only 0.3%, the smallest levy increase since
1973. Full implementation of the two-thirds State funding commitment in Fiscal
Year 1997 will result in the largest reduction in the school property tax levy
in the State's history. The Governor recommended increases in direct school aids
of $204.3 million in fiscal year 1998 and $94.2 million in fiscal year 1999.
Budgetary Process. The State Constitution requires the Legislature to
enact a balanced budget. The State's fiscal year runs from July 1 through June
30 of the following year. State law establishes procedures for the budget's
enactment. The Secretary of Administration, under the direction of the Governor,
compiles all budget information and prepares an executive budget consisting of
the planned operating expenditures and revenues of all State agencies. The
Department of Revenue furnishes forecasts of tax revenues to the Department of
Administration. The budget is submitted to the Legislature on or about February
15 of each odd-numbered year. Upon concurrence by both houses of the Legislature
in the appropriations and revenue measures embodied in the budget bill, the
entire bill is submitted to the Governor. The Governor is empowered to sign the
bill into law or to veto all or part of the bill. If the Governor vetoes any
portions, those items may be reconsidered in accordance with the rules of each
house and, if approved by two-thirds of the members of each house, will become
law notwithstanding the Governor's veto. In the event that a budget is not in
effect at the start of a fiscal year, the prior year's budget serves as the
budget until such time a new one is enacted.
State law prohibits the enactment of legislation which would cause the
estimated General Fund balance to be less than 1% of the general purpose revenue
appropriations for that fiscal year. For the 1995-1996 fiscal year and 1996-1997
fiscal year, the statutorily required reserves are $83 million and $92 million
respectively. The effect of the State law provision is to divide the year-ending
General Fund balance into two components: the statutorily required reserve and
the amount above such reserve.
The Statutes provide that if, following the enactment of the budget,
the Secretary of Administration determines that budgeted expenditures will
exceed revenues by more than one-half of one percent of general purpose
revenues, no action can be taken regarding approval of expenditure estimates.
Further, the Secretary of Administration must notify the Governor, the
Legislature and its Joint Committee on Finance, and the Governor must submit a
bill correcting the imbalance. If the Legislature is not in session, the
Governor must call a special session to take up the matter.
The Secretary of Administration also has statutory power to order
reductions in the appropriations of state agencies (which represent less than
one-third of the General Fund budget). The Secretary of Administration may also
temporarily reallocate free balances of certain funds to other funds which have
insufficient balances and, further, may prorate or defer certain payments in the
event current or projected balances are insufficient to meet current
obligations. In such an event, the Department of Administration may also request
the issuance of operating notes by the Building Commission.
The 1995-1997 State budget provides for a reorganization of State
government that occurs between July 29, 1995 and July 1, 1996. This
reorganization is intended to improve accountability, consolidate similar
functions, provide a better framework to administer policy changes and improve
government efficiency and effectiveness. The reorganization creates two
departments. The Department of Tourism initiates operations on January 1, 1996,
and will perform various duties previously conducted within parts of the
Department of Development and Department of Natural Resources. The Department of
Financial Institutions commences operations on July 1, 1996 and will perform
duties currently conducted within the Offices of the Commissioners of Banking,
Savings and Loan, Securities, and Credit Unions.
This reorganization renames the Department of Public Instruction the
Department of Education and transfers revised duties of the State Superintendent
of Public Instruction to the new Office of the State Superintendent of Public
Instruction. These actions were to go into effect on January 1, 1996; however,
the State Supreme Court issued a temporary injunction on December 27, 1995 that
delays the renaming of the Department of Public Instruction and transfer of
revised duties of the State Superintendent of Public Instruction. Effective July
1, 1996, this reorganization also renames other State Departments and includes
other components for reorganization in eight other functions groupings as well.
Revenues and Expenditures. The State has an extremely diverse
revenue-raising structure. Approximately forty-four percent of the total revenue
is derived from the various taxes levied by the State. The remainder comes from
the federal government and from various kinds of fees, licenses, permits and
service charges paid by users of specific services, privileges or facilities.
State expenditures are categorized under eight functional categories
and three distinct types of expenditures within each. The eight functional
categories are: Commerce, Education, Environmental Resources, Human Relations
and Resources, General Executive, Judicial, Legislative, and General
Appropriations.
As of June 30, 1995, the State ended the fiscal year on a statutory and
unaudited basis with an unreserved, undesignated balance of $401 million. On an
all-funds basis, the total amount available was $23.319 billion consisting of
(I) a beginning balance of $235 million, (ii) tax revenues of $8.577 billion and
(iii) nontax revenues of $14.507 billion. Total disbursements and reserves were
$22.918 billion, resulting in the balance stated previously. On a general-fund
basis the total amount available was $13.495 billion consisting of (I) the same
beginning balance, (ii) tax revenues of $7.816 billion and (iii) nontax revenues
of $5.444 billion. Total disbursements and reserves were approximately $13.94
billion, resulting in the same balance as described on an all-fund basis.
For fiscal year ending June 30, 1996, the budget on an all-funds basis
projects a balance of $442 million. Total available revenues are estimated to be
$20.686 billion consisting of (I) a beginning balance of $337 million, (ii) tax
revenues of $8.218 billion and (iii) nontax revenues of $12.131 billion. Total
disbursements and reserves are estimated to be $20.327 billion, consisting of
net disbursements of $20.187 billion and reserves of $140 million. This results
in an estimated balance of $359 million which, when combined with statutorily
required balance of $83 million, results in a balance at June 30, 1996 of $442
million.
For fiscal year 1997, total tax revenue is estimated at $8,688.5
million and total revenue in the general fund is estimated at $9,407.5 million.
After expenditures of $9,264.8 million, the general fund is expected to have an
ending balance of $142.7 million.
Since 1984 the State has issued operating notes each year in
anticipation of cash-flow imbalances, primarily experienced in November and
December. These operating notes eliminated the need to prorate or defer large
local assistance payments or to reallocate balances in other State funds. The
1997-99 budget assumes issuing operating notes of approximately $500 million in
fiscal year 1998 and $750 million in fiscal year 1999. As a percent of total
appropriations, the size of the operating notes will be within the range of
notes issued in past years. Operating notes are not general obligations of the
State and are not on a parity with State general obligations.
The Dane County Circuit Court has specified the remedies resulting form
its 1991 decision regarding the source of payment for certain additional pension
amounts. One part of the remedy required a lump-sum payment from the General
Fund to the Employee Trust Fund to be made by August 1994. The payment is
estimated to be $95.3 million. In addition, the State is expected to incur other
costs of about $0.5 million to implement the remedy and an amount yet to be
determined to pay plaintiffs' attorneys fees. The monetary remedy has been
stayed by the Dane Count Circuit Court pending entry of a final, nonappealable
judgment. All parties have filed appeals or crossappeals. It is possible that
the amount of the remedy may be increased or decreased, perhaps substantially,
or eliminated. The 1995-1996 and 1996-1997 budgets do not specifically provide
for this payment.
Debt Administration and Limitation. At the inception of statehood,
constitutional limitations severely restricted the issuance of direct State
debt. Prior to 1969, independent nonstock, nonprofit corporations were
established to issue debt on behalf of the State. In April 1969, the voters of
the State, by referendum, adopted an amendment to the Constitution that
authorized the State to borrow money directly and simultaneously terminated the
use of the corporations for financing State construction. Legislation that
established specific implementation powers was subsequently passed in December
1969, whereupon the State first issued general obligation bonds. To date, the
Legislature has authorized the issuance of general obligations for 59 distinct
purposes and has limited the amount of general obligations which may be issued
for each purpose. The purposes for which State general obligations may be issued
are set forth in the Wisconsin Constitution, which provides the basis for the
State's general obligation borrowing program. It permits three types of
borrowing: (1) to acquire, construct, develop, extend, enlarge or improve land,
waters, property, highways, railways, buildings, equipment or facilities for
public purposes; (2) make funds available for veterans housing loans; and, (3)
fund or refund any outstanding State general obligations. There is no
constitutional requirement that the issuance of general obligations receive the
direct approval of the electorate.
The Wisconsin Constitution and State Statutes limits the amount of debt
the State can contract in total and in any calendar year. In total, debt cannot
exceed five percent of the value of all taxable property in the State. The
amount of debt contracted in any calendar year is limited to the lesser of
three-quarters of one percent of aggregate value of taxable property or 5
percent of aggregate value of taxable property less net indebtedness at January
1. Currently, the annual limit is $1,511,535,818 and the cumulative debt limits
is $10,076,905,450 (of which the amount available is 46,832,826,001). The lesser
amount is $1,511,535,818. A refunding bond issue is not taken into account for
purposes of the annual debt limit, and a refunded bond issue is not taken into
account for purposes of the cumulative debt limits. Interest scheduled to accrue
on any obligation that is not payable during the current fiscal year is treated
as debt and taken into account for purposes of the debt limitations.
The $158,080,000 State of Wisconsin General Obligation Bonds of 1996,
Series A, are the State's first publicly offered general obligation bond issue
in 1996. Currently authorized but unissued general obligation bonding authority
for general purpose revenue supported programs amounts to $980.4 million. This
authorized/unissued bond authority breaks down to $514.0 million for building
programs and $466.4 million for environmental programs. The State anticipates
several competitive sales of general obligations for governmental purposes. The
State anticipates the competitive sale of at least one general obligation issue
for the veterans housing loan program and several private sales of general
obligations for the Clean Water Fund program. The amounts will be based on cash
needs and market conditions. The state's most recent long-term 20-year general
obligation bond issue sold at a true interest cost rate of 5.56%. The State is
currently considering a general obligation refunding issue which the State would
undertake to achieve debt service savings. The size of this transaction is
estimated to be $75- $125 million.
Although all general obligation bonds and notes issued by the State are
supported by its full faith, credit and taxing power, a substantial amount of
the indebtedness of the State is issued with the expectation that debt service
payments will not impose a direct burden on the State's taxpayers and its
general revenue sources. Similarly, a portion of the indebtedness issued by
nonstock, nonprofit corporations on behalf of the State prior to 1970 and backed
by lease-rental obligations of various State agencies was issued with the
expectation that the rental obligations of the State would not be discharged
from General Fund revenues. At June 30, 1995, State of Wisconsin bonds had a
rating of Aa from Moody's Investors Services and a rating of AA from Standard
and Poor's Corporation.
INSURANCE
Voyageur anticipates that substantially all of the insured Tax-Exempt
Obligations in each Insured Fund's investment portfolio will be covered by
either Primary Insurance or Secondary Market Insurance. However, as a
non-fundamental policy, the Insured Funds must obtain Portfolio Insurance on all
Tax-Exempt Obligations requiring insurance that are not covered by either
Primary Insurance or Secondary Market Insurance. Both Primary Insurance and
Secondary Market Insurance are non-cancelable and continue in force so long as
the insured security is outstanding and the respective insurer remains in
business. Premiums for Portfolio Insurance, if any, would be paid from Fund
assets and would reduce the current yield on its investment portfolio by the
amount of such premiums.
Because Portfolio Insurance coverage terminates upon the sale of an
insured security from a Fund's portfolio, such insurance does not have an effect
on the resale value of the security. Therefore, unless a Fund elects to purchase
Secondary Market Insurance with respect to such securities or such securities
are already covered by Primary Insurance, it generally will retain any such
securities insured by Portfolio Insurance which are in default or in significant
risk of default, and will place a value on the insurance equal to the difference
between the market value of the defaulted security and the market value of
similar securities which are not in default.
The Insured Funds are authorized to obtain Portfolio Insurance from
insurers that have obtained a claims-paying ability rating of "AAA" from S&P or
"Aaa" (or a short-term rating of "MIG-1") from Moody's, including AMBAC
Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIA"), Financial Guaranty Insurance Company ("FGIC") and Financial Security
Assurance, Inc. ("FSA").
A Moody's insurance claims-paying ability rating is an opinion of the
ability of an insurance company to repay punctually senior policyholder
obligations and claims. An insurer with an insurance claims-paying ability
rating of Aaa is adjudged by Moody's to be of the best quality. In the opinion
of Moody's, the policy obligations of an insurance company with an insurance
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position. An S&P insurance claims-paying ability rating is
an assessment of an operating insurance company's financial capacity to meet
obligations under an insurance policy in accordance with its terms. An insurer
with an insurance claims-paying ability rating of AAA has the highest rating
assigned by S&P. The capacity of an insurer so rated to honor insurance
contracts is adjudged by S&P to be extremely strong and highly likely to remain
so over a long period of time.
An insurance claims-paying ability rating by Moody's or S&P does not
constitute an opinion on any specific insurance contract in that such an opinion
can only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet non-policy
obligations (i.e., debt contracts).
The assignment of ratings by Moody's or S&P to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of insurance claims-paying ability
ratings. The likelihood of a timely flow of funds from the insurer to the
trustee for the bondholders is a likely element in the rating determination for
such debt issues.
Each of AMBAC, MBIA, FGIC, and FSA has a insurance claims-paying
ability rating of Aaa from Moody's and AAA from S&P.
AMBAC has received a letter ruling from the Internal Revenue Service
which holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Insured Tax Free Funds, under policy provisions
substantially identical to those contained in its municipal bond insurance
policy, will excludable from federal gross income under Section 103(a) of the
Internal Revenue Code.
As of December 31, 1995, the total admitted assets (unaudited) of AMBAC
were approximately $3.8 billion with statutory capital (unaudited) of
approximately $1.2 billion. Statutory capital consists of the AMBAC's statutory
contingency reserve and policyholders' surplus.
As of December 31, 1995, the total admitted assets (unaudited) of MBIA
were approximately $2.4 billion with total liabilities (unaudited) of
approximately $2.2 billion and total capital and surplus (unaudited) of
approximately $860 million.
As of December 31, 1995, the total admitted assets (unaudited) of FGIC
were approximately 2.2 billion total capital and surplus (unaudited)
approximately $1.3 billion.
As of December 31, 1995, admitted assets (unaudited) of FSA were
approximately $1 billion with statutory capital (unaudited) of approximately
$644 million.
None of AMBAC, MBIA, FGIC and FSA or any associate thereof, has any
material business relationship, direct or indirect, with the Funds.
AMBAC, MBIA, FGIC and FSA are subject to regulation by the department
of insurance in each state in which they are qualified to do business. Such
regulation however, is not a guarantee that any of AMBAC, MBIA, FGIC and FSA
will be able to perform on its contractual insurance in the event a claim should
be made thereunder at some time in the future.
The information relating to AMBAC, MBIA, FGIC and FSA set forth above,
including the financial information, has been furnished by such corporations or
has been obtained from publicly available sources. Financial information with
respect to AMBAC, MBIA, FGIC and FSA appears in reports filed by AMBAC, MBIA,
FGIC and FSA with insurance regulatory authorities and is subject to audit and
review by such authorities. No representation is made herein as to the accuracy
or adequacy of such information with respect to AMBAC, MBIA, FGIC and FSA or as
to the absence of material adverse changes in such information subsequent to the
date thereof.
BOARD MEMBERS AND EXECUTIVE OFFICERS OF THE FUNDS
The Board members and officers of the Funds, their position with the
Funds and their principal occupations during the past five years are set forth
below. In addition to the occupations set forth below, the Directors and
officers also serve as directors and trustees or officers of various other
closed-end and open-end investment companies managed by Voyageur.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION PAST FIVE YEARS AND OTHER AFFILIATIONS
- ---------------------- -------- --------------------------------------
<S> <C> <C>
Clarence G. Frame, 78 Director Of counsel, Briggs & Morgan law firm. Mr. Frame
First National Bank Building, currently serves on the board of directors of Tosco
W-875 Corporation (an oil refining and marketing company),
332 Minnesota Street Milwaukee Land Company, and Independence
One St. Paul, Minnesota 55101 Mutual Funds.
Richard F. McNamara, 63 Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle #200 Minneapolis-based holding company consisting of
Minneapolis, Minnesota 55439 seventeen companies in industrial plastics, sheet metal,
automotive aftermarket, construction supply, electronics
and financial services, since 1966. Mr. McNamara
currently serves on the board of directors of Rimage
(electronics manufacturing) and Interbank.
Thomas F. Madison, 60 Director President and CEO of MLM Partners, Inc. since
200 South Fifth Street January 1993; previously, Vice Chairman--Office of
Suite 2100 the CEO, The Minnesota Mutual Life Insurance
Minneapolis, Minnesota 55402 Company from February to September 1994; President of
U.S. WEST Communications--Markets from 1988 to
1993. Mr. Madison currently serves on the board of
directors of Valmont Industries, Inc. (metal
manufacturing), Eltrax Systems, Inc. (data
communications integration), Minnegasco, Span Link
Communications (software), ACI Telecentrics (outbound
telemarketing and telecommunications) and various civic
and educational organizations.
James W. Nelson, 55 Director Chairman and Chief Executive Officer of Eberhardt
81 South Ninth Street Holding Company and its subsidiaries.
Suite 400
Minneapolis, Minnesota 55440
Robert J. Odegard, 75 Director Special Assistant to the President of the University of
University of Minnesota Minnesota.
Foundation
1300 South Second Street
Minneapolis, Minnesota 55454
John G. Taft, 42 President President of the Adviser; Director (since 1993) of
90 South Seventh Street (Executive the Adviser and the Underwriter; Executive
Suite 4400 Vice President Vice President (since 1995) of the Underwriter;
Minneapolis, Minnesota 55402 Colorado Tax President of the Underwriter from 1991 to 1995;
Free Fund only) Management committee member of the Adviser from
1991 to 1993.
Jane M. Wyatt, 42 Executive Chief Investment Officer and Director of the Adviser
90 South Seventh Street Vice since 1993; Director and Executive Vice President of
Suite 4400 President the Underwriter since 1993; Executive Vice President
Minneapolis, Minnesota 55402 and Portfolio Manager of the Adviser from 1992 to 1993.
Andrew M. McCullagh, Jr., 48 Executive Senior Tax Exempt Portfolio Manager of the Adviser;
717 Seventeenth Street Vice previously, Director of the Adviser and the
Denver, Colorado 80202 President Underwriter from 1993 to 1995.
(President-
Colorado Tax
Free Fund only)
Elizabeth H. Howell, 35 Vice Senior Tax Exempt Portfolio Manager of the Adviser.
90 South Seventh Street President
Suite 4400
Minneapolis, Minnesota 55402
James C. King, 56 Vice Senior Equity Portfolio Manager of the Adviser since
90 South Seventh Street President 1993; previously, Director of the Adviser and the
Suite 4400 Underwriter from 1993 to 1995.
Minneapolis, Minnesota 55402
Steven P. Eldredge, 40 Vice Senior Tax Exempt Portfolio Manager of the Adviser
90 South Seventh Street President since 1995; previously, portfolio manager for ABT
Suite 4400 Mutual Funds, Palm Beach, Florida, from 1989 to
Minneapolis, Minnesota 55402 1995.
Kenneth R. Larsen, 33 Treasurer Treasurer of the Adviser and the Underwriter;
90 South Seventh Street previously, Director, Secretary and Treasurer of the
Suite 4400 Adviser and the Underwriter from 1993 to 1995.
Minneapolis, Minnesota 55402
Thomas J. Abood, 33 Secretary Senior Vice President and General Counsel of
90 South Seventh Street Dougherty Financial Group, Inc. (since 1995);
Suite 4400 Senior Vice President of the Adviser, the Underwriter
Minneapolis, Minnesota 55402 and Voyageur Companies, Inc. since 1995; previously,
Vice President of the Adviser and Voyageur Companies,
Inc. from 1994 to 1995; associated with the law firm of
Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois
from 1988 to 1994.
</TABLE>
The Funds do not compensate their officers. Each director or trustee
(who is not an employee of Voyageur or any of its affiliates) currently receives
a total annual fee of $26,000 for serving as a director or trustee for all of
the open-end and closed-end investment companies (the "Fund Complex") for which
Voyageur acts as investment adviser, plus a $500 fee for each special in-person
meeting attended by such director. These fees are allocated among each series or
fund in the Fund Complex based on the relative average net asset value of each
series or fund. Currently the Fund Complex consists of ten open-end investment
companies comprising 32 series or funds and six closed-end investment companies.
In addition, each director or trustee who is not an employee of Voyageur or any
of its affiliates is reimbursed for expenses incurred in connection with
attending meetings. The following table sets forth the aggregate compensation
received by each director from each parent entity as well as the total
compensation received by each director from the Fund Complex during the fiscal
and calendar year ended December 31, 1996.
<TABLE>
<CAPTION>
Aggregate Compensation from each Registrant
---------------------------------------------------------------------------
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Total
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual Compensation
Funds Funds ment Free Funds ment Funds Funds II from Fund
Director Inc. Inc. Trust Inc. Trust II Inc. Inc. Complex
- --------- ---- ---- ----- ---- -------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Clarence G. Frame $6,126 $7,080 $4,817 $ 911 $ 36 $1,462 $4,682 $25,500
Richard F. McNamara $6,126 $7,080 $4,817 $ 911 $ 36 $1,462 $4,682 $25,500
Thomas F. Madison $6,126 $7,080 $4,817 $ 911 $ 36 $1,462 $4,682 $25,500
James W. Nelson $6,126 $7,080 $4,817 $ 911 $ 36 $1,462 $4,682 $25,500
Robert J. Odegard $6,126 $7,080 $4,817 $ 911 $ 36 $1,462 $4,682 $25,500
</TABLE>
THE INVESTMENT ADVISER AND UNDERWRITER
Voyageur Fund Managers, Inc., a Minnesota corporation ( "Voyageur"),
has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as each Fund's investment adviser, subject to the authority
of the Board of each Fund. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group Inc. ("DFG"), which is
owned 50% by Michael E. Dougherty and 50% by Pohlad Companies. Mr. Dougherty
co-founded the predecessor of DFG in 1977 and has served as DFG's Chairman of
the Board and Chief Executive Officer since inception. Pohlad Companies is a
holding company owned in equal parts by each of James O. Pohlad, Robert C.
Pohlad and William M. Pohlad. Certain key employees of DFG and its subsidiaries
and an employee benefit plan benefitting the employees of such companies have
been offered the opportunity to purchase voting common shares of DFG through
stock options granted with respect thereto, with the shareholdings of Pohlad
Companies and Mr. Dougherty each to be diluted proportionately by any such
purchases. Following any such purchases, Mr. Dougherty and Pohlad Companies
would each continue to own greater than 25% of the outstanding voting common
shares of DFG, and no other person or entity would own greater than 25% of such
shares. The principal executive offices of Voyageur are located at 90 South
Seventh Street, Suite 4400, Minneapolis, Minnesota 55402.
Voyageur Fund Distributors, Inc. (the "Underwriter") is the principal
distributor of the Funds' shares. With regard to the Underwriter, Mr. Taft and
Ms. Wyatt are Executive Vice Presidents and directors, Mr. Abood is Senior Vice
President and General Counsel, and Mr. Larsen is Treasurer.
INVESTMENT ADVISORY AGREEMENTS
The Funds do not maintain their own research departments. The Funds
have contracted with Voyageur for investment advice and management. Pursuant to
an Investment Advisory Agreement, Voyageur has the sole and exclusive
responsibility for the management of each Fund's portfolio and the making and
execution of all investment decisions for each Fund subject to the objectives
and investment policies and restrictions of each Fund and subject to the
supervision of each Fund's Board of Directors. Voyageur also furnishes, at its
own expense, office facilities, equipment and personnel for servicing the
investments of each Fund. Voyageur has agreed to arrange for officers and
employees of Voyageur to serve without compensation from the Funds as directors,
officers or employees of each Fund if duly elected to such positions by the
shareholders or directors of the Funds.
As compensation for Voyageur's services, each Fund is obligated to pay
to Voyageur a monthly investment advisory and management fee equivalent on an
annual basis to .50 of 1% (.40 of 1% for the Limited Term Tax Free Funds) of its
average daily net assets, respectively. The fee is based on the average daily
value of each Fund's net assets at the close of each business day.
The Investment Advisory Agreement on behalf of each Fund continues from
year to year only if approved annually (a) by the Fund's Board or by vote of a
majority of the outstanding voting securities of the Fund and (b) by vote of a
majority of board members of the Fund who are not parties to such Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
such party, cast in person at a meeting of the Board called for the purpose of
voting on such approval. The Investment Advisory Agreement on behalf of each
Fund may be terminated by either party on 60 days' notice to the other party and
terminates automatically upon its assignment. The Investment Advisory Agreement
also provides that amendments to the Agreement may be affected if approved by
the Board (including a majority of the directors who are not interested persons
of Voyageur or the Fund), unless the 1940 Act requires that any such amendment
must be submitted for approval by the Fund's shareholders and that all proposed
assignments of such agreement are subject to approval by the Board of Directors
(unless the 1940 Act otherwise requires shareholder approval).
ADMINISTRATIVE SERVICES AGREEMENTS
Voyageur also acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement. Pursuant to the Administrative Services Agreements, Voyageur
provides each Fund all dividend disbursing, transfer agency, administrative and
accounting services required by such Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of each Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of the Fund's
shares or the receipt of redemption requests with respect to the Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon the Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of the Fund to be received by
each shareholder of the Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of the Fund as the Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of the Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
the Fund and Voyageur may from time to time agree upon. Pursuant to each
Administrative Services Agreement, Voyageur also provides such regulatory,
reporting and compliance related services and tasks as the Funds may reasonably
request.
As compensation for these services, each Fund pays Voyageur a monthly
fee based upon each Fund's average daily net assets and the number of
shareholder accounts then existing. This fee is equal to the sum of (i) $1.33
per shareholder account per month, (ii) $1,000 per month if the Fund's average
daily net assets do not exceed $50 million, $1,250 per month if the Fund's
average daily net assets are greater than $50 million but do not exceed $100
million, and $1,500 per month if the Fund's average daily net assets exceed $100
million, (iii) with respect to each of Colorado Tax Free Fund, Minnesota Tax
Free Fund, Minnesota Insured Tax Free Fund, Minnesota Limited Term Tax Free
Fund, Florida Limited Term Tax Free Fund, Iowa Tax Free Fund, Idaho Tax Free
Fund, and Wisconsin Tax Free Fund; 0.11% per annum of the first $20 million of
the Fund's average daily net assets, 0.06% per annum of the next $20 million of
the Fund's average daily net assets, 0.035% per annum of the next $60 million of
the Fund's average daily net assets, 0.03% per annum of the next $400 million of
the Fund's average daily net assets and 0.02% per annum of the Fund's average
daily net assets in excess of $500 million and (iv) with respect to each of
Arizona Limited Term Tax Free Fund, Arizona Tax Free Fund, Arizona Insured Tax
Free Fund, California Limited Term Tax Free Fund, California Tax Free Fund,
California Insured Tax Free Fund, Colorado Limited Term Tax Free Fund, Colorado
Insured Tax Free Fund, Florida Tax Free Fund, Florida Insured Tax Free Fund,
Kansas Tax Free Fund, Missouri Insured Tax Free Fund, New Mexico Tax Free Fund,
Oregon Insured Tax Free Fund, Utah Tax Free Fund, Washington Insured Tax Free
Fund, National Limited Term Fund, National Tax Free Fund, National Insured Tax
Free Fund and North Dakota Tax Free Fund, 0.11% per annum of the first $50
million of the Fund's average daily net assets, 0.06% per annum of the next $100
million of the Fund's average daily net assets, 0.035% per annum of the next
$250 million of the Fund's average daily net assets, 0.03% per annum of the next
$300 million of the Fund's average daily net assets and 0.02% per annum of the
Fund's average daily net assets in excess of $700 million. For purposes of
calculating average daily net assets, as such term is used in the Administrative
Services Agreements, each Fund's net assets equal its total assets minus its
total liabilities. Each Fund also reimburses Voyageur for its out-of-pocket
expenses in connection with Voyageur's provision of services under the Fund's
Administrative Services Agreement.
Each Administrative Services Agreement is renewable from year to year
if the directors approve it in the same way they approve the Investment Advisory
Agreements. The Administrative Services Agreements can be terminated by either
party on 60 days' notice to the other party and the Agreements terminate
automatically upon their assignment. The Administrative Services Agreements also
provide that amendments to the Agreement may be effected if approved by the
Board (including a majority of the board members who are not interested persons
of Voyageur or the Fund), unless the 1940 Act requires that any such amendment
must be submitted for approval by the Fund's shareholders and that all proposed
assignments of such agreement are subject to approval by the Board (unless the
1940 Act otherwise requires shareholder approval thereof).
EXPENSES OF THE FUNDS
Voyageur is contractually obligated to pay the operating expenses of
each Fund (excluding interest, taxes, brokerage fees and commissions, Rule 12b-1
fees, if any, and, with respect to the Insured Funds, insurance premiums on
portfolio securities) which exceed 1% of the Fund's average daily net assets on
an annual basis up to the amount of the investment advisory and management fee,
and, with respect to the Insured Tax Free Funds up to the combined amount of the
investment advisory and management fee and the dividend disbursing,
administrative and accounting services fee. In addition, Voyageur reserves the
right to voluntarily waive its fees in whole or part and to voluntarily absorb
certain other of the Funds' expenses. Any such waiver or absorption, however, is
in Voyageur's sole discretion and may be lifted or reinstated at any time. Set
forth below is certain information regarding the investment advisory and
administrative services fees and the amounts waived, if any, by each Fund to
Voyageur during the indicated fiscal periods.
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
-------------- ----------- ------------
<S> <C> <C> <C>
Arizona Insured Tax Free Fund
1/1/96-12/31/96 $ 1,119,609 $ 307,939 $ None
1/1/95-12/31/95 $ 1,223,121 $ 299,757 $ 60,000
1/1/94-12/31/94 $ 1,298,673 $ 289,690 None
Arizona Tax Free Fund
1/1/96-12/31/96 $ 55,464 $ 36,595 $ 90,000
1/1/95-12/31/95(4) $ 14,301 $ 15,541 $ 29,842
California Insured Tax Free Fund
1/1/96-12/31/96 $ 192,101 $ 75,853 $ 75,000
1/1/95-12/31/95 $ 184,315 $ 67,135 $ 90,000
11/1/94-12/31/94(1) $ 23,717 $ 9,550 $ 33,267
11/1/93-10/31/94 $ 111,570 $ 52,328 $ 163,898
California Tax Free Fund
1/1/96-12/31/96 $ 7,369 $ 21,559 $ 40,001
1/1/95-12/31/95(5) $ 4,468 $ 13,974 $ 18,442
Colorado Tax Free Fund
1/1/96-12/31/96 $ 1,865,515 $ 426,237 $ None
1/1/95-12/31/95 $ 1,944,802 $ 441,178 None
1/1/94-12/31/94 $ 2,039,009 $ 409,511 None
Florida Limited Term Tax Free Fund
1/1/96-12/31/96 $ 11,429 $ 21,512 $ 32,941
1/1/95-12/31/95 $ 2,665 $ 10,995 $ 13,660
1/1/94-12/31/94 (3) $ 956 $ 11,264 $ 12,220
Florida Insured Tax Free Fund
1/1/96-12/31/96 $ 1,074,026 $ 314,165 $ 25,000
1/1/95-12/31/95 $ 1,235,118 $ 325,819 $ 480,000
11/1/94-12/31/93 (1) $ 204,833 $ 76,709 $ 250,000
11/1/93-10/31/94 $ 1,481,786 $ 350,992 $ 805,000
Florida Tax Free Fund
1/1/96-12/31/96 $ 29,915 $ 30,812 $ 60,727
1/1/95-12/31/95(6) $ 10,974 $ 15,010 $ 25,984
Idaho Tax Free Fund
1/1/96-12/31/96 $ 131,410 $ 62,657 $ 130,000
1/1/95-12/31/95(7) $ 38,282 $ 29,996 $ 68,278
Iowa Tax Free Fund
1/1/96-12/31/96 $ 217,160 $ 93,979 $ 5,000
1/1/95-12/31/95 $ 193,451 $ 85,579 $ 45,000
9/1/94-12/31/94 (1) $ 56,650 $ 34,707 $ 91,357
9/1/93-8/31/94 $ 127,361 $ 70,832 $ 198,193
Kansas Tax Free Fund
1/1/96-12/31/96 $ 60,154 $ 39,146 $ 30,000
1/1/95-12/31/95 $ 47,512 $ 14,005 $ 50,000
11/1/94-12/31/94 (1) $ 5,550 $ 5,993 $ 11,543
11/1/93-10/31/94 $ 22,132 $ 18,251 $ 40,383
Minnesota Limited Term Tax Free Fund
1/1/96-12/31/96 $ 281,038 $ 110,484 None
1/1/95-12/31/95 $ 298,529 $ 114,999 None
3/1/94-12/31/94 (2) $ 272,884 $ 104,431 None
1/1/94-2/28/94 (2) $ 49,861 $ 16,471 None
Minnesota Insured Fund
1/1/96-12/31/96 $ 1,518,301 $ 355,578 None
1/1/95-12/31/95 $ 1,541,687 $ 329,546 $ 25,000
1/1/94-12/31/94 $ 1,561,406 $ 366,842 $ 925,000
Minnesota Tax Free Fund
1/1/96-12/31/96 $ 2,222,690 $ 472,689 None
1/1/95-12/31/95 $ 2,229,862 $ 499,083 None
1/1/94-12/31/94 $ 2,241,071 $ 460,255 None
Missouri Insured Tax Free Fund
1/1/96-12/31/96 $ 290,247 $ 125,437 $ 95,000
1/1/95-12/31/95 $ 250,578 $ 111,588 $ 170,000
11/1/94-12/31/94 (1) $ 32,651 $ 20,078 $ 50,000
11/1/93-10/31/94 $ 173,907 $ 79,615 $ 253,522
National Limited Term Tax Free Fund
1/1/96-12/31/96 $ 4,731 $ 16,304 $ 21,035
1/1/95-12/31/95 (8) $ 1,389 $ 7,315 $ 8,704
National Insured Tax Free Fund
1/1/96-12/31/96 $ 174,688 $ 75,044 $ 145,000
1/1/95-12/31/95 $ 179,363 $ 70,870 $ 175,000
1/1/94-12/31/94 $ 154,949 $ 68,996 $ 223,945
National Tax Free Fund
1/1/96-12/31/96 $ 12,665 $ 19,984 $ 32,649
1/1/95-12/31/95 (9) $ 1,882 $ 6,361 $ 8,243
New Mexico Tax Free Fund
1/1/96-12/31/96 $ 107,784 $ 51,384 None
1/1/95-12/31/95 $ 108,209 $ 46,835 None
11/1/94-12/31/94 (1) $ 17,494 $ 12,232 $ 29,726
11/1/93-10/31/94 $ 108,865 $ 47,287 $ 135,000
New York Tax Free Fund
10/1/96-12/31/96 (10) $ 17,615 $ 5,447 $ 23,062
10/1/95-9/30/96 $ 93,048 $ N/A $ 24,580
10/1/94-9/30/95 $ 99,309 $ N/A $ 63,096
7/1/94-9/30/94 $ 26,011 $ N/A $ None
7/1/93-6/30/94 $ 111,126 $ N/A $ 14,541
North Dakota Tax Free Fund
1/1/96-12/31/96 $ 175,239 $ 86,034 None
1/1/95-12/31/95 $ 179,121 $ 75,910 None
1/1/94-12/31/94 $ 180,617 $ 80,745 $ 157,087
Oregon Insured Tax Free Fund
1/1/96-12/31/96 $ 124,769 $ 59,737 $ 65,000
1/1/95-12/31/95 $ 103,343 $ 42,931 $ 75,000
11/1/94-12/31/94 (1) $ 12,840 $ 6,649 $ 19,489
11/1/93-10/31/94 $ 49,537 $ 33,740 $ 83,277
Utah Tax Free Fund
1/1/96-12/31/96 $ 21,935 $ 25,695 $ 30,000
1/1/95-12/31/95 $ 20,769 $ 18,829 $ 35,000
11/1/94-12/31/94 (1) $ 3,184 $ 1,757 $ 4,941
11/1/93-10/31/94 $ 20,384 $ 17,294 $ 37,678
Washington Insured Tax Free Fund
1/1/96-12/31/96 $ 12,662 $ 21,966 $ 34,628
1/1/95-12/31/95 $ 10,374 $ 12,752 $ 23,126
11/1/94-12/31/94 (1) $ 1,422 $ 2,369 $ 3,791
11/1/93-10/31/94 $ 7,561 $ 13,824 $ 21,385
Wisconsin Tax Free Fund
1/1/96-12/31/96 $ 141,262 $ 67,833 $ 10,000
1/1/95-12/31/95 $ 123,548 $ 49,595 None
9/1/94-12/31/94 (1) $ 31,634 $ 22,386 $ 54,020
9/1/94-8/31/94 $ 46,460 $ 31,486 $ 77,946
</TABLE>
(1) Effective December 31, 1994, the Fund changed its fiscal year end to
December 31.
(2) Effective February 28, 1994, Minnesota Limited Term Tax Free Fund
changed its fiscal year end to February 28 and, effective December 31,
1994, changed back to December 31.
(3) Period from May 1, 1994 (commencement of operations) to December 31,
1994.
(4) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(5) Period from March 3, 1995 (commencement of operations) to December 31,
1995.
(6) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(7) Period from January 4, 1995 (commencement of operations) to December
31, 1995.
(8) Period from September 7, 1995 (commencement of operations) to December
31, 1995.
(9) Period from September 8, 1995 (commencement of operations) to December
31, 1995.
(10) Effective December 31, 1996, New York Tax Free Fund changed its fiscal
year from September 30 to December 31.
All costs and expenses (other than those specifically referred to as
being borne by Voyageur or the Underwriter) incurred in the operation of each
Fund are borne by the Fund. These expenses include, among others, fees of the
Board members who are not employees of Voyageur or any of its affiliates,
expenses of directors' and shareholders' meetings, including the cost of
printing and mailing proxies, expenses of insurance premiums for fidelity bond
and other coverage and, with respect to the Insured Tax Free Funds, insurance
premiums for portfolio securities, expenses of redemption of shares, expenses of
issue and sale of shares (to the extent not borne by the Underwriter under its
agreement with such Fund), expenses of printing and mailing stock certificates
representing shares of such Fund, association membership dues, charges of such
Fund's custodian, and bookkeeping, auditing and legal expenses. Each Fund will
also pay the fees and bear the expense of registering and maintaining the
registration of such Fund and its shares with the Securities and Exchange
Commission and registering or qualifying its shares under state or other
securities laws and the expense of preparing and mailing prospectuses, reports
and statements to shareholders.
RULE 12b-1 PLANS OF DISTRIBUTION; DISTRIBUTION AGREEMENTS
Each Fund has adopted a Plan of Distribution (the "Plan") relating to
the payment of certain expenses pursuant to Rule 12b-1 under the 1940 Act. Rule
12b-1(b) provides that any payments made by a Fund in connection with the
distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing.
Rule 12b-1(b)(1) requires that such plan be approved by a vote of at
least a majority of the Fund's outstanding shares, and Rule 12b-1(b)(2) requires
that such plan, together with any related agreements, be approved by a vote of
the Board of Directors and of the directors who are not interested persons of
the Fund and have no direct or indirect financial interest in the operation of
the plan or in any agreements related to the plan, cast in person at a meeting
called for the purpose of voting on such plan or agreements. Rule 12b-1(b)(3)
requires that the plan or agreement provide, in substance:
(1) that it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such continuance is
specifically approved at least annually in the manner described in paragraph
(b)(2) of Rule 12b-1;
(2) that any person authorized to direct the disposition of monies paid
or payable by a Fund pursuant to its plan or any related agreement shall provide
to the Board of Directors, and the directors shall review, at least quarterly, a
written report of the amount so expended and the purposes for which such
expenditures were made; and
(3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the Board of Directors who are not
interested persons of the Fund and have no direct or indirect financial interest
in the operation of the plan or in any agreements related to the plan or by vote
of a majority of the outstanding voting securities of a Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1(c) provides that
each Fund may rely upon Rule 12b-1 only if the selection and nomination of that
Fund's disinterested directors are committed to the discretion of such
disinterested directors. Rule 12b-1(e) provides that each Fund may implement or
continue a plan pursuant to Rule 12b-1(b) only if the directors who vote to
approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under state
law, and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable
likelihood that the plan will benefit the Fund and its shareholders.
Each Fund has entered into a Distribution Agreement with the
Underwriter, pursuant to which the Underwriter acts as the principal underwriter
of each Fund's shares. The Distribution Agreement and Plan provide that the
Underwriter agrees to provide, and shall pay costs which it incurs in connection
with providing, administrative or accounting services to shareholders of each
Fund (such costs are referred to as "Shareholder Servicing Expenses") and that
the Underwriter shall also pay all costs of distributing the shares of each Fund
("Distribution Expenses"). Shareholder Servicing Expenses include all expenses
of the Underwriter incurred in connection with providing administrative or
accounting services to shareholders of the Funds, including, but not limited to,
an allocation of the Underwriter's overhead and payments made to persons,
including employees of the Underwriter, who respond to inquiries of shareholders
regarding their ownership of Fund shares, or who provide other administrative or
accounting services not otherwise required to be provided by the Funds'
investment adviser or dividend disbursing, transfer, administrative and
accounting services agent. Distribution Expenses include, but are not limited
to, initial and ongoing sales compensation (in addition to sales loads) paid to
investment executives of the Underwriter and to other broker-dealers and
participating financial institutions; expenses incurred in the printing of
prospectuses, statements of additional information and reports used for sales
purposes; expenses of preparation and distribution of sales literature; expenses
of advertising of any type; an allocation of the Underwriter's overhead;
payments to and expenses of persons who provide support services in connection
with the distribution of Fund shares; and other distribution-related expenses.
Pursuant to the provisions of the Distribution Agreements, the
Underwriter is entitled to receive a total fee each quarter at an annual rate of
.25% of the average daily net assets attributable to each Fund's Class A shares,
1.00% of the average daily net assets attributable to each Fund's Class B shares
and 1.00% of the average daily net assets attributable to each Fund's Class C
shares to pay distribution expenses. As determined from time to time by the
Board, a portion of such fees shall be designated as a "shareholder servicing
fee" and a portion shall be designated as a "distribution fee." The Board has
determined that all of the fee payable with respect to Class A shares shall be
designated a shareholder servicing fee. With respect to fees payable with
respect to Class B shares and Class C shares, that portion of the fee equal to
.25% of average daily net assets attributable to a Fund's Class B shares and
Class C shares is designated a shareholder servicing fee and that portion of the
fee equal to .75% of average daily net assets attributable to a Fund's Class B
shares and Class C shares is designated a distribution fee. Amounts payable to
the Underwriter under the Distribution Agreement may exceed or be less than the
Underwriter's actual distribution expenses and shareholder servicing expenses.
In the event such distribution expenses and shareholder servicing expenses
exceed amounts payable to the Underwriter under the Plan, the Underwriter shall
not be entitled to reimbursement by the Funds. In addition to being paid
shareholder servicing and distribution fees, the Underwriter also receives for
its services the sales charge on sales of Fund shares set forth in each
Prospectus.
Each Fund's Distribution Agreement is renewable from year to year if
such Fund's Board approves the Agreement and the Fund's Plan. Each Fund or the
Underwriter can terminate its Distribution Agreement on 60 days' notice to the
other party, and each Distribution Agreement terminates automatically upon its
assignment.
For the fiscal years (or portions thereof, as indicated) ended December
31, 1996, 1995, and 1994, Rule 12b-1 fees and the amount waived, if any, for
each Fund are set forth below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- --------------------- ----------------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Arizona Insured Tax Free Fund
Class A $551,781 $290,833 $608,790 $582,768 $648,615 $493,491
Class B 25,838 $2,956 7,062 1,807 N/A N/A
Class C 5,529 0 4,263 561 1,609 333
Arizona Tax Free Fund
Class A 21,058 0 6,184 0 N/A N/A
Class B 26,502 2,854 3,765 975 N/A N/A
Class C 240 0 121 0 N/A N/A
California Insured Tax Free Fund
12/31/95 - Class A 79,903 0 80,709 23,803 11,176 8,495
12/31/95 - Class B 63,807 22,641 44,275 17,904 2,774 1,260
12/31/95 - Class C 799 0 1,792 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 54,720 44,074
10/31/94 - Class B N/A N/A N/A N/A 4,534 1,869
10/31/94 - Class C N/A N/A N/A N/A N/A N/A
California Tax Free Fund
Class A 2,820 0 2,145 0 N/A N/A
Class B 3,054 811 390 177 N/A N/A
Class C 418 0 N/A N/A N/A N/A
Colorado Tax Free Fund
Class A 922,540 499,145 969,424 642,447 265,096 265,096
Class B 26,004 1,726 5,460 1,113 N/A N/A
Class C 14,080 0 7.874 0 2,161 14
Florida Limited Term Tax Free Fund
Class A 5,390 4,315 1,536 1,389 602 602
Class B 6,567 1,102 120 30 N/A N/A
Class C 539 0 402 0 N/A N/A
Florida Insured Tax Free Fund
12/31/95 - Class A 529,135 469,011 611,873 595,950 101,760 101,760
12/31/95 - Class B 30,245 14,311 22,840 13,701 2,101 1,265
10/31/94 - Class A N/A N/A N/A N/A 739,775 739,775
10/31/94 - Class B N/A N/A N/A N/A 4,452 1,761
Florida Tax Free Fund
Class A 12,611 0 5,427 0 N/A N/A
Class B 9,331 3,755 195 99 N/A N/A
Class C 98 0 48 0 N/A N/A
Idaho Tax Free Fund
Class A 54,123 0 16,620 3,224 N/A N/A
Class B 37,996 9,559 6,034 1,549 N/A N/A
Class C 8,416 0 4,499 93 N/A N/A
Iowa Tax Free Fund
12/31/95 - Class A 103,980 55,582 95,497 86,503 28,296 28,296
12/31/95 - Class B 12,291 2,296 2,753 704 N/A N/A
12/31/95 - Class C 6,075 301 2,373 0 N/A N/A
8/31/94 - Class A N/A N/A N/A N/A 63,681 63,681
Kansas Tax Free Fund
12/31/95 - Class A 25,773 13,777 23,138 19,960 2,775 2,775
12/31/95 - Class B 16,667 2,342 2,445 601 N/A N/A
12/31/95 - Class C 580 0 136 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 11,078 11,078
Minnesota Limited Term Tax Free Fund
12/31/95 - Class A 172,919 0 185,286 0 171,101 0
12/31/95 - Class B 2,048 124 83 21 N/A N/A
12/31/95 - Class C 8,875 0 5,099 0 1,385 0
2/28/94 - Class A N/A N/A N/A N/A 31,163 0
2/28/94 - Class C N/A N/A N/A N/A N/A N/A
Minnesota Insured Fund
Class A 736,300 0 759,866 126,114 778,913 119,759
Class B 58,570 6,996 19,425 5,515 N/A N/A
Class C 32,890 0 25,345 453 6,399 0
Minnesota Tax Free Fund
Class A 1,093,043 0 1,108,235 0 1,118,958 0
Class B 45,609 8,024 8,871 2,274 N/A N/A
Class C 27,693 0 17,906 0 4,020 0
Missouri Insured Tax Free Fund
12/31/95 - Class A 123,099 75,641 113,879 103,135 15,539 15,539
12/31/95 - Class B 86,717 28,315 44,885 22,490 3,190 1,609
12/31/95 - Class C 1,388 0 28 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 85,866 85,866
10/31/94 - Class B N/A N/A N/A N/A 4,486 2,119
National Insured Tax Free Fund
Class A 83,067 6,617 87,384 21,418 76,958 47,420
Class B 16,639 5,235 9,212 3,702 2,238 903
Class C 395 0 19 0 N/A N/A
National Limited Term Tax Free Fund
Class A 2,854 1,141 876 332 N/A N/A
Class B 410 165 N/A N/A N/A N/A
National Tax Free Fund
Class A 5,503 0 874 0 N/A N/A
Class B 2,817 841 211 77 N/A N/A
Class C 506 0 62 0 N/A N/A
New Mexico Tax Free Fund
12/31/95 - Class A 51,934 39,932 52,868 48,466 8,619 8,619
12/31/95 - Class B 6,452 1,358 5,003 1,508 446 134
12/31/95 - Class C 1,358 118 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 54,411 54,411
10/31/94 - Class B N/A N/A N/A N/A 1,441 310
New York Tax Free Fund
Class A 3,240 0 176 0 90 0
Class B 861 0 3,057 0 1,544 0
Class C 133 0 518 0 260 0
North Dakota Tax Free Fund
Class A 86,154 69,695 88,956 85,447 90,095 90,095
Class B 5,623 2,656 2,317 1,161 622 310
Class C 167 0 168 0 N/A N/A
Oregon Insured Tax Free Fund
12/31/95 - Class A 52,403 21,733 46,075 39,592 5,914 5,914
12/31/95 - Class B 37,462 11,847 21,913 9,883 2,045 923
12/31/95 - Class C 2,501 0 708 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 23,890 23,890
10/31/94 - Class B N/A N/A N/A N/A 3,762 1,507
Utah Tax Free Fund
12/31/95 - Class A 10,009 8,808 10,086 9,556 1,590 1,590
12/31/95 - Class B 3,821 749 1,209 305 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 10,190 10,190
Washington Insured Tax Free Fund
12/31/95 - Class A 5,596 4,029 5,154 4,717 710 710
12/31/95 - Class B 2,775 472 29 8 N/A N/A
12/31/95 - Class C 188 0 123 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 3,782 3,782
Wisconsin Tax Free Fund
12/31/95 - Class A 67,339 20,178 60,960 50,749 15,845 14,603
12/31/95 - Class B 9,369 1,519 3,151 803 N/A N/A
12/31/95 - Class C 3,603 153 308 0 N/A N/A
8/31/94 - Class A N/A N/A N/A N/A 23,230 23,230
</TABLE>
The following table sets forth the aggregate dollar amount of
underwriting commissions paid by each Fund for the fiscal periods indicated and
the amount of such commissions retained by the Underwriter.
<TABLE>
<CAPTION>
Underwriting Commissions
Total Underwriting Commissions Retained by Underwriter
------------------------------ -----------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year ended year ended year ended year ended year ended year ended
12/31/96 12/31/95 12/31/94 12/31/96 12/31/95 12/31/94
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona Insured Tax Free Fund $339,087 $804,383 $2,007,707 $40,338 $103,168 $272,585
Arizona Tax Free Fund 104,978 20,987 N/A 13,217 2,901 N/A
California Insured Tax Free Fund
12/31/95 (1) 107,617 231,679 61,913 14,226 34,177 8,043
10/31/94 N/A N/A 434,743 N/A N/A 58,732
California Tax Free Fund 11,751 19,639 N/A 1,641 2,554 N/A
Colorado Tax Free Fund 525,069 721,452 2,513,880 68,666 117,743 346,636
Florida Limited Term Tax Free Fund 6,853 3,866 0 1,233 741 0
Florida Insured Tax Free Fund
12/31/95 (1) 174,064 357,154 39,051 20,261 48,112 5,589
10/31/94 N/A N/A 1,497,591 N/A N/A 207,722
Florida Tax Free Fund 41,214 42,789 N/A 5,271 6,121 N/A
Idaho Tax Free Fund 313,894 338,974 N/A 32,689 62,968 N/A
Iowa Tax Free Fund
12/31/95 (1) 167,735 223,046 101,383 26,641 40,943 18,061
8/31/94 N/A N/A 1,352,653 N/A N/A 249,929
Kansas Tax Free Fund
12/31/95 (1) 55,360 104,287 9,935 7,686 14,394 1,572
10/31/94 N/A N/A 175,196 N/A N/A 24,852
Minnesota Limited Term
Tax Free Fund
12/31/95 (1) 71,429 47,098 126,433 5,306 8,399 22,538
2/28/94 N/A N/A 67,700 N/A N/A 12,408
Minnesota Tax Free Fund 650,734 812,687 1,781,640 69,682 114,391 246,291
Minnesota Insured Fund 454,762 658,955 1,938,352 33,673 86,858 269,910
Missouri Insured Tax Free Fund
12/31/95 (1) 211,558 316,387 37,792 29,607 53,274 5,375
10/31/94 N/A N/A 467,540 N/A N/A 65,646
National Insured Tax Free Fund 42,119 85,169 406,397 4,583 16,952 54,878
National Limited Term Free Fund 4,983 5,775 N/A 1,073 1,275 N/A
National Tax Free Fund 22,009 293 N/A 2,989 45 N/A
New Mexico Tax Free Fund
12/31/95 (1) 45,937 77,084 7,174 6,724 15,700 1,424
10/31/94 N/A N/A 302,834 N/A N/A 50,348
New York Tax Free Fund 465 0
North Dakota Tax Free Fund 38,688 65,566 188,974 5,425 10,960 27,132
Oregon Insured Tax Free Fund
12/31/95 (1) 149,165 265,488 30,428 20,166 42,930 4,107
10/31/94 N/A N/A 398,064 N/A N/A 55,282
Utah Tax Free Fund
12/31/95 (1) 4,575 10,693 1,003 800 1,782 201
10/31/94 N/A N/A 75,407 N/A N/A 12,223
Washington Insured Tax
Free Fund
12/31/95 (1) 17,167 26,941 3,265 2,196 3,915 380
10/31/94 N/A N/A 26,890 N/A N/A 3,895
Wisconsin Tax Free Fund
12/31/95 (1) 107,671 139,886 101,720 11,170 25,338 18,121
8/31/94 N/A N/A 487,555 N/A N/A 71,314
</TABLE>
(1) Effective 12/31/94, the fund changed its fiscal year end to 12/31.
PORTFOLIO TRANSACTIONS, ALLOCATION OF BROKERAGE AND TURNOVER RATE
As the Funds' portfolios are composed exclusively of debt, rather than
equity securities, most portfolio transactions are effected with dealers without
the payment of brokerage commissions, but rather at net prices which usually
include a spread or markup. In effecting such portfolio transactions on behalf
of the Funds, Voyageur seeks the most favorable net price consistent with the
best execution. However, frequently, Voyageur selects a dealer to effect a
particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the bond market and the
desire of Voyageur to accept a particular price for a security because the price
offered by the dealer meets its guidelines for profit, yield or both.
Decisions with respect to placement of the Funds' portfolio
transactions are made by Voyageur. The primary consideration in making these
decisions is efficiency in the execution of orders and obtaining the most
favorable net prices for the Funds. When consistent with these objectives,
business may be placed with broker-dealers who furnish investment research
services to Voyageur. Such research services include advice, both directly and
in writing, as to the value of securities; the advisability of investing in,
purchasing or selling securities; and the availability of securities, or
purchasers or sellers of securities; as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. This allows Voyageur to supplement its own
investment research activities and enables Voyageur to obtain the views and
information of individuals and research staffs of many different securities
firms prior to making investment decisions for the Funds. To the extent
portfolio transactions are effected with broker-dealers who furnish research
services to Voyageur, Voyageur receives a benefit, not capable of evaluation in
dollar amounts, without providing any direct monetary benefit to the Funds from
these transactions.
Voyageur has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Funds' portfolio transactions in exchange
for research services provided Voyageur, except as noted below. However,
Voyageur does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Funds' business, in
order to encourage certain broker-dealers to provide Voyageur with research
services which Voyageur anticipates will be useful to it. Because the list is
merely a general guide, which is to be used only after the primary criterion for
the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. Voyageur
will authorize the Funds to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if Voyageur determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or Voyageur's overall responsibilities
with respect to the accounts as to which it exercises investment discretion.
The Funds will not effect any brokerage transactions in their portfolio
securities with any broker-dealer affiliated directly or indirectly with
Voyageur, unless such transactions, including the frequency thereof, the receipt
of commissions payable in connection therewith and the selection of the
affiliated broker-dealer effecting such transactions are not unfair or
unreasonable to the shareholders of the Funds. In the event any transactions are
executed on an agency basis, Voyageur will authorize the Funds to pay an amount
of commission for effecting a securities transaction in excess of the amount of
commission another broker-dealer would have charged only if Voyageur determines
in good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either that particular transaction or Voyageur's overall
responsibilities with respect to the Funds as to which it exercises investment
discretion. If the Funds execute any transactions on an agency basis, they will
generally pay higher than the lowest commission rates available.
In determining the commissions to be paid to a broker-dealer affiliated
with Voyageur, it is the policy of the Funds that such commissions will, in the
judgment of Voyageur, subject to review by the Board, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time, and (b) at
least as favorable as commissions contemporaneously charged by such affiliated
broker-dealers on comparable transactions for their most favored comparable
unaffiliated customers. While each Fund does not deem it practicable and in its
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
None of the Funds in existence during the fiscal periods ended December
31, 1994, 1995 and 1996, paid any brokerage commissions, directed portfolio
transactions to broker-dealers because of research services provided to Voyageur
or executed brokerage transactions with an affiliated broker-dealer.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Funds may purchase securities from an underwriting
syndicate of which an affiliated broker-dealer is a member (but not directly
from such affiliated broker-dealer itself). Such conditions relate to the price
and amount of the securities purchased, the commission or spread paid and the
quality of the issuer. The rules further require that such purchases take place
in accordance with procedures adopted and reviewed periodically by the Board of
the Funds, particularly those Board members who are not interested persons of
the Funds.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Funds' directors may
determine, Voyageur may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' securities transactions.
OTHER INFORMATION
Conversion of Class B Shares. In addition to information regarding
conversion set forth in the prospectus, the conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that payment of different
dividends by each of the classes of shares does not result in the Funds'
dividends or distributions constituting "preferential dividends" under the Code
and that such conversions do not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
Signature Guaranty. In addition to information regarding redemption of
shares and signature guaranty set forth in the prospectus, a signature guaranty
will be required when redemption proceeds: (1) exceed $50,000 (unless it is
being wired to a pre-authorized bank account, in which case a guarantee is not
required), (2) are to be paid to someone other than the registered shareholder
or (3) are to be mailed to an address other than the address of record or wired
to an account other than the pre-authorized bank or brokerage account. On joint
account redemptions of the type previously listed, each signature must be
guaranteed. A signature guarantee may not be provided by a notary public. Please
contact your investment executive for instructions as to what institutions
constitute eligible signature guarantors.
Valuation of Portfolio Securities. Generally, trading in certain
securities such as tax exempt securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the primary close of trading on the Exchange. The values
of such securities used in determining the net asset value of Fund shares are
computed as of such times. Occasionally events affecting the value of such
securities may occur between such times and the primary close of trading on the
Exchange which are not reflected in the computation of net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities are valued at their fair market value as
determined in good faith by Voyageur in accordance with procedures adopted by
the Boards.
Bank Purchases. Banks, acting as agents for their customers and not for
the Funds or the Underwriter, from time to time may purchase Fund shares for the
accounts of such customers. Generally, the Glass-Steagall Act prohibits banks
from engaging in the business of underwriting, selling or distributing
securities. Should the activities of any bank, acting as agent for its customers
in connection with the purchase of any Fund's shares, be deemed to violate the
Glass-Steagall Act, management will take whatever action, if any, is appropriate
in order to provide efficient services for the Funds. Management does not
believe that a termination in the relationship with a bank would result in any
material adverse consequences to the Funds. In addition, state securities laws
on this issue may differ and banks and financial institutions may be required to
register as dealers pursuant to state law. Fund shares are not deposits or
obligations of, or guaranteed or endorsed by, any bank and are not insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other federal agency.
TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), all
or a portion of the interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as each of the Funds, will not be deductible by a shareholder. Indebtedness may
be allocated to shares of a Fund even though not directly traceable to the
purchase of such shares.
Each Fund's present policy is to designate exempt-interest dividends at
each daily distribution of net interest income. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns.
An exchange of shares in one Voyageur fund for shares in another fund
pursuant to exercise of the Exchange Privilege is considered to be a sale of the
shares for federal tax purposes that may result in a taxable gain or loss. If a
shareholder incurs a sales charge in acquiring shares and then, after holding
those shares not more than 90 days, exchanges them pursuant to the Exchange
Privilege for shares of another Voyageur fund, the shareholder may not take into
account the initial sales charge (to the extent that the otherwise applicable
sales charge on the later-acquired shares is reduced) for purposes of
determining the shareholder's gain or loss on the exchange of the first held
shares. To the extent that the sales charge is disregarded upon the exchange of
the first shares, however, it may be taken into account in determining gain or
loss on the eventual sale or exchange of the later-acquired shares.
Each Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, each Fund must declare dividends by the end of the calendar year
representing 98% of such Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long- and short-term capital gain) for the
12-month period ending on October 31 of such year. For purposes of the excise
tax, any income on which a Fund has paid corporate-level tax is considered to
have been distributed. Each Fund intends to make sufficient distributions each
year to avoid the payment of the excise tax.
Under a special provision of the Revenue Reconciliation Act of 1993,
all or a portion of the gain that a Fund realizes on the sale of a Tax Exempt
Obligation that it purchased at a market discount may have to be treated as
ordinary income rather than capital gain.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Exempt-interest
dividends attributable to interest income on certain tax-exempt obligations
issued after August 7, 1986 to finance private activities are treated as an item
of tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers and the federal
environmental tax on corporations. In addition, all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings for purposes of determining the federal corporate
AMT and the environmental tax imposed on corporations by Section 59A of the
Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Funds. The Funds will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in any Fund's portfolio lost its exempt status,
such Fund would make every effort to dispose of such investment on terms that
are not detrimental to the Fund.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which any Fund
may purchase options. To the extent a Fund engages in short-term trading and
enters into options transactions, the likelihood of violating this 30%
requirement is increased.
Gain or loss on options is taken into account when realized by entering
into a closing transaction or by exercise. In addition, with respect to many
types of options held at the end of a Fund's taxable year, unrealized gain or
loss on such contracts is taken into account at the then current fair market
value thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from such options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by a
Fund in a subsequent sale or other disposition of such options will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale under the "marked-to-market, 60/40
system."
Certain information about state taxation is contained in the
Prospectus. Additional information about California, Iowa and Wisconsin follows:
California State Taxation. Present California law taxes both long-term
and short-term capital gains at the rates applicable to ordinary income.
Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of shares of California Fund will not be deductible for
California personal income tax purposes. California has an alternative minimum
tax similar to the federal alternative minimum tax described above. However, the
California alternative minimum tax does not include interest from private
activity bonds as an item of tax preference. Generally, corporate shareholders
of a California Fund subject to the California franchise tax will be required to
include any gain on an exchange or redemption of shares and all distributions of
exempt interest, capital gains and other taxable income, if any, as income
subject to such tax. The California Funds will not be subject to California
franchise or corporate income tax on interest income or net capital gain
distributed to the shareholders. Shares of the California Funds will be exempt
from local property taxes in California.
Iowa State Taxation. Iowa taxes long-term capital gains at the same
rates as ordinary income, while imposing limitations on the deductibility of
capital losses similar to those under federal law.
Iowa imposes an alternative minimum tax on individuals and corporations
to the extent that such tax exceeds the taxpayer's regular tax liability. Iowa
AMT is based on federal alternative minimum taxable income, with certain
adjustments. The Fund has received a ruling to the effect that dividends paid by
the Iowa Fund that are attributable to interest paid on obligations issued by
the State of Iowa, its political subdivisions, agencies and instrumentalities,
the interest on which is exempt under Iowa statute, and on obligations of U. S.
territories and possessions will not be subject to the AMT that Iowa imposes on
individuals and corporations.
Wisconsin State Taxation. Wisconsin taxes long-term capital gains at
the same rates as ordinary income, while imposing limitations on the
deductibility of capital losses similar to those under federal law.
Wisconsin imposes an alternative minimum tax on individuals, trusts and
estates to the extent that such tax exceeds a taxpayer's regular tax liability.
Wisconsin's AMT is based on federal alternative minimum taxable income, with
certain adjustments. The Fund has received a ruling to the effect that dividends
paid by the Wisconsin Fund that are attributable to interest paid on obligations
issued by the State of Wisconsin or its agencies, the interest on which is
exempt from Wisconsin personal income tax under Wisconsin statute, and on
obligations of U. S. territories and possessions will not be subject to the
Wisconsin AMT when received by shareholders subject to the Wisconsin personal
income tax.
SPECIAL PURCHASE PLANS
Automatic Investment Plan. As a convenience to investors, shares may be
purchased through a preauthorized automatic investment plan. Such preauthorized
investments (at least $100) may be used to purchase shares of any Fund at the
public offering price next determined after such Fund receives the investment
(normally the 20th of each month, or the next business day thereafter). Further
information is available from the Underwriter.
Combined Purchase Privilege. The following persons (or groups of
persons) may qualify for reductions from the front end sales charge ("FESC")
schedule for Class A shares set forth in each Fund's prospectus by combining
purchases of any class of shares of any one or more of the Funds which bear a
FESC (and, in certain circumstances, purchases of FESC shares of certain other
open end investment companies) if the combined purchase of all such funds totals
at least $50,000.
(i) an individual, or a "company" as defined in Section
2(a)(8) of the 1940 Act;
(ii) an individual, his or her spouse and their children under
twenty-one, purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single
trust estate or single fiduciary account (including a pension,
profit-sharing or other employee benefit trust) created pursuant to a
plan qualified under Section 401 of the Code;
(iv) tax-exempt organizations enumerated in Section 501(c)(3)
of the Code;
(v) employee benefit plans of a single employer or of
affiliated employers;
(vi) any organized group which has been in existence for more
than six months, provided that it is not organized for the purpose of
buying redeemable securities of a registered investment company, and
provided that the purchase is made through a central administration, or
through a single dealer, or by other means which result in economy of
sales effort or expense. An organized group does not include a group of
individuals whose sole organizational connection is participation as
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer, or clients of an
investment adviser.
Cumulative Quantity Discount (Right of Accumulation). A purchase of
Class A shares may qualify for a Cumulative Quantity Discount. The applicable
FESC will then be based on the total of:
(i) the investor's current purchase; and
(ii) the amount previously invested (valued at the time of
investment) in shares of any class of one or more Voyageur Funds which
has a FESC owned by the investor; and
(iii) the amount previously invested (valued at the time of
investment) in shares of any classes of one or more Voyageur Funds
which has a FESC owned by another shareholder eligible to participate
with the investor in a "Combined Purchase Privilege" (see above).
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through an investment dealer, when
each purchase is made the investor or dealer must provide the Fund whose shares
are being purchased with sufficient information to verify that the purchase
qualifies for the privilege or discount.
Letter of Intention. Investors may also obtain the reduced front end
sales charges shown in each Fund's prospectus by means of a written Letter of
Intention, which expresses the investor's intention to invest not less than
$50,000 (including certain "credits," as described below) within a period of 13
months in the Funds bearing a FESC. Each purchase of shares under a Letter of
Intention will be made at the public offering price applicable at the time of
such purchase to a single transaction of the dollar amount indicated in the
Letter. A Letter of Intention may include purchases of shares made not more than
90 days prior to the date that an investor signs a Letter; however, the 13-month
period during which the Letter is in effect will begin on the date of the
earliest purchase to be included. Investors qualifying for the Combined Purchase
Privilege described above may purchase shares under a single Letter of
Intention.
If, for example, on the date an investor signs a Letter of Intention to
invest at least $50,000 as set forth above and the investor and the investor's
spouse and children under twenty-one have previously invested $20,000 in shares
which are still held by such persons, it will only be necessary to invest a
total of $30,000 during the 13 months following the first date of purchase of
such shares in order to qualify for the sales charges applicable to investments
of $50,000.
The Letter of Intention is not a binding obligation upon the investor
to purchase the full amount indicated. The minimum initial investment under a
Letter of Intention is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased. When the full amount indicated has been purchased, the escrow will be
released. To the extent that an investor purchases more than the dollar amount
indicated on the Letter of Intention and qualifies for further reduced sales
charges, the sales charges will be adjusted for the entire amount purchased at
the end of the 13-month period. The difference in sales charges will be used to
purchase additional shares at the then current offering price applicable to the
actual amount of the aggregate purchases.
Investors electing to take advantage of the Letter of Intention should
carefully review the appropriate provisions on the authorization form attached
to each Prospectus.
Shares of other open end investment companies bearing a FESC will be
included with Voyageur fund shares bearing a FESC in a Combined Purchase
Privilege, Cumulative Quantity Discount or Letter of Intention only if such
shares are owned by customers of dealers that Voyageur or the Underwriter has
engaged to provide administration or accounting services to Fund omnibus
accounts in connection with the offering of the Funds as part of such other
investment companies' family of funds. Additionally, the maximum reduction of
the applicable Fund's FESC that may result from the inclusion of shares of such
other investment companies in a Combined Purchase Privilege, Cumulative Quantity
Discount or Letter of Intention shall be a reduction to the front-end sales
charge applicable to purchases of $500,000 but less than $1,000,000 (as set
forth in the sales charge tables in the prospectus).
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the net asset value of Fund shares is
summarized in the prospectus in "Determination of Net Asset Value." The public
offering price of Class A shares is the net asset value of Fund shares plus the
applicable front end sales charge, if any. The maximum front end sales charge is
3.90% of the net asset value (certain Funds have lower maximum sales charges).
The public offering price of Class B and Class C shares is the net asset value
of Fund shares.
The portfolio securities in which each Fund invests fluctuate in value,
and therefore, the net asset value per share of each Fund also fluctuates. As of
December 31, 1996, the net asset value per share of each Fund which had
commenced investment operations was calculated as follows:
<TABLE>
<CAPTION>
Arizona Insured Tax Free Fund
<S> <C> <C>
Class A Net Assets ($209,258,103) = Net Asset Value Per Share ($11.06)
------------------------------------
Shares Outstanding (18,923,862)
Class B Net Assets ($3,110,071) = Net Asset Value Per Share ($11.05)
------------------------------------
Shares Outstanding (281,457)
Class C Net Assets ($554,189) = Net Asset Value Per Share ($11.06)
-------------------------------------
Shares Outstanding (50,124)
Arizona Tax Free Fund
Class A Net Assets ($9,755,083) = Net Asset Value Per Share ($10.70)
------------------------------------
Shares Outstanding (911,692)
Class B Net Assets ($3,490,651) = Net Asset Value Per Share ($10.69)
------------------------------------
Shares Outstanding (326,539)
Class C Net Assets ($22,697) = Net Asset Value Per Share ($10.71)
--------------------------------------
Shares Outstanding (2,120)
California Insured Tax Free Fund
Class A Net Assets ($30,551,302) = Net Asset Value Per Share ($10.50)
------------------------------------
Shares Outstanding (2,909,650)
Class B Net Assets ($6,717,106) = Net Asset Value Per Share ($10.50)
------------------------------------
Shares Outstanding (639,694)
Class C Net Assets ($54,786) = Net Asset Value Per Share ($10.46)
--------------------------------------
Shares Outstanding (5,239)
California Tax Free Fund
Class A Net Assets ($1,218,159) = Net Asset Value Per Share ($10.43)
------------------------------------
Shares Outstanding (116,808)
Class B Net Assets ($660,468) = Net Asset Value Per Share ($10.44)
-------------------------------------
Shares Outstanding (63,260)
Class C Net Assets ($93,850) = Net Asset Value Per Share ($10.42)
--------------------------------------
Shares Outstanding (9,003)
Colorado Tax Free Fund
Class A Net Assets ($358,328,150) = Net Asset Value Per Share ($10.78)
------------------------------------
Shares Outstanding (33,238,520)
Class B Net Assets ($4,172,133) = Net Asset Value Per Share ($10.78)
------------------------------------
Shares Outstanding (387,138)
Class C Net Assets ($1,522,353) = Net Asset Value Per Share ($10.78)
------------------------------------
Shares Outstanding (141,218)
Florida Insured Tax Free Fund
Class A Net Assets ($192,170,842) = Net Asset Value Per Share ($10.71)
------------------------------------
Shares Outstanding (17,937,779)
Class B Net Assets ($3,222,081) = Net Asset Value Per Share ($10.71)
------------------------------------
Shares Outstanding (300,908)
Florida Limited Term Tax Free Fund
Class A Net Assets ($3,158,899) = Net Asset Value Per Share ($10.43)
------------------------------------
Shares Outstanding (302,985)
Class B Net Assets ($1,042,061) = Net Asset Value Per Share ($10.42)
--------------------------------------
Shares Outstanding (99,966)
Class C Net Assets ($54,283) = Net Asset Value Per Share ($10.42)
-------------------------------------- -
Shares Outstanding (5,209)
Florida Tax Free Fund
Class A Net Assets ($5,761,111) = Net Asset Value Per Share ($10.52)
------------------------------------
Shares Outstanding (547,447)
Class B Net Assets ($1,634,750) = Net Asset Value Per Share ($10.53)
-------------------------------------
Shares Outstanding (155,265)
Class C Net Assets ($15,563) = Net Asset Value Per Share ($10.52)
--------------------------------------
Shares Outstanding (1,479)
Idaho Tax Free Fund
Class A Net Assets ($27,683,985) = Net Asset Value Per Share ($10.91)
------------------------------------
Shares Outstanding (2,538,218)
Class B Net Assets ($4,945,246) = Net Asset Value Per Share ($10.89)
------------------------------------
Shares Outstanding (453,932)
Class C Net Assets ($821,981) = Net Asset Value Per Share ($10.90)
-------------------------------------
Shares Outstanding (75,392)
Iowa Tax Free Fund
Class A Net Assets ($40,037,169) = Net Asset Value Per Share ($9.62)
------------------------------------
Shares Outstanding (4,163,834)
Class B Net Assets ($1,645,131) = Net Asset Value Per Share ($9.61)
-------------------------------------
Shares Outstanding (171,173)
Class C Net Assets ($670,289) = Net Asset Value Per Share ($9.61)
-------------------------------------
Shares Outstanding (69,744)
Kansas Tax Free Fund
Class A Net Assets ($10,176,166) = Net Asset Value Per Share ($10.56)
-----------------------------------
Shares Outstanding (964,027)
Class B Net Assets ($2,401,734 ) = Net Asset Value Per Share ($10.57)
--------------------------------------
Shares Outstanding (227,305)
Class C Net Assets ($90,350) = Net Asset Value Per Share ($10.55)
--------------------------------------
Shares Outstanding (8,565)
Minnesota Insured Fund
Class A Net Assets ($304,876,891) = Net Asset Value Per Share ($10.60)
------------------------------------
Shares Outstanding (28,772,685)
Class B Net Assets ($6,817,309) = Net Asset Value Per Share ($10.58)
------------------------------------
Shares Outstanding (644,114)
Class C Net Assets ($3,126,091) = Net Asset Value Per Share ($10.60)
------------------------------------
Shares Outstanding (295,018)
Minnesota Limited Term Tax Free Fund
Class A Net Assets ($66,024,295) = Net Asset Value Per Share ($10.99)
------------------------------------
Shares Outstanding (6,010,087)
Class B Net Assets ($408,320) = Net Asset Value Per Share ($10.99)
--------------------------------------
Shares Outstanding (37,154)
Class C Net Assets ($1,137,276) = Net Asset Value Per Share ($10.99)
--------------------------------------
Shares Outstanding (103,528)
Minnesota Tax Free Fund
Class A Net Assets ($428,379,970) = Net Asset Value Per Share ($12.40)
------------------------------------
Shares Outstanding (34,538,091)
Class B Net Assets ($6,233,411) = Net Asset Value Per Share ($12.40)
--------------------------------------
Shares Outstanding (502,673)
Class C Net Assets ($3,082,795) = Net Asset Value Per Share ($12.41)
------------------------------------
Shares Outstanding (248,473)
Missouri Insured Tax Free Fund
Class A Net Assets ($49,301,215) = Net Asset Value Per Share ($10.37)
------------------------------------
Shares Outstanding (4,754,081)
Class B Net Assets ($10,432,486) = Net Asset Value Per Share ($10.37)
------------------------------------
Shares Outstanding (1,006,301)
Class C Net Assets ($151,771) = Net Asset Value Per Share ($10.37)
--------------------------------------
Shares Outstanding (14,630)
National Insured Tax Free Fund
Class A Net Assets ($30,160,053) = Net Asset Value Per Share ($10.38)
------------------------------------
Shares Outstanding (2,904,199)
Class B Net Assets ($1,780,248) = Net Asset Value Per Share ($10.38)
------------------------------------
Shares Outstanding (171,462)
Class C Net Assets ($89,957) = Net Asset Value Per Share ($10.38)
--------------------------------------
Shares Outstanding (8,670)
National Limited Term Tax Free Fund
Class A Net Assets ($1,133,038) = Net Asset Value Per Share ($10.17)
------------------------------------
Shares Outstanding (111,391)
Class B Net Assets ($51,387) = Net Asset Value Per Share ($10.18)
--------------------------------------
Shares Outstanding (5,050)
National Tax Free Fund
Class A Net Assets ($3,203,314) = Net Asset Value Per Share ($10.33)
------------------------------------
Shares Outstanding (310,159)
Class B Net Assets ($472,365) = Net Asset Value Per Share ($10.33)
-----------------------------------
Shares Outstanding (45,714)
Class C Net Assets ($62,142) = Net Asset Value Per Share ($10.33)
--------------------------------------
Shares Outstanding (6,014)
New Mexico Tax Free Fund
Class A Net Assets ($20,133,196) = Net Asset Value Per Share ($10.79)
------------------------------------
Shares Outstanding (1,865,440)
Class B Net Assets ($794,330) = Net Asset Value Per Share ($10.79)
-------------------------------------
Shares Outstanding (73,584)
Class C Net Assets ($341,228) = Net Asset Value Per Share ($10.79)
-------------------------------------
Shares Outstanding (31,619)
New York Tax Free Fund
Class A Net Assets ($10,044,178) = Net Asset Value Per Share ($10.69)
------------------------------------
Shares Outstanding (940,019)
Class B Net Assets ($254,408) = Net Asset Value Per Share ($10.65)
-----------------------------------
Shares Outstanding (23,887)
Class C Net Assets ($52,815) = Net Asset Value Per Share ($10.66)
--------------------------------------
Shares Outstanding (4,955)
North Dakota Tax Free Fund
Class A Net Assets ($33,713,299) = Net Asset Value Per Share ($10.88)
------------------------------------
Shares Outstanding (3,099,514)
Class B Net Assets ($700,333) = Net Asset Value Per Share ($10.88)
-------------------------------------
Shares Outstanding (64,382)
Class C Net Assets ($40,492) = Net Asset Value Per Share ($10.87)
--------------------------------------
Shares Outstanding (3,726)
Oregon Insured Tax Free Fund
Class A Net Assets ($20,912,822) = Net Asset Value Per Share ($9.87)
------------------------------------
Shares Outstanding (2,118,095)
Class B Net Assets ($4,758,497) = Net Asset Value Per Share ($9.87)
------------------------------------
Shares Outstanding (481,913)
Class C Net Assets ($359,820) = Net Asset Value Per Share ($9.88)
-------------------------------------
Shares Outstanding (36,429)
Utah Tax Free Fund
Class A Net Assets ($3,860,621) = Net Asset Value Per Share ($10.84)
------------------------------------
Shares Outstanding (356,303)
Class B Net Assets ($397,386) = Net Asset Value Per Share ($10.83)
-------------------------------------
Shares Outstanding (36,679)
Washington Insured Tax Free Fund
Class A Net Assets ($2,382,304) = Net Asset Value Per Share ($10.30)
------------------------------------
Shares Outstanding (231,187)
Class B Net Assets ($515,653) = Net Asset Value Per Share ($10.31)
--------------------------------------
Shares Outstanding (50,013)
Class C Net Assets ($19,459) = Net Asset Value Per Share ($10.30)
--------------------------------------
Shares Outstanding (1,890)
Wisconsin Tax Free Fund
Class A Net Assets ($28,292,440) = Net Asset Value Per Share ($9.64)
------------------------------------
Shares Outstanding (2,936,014)
Class B Net Assets ($1,339,330) = Net Asset Value Per Share ($9.63)
-------------------------------------
Shares Outstanding (139,085)
Class C Net Assets ($554,860) = Net Asset Value Per Share ($9.66)
--------------------------------------
Shares Outstanding (57,445)
</TABLE>
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Funds may refer to
"yield," "taxable equivalent yield," "average annual total return" and
"cumulative total return." Yield, taxable equivalent yield, average annual total
return and cumulative total return are calculated as follows. Performance data
is provided for Class B or Class C shares to the extent such shares were
outstanding during the periods indicated.
YIELD
Yield is computed by dividing the net investment income per share deemed
earned during the computation period by the maximum offering price per share on
the last day of the period, according to the following formula:
YIELD = 2 [ ( {a-b/cd} + 1 ){6th power} - 1 ]
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The yields for the Funds for the 30-day period ended December 31, 1996
are as set forth below:
<TABLE>
<CAPTION>
30-Day Yield
-----------------------------------------
Absent
Actual Voluntary Fee Waivers
------ ---------------------
<S> <C> <C>
Arizona Insured Tax Free Fund - Class A 4.44% 4.34%
Arizona Insured Tax Free Fund - Class B 3.86% 3.77%
Arizona Insured Tax Free Fund - Class C 3.86% N/A
Arizona Tax Free Fund - Class A 5.28% 4.68%
Arizona Tax Free Fund - Class B 4.73% 4.03%
Arizona Tax Free Fund - Class C 4.72% 4.10%
California Insured Tax Free Fund - Class A 5.05% 4.91%
California Insured Tax Free Fund - Class B 4.83% 4.41%
California Insured Tax Free Fund - Class C 4.50% 4.34%
California Tax Free Fund - Class A 6.47% 5.72%
California Tax Free Fund - Class B 6.17% 4.94%
California Tax Free Fund - Class C 5.97% 4.95%
Colorado Tax Free Fund - Class A 5.16% 5.06%
Colorado Tax Free Fund - Class B 4.48% 4.43%
Colorado Tax Free Fund - Class C 4.48% N/A
Florida Insured Tax Free Fund - Class A 4.56% 4.38%
Florida Insured Tax Free Fund - Class B 4.10% 3.73%
Florida Limited Term Tax Free Fund - Class A 6.05% 5.58%
Florida Limited Term Tax Free Fund - Class B 5.37% 4.95%
Florida Limited Term Tax Free Fund - Class C 5.27% 4.92%
Florida Tax Free Fund - Class A 5.01% 4.32%
Florida Tax Free Fund - Class B 4.80% 3.80%
Florida Tax Free Fund - Class C 4.45% 3.77%
Idaho Tax Free Fund - Class A 5.33% 4.96%
Idaho Tax Free Fund - Class B 5.07% 4.49%
Idaho Tax Free Fund - Class C 4.79% 4.41%
Iowa Tax Free Fund - Class A 4.53% 4.42%
Iowa Tax Free Fund - Class B 3.93% 3.78%
Iowa Tax Free Fund - Class C 4.22% 4.17%
Kansas Tax Free Fund - Class A 4.47% 4.18%
Kansas Tax Free Fund - Class B 3.81% 3.50%
Kansas Tax Free Fund - Class C 3.76% 3.57%
Minnesota Insured Tax Free Fund - Class A 4.47% N/A
Minnesota Insured Tax Free Fund - Class B 3.90% 3.81%
Minnesota Insured Tax Free Fund - Class C 3.89% N/A
Minnesota Limited Term Tax Free Fund - Class A 4.01% N/A
Minnesota Limited Term Tax Free Fund - Class B 3.38% 3.33%
Minnesota Limited Term Tax Free Fund - Class C 3.38% N/A
Minnesota Tax Free Fund - Class A 4.80% N/A
Minnesota Tax Free Fund - Class B 4.38% 4.24%
Minnesota Tax Free Fund - Class C 4.23% N/A
Missouri Insured Tax Free Fund - Class A 4.95% 4.71%
Missouri Insured Tax Free Fund - Class B 4.46% 4.09%
Missouri Insured Tax Free Fund - Class C 4.22% 4.09%
National Insured Tax Free Fund - Class A 5.49% 5.17%
National Insured Tax Free Fund - Class B 5.19% 4.64%
National Insured Tax Free Fund - Class C 4.93% 4.59%
National Limited Term Tax Free Fund - Class A 4.85% 4.17%
National Limited Term Tax Free Fund - Class B 4.53% 3.56%
National Tax Free Fund - Class A 5.45% 4.75%
National Tax Free Fund - Class B 5.17% 4.20%
National Tax Free Fund - Class C 4.92% 4.20%
New Mexico Tax Free Fund - Class A 4.93% 4.79%
New Mexico Tax Free Fund - Class B 4.31% 4.15%
New Mexico Tax Free Fund - Class C 4.62% 4.55%
New York Tax Free Fund - Class A 4.80% 4.68%
New York Tax Free Fund - Class B 4.24% 4.13%
New York Tax Free Fund - Class C 4.24% 4.10%
North Dakota Tax Free Fund - Class A 4.79% 4.64%
North Dakota Tax Free Fund - Class B 4.49% 4.12%
North Dakota Tax Free Fund - Class C 4.53% N/A
Oregon Insured Tax Free Fund - Class A 4.65% 4.37%
Oregon Insured Tax Free Fund - Class B 4.17% 3.72%
Oregon Insured Tax Free Fund - Class C 3.94% 3.73%
Utah Tax Free Fund - Class A 4.88% 4.44%
Utah Tax Free Fund - Class B 4.20% 3.78%
Washington Insured Tax Free Fund - Class A 5.13% 4.52%
Washington Insured Tax Free Fund - Class B 4.49% 3.84%
Washington Insured Tax Free Fund - Class C 4.39% 3.90%
Wisconsin Tax Free Fund - Class A 4.71% 4.63%
Wisconsin Tax Free Fund - Class B 4.17% 4.02%
Wisconsin Tax Free Fund - Class C 4.29% 4.23%
</TABLE>
TAXABLE EQUIVALENT YIELD
Taxable equivalent yield is computed by dividing that portion of the
yield of a Fund (as computed above) which is tax-exempt by one minus a stated
marginal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
The taxable equivalent yields for the Funds for the 30-day period ended
December 31, 1996 are set forth below. These taxable equivalent yields are based
on current Federal marginal income tax rates combined with state marginal income
tax rates, if applicable. Each combined marginal rate assumes a single taxpayer
and that state income taxes paid are fully deductible for purposes of computing
federal taxable income. The combined marginal rates do not reflect federal rules
concerning the phase-out of personal exemptions and limitations on the allowance
of itemized deductions for certain high-income taxpayers. The highest state
marginal tax rate was used for each Federal taxable income bracket. State
marginal tax rates are those currently scheduled to be in effect for 1997. As of
the date of this Statement of Additional Information, many state legislatures
are in session and it is possible that tax rates in those states will be
changed. If tax rates were lowered, this would have the effect of reducing the
taxable equivalent yields shown below.
<TABLE>
<CAPTION>
ACTUAL
------
ARIZONA(1)
----------
31.74% 34.59% 39.58% 42.98%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Arizona Insured Tax Free Fund - Class A 6.50% 6.79% 7.35% 7.79%
Arizona Insured Tax Free Fund - Class B 5.66% 5.90% 6.39% 6.77%
Arizona Insured Tax Free Fund - Class C 5.66% 5.90% 6.39% 6.77%
Arizona Tax Free Fund - Class A 7.74% 8.07% 8.74% 9.26%
Arizona Tax Free Fund - Class B 6.93% 7.23% 7.83% 8.30%
Arizona Tax Free Fund - Class C 6.92% 7.22% 7.81% 8.28%
CALIFORNIA(2)
-------------
34.70% 37.42% 41.95% 45.22%
------ ------ ------ ------
California Insured Tax Free Fund - Class A 7.73% 8.07% 8.70% 9.22%
California Insured Tax Free Fund - Class B 7.40% 7.72% 8.32% 8.82%
California Insured Tax Free Fund - Class C 6.89% 7.19% 7.75% 8.21%
California Tax Free Fund - Class A 9.91% 10.34% 11.15% 11.81%
California Tax Free Fund - Class B 9.45% 9.86% 10.63% 11.26%
California Tax Free Fund - Class C 9.14% 9.54% 10.28% 10.90%
COLORADO (3)
------------
31.60% 34.45% 39.20% 42.62%
------ ------ ------ ------
Colorado Tax Free Fund - Class A 7.54% 7.87% 8.49% 8.99%
Colorado Tax Free Fund - Class B 6.55% 6.83% 7.37% 7.81%
Colorado Tax Free Fund - Class C 6.55% 6.83% 7.37% 7.81%
FLORIDA
-------
28% 31% 36% 39.6%
--- --- --- -----
Florida Insured Tax Free Fund - Class A 6.33% 6.61% 7.13% 7.55%
Florida Insured Tax Free Fund - Class B 5.69% 5.94% 6.41% 6.79%
Florida Limited Term Tax Free Fund - Class A 8.40% 8.77% 9.45% 10.02%
Florida Limited Term Tax Free Fund - Class B 7.46% 7.78% 8.39% 8.89%
Florida Limited Term Tax Free Fund - Class C 7.32% 7.64% 8.23% 8.73%
Florida Tax Free Fund - Class A 6.96% 7.26% 7.83% 8.29%
Florida Tax Free Fund - Class B 6.67% 6.96% 7.50% 7.95%
Florida Tax Free Fund - Class C 6.18% 6.45% 6.95% 7.37%
IDAHO(4)
--------
33.90% 36.66% 41.25% 44.55%
------ ------ ------ ------
Idaho Tax Free Fund - Class A 8.06% 8.41% 9.07% 9.61%
Idaho Tax Free Fund - Class B 7.67% 8.00% 8.63% 9.14%
Idaho Tax Free Fund - Class C 7.25% 7.56% 8.15% 8.64%
IOWA (5)
--------
33.32% 35.90% 40.24% 43.39%
------ ------ ------ ------
Iowa Tax Free Fund - Class A 6.79% 7.07% 7.58% 8.00%
Iowa Tax Free Fund - Class B 5.89% 6.13% 6.58% 6.94%
Iowa Tax Free Fund - Class C 6.33% 6.58% 7.06% 7.45%
KANSAS (6)
----------
33.58% 36.35% 40.96% 44.28%
------ ------ ------ ------
Kansas Tax Free Fund - Class A 6.73% 7.02% 7.57% 8.02%
Kansas Tax Free Fund - Class B 5.74% 5.99% 6.45% 6.84%
Kansas Tax Free Fund - Class C 5.66% 5.91% 6.37% 6.75%
MINNESOTA (7)
-------------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Minnesota Insured Fund - Class A 6.79% 7.08% 7.63% 8.09%
Minnesota Insured Fund - Class B 5.92% 6.18% 6.66% 7.06%
Minnesota Insured Fund - Class C 5.90% 6.16% 6.64% 7.04%
Minnesota Limited Term Tax Free Fund - Class A 6.09% 6.35% 6.85% 7.26%
Minnesota Limited Term Tax Free Fund - Class B 5.13% 5.35% 5.77% 6.12%
Minnesota Limited Term Tax Free Fund - Class C 5.13% 5.35% 5.77% 6.12%
Minnesota Tax Free Fund - Class A 7.29% 7.60% 8.20% 8.69%
Minnesota Tax Free Fund - Class B 6.65% 6.94% 7.48% 7.93%
Minnesota Tax Free Fund - Class C 6.42% 6.70% 7.22% 7.65%
MISSOURI(8)
-----------
31.16% 33.91% 38.51% 41.84%
------ ------ ------ ------
Missouri Insured Tax Free Fund - Class A 7.19% 7.49% 8.05% 8.51%
Missouri Insured Tax Free Fund - Class B 6.48% 6.75% 7.25% 7.67%
Missouri Insured Tax Free Fund - Class C 6.13% 6.39% 6.86% 7.26%
NEW MEXICO(9)
-------------
33.69% 36.87% 41.44% 44.73%
------ ------ ------ ------
New Mexico Tax Free Fund - Class A 7.48% 7.81% 8.42% 8.92%
New Mexico Tax Free Fund - Class B 6.54% 6.83% 7.36% 7.80%
New Mexico Tax Free Fund - Class C 7.01% 7.32% 7.89% 8.36%
NEW YORK(10)
------------
33.13% 35.92% 40.56% 43.90%
------ ------ ------ ------
New York Tax Free Fund - Class A 7.18% 7.49% 8.08% 8.56%
New York Tax Free Fund - Class B 6.34% 6.62% 7.13% 7.56%
New York Tax Free Fund - Class C 6.34% 6.62% 7.13% 7.56%
NORTH DAKOTA(11)
----------------
30.72% 33.87% 39.07% 42.77%
------ ------ ------ ------
North Dakota Tax Free Fund - Class A 6.91% 7.24% 7.86% 8.37%
North Dakota Tax Free Fund - Class B 6.48% 6.79% 7.37% 7.85%
North Dakota Tax Free Fund - Class C 6.54% 6.85% 7.43% 7.92%
OREGON(12)
----------
34.48% 37.21% 41.76% 45.04%
------ ------ ------ ------
Oregon Insured Tax Free Fund - Class A 7.10% 7.41% 7.98% 8.46%
Oregon Insured Tax Free Fund - Class B 6.36% 6.64% 7.16% 7.59%
Oregon Insured Tax Free Fund - Class C 6.01% 6.27% 6.77% 7.17%
UTAH(13)
--------
32.38% 35.13% 39.72% 43.04%
------ ------ ------ ------
Utah Tax Free Fund - Class A 7.22% 7.52% 8.10% 8.57%
Utah Tax Free Fund - Class B 6.21% 6.47% 6.97% 7.37%
WASHINGTON
----------
28% 31% 36% 39.6%
--- --- --- -----
Washington Insured Tax Free Fund - Class A 7.13% 7.43% 8.02% 8.49%
Washington Insured Tax Free Fund - Class B 6.24% 6.51% 7.02% 7.43%
Washington Insured Tax Free Fund - Class C 6.10% 6.36% 6.86% 7.27%
WISCONSIN(14)
-------------
32.99% 35.78% 40.44% 43.79%
------ ------ ------ ------
Wisconsin Tax Free Fund - Class A 7.03% 7.33% 7.91% 8.38%
Wisconsin Tax Free Fund - Class B 6.22% 6.49% 7.00% 7.42%
Wisconsin Tax Free Fund - Class C 6.40% 6.68% 7.20% 7.63%
NATIONAL
--------
28% 31% 36% 39.6%
--- --- --- -----
National Insured Tax Free Fund - Class A 7.63% 7.96% 8.58% 9.09%
National Insured Tax Free Fund - Class B 7.21% 7.52% 8.11% 8.59%
National Insured Tax Free Fund - Class C 6.85% 7.14% 7.70% 8.16%
National Limited Term Tax Free Fund - Class A 6.74% 7.03% 7.58% 8.03%
National Limited Term Tax Free Fund - Class B 6.29% 6.57% 7.08% 7.50%
National Tax Free Fund - Class A 7.57% 7.90% 8.52% 9.02%
National Tax Free Fund - Class B 7.18% 7.49% 8.08% 8.56%
National Tax Free Fund - Class C 6.83% 7.13% 7.69% 8.15%
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
ARIZONA(1)
----------
31.74% 34.59% 39.58% 42.98%
------ ------ ------ ------
Arizona Insured Tax Free Fund - Class A 6.36% 6.63% 7.18% 7.61%
Arizona Insured Tax Free Fund - Class B 5.52% 5.76% 6.24% 6.61%
Arizona Insured Tax Free Fund - Class C 5.66% 5.90% 6.39% 6.77%
Arizona Tax Free Fund - Class A 6.86% 7.15% 7.75% 8.21%
Arizona Tax Free Fund - Class B 5.90% 6.16% 6.67% 7.07%
Arizona Tax Free Fund - Class C 6.01% 6.27% 6.79% 7.19%
CALIFORNIA(2)
-------------
34.70% 37.42% 41.95% 45.22%
------ ------ ------ ------
California Insured Tax Free Fund - Class A 7.52% 7.85% 8.46% 8.96%
California Insured Tax Free Fund - Class B 6.75% 7.05% 7.60% 8.05%
California Insured Tax Free Fund - Class C 6.65% 6.93% 7.48% 7.92%
California Tax Free Fund - Class A 8.76% 9.14% 9.85% 10.44%
California Tax Free Fund - Class B 7.56% 7.89% 8.51% 9.02%
California Tax Free Fund - Class C 7.58% 7.91% 8.53% 9.04%
COLORADO (3)
------------
31.60% 34.45% 39.20% 42.62%
------ ------ ------ ------
Colorado Tax Free Fund - Class A 7.40% 7.72% 8.32% 8.82%
Colorado Tax Free Fund - Class B 6.48% 6.76% 7.29% 7.72%
Colorado Tax Free Fund - Class C 6.55% 6.83% 7.37% 7.81%
FLORIDA
-------
28% 31% 36% 39.6%
--- --- --- -----
Florida Insured Tax Free Fund - Class A 6.08% 6.35% 6.84% 7.25%
Florida Insured Tax Free Fund - Class B 5.18% 5.41% 5.83% 6.18%
Florida Limited Term Tax Free Fund - Class A 7.75% 8.09% 8.72% 9.24%
Florida Limited Term Tax Free Fund - Class B 6.88% 7.17% 7.73% 8.20%
Florida Limited Term Tax Free Fund - Class C 6.83% 7.13% 7.69% 8.15%
Florida Tax Free Fund - Class A 6.00% 6.26% 6.75% 7.15%
Florida Tax Free Fund - Class B 5.28% 5.51% 5.94% 6.29%
Florida Tax Free Fund - Class C 5.24% 5.46% 5.89% 6.24%
IDAHO (4)
---------
33.90% 36.66% 41.25% 44.55%
------ ------ ------ ------
Idaho Tax Free Fund - Class A 7.50% 7.83% 8.44% 8.95%
Idaho Tax Free Fund - Class B 6.79% 7.09% 7.64% 8.10%
Idaho Tax Free Fund - Class C 6.67% 6.96% 7.51% 7.95%
IOWA(5)
-------
33.32% 35.90% 40.24% 43.39%
------ ------ ------ ------
Iowa Tax Free Fund - Class A 6.63% 6.90% 7.40% 7.81%
Iowa Tax Free Fund - Class B 5.67% 5.90% 6.33% 6.68%
Iowa Tax Free Fund - Class C 6.25% 6.51% 6.98% 7.37%
KANSAS (6)
----------
33.58% 36.35% 40.96% 44.28%
------ ------ ------ ------
Kansas Tax Free Fund - Class A 6.29% 6.57% 7.08% 7.50%
Kansas Tax Free Fund - Class B 5.27% 5.50% 5.93% 6.28%
Kansas Tax Free Fund - Class C 5.37% 5.61% 6.05% 6.41%
MINNESOTA (7)
-------------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Minnesota Insured Fund - Class A 6.79% 7.08% 7.63% 8.09%
Minnesota Insured Fund - Class B 5.78% 6.03% 6.51% 6.89%
Minnesota Insured Fund - Class C 5.90% 6.16% 6.64% 7.04%
Minnesota Limited Term Tax Free Fund - Class A 6.09% 6.35% 6.85% 7.26%
Minnesota Limited Term Tax Free Fund - Class B 5.05% 5.27% 5.69% 6.03%
Minnesota Limited Term Tax Free Fund - Class C 5.13% 5.35% 5.77% 6.12%
Minnesota Tax Free Fund - Class A 7.29% 7.60% 8.20% 8.69%
Minnesota Tax Free Fund - Class B 6.44% 6.72% 7.24% 7.67%
Minnesota Tax Free Fund - Class C 6.42% 6.70% 7.22% 7.65%
MISSOURI(8)
-----------
31.16% 33.91 38.51% 41.84%
------ ----- ------ ------
Missouri Insured Tax Free Fund - Class A 6.84% 7.13% 7.66% 8.10%
Missouri Insured Tax Free Fund - Class B 5.94% 6.19% 6.65% 7.03%
Missouri Insured Tax Free Fund - Class C 5.94% 6.19% 6.65% 7.03%
NEW MEXICO(9)
-------------
33.69% 36.87% 41.44% 44.73%
------ ------ ------ ------
New Mexico Tax Free Fund - Class A 7.27% 7.59% 8.18% 8.67%
New Mexico Tax Free Fund - Class B 6.30% 6.57% 7.09% 7.51%
New Mexico Tax Free Fund - Class C 6.91% 7.21% 7.77% 8.23%
NEW YORK(10)
------------
33.13% 35.92% 40.56% 43.90%
------ ------ ------ ------
New York Tax Free Fund - Class A 7.00% 7.30% 7.87% 8.34%
New York Tax Free Fund - Class B 6.18% 6.44% 6.95% 7.36%
New York Tax Free Fund - Class C 6.13% 6.40% 6.90% 7.31%
NORTH DAKOTA(11)
----------------
30.72% 33.87% 39.07% 42.77%
------ ------ ------ ------
North Dakota Tax Free Fund - Class A 6.70% 7.02% 7.62% 8.11%
North Dakota Tax Free Fund - Class B 5.95% 6.23% 6.76% 7.20%
North Dakota Tax Free Fund - Class C 6.54% 6.85% 7.43% 7.92%
OREGON(12)
----------
34.48% 37.21% 41.76% 45.04%
------ ------ ------ ------
Oregon Insured Tax Free Fund - Class A 6.67% 6.96% 7.50% 7.95%
Oregon Insured Tax Free Fund - Class B 5.68% 5.92% 6.39% 6.77%
Oregon Insured Tax Free Fund - Class C 5.69% 5.94% 6.40% 6.79%
UTAH(13)
--------
32.38% 35.13% 39.72% 43.04%
------ ------ ------ ------
Utah Tax Free Fund - Class A 6.57% 6.84% 7.37% 7.79%
Utah Tax Free Fund - Class B 5.59% 5.83% 6.27% 6.64%
WASHINGTON
----------
28% 31% 36% 39.6%
--- --- --- -----
Washington Insured Tax Free Fund - Class A 6.28% 6.55% 7.06% 7.48%
Washington Insured Tax Free Fund - Class B 5.33% 5.57% 6.00% 6.36%
Washington Insured Tax Free Fund - Class C 5.42% 5.65% 6.09% 6.46%
WISCONSIN(14)
-------------
32.99% 35.78% 40.44% 43.79%
------ ------ ------ ------
Wisconsin Tax Free Fund - Class A 6.91% 7.21% 7.77% 8.54%
Wisconsin Tax Free Fund - Class B 6.00% 6.26% 6.75% 7.15%
Wisconsin Tax Free Fund - Class C 6.31% 6.59% 7.10% 7.52%
NATIONAL
--------
28% 31% 36% 39.6%
--- --- --- -----
National Insured Tax Free Fund - Class A 7.18% 7.49% 8.08% 8.56%
National Insured Tax Free Fund - Class B 6.44% 6.72% 7.25% 7.68%
National Insured Tax Free Fund - Class C 6.38% 6.65% 7.17% 7.60%
National Limited Term Tax Free Fund - Class A 5.79% 6.04% 6.52% 6.90%
National Limited Term Tax Free Fund - Class B 4.94% 5.16% 5.56% 5.89%
National Tax Free Fund - Class A 6.60% 6.88% 7.42% 7.86%
National Tax Free Fund - Class B 5.83% 6.09% 6.56% 6.95%
National Tax Free Fund - Class C 5.83% 6.09% 6.56% 6.95%
</TABLE>
(1) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 5.2% Arizona marginal rate and a 26.54%
federal marginal rate, (b) a 5.2% Arizona marginal rate and a 29.39%
federal marginal rate, (c) a 5.6% Arizona marginal rate and a 33.98%
federal marginal rate, and (d) a 5.6%Arizona marginal rate and a 37.38%
federal marginal rate.
(2) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9.3% California marginal rate and (a) a 25.4%
federal marginal rate, (b) a 28.12% federal marginal rate, (c) a 32.65%
federal marginal rate, and (d) a 35.92% federal marginal rate.
(3) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 5% Colorado rate and (a) a 26.6% federal
marginal rate, (b) a 29.45% federal marginal rate, (c) a 34.20% federal
marginal rate, and (d) 37.62% federal marginal rate.
(4) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.20% Idaho tax rate and (a) a 25.70% federal
marginal rate, (b) a 28.46% federal marginal rate, (c) a 33.05% federal
marginal rate, and (d) a 36.35% federal marginal rate.
(5) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.39% Iowa marginal rate and a 25.93%
federal marginal rate, (b) a 7.11% Iowa marginal rate and a 28.8% federal
marginal rate, (c) a 6.63% Iowa marginal rate and a 33.61% federal
marginal rate, and (d) a 6.28% Iowa marginal rate and a 37.11% federal
marginal rate.
(6) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 7.75 Kansas marginal rate and (a) a 25.83%
federal marginal rate, (b)a 28.60% federal marginal rate, (c) a 33.21%
federal marginal rate, and (d) a 36.53% federal marginal rate.
(7) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.5% Minnesota marginal rate and (a) a 25.62%
federal marginal rate, (b) a 28.37% federal marginal rate, (c) a 32.94%
federal marginal rate, and (d) a 36.23% federal marginal rate.
(8) The four combined rates listed above assume that the taxpayer is subject
to (a) a 4.39% Missouri marginal rate and a 26.77% federal marginal rate,
(b) a 4.22% Missouri marginal rate and a 29.69% federal marginal rate,
(c) a 3.92% Missouri marginal rate and a 34.59% federal marginal rate,
and (d) a 3.71% Missouri marginal rate and a 38.13% federal marginal
rate.
(9) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.9% New Mexico marginal rate and a 25.79%
federal marginal rate, (b) a 8.5% New Mexico marginal rate and a 28.37%
federal marginal rate, (c) a 8.5% New Mexico marginal rate and a 32.94%
federal marginal rate, and (d) a 8.5% New Mexico marginal rate and a
36.23% federal marginal rate.
(10) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 7.125% New York maginal rate and (a) a 26.00%
federal marginal rate, (b) a 28.79% federal marginal rate, (c) a 33.43%
federal marginal rate and (d) a 36.77% federal marginal rate.
(11) The four combined rates listed above assume that the taxpayer is subject
to (a) 26.94%, (b) 29.71%, (c) 34.27%% and (d) 37.52% federal marginal
rates and elects to determine his or her North Dakota income tax
liability as an amount equal to 14% of his or her adjusted federal income
tax liability.
(12) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9% Oregon tax rate and (a) a 25.48% federal
marginal rate, (b) a 28.21% federal marginal rate, (c) a 32.76% federal
marginal rate, and (d) a 36.04% federal marginal rate.
(13) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 6.08% Utah marginal rate and a 26.30%
federal marginal rate, (b) a 5.98% Utah marginal rate and a 29.15%
federal marginal rate, (c) a 5.81% Utah marginal rate and a 33.91%
federal marginal rate, and (d) a 5.69% Utah marginal rate and a 37.35%
federal marginal rate.
(14) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 6.93% Wisconsin marginal rate and (a) a 26.06%
federal marginal rate, (b) a 28.85% federal marginal rate, (c) a 33.51%
federal marginal rate, and (d) a 36.86% federal marginal rate.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P [( 1 + T )nth power] = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The following table sets forth the average annual total return for each
Fund for the periods indicated and ended December 31, 1996:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Absent Voluntary
Actual Fee Waivers
----------------------------- ------------------------------
Since Since
1 Year 5 Year Inception 1 Year 5 Year Inception
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Arizona Insured Tax Free Fund
Class A (Inception 4/1/91) 0.19% 6.44% 7.34% 0.06% 6.09% 6.80%
Class B (Inception 3/10/95) 3.32% ** 7.49% 3.20% ** 7.30%
Class C (Inception 5/26/94) 3.18% ** 6.69% + ** 6.57%
Arizona Tax Free Fund
Class A (Inception 3/2/95) 1.53% ** 7.90% 0.73% ** 7.07%
Class B (Inception 6/29/95) 4.84% ** 8.39% 3.89% ** 7.35%
Class C (Inception 5/13/95) 4.70% ** 8.64% 3.87% ** 7.84%
California Tax Free Fund
Class A (Inception 3/2/95) 0.30% ** 6.52% -0.68% ** 5.59%
Class B (Inception 8/23/95) 3.77% ** 9.85% 2.14% ** 8.22%
Class C (Inception 4/9/96) ** ** 7.58% ** ** 6.61%
California Insured Tax Free Fund
Class A (Inception 10/15/92) -0.26% ** 5.94% -0.45% ** 5.24%
Class B (Inception 3/1/94) 3.22% ** 4.40% 2.65% ** 3.52%
Class C (Inception 4/12/95) 2.47% ** 5.92% 2.26% ** 5.68%
Colorado Tax Free Fund
Class A (Inception 4/23/87) 0.18% 6.60% 7.74% 0.04% 6.54% 7.70%
Class B (Inception 3/22/95) 3.25% ** 7.34% 3.18% ** 7.20%
Class C (Inception 5/6/94) 3.17% ** 6.62% + ** 6.62%
Florida Tax Free Fund
Class A (Inception 3/2/95) -0.15% ** 6.53% -1.06% ** 5.54%
Class B (Inception 9/15/95) 3.51% ** 6.70% 2.17% ** 5.26%
Class C (Inception 4/22/95) 2.97% ** 6.97% 2.21% ** 6.12%
Florida Limited Term Tax Free Fund
Class A (Inception 5/1/94) 0.50% ** 5.00% -0.11% ** 4.28%
Class B (Inception 9/15/95) 2.57% ** 2.86% 2.02% ** 2.33%
Class C (Inception 3/23/95) 2.37% ** 5.77% 1.91% ** 5.33%
Florida Insured Tax Free Fund
Class A (Inception 1/1/92) -0.96% ** 6.58% -0.21% ** 6.04%
Class B (Inception 3/11/94) 2.40% ** 5.21% 1.91% ** 4.44%
Idaho Tax Free Fund
Class A (Inception 1/4/95) 0.44% ** 8.65% -0.07% ** 7.79%
Class B (Inception 3/16/95) 3.75% ** 7.54% 2.96% ** 7.63%
Class C (Inception 1/11/95) 3.48% ** 9.60% 2.97% ** 8.79%
Iowa Tax Free Fund
Class A (Inception 9/1/93) -1.29% ** 2.69% -1.43% ** 2.05%
Class B (Inception 3/24/95) 1.76% ** 6.88% 1.55% ** 6.57%
Class C (Inception 1/14/95) 1.56% ** 10.27% 1.49% ** 10.16%
Kansas Tax Free Fund
Class A (Inception 11/30/92) -0.45% ** 6.02% -0.82% ** 5.06%
Class B (Inception 4/8/95) 2.69% ** 6.57% 2.29% ** 5.94%
Class C (Inception 4/12/95) 2.52% ** 6.24% 2.29% ** 5.82%
Minnesota Limited Term Tax Free Fund
Class A (Inception 10/27/85) 0.61% 4.72% 5.44%# + 4.73% 5.45%
Class B (Inception 8/15/95) 2.74% ** 4.37% 2.66% ** 4.24%
Class C (Inception 5/4/94) 2.69% ** 4.73% + ** 4.72%
Minnesota Tax Free Fund
Class A (Inception 2/27/84) -0.54% 5.80% 6.72%# + + 6.72%
Class B (Inception 3/11/95) 2.83% ** 7.00% 2.64% ** 6.78%
Class C (Inception 5/4/94) 2.64% ** 6.04% + ** +
Minnesota Insured Fund
Class A (Inception 5/1/87) -0.14% 5.95% 7.12% + 5.69% 6.81%
Class B (Inception 3/7/95) 3.03% ** 6.88% 2.90% ** 6.66%
Class C (Inception 5/4/94) 2.98% ** 5.84% + ** 5.74%
Missouri Insured Tax Free Fund
Class A (Inception 11/2/92) -0.47% ** 5.61% -0.77% ** 4.88%
Class B (Inception 3/12/94) 2.93% ** 5.08% 2.42% ** 4.15%
Class C (Inception 11/11/95) 2.48% ** 4.13% 2.31% ** 3.93%
National Tax Free Fund
Class A (Inception 9/8/95) 0.47% ** 6.07% -0.46% ** 5.08%
Class B (Inception 9/15/95) 3.83% ** 7.97% 2.54% ** 6.64%
Class C (Inception 9/12/95) 3.51% ** 8.46% 2.55% ** 7.44%
National Insured Tax Free Fund
Class A (Inception 1/10/92) -1.15% ** 5.88% -1.58% ** 4.83%
Class B (Inception 5/26/94) 2.24% ** 7.14% 1.50% ** 6.06%
Class C (Inception 10/20/95) 2.02% ** 4.39% 1.56% ** 3.86%
National Limited Term Tax Free Fund
Class A (Inception 9/7/95) 1.98% ** 3.97% 1.03% ** 3.02%
Class B (inception 3/7/96) ** ** 3.19% ** ** 2.19%
New Mexico Tax Free Fund
Class A (Inception 10/5/92) 0.23% ** 6.36% 0.04% ** 5.72%
Class B (Inception 3/3/94) 3.39% ** 4.91% 3.17% ** 4.40%
Class C (Inception 5//96) ** ** 6.30% ** ** 6.24%
New York Tax Free Fund
Class A (Inception 11/6/87) -1.40% 5.33% 7.11% -1.49% 5.04% 6.63%
Class B (Inception 11/14/94) 1.43% ** 6.31% 1.16% ** 5.91%
Class C (Inception 4/26/95) 1.43% ** 3.98% 1.21% ** 3.36%
North Dakota Tax Free Fund
Class A (Inception 4/1/91) -0.01% 6.30% 7.09% -0.21% 5.00% 6.51%
Class B (Inception 5/10/94) 3.39% ** 7.55% 2.90% ** 6.90%
Class C (Inception 7/29/95) 2.81% ** 6.53% + ** 6.52%
Oregon Insured Tax Free Fund
Class A (Inception 8/1/93) -0.72% ** 3.70% -1.08% ** 2.87%
Class B (Inception 3/12/94) 2.61% ** 4.77% 2.01% ** 3.81%
Class C (Inception 7/7/95) 2.38% ** 5.87% 2.10% ** 5.53%
Utah Tax Free Fund
Class A (Inception 10/5/92) -0.52% ** 6.82% -1.08% ** 5.87%
Class B (Inception 5/27/95) 2.47% ** 5.66% 1.91% ** 4.97%
Washington Insured Tax Free Fund
Class A (Inception 8/1/93) 0.08% ** 5.47% -0.73% ** 4.40%
Class B (Inception 10/24/95) 3.32% ** 5.62% 2.45% ** 4.69%
Class C (Inception 4/21/95) 3.12% ** 6.61% 2.47% ** 5.85%
Wisconsin Tax Free Fund
Class A (Inception 9/1/93) -0.40% ** 2.83% -0.51% ** 2.20%
Class B (Inception 4/22/95) 2.84% ** 5.84% 2.64% ** 5.57%
Class C (Inception 3/28/95) 2.74% ** 6.09% 2.65% ** 6.01%
</TABLE>
** Not in existence for the period.
+ There were no voluntary fee waivers during the period.
# Return is for the 10 year period ended December 31, 1996.
CUMULATIVE TOTAL RETURN
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = [ {ERV-P} / P ] 100
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period; and
P = initial payment of $1,000.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The following table sets forth the cumulative total return for shares
of each Fund for the period from inception to December 31, 1996:
<TABLE>
<CAPTION>
Cumulative Total Return Since Inception
---------------------------------------
Absent Voluntary
Actual Fee Waivers
------ ----------------
<S> <C> <C>
Arizona Tax Free Fund
Class A (Inception 3/2/95) 14.99% 13.36%
Class B (Inception 6/29/95) 12.96% 11.31%
Class C (Inception 5/13/95) 14.56% 13.17%
Arizona Insured Tax Free Fund
Class A (Inception 4/1/91) 50.33% 46.03%
Class B (Inception 3/10/95) 14.03% 13.61%
Class C (Inception 5/26/94) 18.39% 18.03%
California Tax Free Fund
Class A (Inception 3/2/95) 12.30% 10.49%
Class B (Inception 8/23/95) 13.65% 11.33%
Class C (Inception 4/9/96) 7.58% 6.61%
California Insured Tax Free Fund
Class A (Inception 10/15/92) 27.53% 23.99%
Class B (Inception 3/1/94) 13.00% 10.38%
Class C (Inception 4/12/95) 10.43% 9.99%
Colorado Tax Free Fund
Class A (Inception 4/23/87) 106.03% 105.31%
Class B (Inception 3/22/95) 13.46% 13.17%
Class C (Inception 5/6/94) 18.61% 18.60%
Florida Tax Free Fund
Class A (Inception 3/2/95) 12.33% 10.41%
Class B (Inception 9/15/95) 8.79% 6.87%
Class C (Inception 4/22/95) 12.12% 10.60%
Florida Insured Tax Free Fund
Class A (Inception 1/1/92) 37.55% 34.07%
Class B (Inception 3/1/94) 15.35% 13.09%
Florida Limited Term Tax Free Fund
Class A (Inception 5/1/94) 13.92% 11.85%
Class B (Inception 9/15/95) 3.73% 3.02%
Class C (Inception 3/23/95) 10.50% 9.68%
Idaho Tax Free Fund
Class A (Inception 1/4/95) 18.00% 16.14%
Class B (Inception 3/16/95) 13.97% 12.03%
Class C (Inception 1/11/95) 19.85% 18.10%
Iowa Tax Free Fund
Class A (Inception 9/1/93) 9.25% 7.01%
Class B (Inception 3/24/95) 12.57% 11.96%
Class C (Inception 1/4/95) 21.52% 21.26%
Kansas Tax Free Fund
Class A (Inception 11/30/92) 26.99% 22.38%
Class B (Inception 4/8/95) 11.69% 10.53%
Class C (Inception 4/12/95) 11.02% 10.24%
Minnesota Limited Term Tax Free Fund
Class A (Inception 10/27/85) 90.52% 90.51%
Class B (Inception 8/15/95) 6.09% 5.90%
Class C (Inception 5/4/94) 13.11% 13.10%
Minnesota Insured Fund
Class A (Inception 5/1/87) 94.61% 89.12%
Class B (Inception 3/7/95) 12.91% 12.47%
Class C ((Inception 5/4/94) 16.33% 16.04%
Minnesota Tax Free Fund
Class A (Inception 2/27/84) 192.23% 191.91%
Class B (Inception 3/11/95) 13.06% 12.61%
Class C (Inception 5/4/94) 16.91% 16.91%
Missouri Insured Tax Free Fund
Class A (Inception 11/2/92) 25.56% 21.98%
Class B (Inception 3/12/94) 14.95% 12.12%
Class C (Inception 11/11/95) 4.73% 4.50%
National Tax Free Fund
Class A (Inception 9/8/95) 8.07% 6.75%
Class B (Inception 9/15/95) 10.47% 8.71%
Class C (Inception 9/12/95) 11.13% 9.83%
National Insured Tax Free Fund
Class A (Inception 1/10/92) 32.92% 26.49%
Class B (Inception 5/26/94) 19.68% 16.56%
Class C (Inception 10/20/95) 5.24% 4.67%
National Limited Term Tax Free Fund
Class A (Inception 9/7/95) 5.27% 4.01%
Class B (Inception 3/7/96) 3.19% 2.19%
New Mexico Tax Free Fund
Class A (Inception 10/5/92) 29.90% 26.61%
Class B (Inception 3/3/94) 14.55% 12.97%
Class C (Inception 5/7/96) 6.30% 6.24%
New York Tax Free Fund
Class A (Inception 11/6/87) 87.63% 80.08%
Class B (Inception 11/14/94) 13.94% 13.03%
Class C (Inception 4/26/95) 6.79% 5.72%
North Dakota Tax Free Fund
Class A (Inception 4/1/91) 48.33% 43.76%
Class B (Inception 5/10/94) 21.27% 19.34%
Class C (Inception 7/29/95) 9.46% 9.45%
Oregon Insured Tax Free Fund
Class A (Inception 8/1/93) 13.23% 10.17%
Class B (Inception 3/12/94) 14.01% 11.08%
Class C (Inception 7/7/95) 8.87% 8.35%
Utah Tax Free Fund
Class A (Inception 10/5/92) 32.39% 27.40%
Class B (Inception 5/27/95) 9.23% 8.08%
Washington Insured Tax Free Fund
Class A (Inception 8/1/93) 19.99% 15.86%
Class B (Inception 10/24/95) 6.73% 5.61%
Class C (Inception 4/21/95) 11.50% 10.16%
Wisconsin Tax Free Fund
Class A (Inception 9/1/93) 9.74% 7.52%
Class B (Inception 4/22/95) 10.12% 9.65%
Class C (Inception 3/28/95) 11.02% 10.86%
</TABLE>
MONTHLY CASH WITHDRAWAL PLAN
Any investor who owns or buys shares of any Fund valued at $10,000 or
more at the current offering price may open a Withdrawal Plan and have a
designated sum of money paid monthly to the investor or another person. Shares
are deposited in a Withdrawal Plan account and all distributions are reinvested
in additional shares of such Fund at net asset value or distributed in cash.
Shares in a Withdrawal Plan account are then redeemed to make each withdrawal
payment. Deferred sales charges may apply to monthly redemptions of Class A,
Class B and Class C shares (or to redemptions of class A shares in connection
with initial purchases of $1,000,000 or more which were not subject to a FESC).
Redemptions for the purpose of withdrawal are made on the 25th of the month (or
on the preceding business day if the 25th falls on a weekend or is a holiday) at
that day's closing net asset value and checks are mailed on the next business
day. Payments will be made to the registered shareholder. As withdrawal payments
may include a return on principal, they cannot be considered a guaranteed
annuity or actual yield of income to the investor. The redemption of shares in
connection with a Withdrawal Plan may result in a gain or loss for tax purposes.
Continued withdrawals in excess of income will reduce and possibly exhaust
invested principal, especially in the event of a market decline. The maintenance
of a Withdrawal Plan concurrently with purchases of additional Class A shares of
a Fund would normally be disadvantageous to the investor because of the FESC
payable on such purchases. For this reason, an investor may not maintain a plan
for the accumulation of Class A shares of a Fund (other than through
reinvestment of distributions) and a Withdrawal Plan at the same time. The cost
of administering Withdrawal Plans is borne by each Fund as an expense of all
shareholders. Each Fund or the Underwriter may terminate or change the terms of
the Withdrawal Plan at any time. The Withdrawal Plan is fully voluntary and may
be terminated by the shareholder at any time without the imposition of any
penalty.
Since the Withdrawal Plan may involve invasion of capital, investors
should consider carefully with their own financial advisers whether the
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in
their circumstances. The Funds make no recommendations or representations in
this regard.
ADDITIONAL INFORMATION
Information regarding certain record and beneficial ownership of the
Fund shares as of March 31, 1997 which equals or exceeds 5% of any class of Fund
shares is available without charge by calling 800-553-2143.
Organizational costs in connection with start-up and initial
registration are being amortized over 60 months on an inverse acceleration
(sum-of-the-year's-digits) basis. If Voyageur redeems any or all of its shares
of any Fund prior to the end of such Fund's 60-month amortization period, the
redemption proceeds will be reduced by its pro rata portion of such Fund's
unamortized organizational costs. If a Fund liquidates prior to the date such
costs are fully amortized, Voyageur will bear all unamortized organizational
costs of such Fund.
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A., Sixth Street & Marquette Avenue,
Minneapolis, Minnesota 55479, acts as custodian of the Funds' assets and
portfolio securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, serves as counsel for the Funds.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as independent auditors for the Funds. The Financial Statements
and Financial Highlights for the Funds as of December 31, 1996, incorporated by
reference or included in this Registration Statement have been so incorporated
or included herein in reliance upon the report of the independent auditors and
upon the authority of said firm as experts in accounting and auditing.
LIMITATION OF DIRECTOR LIABILITY
Corporate Entities. Under Minnesota law, each director owes certain
fiduciary duties to each Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances). Minnesota law authorizes corporations to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of the fiduciary duty of "care". Minnesota law does
not, however, permit a corporation to eliminate or limit the liability of
directors (i) for any breach of the directors' duty of "loyalty" to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for
authorizing a dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions of Minnesota
securities law, or (iv) for any transaction from which the directors derived an
improper personal benefit. The Articles of Incorporation of each of the Funds
limits the liability of such Funds' directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the 1940 Act (which Act prohibits any provisions which purport to
limit the liability of directors arising from such directors' willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the 1940 Act and the rules and regulations
adopted thereunder.
Trust Entities. As described in the prospectus following the caption
"General Information," shares of the Funds are entitled to one vote per share
(with proportional voting for fractional shares) on such matters as shareholders
are entitled to vote. There will normally be no meetings of shareholders for the
purpose of electing Trustees, except insofar as elections are required under the
1940 Act in the event that (i) less than a majority of the Trustees have been
elected by shareholders, or (ii) if, as a result of a vacancy, less than
two-thirds of the Trustees have been elected by the shareholders, the vacancy
will be filled only by a vote of the shareholders.
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Funds. However, the
Funds' Agreement and Declaration of Trust disclaims shareholder liability for
acts or obligations of the Funds and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or executed by a
Fund or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of each Fund's property for all loss and expense of any
shareholder of such Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which such Fund would be
unable to meet its obligations.
SHAREHOLDER MEETINGS
None of the Funds is required under Minnesota law to hold annual or
periodically scheduled regular meetings of shareholders. Regular and special
shareholder meetings are held only at such times and with such frequency as
required by law. Minnesota corporation law provides for the Board of Directors
to convene shareholder meetings when it deems appropriate. Similar discretion is
vested in the Boards of Trustees of parent entities organized as Massachusetts
Business Trusts. In addition, if a regular meeting of shareholders has not been
held during the immediately preceding fifteen months, a shareholder or
shareholders holding three percent or more of the voting shares of certain Funds
may demand a regular meeting of shareholders of the Fund by written notice of
demand given to the chief executive officer or the chief financial officer of
the Fund. Within ninety days after receipt of the demand, a regular meeting of
shareholders must be held at the expense of the Fund. Additionally, the 1940 Act
requires shareholder votes for all amendments to fundamental investment policies
and restrictions and for amendments to investment advisory contracts and Rule
12b-1 distribution plans.
FINANCIAL STATEMENTS
The audited Financial Statements and Financial Highlights for the Funds
for the fiscal year ended December 31, 1996 are incorporated herein by reference
from the annual report of each Fund as filed with the Securities and Exchange
Commission. Please call (800) 525-6584 to obtain a copy of the most recent
annual report of a Fund at no charge.
APPENDIX A
DESCRIPTIONS OF BOND RATINGS
Description of Standard and Poor's Ratings Services ("S&P") and Moody's
Investors Service, Inc. ("Moody's") ratings:
S&P's Ratings for Municipal Bonds
An S&P municipal bond rating is a current assessment of the
creditworthiness of an object with respect to a specific obligation. S&P's
letter ratings may be modified by the addition of a plus or minus sign, which is
used to show relative standing within the major rating categories, except in the
AAA (Prime Grade) category.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA
AAA is the highest rating assigned by S&P. An issuer's capacity to pay
interest and repay the principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A
Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB
Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B
Debt rated BB and B (as well as debt rated CCC, C and C) is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation within this category, B represents a
somewhat higher degree of speculation and C represents the highest degree of
speculation of these ratings.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal repayments.
Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
S&P Ratings for Municipal Notes
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest.
Moody's Ratings for Municipal Bonds
Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. A short-term rating designated VMIG, may also be assigned an issue having
a demand feature. The municipal obligations bearing the designation MIG 1/VMIG 1
are of the best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. The municipal obligations bearing the designation are
ample although not so large as in the preceding group.
Description of S&P A-1+
and
A-1 Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must possess overwhelming safety
characteristics regarding timely payment. Commercial paper rated A-1 must have a
degree of safety that is either overwhelming or very strong.
Description of
Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and will normally be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation and well established access
to a range of financial markets and assured sources of alternate liquidity.
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS
OF OPTIONS AND FUTURES
GENERAL. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," each Fund may purchase and sell options on
the securities in which it may invest and certain Funds may purchase and sell
options on futures contracts (as defined below) and may purchase and sell
futures contracts. The Funds intend to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Funds' investment
objectives, to seek to hedge against the effects of market conditions and to
seek to stabilize the value of its assets. The Funds will engage in hedging and
risk management transactions from time to time in Voyageur's discretion, and may
not necessarily be engaging in such transactions when movements in interest
rates that could affect the value of the assets of the Funds occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Funds will employ any of the
techniques or strategies described below. The Funds' ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the ' CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Funds do not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and attendant
risks, are discussed below.
FUTURES CONTRACTS AND RELATED OPTIONS. Certain Funds may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which certain Funds may invest. A "sale" of a futures
contract means the undertaking of a contractual obligation to deliver the
securities, or the cash value of an index, called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities, or cash value of an index, at a specified price during a specified
delivery period. Certain Funds may also purchase and sell (write) call and put
options on financial futures contracts. An option on a futures contract gives
the purchaser the right, in return for the premium paid, to assume a position in
a futures contract at a specified exercise price at any time during, or at the
termination of, the period specified in the terms of the option. Upon exercise,
the writer of the option delivers the futures contract to the holder at the
exercise price. The Funds would be required to deposit with its custodian
initial margin and maintenance margin with respect to put and call options on
futures contracts written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. Certain
Funds' ability to establish and close out positions in futures contracts and
options on futures contracts will be subject to the liquidity of the market.
Although certain Funds generally will purchase or sell only those futures
contracts and options thereon for which there appears to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option thereon at any particular time. Where it
is not possible to effect a closing transaction in a contract or to do so at a
satisfactory price, certain Funds would have to make or take delivery under the
futures contract, or, in the case of a purchased option, exercise the option.
The Funds would be required to maintain initial margin deposits with respect to
the futures contract and to make variation margin payments until the contract is
closed. The Funds will incur brokerage fees when they purchase or sell futures
contracts.
At the time a futures contract is purchased or sold, the Funds must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts certain Funds may purchase or sell may range from
approximately 1 1/2% to approximately 5% of the value of the securities (or the
securities index) underlying the contract. In certain circumstances, however,
such as during periods of high volatility, certain Funds may be required by an
exchange to increase the level of its initial margin payment. Initial margin
requirements may be increased generally in the future by regulatory action. An
outstanding futures contract is valued daily in a process known as "marking to
market." If the market value of the futures contract has changed, certain Funds
will be required to make or will be entitled to receive a payment in cash or
specified high quality debt securities in an amount equal to any decline or
increase in the value of the futures contract. These additional deposits or
credits are calculated and required on a daily basis and are known as "variation
margin."
There may be an imperfect correlation between movements in prices of
the futures contract certain Funds purchase or sell and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the com
paratively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
move ments in the prices of securities may not correlate precisely with
movements in the prices of futures contracts purchased or sold by the Funds in a
hedging transaction, even if Voyageur correctly forecasts market trends certain
Funds' hedging strategy may not be successful. If this should occur, the Funds
could lose money on the futures contracts and also on the value of its portfolio
securities.
Although the Funds believe that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Funds'
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Funds seek
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Funds will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Funds may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
OPTIONS ON SECURITIES. Each Fund may purchase and sell (write) options
on securities, which options may be either exchange-listed or over-the-counter
options. The Funds may write call options only if the call option is "covered."
A call option written by a Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Funds may write put
options only if the put option is "secured." A put option written by a Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Each Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
Each Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
Each Fund may purchase and sell options that are exchange-traded or
that are traded over-the counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when a Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although each Fund will enter into OTC options only with dealers that
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until a Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Funds' ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Funds may be unable to liquidate an OTC
option. In the case of options written by the Funds, the inability to enter into
a closing purchase transaction may result in material losses to the Funds.
REGULATORY RESTRICTIONS. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the
Funds will maintain, in a segregated account, cash or liquid high-grade
securities equal to the value of such contracts. Compliance with such
segregation requirements may restrict the Funds' ability to invest in
intermediate- and long-term Tax Exempt Obligations.
The Funds intend to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that futures and options
positions be used (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Funds currently do not intend
to engage in transactions in futures contracts or options thereon for
speculation.
ACCOUNTING CONSIDERATIONS. When a Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When a Fund purchases an option, the premium paid by the Fund is recorded as an
asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by
certain Funds. an amount equal to the initial margin deposit is recorded as an
asset. The amount of the asset subsequently is adjusted to reflected changes in
the amount of the deposit as well as changes in the value of the contract.
PART B
VOYAGEUR MUTUAL FUNDS, INC.
(VOYAGEUR MINNESOTA HIGH YIELD MUNICIPAL BOND FUND)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Fund's Prospectus dated April 28, 1997. A
copy of the Prospectus or this Statement of Additional Information may be
obtained free of charge by contacting the Fund at 90 South Seventh Street, Suite
4400, Minneapolis, Minnesota 55402. Telephone: (612) 376-7000 or (800) 525-6584.
Table of Contents
Page
Investment Policies and Restrictions.........................................2
Special Factors Affecting the Fund...........................................17
Board Members and Executive Officers of the Fund.............................19
The Investment Adviser and Underwriter.......................................21
Taxes........................................................................29
Special Purchase Plans ......................................................31
Net Asset Value and Public Offering Price....................................33
Calculation of Performance Data..............................................33
Monthly Cash Withdrawal Plan.................................................35
Additional Information.......................................................36
Appendix A - Descriptions of Bond Ratings....................................A-1
Appendix B - General Characteristics and Risks of Options and Futures .......B-1
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated April 28, 1997, and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Fund. This Statement of Additional Information does not constitute an
offer to sell securities in any state or jurisdiction in which such offering may
not lawfully be made. The delivery of this Statement of Additional Information
at any time shall not imply that there has been no change in the affairs of the
Fund since the date hereof.
Dated April 28, 1997
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions of the Voyageur
Minnesota High Yield Municipal Bond Fund (the "Fund") are set forth in the
Prospectus. Certain additional investment information is set forth below. All
capitalized terms not defined herein have the same meanings as set forth in the
Prospectus.
MUNICIPAL OBLIGATIONS
Municipal Obligations are generally issued to obtain funds for various
public purposes, including the construction or improvement of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
Municipal Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Fund may invest, including Municipal
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Municipal Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Municipal Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Municipal Obligations for investment by the
Fund and the value of the Fund's portfolio. In such event, management of the
Fund may discontinue the issuance of shares to new investors and may reevaluate
the Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service ("Fitch"), or Standard & Poor's Ratings
Services ("S&P") for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for their investments in accordance with the
investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's, Fitch and S&P represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings provide an
initial criterion for selection of portfolio investments, Voyageur Fund
Managers, Inc. ("Voyageur"), the Fund's investment manager, will subject these
securities to other evaluative criteria prior to investing in such securities.
Floating and Variable Rate Demand Notes. The Fund may purchase floating
and variable rate demand notes. Generally, such notes are secured by letters of
credit or other credit support arrangements provided by banks. Such notes
normally have a stated long-term maturity but permit the holder to tender the
note for purchase and payment of principal and accrued interest upon a specified
number of days' notice. The issuer of floating and variable rate demand notes
normally has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus accrued interest
upon a specified number of days' notice to the noteholders. The interest rate on
a floating rate demand note is based on a specified interest index, such as a
bank's prime rate, and is adjusted automatically each time such index is
adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals, based upon current market conditions. Voyageur monitors the
creditworthiness of issuers of floating and variable rate demand notes in the
Fund's portfolio.
Escrow Secured Bonds or Defeased Bonds. Escrow secured bonds or
defeased bonds are created when an issuer refunds in advance of maturity (or
pre-refunds) some of its outstanding bonds and it becomes necessary or desirable
to set aside funds for redemption or payment of the bonds at a future date or
dates. 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 of the advance refunded bond. Escrow
secured bonds will often receive a triple A rating from S&P, Moody's and Fitch.
State or Municipal Lease Obligations. Municipal leases may take the
form of a lease with an option to purchase, an installment purchase contract, a
conditional sales contract or a participation certificate in any of the
foregoing. In determining leases in which the Fund will invest, Voyageur will
evaluate the credit rating of the lessee and the terms of the lease.
Additionally, Voyageur may require that certain municipal leases be secured by a
letter of credit or put arrangement with an independent financial institution.
State or municipal lease obligations frequently have the special risks described
below which are not associated with general obligation or revenue bonds issued
by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "nonappropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "nonappropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for nonappropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
Concentration Policy. As a fundamental policy, the Fund may not invest
25% or more of its total assets in the securities of any industry, although, for
purposes of this limitation, tax-exempt securities and U.S. Government
obligations are not considered to be part of any industry. The Fund may invest
25% or more of its total assets in industrial development revenue bonds. In
addition, it is possible that the Fund from time to time will invest 25% or more
of its total assets in a particular segment of the municipal bond market, such
as housing, health care, utility, transportation, education or industrial
obligations. In such circumstances, economic, business, political or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or a declining
market or need for the project) might also affect other bonds in the same
segment, thereby potentially increasing market or credit risk.
HOUSING OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
HEALTH CARE OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
UTILITY OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
TRANSPORTATION OBLIGATIONS. The Fund may, from time to time, invest 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance airports and highway, bridge and
toll road facilities. The major portion of an airport's gross operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and other factors,
and several airlines are experiencing severe financial difficulties. The
revenues of issuers which derive their payments from bridge, road or tunnel toll
revenues could be adversely affected by competition from toll-free vehicular
bridges and roads and alternative modes of transportation. Such revenues could
also be adversely affected by a reduction in the availability of fuel to
motorists or significant increases in the costs thereof.
EDUCATION OBLIGATIONS. The Fund may, from time to time, invest 25% or
more of its total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
INDUSTRIAL REVENUE OBLIGATIONS. The Fund may, from time to time, invest
25% or more of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
OTHER RISKS. The exclusion from gross income for purposes of federal
income taxes and the personal income taxes of Minnesota for certain housing,
health care, utility, transportation, education and industrial revenue bonds
depends on compliance with relevant provisions of the Code. The failure to
comply with these provisions could cause the interest on the bonds to become
includable in gross income, possibly retroactively to the date of issuance,
thereby reducing the value of the bonds, subjecting shareholders to
unanticipated tax liabilities and possibly requiring the Fund to sell the bonds
at the reduced value. Furthermore, such a failure to meet these ongoing
requirements may not enable the holder to accelerate payment of the bond or
require the issuer to redeem the bond.
TAXABLE OBLIGATIONS
As set forth in the Fund's Prospectus, the Fund may invest to a limited
extent in obligations and instruments, the interest on which is includable in
gross income for purposes of federal and Minnesota state income taxation.
Government Obligations. The Fund may invest in securities issued or
guaranteed by the U. S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally have
maturities of one year or less; Treasury Notes generally have maturities of one
to ten years; and Treasury Bonds generally have maturities of greater than ten
years. Some obligations issued or guaranteed by U. S. Government agencies and
instrumentalities, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U. S. Treasury;
other obligations, such as those of the Federal Home Loan Banks, are secured by
the right of the issuer to borrow from the Treasury; other obligations, such as
those issued by the Federal National Mortgage Association, are supported by the
discretionary authority of the U. S. Government to purchase certain obligations
of the agency or instrumentality; and other obligations, such as those issued by
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality itself. Although the U. S. Government provides financial support
to such U. S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law. The
Fund will invest in such securities only when Voyageur is satisfied that the
credit risk with respect to the issuer is minimal.
Repurchase Agreements. The Fund may invest in repurchase agreements.
The Fund's custodian will hold the securities underlying any repurchase
agreement or such securities will be part of the Federal Reserve Book Entry
System. The market value of the collateral underlying the repurchase agreement
will be determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the obligor under the agreement will promptly
furnish additional collateral to the Fund's custodian (so the total collateral
is an amount at least equal to the repurchase price plus accrued interest).
Other Taxable Investments. The Fund also may invest in certificates of
deposit, bankers' acceptances and other time deposits. Certificates of deposit
are certificates representing the obligation of a bank to repay the funds
deposited (plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate.
OPTIONS AND FUTURES TRANSACTIONS
To the extent set forth in the Prospectus, the Fund may buy and sell
put and call options on the securities in which it may invest, and the Fund may
enter into futures contracts and options on futures contracts with respect to
fixed-income securities or based on financial indices including any index of
securities in which the Fund may invest. Futures and options will be used to
facilitate allocation of the Fund's investments among asset classes, to generate
income or to hedge against changes in interest rates or declines in securities
prices or increases in prices of securities proposed to be purchased. Different
uses of futures and options have different risk and return characteristics.
Generally, selling futures contracts, purchasing put options and writing (i.e.
selling) call options are strategies designed to protect against falling
securities prices and can limit potential gains if prices rise. Purchasing
futures contracts, purchasing call options and writing put options are
strategies whose returns tend to rise and fall together with securities prices
and can causes losses if prices fall. If securities prices remain unchanged over
time option writing strategies tend to be profitable, while option buying
strategies tend to decline in value.
Writing Options. The Fund may write (i.e. sell) covered put and call
options with respect to the securities in which they may invest. By writing a
call option, the Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, the Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by the Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of the Fund.
"Covered options" means that so long as the Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered "covered" with respect to a put option
it writes if, so long as it is obligated as the writer of a put option, it
deposits and maintains with its custodian cash, U. S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater than
the exercise price of the option.
Through the writing of call or put options, the Fund may obtain a
greater current return than would be realized on the underlying securities
alone. The Fund receives premiums from writing call or put options, which it
retains whether or not the options are exercised. By writing a call option, the
Fund might lose the potential for gain on the underlying security while the
option is open, and by writing a put option, the Fund might become obligated to
purchase the underlying security for more than its current market price upon
exercise.
Purchasing Options. The Fund may purchase put options in order to
protect portfolio holdings in an underlying security against a decline in the
market value of such holdings. Such protection is provided during the life of
the put because the Fund may sell the underlying security at the put exercise
price, regardless of a decline in the underlying security's market price. Any
loss to the Fund is limited to the premium paid for, and transaction costs paid
in connection with, the put plus the initial excess, if any, of the market price
of the underlying security over the exercise price. However, if the market price
of such security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put is sold.
The Fund may wish to protect certain portfolio securities against a
decline in market value at a time when no put options on those particular
securities are available for purchase. The Fund may therefore purchase a put
option on securities other than those it wishes to protect even though it does
not hold such other securities in its portfolio.
The Fund may also purchase call options. During the life of the call
option, the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the Fund will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Securities Index Option Trading. The Fund may purchase and write put
and call options on securities indexes. Options on securities indexes are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated to make delivery of
this amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in the Fund's
portfolio correlate with price movements of the index selected. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular security, whether the Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon movements
in the level of prices in the relevant underlying securities markets generally
or, in the case of certain indexes, in an industry market segment, rather than
movements in the price of a particular security. Accordingly, successful use by
the Fund of options on security indexes will be subject to Voyageur's ability to
predict correctly movements in the direction of the stock market or interest
rates market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. In the event Voyageur is unsuccessful in predicting the movements of
an index, the Fund could be in a worse position than had no hedge been
attempted.
Because exercises of index options are settled in cash, the Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When the Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker as collateral for the option, cash,
high-grade liquid debt securities or "qualified securities" with a market value
determined on a daily basis of not less than 100% of the current market value of
the option.
Options purchased and written by the Fund may be exchange traded or may
be options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by Voyageur. OTC options are illiquid and it may not be possible for the Fund to
dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when Voyageur believes it would be advantageous
to do so.
Futures Contracts and Options on Futures Contracts. The Fund may enter
into futures contracts and purchase and write options on these contracts,
including but not limited to interest rate and securities index contracts and
put and call options on these futures contracts. These contracts will be entered
into on domestic and foreign exchanges and boards of trade, subject to
applicable regulations of the Commodity Futures Trading Commission. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes.
In connection with transactions in futures contracts and writing
related options, the Fund will be required to deposit as "initial margin" a
specified amount of cash or short-term, U. S. Government securities. The initial
margin required for a futures contract is set by the exchange on which the
contract is traded. It is expected that the initial margin would be
approximately 1-1/2% to 5% of a contract's face value. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract. The Fund will not purchase
or sell futures contracts or related options if, as a result, the sum of the
initial margin deposit on the Fund's existing futures and related options
positions and premiums paid for options or futures contracts entered into for
other than bona fide hedging purposes would exceed 5% of the Fund's assets.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS.
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in indexes of securities and movements
in the prices of futures contracts, even a correct forecast of general market
trends may not result in a successful hedging transaction over a very short
period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by the Fund is subject to the
ability of Voyageur to predict correctly movements in the direction of interest
rates or the relevant underlying securities market. If the Fund has hedged
against the possibility of an increase in interest rates adversely affecting the
value of fixed-income securities held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its security which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
LIQUIDITY OF FUTURES CONTRACTS. The Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. The Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Fund intends to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISK OF OPTIONS. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium, which may
partially offset a decline in the value of the Fund's portfolio assets. By
writing a call option, the Fund becomes obligated to sell an underlying
instrument or a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option generates a premium, but
the Fund becomes obligated to purchase the underlying instrument or futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options may exceed the amount of the premium
received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when
Voyageur deems it desirable to do so. Although the Fund will enter into an
option position only if Voyageur believes that a liquid secondary market exists
for such option, there is no assurance that the Fund will be able to effect
closing transactions at any particular time or at an acceptable price. The
Fund's transactions involving options on futures contracts will be conducted
only on recognized exchanges.
The Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by Voyageur, which
could prove to be inaccurate. Even if the expectations of Voyageur are correct,
there may be an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Fund will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in
price of securities that the Fund anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Fund to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when Voyageur believes it would be advantageous to do so. Accordingly, OTC
options are subject to the Fund's limitation that a maximum of 15% of its net
assets be invested in illiquid securities. In the event of the bankruptcy of the
writer of an OTC option, the Fund could experience a loss of all or part of the
value of the option. Voyageur anticipates that options on Municipal Obligations
will consist primarily of OTC options.
ILLIQUID INVESTMENTS
The Fund is permitted to invest up to 15% of its net assets in illiquid
investments. An investment is generally deemed to be "illiquid" if it cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the investment company is valuing the
investment.
As set forth in the Prospectus, the Fund may invest in certain
restricted securities (securities which were originally sold in private
placements and which have not been registered under Securities Act of 1933 (the
"1933 Act")), commercial paper issued pursuant to Section 4(2) under the 1933
Act, and municipal lease obligations, and treat such securities as liquid when
they have been determined to be liquid by Voyageur subject to the oversight of
and pursuant to procedures adopted by the Fund's Board of Trustees. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (c) dealer undertakings to make a market in the
security; and (d) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). With respect to restricted
securities, the liquidity of such securities increased as a result of the
adoption of Rule 144A under the 1933 Act, which provides a safe harbor exemption
from the registration requirements of the 1933 Act for resales of restricted
securities to "qualified institutional buyers," as defined in the rule.
Investing in such securities could have the effect of increasing the level of
Fund illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
DIVERSIFICATION
Although the Fund is characterized as a non-diversified fund under the
1940 Act, the Fund intends to conduct its operations so that it will qualify
under the Internal Revenue Code of 1986 as a "regulated investment company." In
order to qualify as a regulated investment company, the Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Code requires that not more than 25% in value of the Fund's total assets may be
invested in the securities of a single issuer at the close of each quarter of
the taxable year.
For purposes of such diversification, the identification of the issuer
of Municipal Obligations depends on the terms and conditions of the security. If
a State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond
is backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by the Fund
exceeds 10% of the value of the Fund's total assets, the guarantee is considered
a separate security and is treated as an issue of the guarantor. Investments in
municipal obligations refunded with escrowed U. S. Government securities will be
treated as investments in U. S. Government securities for purposes of
determining the Fund's compliance with the 1940 Act diversification
requirements.
PORTFOLIO TURNOVER
Portfolio turnover for the Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by the Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of the Fund's
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned by the Fund during the year.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions set forth below
which, together with the investment objectives of the Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the 1940 Act, this means the lesser of
the vote of (1) 67% of the shares of the Fund at a meeting where more than 50%
of the outstanding shares of the Fund are present in person or by proxy or (2)
more than 50% of the outstanding shares of the Fund. The following investment
restrictions apply to the Fund. The Fund will not:
(1) Borrow money (provided that the Fund may enter into
reverse repurchase agreements with respect to not more than 10% of its
total assets), except from banks for temporary or emergency purposes in
an amount not exceeding 20% of the value of the Fund's total assets,
including the amount borrowed. The Fund may not borrow for leverage
purposes, provided that the Fund may enter into reverse repurchase
agreements for such purposes, and securities will not be purchased
while outstanding borrowings exceed 5% of the value of the Fund's total
assets.
(2) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of portfolio
investments, the Fund may be deemed to be an underwriter under federal
securities laws.
(3) Purchase or sell real estate, although it may purchase
securities which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in
which the Fund may invest consistent with its investment policies, and
through repurchase agreements.
(5) Invest 25% or more if its total assets in the securities
of any industry, although, for purposes of this limitation, tax-exempt
securities and U.S. Government obligations are not considered to be
part of any industry.
(6) Issue any senior securities (as defined in the 1940 Act),
except as set forth in investment restriction number (1) above, and
except to the extent that using options, futures contracts and options
on futures contracts, purchasing or selling on a when-issued or forward
commitment basis or using similar investment strategies may be deemed
to constitute issuing a senior security.
(7) Purchase or sell commodities or futures or options
contracts with respect to physical commodities. This restriction shall
not restrict the Fund from purchasing or selling, on a basis consistent
with any restrictions contained in its then-current Prospectus, any
financial contracts or instruments which may be deemed commodities
(including, by way of example and not by way of limitation, options,
futures, and options on futures with respect, in each case, to interest
rates, currencies, stock indices, bond indices or interest rate
indices).
The following non-fundamental investment restrictions may be changed by
the Board of the Fund at any time. The Fund will not:
(1) Invest more than 5% of its total assets in securities of
any single investment company, nor more than 10% of its total assets in
securities of two or more investment companies, except as part of a
merger, consolidation or acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(3) The Fund will not write puts if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover
such puts.
(4) The Fund will not make short sales of securities or
maintain a short position for the account of the Fund, unless at all
times when a short position is open it owns an equal amount of such
securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short.
Except for the Fund's policy with respect to borrowing, any
investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after
an acquisition of securities or a utilization of assets and such excess
results therefrom.
SPECIAL FACTORS AFFECTING THE FUND
The following information is a brief summary of Minnesota factors
affecting the Fund and does not purport to be a complete description of such
factors. The financial condition of Minnesota, its public authorities and local
governments could affect the market values and marketability of, and therefore
the net asset value per share and the interest income of the Fund, or result in
the default of existing obligations, including obligations which may be held by
the Fund. Further, Minnesota faces numerous forms of litigation seeking
significant damages which, if awarded, could adversely affect the financial
situation of Minnesota or issuers located in therein. It should be noted that
the creditworthiness of obligations issued by local issuers may be unrelated to
the creditworthiness of Minnesota, and that there is no obligation on the part
of Minnesota to make payment on such local obligations in the event of default
in the absence of a specific guarantee or pledge provided by Minnesota. The
following information is based primarily upon information derived from public
documents relating to securities offerings of issuers of such states and other
historically reliable sources, but has not been independently verified by the
Fund. The Fund makes no representation or warranty regarding the completeness or
accuracy of such information. The market value of the shares of the Fund may
fluctuate due to factors such as changes in interest rates, matters affecting
Minnesota or for other reasons.
General Economic Conditions. Diversity and a significant natural
resource base are two important characteristics of the Minnesota economy.
Generally, the structure of the State's economy parallels the structure of the
United States economy as a whole. There are, however, employment concentrations
in durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. During the period from 1980 to 1990, overall
employment growth in Minnesota lagged behind national employment growth, in
large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1994. Since 1980, Minnesota per capita income generally
has remained above the national average, but tightness in local labor markets
may reduce the rate of personal income growth below that of the national average
in the future. During 1993, 1994 and 1995, the State's monthly unemployment rate
generally was less than the national unemployment rate.
Revenue and Expenditures. The State relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve, imposing
a sales tax on purchases by local governmental units, and making other budgetary
adjustment. The Minnesota Department of Finance February 1996 Forecast has
projected that, under current laws, the State will complete its current biennium
June 30, 1997 with a $15 million surplus, plus a $350 million cash flow account
balance, plus a $220 million budget reserve. Total General Fund expenditures and
transfers for the biennium are projected to be $18.8 billion. State expenditures
for education finance (K-12), post-secondary education, and human services in
the biennium ending June 30, 1997 are not anticipated to be sufficient to
maintain program levels of the previous biennium. The State is party to a
variety of civil actions that could adversely affect the State's General Fund.
In addition, substantial portions of State and local revenues are derived from
federal expenditures, and reductions in federal aid to the State and its
political subdivisions and other federal spending cuts may have substantial
adverse effects on the economic and fiscal condition of the State and its local
governmental units. The February 1996 Forecast states that pending federal
legislation could reduce federal aid to Minnesota's state and local governments
by a total of $3.2 billion over seven years. Risks are inherent in making
revenue and expenditure forecasts. Economic or fiscal conditions less favorable
than those reflected in State budget forecasts and planning estimates may create
additional budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective obligors to make timely payment of the principal and interest on
Minnesota Municipal Obligations that are held by the Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in federal
and State income tax laws, including rate reductions, could adversely affect the
value and marketability of Minnesota Municipal Obligations that are held by the
Fund. See "Distributions to Shareholders and Taxes--Minnesota State Taxation" in
the Prospectus.
As of May 1996, ratings applicable to General Obligation bonds issued
by the State of Minnesota are as follows: "Aaa" by Moody's; "AA+" by S&P and
"AAA" by Fitch Investors Service.
BOARD MEMBERS AND EXECUTIVE OFFICERS OF THE FUND
The Board members and officers of the Fund, their position with the
Fund and their principal occupations during the past five years are set forth
below. In addition to the occupations set forth below, the Directors and
officers also serve as directors and trustees or officers of various other
closed-end and open-end investment companies managed by Voyageur.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION PAST FIVE YEARS AND OTHER AFFILIATIONS
- ---------------------- -------- --------------------------------------
<S> <C> <C>
Clarence G. Frame, 78 Director Of counsel, Briggs & Morgan law firm. Mr. Frame
First National Bank Building, currently serves on the board of directors of Tosco
W-875 Corporation (an oil refining and marketing
332 Minnesota Street company), Milwaukee Land Company, and
St. Paul, Minnesota 55101 Independence One Mutual Funds.
Richard F. McNamara, 64 Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle #200 Minneapolis-based holding company consisting of
Minneapolis, Minnesota 55439 seventeen companies in industrial plastics,
sheet metal, automotive aftermarket,
construction supply, electronics and financial
services, since 1966. Mr. McNamara currently
serves on the board of directors of Rimage
(electronics manufacturing) and Interbank.
Thomas F. Madison, 61 Director President and CEO of MLM Partners, Inc. since
200 South Fifth Street January 1993; previously, Vice Chairman--Office of
Suite 2100 the CEO, The Minnesota Mutual Life Insurance
Minneapolis, Minnesota 55402 Company from February to September 1994;
President of U.S. WEST Communications--Markets
from 1988 to 1993. Mr. Madison currently
serves on the board of directors of Valmont
Industries, Inc. (metal manufacturing), Eltrax
Systems, Inc. (data communications
integration), Minnegasco, Span Link
Communications (software), ACI Telecentrics
(outbound telemarketing and telecommunications)
and various civic and educational organizations.
James W. Nelson, 55 Director Chairman and Chief Executive Officer of Eberhardt
81 South Ninth Street Holding Company and its subsidiaries.
Suite 400
Minneapolis, Minnesota 55440
Robert J. Odegard, 76 Director Special Assistant to the President of the University of
University of Minnesota Minnesota.
Foundation
1300 South Second Street
Minneapolis, Minnesota 55454
John G. Taft, 42 President President of the Adviser; Director (since 1993) of
90 South Seventh Street the Adviser and the Underwriter; Executive
Suite 4400 Vice President (since 1995) of the Underwriter;
Minneapolis, Minnesota 55402 President of the Underwriter from 1991 to 1995;
Management committee member of the Adviser from
1991 to 1993.
Jane M. Wyatt, 42 Executive Chief Investment Officer and Director of the
Adviser 90 South Seventh Street Vice since 1993; Director and Executive Vice President of
Suite 4400 President the Underwriter since 1993; Executive Vice
Minneapolis, Minnesota 55402 President and Portfolio Manager of the Adviser
from 1992 to 1993.
Andrew M. McCullagh, Jr., 48 Executive Senior Tax Exempt Portfolio Manager of the
717 Seventeenth Street Vice Adviser; previously, Director of the Adviser and the
Denver, Colorado 80202 President Underwriter from 1993 to 1995.
Elizabeth H. Howell, 35 Vice Senior Tax Exempt Portfolio Manager of the
90 South Seventh Street President Adviser.
Suite 4400
Minneapolis, Minnesota 55402
James C. King, 56 Vice Senior Equity Portfolio Manager of the Adviser since
90 South Seventh Street President 1993; previously, Director of the Adviser and the
Suite 4400 Underwriter from 1993 to 1995.
Minneapolis, Minnesota 55402
Steven P. Eldredge, 41 Vice Senior Tax Exempt Portfolio Manager of the Adviser
90 South Seventh Street President since 1995; previously, portfolio manager for ABT
Suite 4400 Mutual Funds, Palm Beach, Florida, from 1989 to
Minneapolis, Minnesota 55402 1995.
Kenneth R. Larsen, 34 Treasurer Treasurer of the Adviser and the Underwriter;
90 South Seventh Street previously, Director, Secretary and Treasurer of the
Suite 4400 Adviser and the Underwriter from 1993 to 1995.
Minneapolis, Minnesota 55402
Thomas J. Abood, 33 Secretary Senior Vice President and General Counsel of
90 South Seventh Street Dougherty Financial Group, Inc. (since 1995);
Suite 4400 Senior Vice President of the Adviser, the
Minneapolis, Minnesota 55402 Underwriter and Voyageur Companies, Inc. since
1995; previously, Vice President of the Adviser
and Voyageur Companies, Inc. from 1994 to
1995; associated with the law firm of Skadden,
Arps, Slate, Meagher & Flom, Chicago, Illinois
from 1988 to 1994.
</TABLE>
The Fund does not compensate its officers. Each director or trustee
(who is not an employee of Voyageur or any of its affiliates) will receive a
total annual fee of $26,000 for serving as a director or trustee for each of the
open-end and closed-end investment companies (the "Fund Complex") for which
Voyageur acts as investment adviser, plus a $500 fee for each special in-person
meeting attended by such director. These fees are allocated among each series or
fund in the Fund Complex based on the relative average net asset value of each
series or fund. Currently the Fund Complex consists of ten open-end investment
companies comprising 32 series or funds and six closed-end investment companies.
In addition, each director or trustee who is not an employee of Voyageur or any
of its affiliates is reimbursed for expenses incurred in connection with
attending meetings. The following table sets forth the aggregate compensation
received by each director from the Fund Complex and from the Fund during the
calendar year ended December 31, 1996.
Compensation Compensation
Director from the Fund from Fund Complex
- -------- ------------- -----------------
Clarence G. Frame $24 $25,500
Richard F. McNamara $24 $25,500
Thomas F. Madison $24 $25,500
James W. Nelson $24 $25,500
Robert J. Odegard $24 $25,500
THE INVESTMENT ADVISER AND UNDERWRITER
Voyageur Fund Managers, Inc., a Minnesota corporation ( "Voyageur"),
has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as the Fund's investment adviser, subject to the authority of
the Board of the Fund. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group Inc. ("DFG"), which is
owned 50% by Michael E. Dougherty and 50% by Pohlad Companies. Mr. Dougherty
co-founded the predecessor of DFG in 1977 and has served as DFG's Chairman of
the Board and Chief Executive Officer since inception. Pohlad Companies is a
holding company owned in equal parts by each of James O. Pohlad, Robert C.
Pohlad and William M. Pohlad. Certain key employees of DFG and its subsidiaries
and an employee benefit plan benefitting the employees of such companies have
been offered the opportunity to purchase voting common shares of DFG through
stock options granted with respect thereto, with the shareholdings of Pohlad
Companies and Mr. Dougherty each to be diluted proportionately by any such
purchases. Following any such purchases, Mr. Dougherty and Pohlad Companies
would each continue to own greater than 25% of the outstanding voting common
shares of DFG, and no other person or entity would own greater than 25% of such
shares. The principal executive offices of Voyageur are located at 90 South
Seventh Street, Suite 4400, Minneapolis, Minnesota, 55402.
Voyageur Fund Distributors, Inc. (the "Underwriter") is the principal
distributor of the Fund's shares. With regard to the Underwriter, Mr. Taft and
Ms. Wyatt are Executive Vice Presidents and directors, Mr. Abood is Senior Vice
President and General Counsel, and Mr. Larsen is Treasurer.
INVESTMENT ADVISORY AGREEMENT
The Fund does not maintain its own research department. The Fund has
contracted with Voyageur for investment advice and management. Pursuant to an
Investment Advisory Agreement, Voyageur has the sole and exclusive
responsibility for the management of the Fund's portfolio and the making and
execution of all investment decisions for the Fund subject to the objective and
investment policies and restrictions of the Fund and subject to the supervision
of the Fund's Board of Directors. Voyageur also furnishes, at its own expense,
office facilities, equipment and personnel for servicing the investments of the
Fund. Voyageur has agreed to arrange for officers and employees of Voyageur to
serve without compensation from the Fund as directors, officers or employees of
the Fund if duly elected to such positions by the shareholders or directors of
the Fund.
As compensation for Voyageur's services, the Fund is obligated to pay
to Voyageur a monthly investment advisory and management fee equivalent on an
annual basis to .65 of 1% of its average daily net assets, respectively. The fee
is based on the average daily value of the Fund's net assets at the close of
each business day. For the period from June 4, 1996 (commencement of operations)
to December 31, 1996, the Fund paid $17,203 in advisory fees.
The Investment Advisory Agreement continues from year to year only if
approved annually (a) by the Fund's Board or by vote of a majority of the
outstanding voting securities of the Fund and (b) by vote of a majority of board
members of the Fund who are not parties to such Investment Advisory Agreement or
interested persons (as defined in the 1940 Act) of any such party, cast in
person at a meeting of the Board called for the purpose of voting on such
approval. The Investment Advisory Agreement may be terminated by either party on
60 days' notice to the other party and terminates automatically upon its
assignment. The Investment Advisory Agreement also provides that amendments to
the Agreement may be affected if approved by the Board (including a majority of
the directors who are not interested persons of Voyageur or the Fund), unless
the 1940 Act requires that any such amendment must be submitted for approval by
the Fund's shareholders and that all proposed assignments of such agreement are
subject to approval by the Board of Directors (unless the 1940 Act otherwise
requires shareholder approval).
ADMINISTRATIVE SERVICES AGREEMENT
Voyageur also acts as the Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement. Pursuant to the Administrative Services Agreement, Voyageur
provides the Fund all dividend disbursing, transfer agency, administrative and
accounting services required by the Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of the Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of the Fund's
shares or the receipt of redemption requests with respect to the Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon the Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of the Fund to be received by
each shareholder of the Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of the Fund as the Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of the Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
the Fund and Voyageur may from time to time agree upon. Pursuant to the
Administrative Services Agreement, Voyageur also provides such regulatory,
reporting and compliance related services and tasks as the Fund may reasonably
request.
As compensation for these services, the Fund pays Voyageur a monthly
fee based upon the Fund's average daily net assets and the number of shareholder
accounts then existing. This fee is equal to the sum of (i) $1.33 per
shareholder account per month, (ii) $1,000 per month if the Fund's average daily
net assets do not exceed $50 million, $1,250 per month if the Fund's average
daily net assets are greater than $50 million but do not exceed $100 million,
and $1,500 per month if the Fund's average daily net assets exceed $100 million,
and (iii) 0.11% per annum of the first $50 million of the Fund's average daily
net assets, 0.06% per annum of the next $100 million of the Fund's average daily
net assets, 0.035% per annum of the next $250 million of the Fund's average
daily net assets, 0.03% per annum of the next $300 million of the Fund's average
daily net assets and 0.02% per annum of the Fund's average daily net assets in
excess of $700 million. For purposes of calculating average daily net assets, as
such term is used in the Administrative Services Agreements, the Fund's net
assets equal its total assets minus its total liabilities. The Fund also
reimburses Voyageur for its out-of-pocket expenses in connection with Voyageur's
provision of services under the Fund's Administrative Services Agreement. For
the period from June 4, 1996 (commencement of operations) to December 31, 1996,
the Fund paid $13,721 in administrative service fees.
The Administrative Services Agreement is renewable from year to year if
the directors approve it in the same way they approve the Investment Advisory
Agreement. The Administrative Services Agreement can be terminated by either
party on 60 days' notice to the other party and the Agreement terminates
automatically upon its assignment. The Administrative Services Agreement also
provides that amendments to the Agreement may be effected if approved by the
Board (including a majority of the board members who are not interested persons
of Voyageur or the Fund), unless the 1940 Act requires that any such amendment
must be submitted for approval by the Fund's shareholders and that all proposed
assignments of such agreement are subject to approval by the Board (unless the
1940 Act otherwise requires shareholder approval thereof).
EXPENSES OF THE FUND
Voyageur is contractually obligated to pay the operating expenses of
the Fund (excluding interest, taxes, brokerage fees and commissions and Rule
12b-1 fees, if any) which exceed 1% of the Fund's average daily net assets on an
annual basis up to the amount of the investment advisory and management fee, and
the dividend disbursing, administrative and accounting services fee. In
addition, Voyageur reserves the right to voluntarily waive its fees in whole or
part and to voluntarily absorb certain other of the Fund's expenses. Any such
waiver or absorption, however, is in Voyageur's sole discretion and may be
lifted or reinstated at any time.
All costs and expenses (other than those specifically referred to as
being borne by Voyageur or the Underwriter) incurred in the operation of the
Fund are borne by the Fund. These expenses include, among others, fees of the
Board members who are not employees of Voyageur or any of its affiliates,
expenses of directors' and shareholders' meetings, including the cost of
printing and mailing proxies, expenses of insurance premiums for fidelity bond
and other coverage and expenses of redemption of shares, expenses of issue and
sale of shares (to the extent not borne by the Underwriter under its agreement
with the Fund), expenses of printing and mailing stock certificates representing
shares of the Fund, association membership dues, charges of the Fund's
custodian, and bookkeeping, auditing and legal expenses. The Fund will also pay
the fees and bear the expense of registering and maintaining the registration of
the Fund and its shares with the Securities and Exchange Commission and
registering or qualifying its shares under state or other securities laws and
the expense of preparing and mailing prospectuses, reports and statements to
shareholders.
RULE 12b-1 PLAN OF DISTRIBUTION; DISTRIBUTION AGREEMENT
The Fund has adopted a Plan of Distribution (the "Plan") relating to
the payment of certain expenses pursuant to Rule 12b-1 under the 1940 Act. Rule
12b-1(b) provides that any payments made by a Fund in connection with the
distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing.
Rule 12b-1(b)(1) requires that such plan be approved by a vote of at
least a majority of the Fund's outstanding shares, and Rule 12b-1(b)(2) requires
that such plan, together with any related agreements, be approved by a vote of
the Board of Directors and of the directors who are not interested persons of
the Fund and have no direct or indirect financial interest in the operation of
the plan or in any agreements related to the plan, cast in person at a meeting
called for the purpose of voting on such plan or agreements. Rule 12b-1(b)(3)
requires that the plan or agreement provide, in substance:
(1) that it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such continuance is
specifically approved at least annually in the manner described in paragraph
(b)(2) of Rule 12b-1;
(2) that any person authorized to direct the disposition of monies paid
or payable by a Fund pursuant to its plan or any related agreement shall provide
to the Board of Directors, and the directors shall review, at least quarterly, a
written report of the amount so expended and the purposes for which such
expenditures were made; and
(3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the Board of Directors who are not
interested persons of the Fund and have no direct or indirect financial interest
in the operation of the plan or in any agreements related to the plan or by vote
of a majority of the outstanding voting securities of a Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1 (c) provides that
the Fund may rely upon Rule 12b-1 only if the selection and nomination of that
Fund's disinterested directors are committed to the discretion of such
disinterested directors. Rule 12b-1(e) provides that the Fund may implement or
continue a plan pursuant to Rule 12b-1(b) only if the directors who vote to
approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under state
law, and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable
likelihood that the plan will benefit the Fund and its shareholders.
The Fund has entered into a Distribution Agreement with the
Underwriter, pursuant to which the Underwriter acts as the principal underwriter
of the Fund's shares. The Distribution Agreement and Plan provide that the
Underwriter agrees to provide, and shall pay costs which it incurs in connection
with providing, administrative or accounting services to shareholders of the
Fund (such costs are referred to as "Shareholder Servicing Expenses") and that
the Underwriter shall also pay all costs of distributing the shares of the Fund
("Distribution Expenses"). Shareholder Servicing Expenses include all expenses
of the Underwriter incurred in connection with providing administrative or
accounting services to shareholders of the Fund, including, but not limited to,
an allocation of the Underwriter's overhead and payments made to persons,
including employees of the Underwriter, who respond to inquiries of shareholders
regarding their ownership of Fund shares, or who provide other administrative or
accounting services not otherwise required to be provided by the Fund's
investment adviser or dividend disbursing, transfer, administrative and
accounting services agent. Distribution Expenses include, but are not limited
to, initial and ongoing sales compensation (in addition to sales loads) paid to
investment executives of the Underwriter and to other broker-dealers and
participating financial institutions; expenses incurred in the printing of
prospectuses, statements of additional information and reports used for sales
purposes; expenses of preparation and distribution of sales literature; expenses
of advertising of any type; an allocation of the Underwriter's overhead;
payments to and expenses of persons who provide support services in connection
with the distribution of Fund shares; and other distribution-related expenses.
Pursuant to the provisions of the Distribution Agreement, the
Underwriter is entitled to receive a total fee each quarter at an annual rate of
.25% of the average daily net assets attributable to the Fund's Class A shares,
1.00% of the average daily net assets attributable to the Fund's Class B shares
and 1.00% of the average daily net assets attributable to the Fund's Class C
shares to pay distribution expenses. As determined from time to time by the
Board, a portion of such fees shall be designated as a "shareholder servicing
fee" and a portion shall be designated as a "distribution fee." The Board has
determined that all of the fee payable with respect to Class A shares shall be
designated a shareholder servicing fee. With respect to fees payable with
respect to Class B shares and Class C shares, that portion of the fee equal to
.25% of average daily net assets attributable to the Fund's Class B shares and
Class C shares is designated a shareholder servicing fee and that portion of the
fee equal to .75% of average daily net assets attributable to the Fund's Class B
shares and Class C shares is designated a distribution fee. Amounts payable to
the Underwriter under the Distribution Agreement may exceed or be less than the
Underwriter's actual distribution expenses and shareholder servicing expenses.
In the event such distribution expenses and shareholder servicing expenses
exceed amounts payable to the Underwriter under the Plan, the Underwriter shall
not be entitled to reimbursement by the Fund. In addition to being paid
shareholder servicing and distribution fees, the Underwriter also receives for
its services the sales charge on sales of Fund shares set forth in the
Prospectus. For the period from June 4, 1996 (commencement of operations) to
December 31, 1996, the Fund paid $14,659 in Rule 12b-1 fees.
The Fund's Distribution Agreement is renewable from year to year if the
Fund's Board approves the Agreement and the Fund's Plan. The Fund or the
Underwriter can terminate its Distribution Agreement on 60 days' notice to the
other party, and the Distribution Agreement terminates automatically upon its
assignment. In the Fund's Distribution Agreement, the Underwriter agrees to
indemnify the Fund against all costs of litigation and other legal proceedings
and against any liability incurred by or imposed on the Fund in any way arising
out of or in connection with the sale or distribution of the Fund's shares,
except to the extent that such liability is the result of information which was
obtainable by the Underwriter only from persons affiliated with the Fund but not
the Underwriter.
PORTFOLIO TRANSACTIONS, ALLOCATION OF BROKERAGE AND TURNOVER RATE
As the Fund's portfolio is composed exclusively of debt, rather than
equity securities, most portfolio transactions are effected with dealers without
the payment of brokerage commissions, but rather at net prices which usually
include a spread or markup. In effecting such portfolio transactions on behalf
of the Fund, Voyageur seeks the most favorable net price consistent with the
best execution. However, frequently, Voyageur selects a dealer to effect a
particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the bond market and the
desire of Voyageur to accept a particular price for a security because the price
offered by the dealer meets its guidelines for profit, yield or both.
Decisions with respect to placement of the Fund's portfolio
transactions are made by Voyageur. The primary consideration in making these
decisions is efficiency in the execution of orders and obtaining the most
favorable net prices for the Fund. When consistent with these objectives,
business may be placed with broker-dealers who furnish investment research
services to Voyageur. Such research services include advice, both directly and
in writing, as to the value of securities; the advisability of investing in,
purchasing or selling securities; and the availability of securities, or
purchasers or sellers of securities; as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. This allows Voyageur to supplement its own
investment research activities and enables Voyageur to obtain the views and
information of individuals and research staffs of many different securities
firms prior to making investment decisions for the Fund. To the extent portfolio
transactions are effected with broker-dealers who furnish research services to
Voyageur, Voyageur receives a benefit, not capable of evaluation in dollar
amounts, without providing any direct monetary benefit to the Fund from these
transactions.
Voyageur has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's portfolio transactions in exchange
for research services provided Voyageur, except as noted below. However,
Voyageur does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Fund's business, in
order to encourage certain broker-dealers to provide Voyageur with research
services which Voyageur anticipates will be useful to it. Because the list is
merely a general guide, which is to be used only after the primary criterion for
the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. In the
event any transactions are executed on an agency basis, Voyageur will authorize
the Fund to pay an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker-dealer would have charged
only if Voyageur determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or Voyageur's overall responsibilities with respect to the accounts
as to which it exercises investment discretion. If the Fund executes any
transactions on an agency basis, it will generally pay higher than the lowest
commission rates available.
The Fund will not effect any brokerage transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with
Voyageur, unless such transactions, including the frequency thereof, the receipt
of commissions payable in connection therewith and the selection of the
affiliated broker-dealer effecting such transactions are not unfair or
unreasonable to the shareholders of the Fund. In determining the commissions to
be paid to a broker-dealer affiliated with Voyageur, it is the policy of the
Fund that such commissions will, in the judgment of Voyageur, subject to review
by the Board of Directors, be both (a) at least as favorable as those which
would be charged by other qualified brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period of time, and (b) at least as favorable as commissions
contemporaneously charged by such affiliated broker-dealers on comparable
transactions for their most favored comparable unaffiliated customers. While the
Fund does not deem it practicable and in its best interest to solicit
competitive bids for commission rates on each transaction, consideration will
regularly be given to posted commission rates as well as to other information
concerning the level of commissions charged on comparable transactions by other
qualified brokers.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Fund may purchase securities from an underwriting
syndicate of which an affiliated broker-dealer is a member (but not directly
from such affiliated broker-dealer itself). Such conditions relate to the price
and amount of the securities purchased, the commission or spread paid and the
quality of the issuer. The rules further require that such purchases take place
in accordance with procedures adopted and reviewed periodically by the Board of
Directors, particularly those Board members who are not interested persons of
the Fund.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Fund's directors may
determine, Voyageur may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
OTHER INFORMATION
Conversion of Class B Shares. In addition to information regarding
conversion set forth in the Prospectus, the conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that payment of different
dividends by each of the classes of shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the Code
and that such conversions do not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
Signature Guaranty. In addition to information regarding redemption of
shares and signature guaranty set forth in the Prospectus, a signature guaranty
will be required when redemption proceeds: (1) exceed $50,000 (unless it is
being wired to a pre-authorized bank account, in which case a guarantee is not
required), (2) are to be paid to someone other than the registered shareholder
or (3) are to be mailed to an address other than the address of record or wired
to an account other than the pre-authorized bank or brokerage account. On joint
account redemptions of the type previously listed, each signature must be
guaranteed. A signature guarantee may not be provided by a notary public. Please
contact your investment executive for instructions as to what institutions
constitute eligible signature guarantors.
Valuation of Portfolio Securities. Generally, trading in certain
securities such as tax-exempt securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the primary close of trading on the Exchange. The values
of such securities used in determining the net asset value of Fund shares are
computed as of such times. Occasionally events affecting the value of such
securities may occur between such times and the primary close of trading on the
Exchange which are not reflected in the computation of net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities are valued at their fair market value as
determined in good faith by Voyageur in accordance with procedures adopted by
the Board of Directors.
Bank Purchases. Banks, acting as agents for their customers and not for
the Fund or the Underwriter, from time to time may purchase Fund shares for the
accounts of such customers. Generally, the Glass-Steagall Act prohibits banks
from engaging in the business of underwriting, selling or distributing
securities. Should the activities of any bank, acting as agent for its customers
in connection with the purchase of any Fund's shares, be deemed to violate the
Glass-Steagall Act, management will take whatever action, if any, is appropriate
in order to provide efficient services for the Fund. Management does not believe
that a termination in the relationship with a bank would result in any material
adverse consequences to the Fund. In addition, state securities laws on this
issue may differ and banks and financial institutions may be required to
register as dealers pursuant to state law. Fund shares are not deposits or
obligations of, or guaranteed or endorsed by, any bank and are not insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other federal agency.
TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), all
or a portion of the interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as the Fund, will not be deductible by a shareholder. Indebtedness may be
allocated to shares of the Fund even though not directly traceable to the
purchase of such shares.
The Fund's present policy is to designate exempt-interest dividends at
each daily distribution of net interest income. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns.
An exchange of shares in one Voyageur fund for shares in another fund
pursuant to exercise of the Exchange Privilege is considered to be a sale of the
shares for federal tax purposes that may result in a taxable gain or loss. If a
shareholder incurs a sales charge in acquiring shares and then, after holding
those shares not more than 90 days, exchanges them pursuant to the Exchange
Privilege for shares of another Voyageur fund, the shareholder may not take into
account the initial sales charge (to the extent that the otherwise applicable
sales charge on the later-acquired shares is reduced) for purposes of
determining the shareholder's gain or loss on the exchange of the first held
shares. To the extent that the sales charge is disregarded upon the exchange of
the first shares, however, it may be taken into account in determining gain or
loss on the eventual sale or exchange of the later-acquired shares.
The Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, the Fund must declare dividends by the end of the calendar year
representing 98% of the Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long and short term capital gain) for the
12-month period ending on October 31 of such year. For purposes of the excise
tax, any income on which the Fund has paid corporate-level tax is considered to
have been distributed. The Fund intends to make sufficient distributions each
year to avoid the payment of the excise tax.
Under a special provision of the Revenue Reconciliation Act of 1993,
all or a portion of the gain that the Fund realizes on the sale of a Municipal
Obligation that it purchased at a market discount may have to be treated as
ordinary income rather than capital gain.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Exempt-interest
dividends attributable to interest income on certain tax-exempt obligations
issued after August 7, 1986 to finance private activities are treated as an item
of tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers and the federal
environmental tax on corporations. In addition, all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings for purposes of determining the federal corporate
AMT and the environmental tax imposed on corporations by Section 59A of the
Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Fund. The Fund will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in the Fund's portfolio lost its exempt status,
the Fund would make every effort to dispose of such investment on terms that are
not detrimental to the Fund.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which the Fund
may purchase options. To the extent the Fund engages in short-term trading and
enters into options transactions, the likelihood of violating this 30%
requirement is increased.
Gain or loss on options is taken into account when realized by entering
into a closing transaction or by exercise. In addition, with respect to many
types of options held at the end of a Fund's taxable year, unrealized gain or
loss on such contracts is taken into account at the then current fair market
value thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from such options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by the
Fund in a subsequent sale or other disposition of such options will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale under the "marked-to-market, 60/40
system."
SPECIAL PURCHASE PLANS
Automatic Investment Plan. As a convenience to investors, shares may be
purchased through a preauthorized automatic investment plan. Such preauthorized
investments (at least $100) may be used to purchase shares of the Fund at the
public offering price next determined after the Fund receives the investment
(normally the 20th of each month, or the next business day thereafter). Further
information is available from the Underwriter.
Combined Purchase Privilege. The following persons (or groups of
persons) may qualify for reductions from the front end sales charge ("FESC")
schedule for Class A shares set forth in the Fund's prospectus by combining
purchases of any class of shares of any one or more of the Voyageur funds which
bears a FESC (and, in certain circumstances, purchases of FESC shares of certain
other open-end investment companies) if the combined purchase of all such funds
totals at least $50,000.
(i) an individual, or a "company" as defined in Section
2(a)(8) of the 1940 Act;
(ii) an individual, his or her spouse and their children under
twenty-one, purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single
trust estate or single fiduciary account (including a pension,
profit-sharing or other employee benefit trust) created pursuant to a
plan qualified under Section 401 of the Code;
(iv) tax-exempt organizations enumerated in Section 501(c)(3)
of the Code;
(v) employee benefit plans of a single employer or of
affiliated employers;
(vi) any organized group which has been in existence for more
than six months, provided that it is not organized for the purpose of
buying redeemable securities of a registered investment company, and
provided that the purchase is made through a central administration, or
through a single dealer, or by other means which result in economy of
sales effort or expense. An organized group does not include a group of
individuals whose sole organizational connection is participation as
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer, or clients of an
investment adviser.
Cumulative Quantity Discount (Right of Accumulation). A purchase of
Class A shares may qualify for a Cumulative Quantity Discount. The applicable
FESC will then be based on the total of:
(i) the amount of the current purchase; and
(ii) the amount previously invested (valued at the time of
investment) in shares of any class of one or more Voyageur Funds which
has a FESC owned by the investor; and
(iii) the amount previously invested (valued at the time of
investment) in shares of any classes of one or more Voyageur Funds
which has a FESC owned by another shareholder eligible to participate
with the investor in a "Combined Purchase Privilege" (see above).
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through an investment dealer, when
each purchase is made the investor or dealer must provide the Fund with
sufficient information to verify that the purchase qualifies for the privilege
or discount.
Letter of Intention. Investors may also obtain the reduced front end
sales charges shown in the Fund's prospectus by means of a written Letter of
Intention, which expresses the investor's intention to invest not less than
$50,000 (including certain "credits," as described below) within a period of 13
months in any one or more of the Voyageur funds which has a FESC. Each purchase
of shares under a Letter of Intention will be made at the public offering price
applicable at the time of such purchase to a single transaction of the dollar
amount indicated in the Letter. A Letter of Intention may include purchases of
shares made not more than 90 days prior to the date that an investor signs a
Letter; however, the 13-month period during which the Letter is in effect will
begin on the date of the earliest purchase to be included. Investors qualifying
for the Combined Purchase Privilege described above may purchase shares under a
single Letter of Intention.
If, for example, on the date an investor signs a Letter of Intention to
invest at least $50,000 as set forth above and the investor and the investor's
spouse and children under age 21 have previously invested $20,000 in shares
which are still held by such persons, it will only be necessary to invest a
total of $30,000 during the 13 months following the first date of purchase of
such shares in order to qualify for the sales charges applicable to investments
of $50,000. The cumulative purchase would have to total at least $50,000 to
qualify for a reduced sales charge for the Fund.
The Letter of Intention is not a binding obligation upon the investor
to purchase the full amount indicated. The minimum initial investment under a
Letter of Intention is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased. When the full amount indicated has been purchased, the escrow will be
released. To the extent that an investor purchases more than the dollar amount
indicated on the Letter of Intention and qualifies for further reduced sales
charges, the sales charges will be adjusted for the entire amount purchased at
the end of the 13-month period. The difference in sales charges will be used to
purchase additional shares at the then current offering price applicable to the
actual amount of the aggregate purchases.
Investors electing to take advantage of the Letter of Intention should
carefully review the appropriate provisions on the authorization form attached
to the Prospectus.
Shares of other open-end investment companies bearing a FESC will be
included with Voyageur fund shares bearing a FESC in a Combined Purchase
Privilege, Cumulative Quantity Discount or Letter of Intention only if such
shares are owned by customers of dealers that Voyageur or the Underwriter has
engaged to provide administration or accounting services to Fund omnibus
accounts in connection with the offering of the Fund as part of such other
investment companies' family of funds. Additionally, the maximum reduction of
the Fund's FESC that may result from the inclusion of shares of such other
investment companies in a Combined Purchase Privilege, Cumulative Quantity
Discount or Letter of Intention shall be a reduction to the front-end sales
charge applicable to purchases of $500,000 but less than $1,000,000 (as set
forth in the sales charge table in the Prospectus).
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the net asset value of Fund shares is
summarized in the Prospectus in "Determination of Net Asset Value." The public
offering price of Class A shares is the net asset value of Fund shares plus the
applicable front end sales charge, if any. The maximum front end sales charge is
3.90% of the net asset value. The public offering price of Class B and Class C
shares is the net asset value of Fund shares.
Net asset value data of the Fund as of December 31, 1996 was calculated
as follows:
Class A Net Assets ($6,067,647) = Net Asset Value Per Share ($10.18)
Shares Outstanding (596,194)
Class B Net Assets ($2,737,647) = Net Asset Value Per Share ($10.19)
Shares Outstanding (268,787)
Class C Net Assets ($900,257) = Net Asset Value Per Share ($10.18)
Shares Outstanding (88,448)
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may refer to
"yield," "taxable equivalent yield," "average annual total return" and
"cumulative total return." Yield, taxable equivalent yield, average annual total
return and cumulative total return are calculated as follows.
YIELD
Yield is computed by dividing the net investment income per share
deemed earned during the computation period by the maximum offering price per
share on the last day of the period, according to the following formula:
FUNC {YIELD = 2 LEFT [LEFT ({ a-b} OVER cd + 1) RIGHT)SUP 6-1 RIGHT]}
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
The 30-day yields for the Fund for the 30-day period ended
December 31, 1996 were:
30-Day Yield
------------
Absent Voluntary
Actual Fee Waivers
------ -----------
Class A 6.01% 5.17%
Class B 5.49% 4.59%
Class C 5.51% 4.64%
TAXABLE EQUIVALENT YIELD
Taxable equivalent yield is computed by dividing that portion of the
yield of the Fund (as computed above) which is tax-exempt by one minus a stated
marginal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
The taxable equivalent yield is based on current Federal marginal
income tax rates combined with Minnesota marginal income tax rates. Each
combined marginal rate assumes a single taxpayer and that state income taxes
paid are fully deductible for purposes of computing federal taxable income. The
combined marginal rates do not reflect federal rules concerning the phase-out of
personal exemptions and limitations on the allowance of itemized deductions for
certain high-income taxpayers.
The taxable equivalent yields for the Fund for the 30-day period ended
December 31, 1996 were:
ACTUAL
------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Class A 9.12% 9.52% 10.26% 10.87%
Class B 8.33% 8.70% 9.38% 9.93%
Class C 8.36% 8.73% 9.41% 9.97%
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Class A 7.85% 8.19% 8.83% 9.35%
Class B 6.97% 7.27% 7.84% 8.31%
Class C 7.04% 7.35% 7.92% 8.40%
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
FUNC {P (1+T) SUP n = ERV}
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The Fund average annual total return since inception as of December 31,
1996 for Class A shares (inception 6/14/96), Class B shares (inception 6/12/96)
and Class C shares (inception 6/7/96) was 1.45%, 7.29% and 5.02%, respectively.
Absent voluntary fee waivers the average annual total return for Class A shares,
Class B shares and Class C shares, would have been 0.83%, 6.61% and 4.34%,
respectively.
CUMULATIVE TOTAL RETURN
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
FUNC {CTR = LEFT ({ERV-P} OVER P RIGHT) 100}
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period; and
P = initial payment of $1,000.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The Fund cumulative total return since inception as of December 31,
1996 for Class A shares (inception 6/14/96), Class B shares (inception 6/12/96)
and Class C shares (inception 6/7/96) was 1.45%, 7.29% and 5.02%, respectively.
Absent voluntary fee waivers the average annual total return for Class A shares,
Class B shares and Class C shares would have been 0.83%, 6.61% and 4.34%,
respectively.
MONTHLY CASH WITHDRAWAL PLAN
Any investor who owns or buys shares of the Fund valued at $10,000 or
more at the current offering price may open a Withdrawal Plan and have a
designated sum of money paid monthly to the investor or another person. Shares
are deposited in a Withdrawal Plan account and all distributions are reinvested
in additional shares of the Fund at net asset value or distributed in cash.
Shares in a Withdrawal Plan account are then redeemed to make each withdrawal
payment. Deferred sales charges may apply to monthly redemptions of Class B and
Class C shares (or to redemptions of Class A shares in connection with initial
purchases of $1,000,000 or more which were not subject to a FESC). Redemptions
for the purpose of withdrawal are made on the 25th of the month (or on the
preceding business day if the 25th falls on a weekend or is a holiday) at that
day's closing net asset value and checks are mailed on the next business day.
Payments will be made to the registered shareholder. As withdrawal payments may
include a return on principal, they cannot be considered a guaranteed annuity or
actual yield of income to the investor. The redemption of shares in connection
with a Withdrawal Plan may result in a gain or loss for tax purposes. Continued
withdrawals in excess of income will reduce and possibly exhaust invested
principal, especially in the event of a market decline. The maintenance of a
Withdrawal Plan concurrently with purchases of additional Class A shares of the
Fund would normally be disadvantageous to the investor because of the FESC
payable on such purchases. For this reason, an investor may not maintain a plan
for the accumulation of Class A shares of the Fund (other than through
reinvestment of distributions) and a Withdrawal Plan at the same time. The cost
of administering Withdrawal Plans is borne by the Fund as an expense of all
shareholders. The Fund or the Underwriter may terminate or change the terms of
the Withdrawal Plan at any time. The Withdrawal Plan is fully voluntary and may
be terminated by the shareholder at any time without the imposition of any
penalty.
Since the Withdrawal Plan may involve invasion of capital, investors
should consider carefully with their own financial advisers whether the
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in
their circumstances. The Fund makes no recommendations or representations in
this regard.
ADDITIONAL INFORMATION
Information regarding certain record and beneficial ownership of Fund
shares as of March 31, 1997 which equals or exceeds 5% of any class of Fund
shares is available without charge by calling 800-525-6584.
Organizational costs in connection with start-up and initial
registration are being amortized over 60 months on a straight-line basis. If
Voyageur redeems any or all of its shares of the Fund prior to the end of the
Fund's 60-month amortization period, the redemption proceeds will be reduced by
its pro rata portion of such Fund's unamortized organizational costs. If the
Fund liquidates prior to the date such costs are fully amortized, Voyageur will
bear all unamortized organizational costs of the Fund.
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A., Sixth Street & Marquette Avenue,
Minneapolis, Minnesota 55479, acts as custodian of the Fund's assets and
portfolio securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, serves as counsel for the Fund.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as independent auditors for the Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director owes certain fiduciary duties to the
Fund and to its shareholders. Minnesota law provides that a director "shall
discharge the duties of the position of director in good faith, in a manner the
director reasonably believes to be in the best interest of the corporation, and
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances." Fiduciary duties of a director of a Minnesota
corporation include, therefore, both a duty of "loyalty" (to act in good faith
and act in a manner reasonably believed to be in the best interests of the
corporation) and a duty of "care" (to act with the care an ordinarily prudent
person in a like position would exercise under similar circumstances). Minnesota
law authorizes corporations to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of the fiduciary duty of "care". Minnesota law does not, however, permit a
corporation to eliminate or limit the liability of directors (i) for any breach
of the directors' duty of "loyalty" to the corporation or its shareholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for authorizing a dividend, stock
repurchase or redemption or other distribution in violation of Minnesota law or
for violation of certain provisions of Minnesota securities law, or (iv) for any
transaction from which the directors derived an improper personal benefit. The
Articles of Incorporation of the Fund limit the liability of the Fund's
directors to the fullest extent permitted by Minnesota statutes, except to the
extent that such liability cannot be limited as provided in the 1940 Act (which
Act prohibits any provisions which purport to limit the liability of directors
arising from such directors' willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their role as
directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the 1940 Act and the rules and regulations
adopted thereunder.
SHAREHOLDER MEETINGS
The Fund is not required under Minnesota law to hold annual or
periodically scheduled regular meetings of shareholders. Regular and special
shareholder meetings are held only at such times and with such frequency as
required by law. Minnesota corporation law provides for the Board of Directors
to convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, a shareholder or shareholders holding three percent or
more of the voting shares of the Fund may demand a regular meeting of
shareholders of the Fund by written notice of demand given to the chief
executive officer or the chief financial officer of the Fund. Within ninety days
after receipt of the demand, a regular meeting of shareholders must be held at
the expense of the Fund. Additionally, the 1940 Act requires shareholder votes
for all amendments to fundamental investment policies and restrictions and for
amendments to investment advisory contracts and Rule 12b-1 distribution plans.
FINANCIAL STATEMENTS
The audited Financial Statements and Financial Highlights for the Funds
for the period ended December 31, 1996 are incorporated herein by reference from
the annual report of each Fund as filed with the Securities and Exchange
Commission. Please call (800) 525-6584 to obtain a copy of the most recent
annual report of a Fund at no charge.
APPENDIX A
DESCRIPTIONS OF BOND RATINGS
Description of Standard and Poor's Ratings Services ("S&P"), Moody's Investors
Service, Inc. ("Moody's") and Fitch Investors Service LP ("Fitch") ratings:
S&P's Ratings for Municipal Bonds
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. S&P's
letter ratings may be modified by the addition of a plus or minus sign, which is
used to show relative standing within the major rating categories, except in the
AAA (Prime Grade) category.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA
AAA is the highest rating assigned by S&P. An issuer's capacity to pay
interest and repay the principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A
Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BBB
Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B
Debt rated BB and B (as well as debt rated CCC, C and C) is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation within this category, B represents a somewhat
higher degree of speculation and C represents the highest degree of speculation
of these ratings.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal repayments.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
C1
The rating C1 is reserved for income bonds on which no interest is being
paid.
D
Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-)
The ratings from AA to CCC may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
NR
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
S&P Ratings for Municipal Notes
SP-1
The issuers of these municipal notes exhibit very strong or strong capacity
to pay principal and interest. Those issues determined to possess overwhelming
safety characteristics are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to pay
principal and interest.
Moody's Ratings for Municipal Bonds
Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what generally are known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium-grade obligations, I.E.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are considered of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Unrated
When no rating has been assigned or when a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. A short-term rating designated VMIG, may also be assigned an issue having
a demand feature. The municipal obligations bearing the designation MIG 1/VMIG 1
are of the best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. The municipal obligations bearing the designation are
ample although not so large as in the preceding group.
Description of S&P A-1+
and
A-1 Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must possess overwhelming safety
characteristics regarding timely payment. Commercial paper rated A-1 must have a
degree of safety that is either overwhelming or very strong.
Description of
Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations, and will normally be evidenced by leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation and well established access
to a range of financial markets and assured sources of alternate liquidity.
Fitch's Ratings for Municipal Bonds
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
AAA
Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA
Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A
Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB
Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
(`BB' to `C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating (`DDD' to `D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
BB
Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could assist the
obligor in satisfying its debt service requirements.
B
Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirement, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC
Bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC
Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C
Bonds are in imminent default in payment of interest or principal.
DDD, DD and D
Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. `DDD' represents
the highest potential for recovery on these bonds, and `D' represents the lowest
potential for recovery.
Plus(+) Minus(-)
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the "AAA" category.
NR
Indicates that Fitch does not rate the specific issue.
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS
OF OPTIONS AND FUTURES
GENERAL. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," the Fund may purchase and sell options on
the securities in which it may invest and the Fund may purchase and sell options
on futures contracts (as defined below) and may purchase and sell futures
contracts. The Fund intends to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Fund's investment
objective, to seek to hedge against the effects of market conditions and to seek
to stabilize the value of its assets. The Fund will engage in hedging and risk
management transactions from time to time in Voyageur's discretion, and may not
necessarily be engaging in such transactions when movements in interest rates
that could affect the value of the assets of the Fund occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Fund will employ any of the
techniques or strategies described below. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the "CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Fund does not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and attendant
risks, are discussed below.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which the Fund may invest. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities, or
the cash value of an index, called for by the contract at a specified price
during a specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. The Fund
may also purchase and sell (write) call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during, or at the termination of, the
period specified in the terms of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. The
Fund would be required to deposit with its custodian initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. The Fund's
ability to establish and close out positions in futures contracts and options on
futures contracts will be subject to the liquidity of the market. Although the
Fund generally will purchase or sell only those futures contracts and options
thereon for which there appears to be a liquid market, there is no assurance
that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. Where it is not possible to
effect a closing transaction in a contract or to do so at a satisfactory price,
the Fund will have to make or take delivery under the futures contract, or, in
the case of a purchased option, exercise the option. The Fund may incur
brokerage fees when it purchases or sells futures contracts.
At the time a futures contract is purchased or sold, the Fund must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts the Fund may purchase or sell may range from approximately
1.5% to approximately 5% of the value of the securities (or the securities
index) underlying the contract. In certain circumstances, however, such as
during periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Initial margin requirements
may be increased generally in the future by regulatory action. An outstanding
futures contract is valued daily in a process known as "marking to market." If
the market value of the futures contract has changed, the Fund will be required
to make or will be entitled to receive a payment in cash or specified high
quality debt securities in an amount equal to any decline or increase in the
value of the futures contract. These additional deposits or credits are
calculated and required on a daily basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of
the futures contract the Fund purchases or sells and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts, even if Voyageur correctly forecasts market
trends the Fund's hedging strategy may not be successful. If this should occur,
the Fund could lose money on the futures contracts and also on the value of its
portfolio securities.
Although the Fund believes that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Fund's
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Fund seeks
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Fund may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
OPTIONS ON SECURITIES. The Fund may purchase and sell (write) options
on securities, which options may be either exchange-listed or over-the-counter
options. The Fund may write call options only if the call option is "covered." A
call option written by the Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Fund may write put
options only if the put option is "secured." A put option written by the Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
The Fund may purchase and sell options that are exchange-traded or that
are traded over-the counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when the Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although the Fund will enter into OTC options only with dealers that
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Fund's ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Fund may be unable to liquidate an OTC
option. In the case of options written by the Fund, the inability to enter into
a closing purchase transaction may result in material losses to the Fund.
REGULATORY RESTRICTIONS. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the Fund
will maintain, in a segregated account, cash or liquid high-grade securities
equal to the value of such contracts. Compliance with such segregation
requirements may restrict the Funds' ability to invest in intermediate- and
long-term Municipal Obligations.
The Fund intends to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that futures and options
positions be used (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Fund currently does not
intend to engage in transactions in futures contracts or options thereon for
speculation.
ACCOUNTING CONSIDERATIONS. When the Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When the Fund purchases an option, the premium paid by the Fund is recorded as
an asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the
Fund. an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset subsequently is adjusted to reflected changes in the amount
of the deposit as well as changes in the value of the contract.
PART B
VOYAGEUR MUTUAL FUNDS, INC.
(VOYAGEUR NATIONAL HIGH YIELD MUNICIPAL BOND FUND)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Fund's Prospectus dated April 28, 1997. A
copy of the Prospectus or this Statement of Additional Information may be
obtained free of charge by contacting the Fund at 90 South Seventh Street, Suite
4400, Minneapolis, Minnesota 55402. Telephone: (612) 376-7000 or (800) 553-2143.
Table of Contents
Page
Investment Policies and Restrictions........................................B-2
Board Members and Executive Officers of the Fund............................B-16
The Investment Adviser and Underwriter......................................B-19
Taxes.......................................................................B-26
Special Purchase Plans .....................................................B-28
Net Asset Value and Public Offering Price...................................B-30
Calculation of Performance Data.............................................B-30
Monthly Cash Withdrawal Plan................................................B-32
Additional Information......................................................B-33
Financial Information.......................................................B-35
Appendix A - Descriptions of Bond Ratings...................................A-1
Appendix B - General Characteristics and Risks of Options and Futures ......B-1
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated April 28, 1997, and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Fund. This Statement of Additional Information does not constitute an
offer to sell securities in any state or jurisdiction in which such offering may
not lawfully be made. The delivery of this Statement of Additional Information
at any time shall not imply that there has been no change in the affairs of the
Fund since the date hereof.
Dated April 28, 1997
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions of the Voyageur
National High Yield Municipal Bond Fund (the "Fund") are set forth in the
Prospectus. Certain additional investment information is set forth below. All
capitalized terms not defined herein have the same meanings as set forth in the
Prospectus.
MUNICIPAL OBLIGATIONS
Municipal Obligations are generally issued to obtain funds for various
public purposes, including the construction or improvement of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
Municipal Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Fund may invest, including Municipal
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Municipal Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Municipal Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Municipal Obligations for investment by the
Fund and the value of the Fund's portfolio. In such event, management of the
Fund may discontinue the issuance of shares to new investors and may reevaluate
the Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service LP ("Fitch"), or Standard & Poor's Ratings
Services ("S&P") for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for their investments in accordance with the
investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's, Fitch and S&P represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings provide an
initial criterion for selection of portfolio investments, Voyageur Fund
Managers, Inc. ("Voyageur" or "VFM"), the Fund's investment adviser, will
subject these securities to other evaluative criteria prior to investing in such
securities.
Floating and Variable Rate Demand Notes. The Fund may purchase floating
and variable rate demand notes. Generally, such notes are secured by letters of
credit or other credit support arrangements provided by banks. Such notes
normally have a stated long-term maturity but permit the holder to tender the
note for purchase and payment of principal and accrued interest upon a specified
number of days' notice. The issuer of floating and variable rate demand notes
normally has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus accrued interest
upon a specified number of days' notice to the noteholders. The interest rate on
a floating rate demand note is based on a specified interest index, such as a
bank's prime rate, and is adjusted automatically each time such index is
adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals, based upon current market conditions. Voyageur monitors the
creditworthiness of issuers of floating and variable rate demand notes in the
Fund's portfolio.
Escrow Secured Bonds or Defeased Bonds. Escrow secured bonds or
defeased bonds are created when an issuer refunds in advance of maturity (or
pre-refunds) some of its outstanding bonds and it becomes necessary or desirable
to set aside funds for redemption or payment of the bonds at a future date or
dates. 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 of the advance refunded bond. Escrow
secured bonds will often receive a triple A rating from S&P, Moody's and Fitch.
State or Municipal Lease Obligations. Municipal leases may take the
form of a lease with an option to purchase, an installment purchase contract, a
conditional sales contract or a participation certificate in any of the
foregoing. In determining leases in which the Fund will invest, Voyageur will
evaluate the credit rating of the lessee and the terms of the lease.
Additionally, Voyageur may require that certain municipal leases be secured by a
letter of credit or put arrangement with an independent financial institution.
State or municipal lease obligations frequently have the special risks described
below which are not associated with general obligation or revenue bonds issued
by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "non-appropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "non-appropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for non-appropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
Concentration Policy. As a fundamental policy, the Fund may not invest
25% or more of its total assets in the securities of any industry, although, for
purposes of this limitation, tax-exempt securities and U.S. Government
obligations are not considered to be part of any industry. The Fund may invest
25% or more of its total assets in industrial development revenue bonds. In
addition, it is possible that the Fund from time to time will invest 25% or more
of its total assets in a particular segment of the municipal bond market, such
as housing, health care, utility, transportation, education or industrial
obligations. In such circumstances, economic, business, political or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or a declining
market or need for the project) might also affect other bonds in the same
segment, thereby potentially increasing market or credit risk.
HOUSING OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
HEALTH CARE OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
UTILITY OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
TRANSPORTATION OBLIGATIONS. The Fund may invest, from time to time, 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance airports and highway, bridge and
toll road facilities. The major portion of an airport's gross operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and other factors,
and several airlines are experiencing severe financial difficulties. The
revenues of issuers which derive their payments from bridge, road or tunnel toll
revenues could be adversely affected by competition from toll-free vehicular
bridges and roads and alternative modes of transportation. Such revenues could
also be adversely affected by a reduction in the availability of fuel to
motorists or significant increases in the costs thereof.
EDUCATION OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
INDUSTRIAL REVENUE OBLIGATIONS. The Fund may invest, from time to time,
25% or more of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
OTHER RISKS. The exclusion from gross income for purposes of federal
income taxes for certain housing, health care, utility, transportation,
education and industrial revenue bonds depends on compliance with relevant
provisions of the Code. The failure to comply with these provisions could cause
the interest on the bonds to become includable in gross income, possibly
retroactively to the date of issuance, thereby reducing the value of the bonds,
subjecting shareholders to unanticipated tax liabilities and possibly requiring
the Fund to sell the bonds at the reduced value. Furthermore, such a failure to
meet these ongoing requirements may not enable the holder to accelerate payment
of the bond or require the issuer to redeem the bond.
TAXABLE OBLIGATIONS
As set forth in the Prospectus, the Fund may invest to a limited extent
in obligations and instruments, the interest on which is includable in gross
income for purposes of federal income taxation.
Government Obligations. The Fund may invest in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally have
maturities of one year or less; Treasury Notes generally have maturities of one
to ten years; and Treasury Bonds generally have maturities of greater than ten
years. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury;
other obligations, such as those of the Federal Home Loan Banks, are secured by
the right of the issuer to borrow from the Treasury; other obligations, such as
those issued by the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; and other obligations, such as those issued by
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality itself. Although the U.S. Government provides financial support
to such U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law. The
Fund will invest in such securities only when Voyageur is satisfied that the
credit risk with respect to the issuer is minimal.
Repurchase Agreements. The Fund may invest in repurchase agreements.
The Fund's custodian will hold the securities underlying any repurchase
agreement or such securities will be part of the Federal Reserve Book Entry
System. The market value of the collateral underlying the repurchase agreement
will be determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the obligor under the agreement will promptly
furnish additional collateral to the Fund's custodian (so the total collateral
is an amount at least equal to the repurchase price plus accrued interest).
Other Taxable Investments. The Fund also may invest in certificates of
deposit, bankers' acceptances and other time deposits. Certificates of deposit
are certificates representing the obligation of a bank to repay the funds
deposited (plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate.
OPTIONS AND FUTURES TRANSACTIONS
To the extent set forth in the Prospectus, the Fund may buy and sell
put and call options on the securities in which it may invest, and the Fund may
enter into futures contracts and options on futures contracts with respect to
fixed-income securities or based on financial indices including any index of
securities in which the Fund may invest. Futures and options will be used to
facilitate allocation of the Fund's investments among asset classes, to generate
income or to hedge against changes in interest rates or declines in securities
prices or increases in prices of securities proposed to be purchased. Different
uses of futures and options have different risk and return characteristics.
Generally, selling futures contracts, purchasing put options and writing (i.e.
selling) call options are strategies designed to protect against falling
securities prices and can limit potential gains if prices rise. Purchasing
futures contracts, purchasing call options and writing put options are
strategies whose returns tend to rise and fall together with securities prices
and can causes losses if prices fall. If securities prices remain unchanged over
time option writing strategies tend to be profitable, while option buying
strategies tend to decline in value.
Writing Options. The Fund may write (i.e. sell) covered put and call
options with respect to the securities in which they may invest. By writing a
call option, the Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, the Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by the Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of the Fund.
"Covered options" means that so long as the Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered "covered" with respect to a put option
it writes if, so long as it is obligated as the writer of a put option, it
deposits and maintains with its custodian cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater than
the exercise price of the option.
Through the writing of call or put options, the Fund may obtain a
greater current return than would be realized on the underlying securities
alone. The Fund receives premiums from writing call or put options, which it
retains whether or not the options are exercised. By writing a call option, the
Fund might lose the potential for gain on the underlying security while the
option is open, and by writing a put option, the Fund might become obligated to
purchase the underlying security for more than its current market price upon
exercise.
Purchasing Options. The Fund may purchase put options in order to
protect portfolio holdings in an underlying security against a decline in the
market value of such holdings. Such protection is provided during the life of
the put because the Fund may sell the underlying security at the put exercise
price, regardless of a decline in the underlying security's market price. Any
loss to the Fund is limited to the premium paid for, and transaction costs paid
in connection with, the put plus the initial excess, if any, of the market price
of the underlying security over the exercise price. However, if the market price
of such security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put is sold.
The Fund may wish to protect certain portfolio securities against a
decline in market value at a time when no put options on those particular
securities are available for purchase. The Fund may therefore purchase a put
option on securities other than those it wishes to protect even though it does
not hold such other securities in its portfolio.
The Fund may also purchase call options. During the life of the call
option, the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the Fund will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Securities Index Option Trading. The Fund may purchase and write put
and call options on securities indexes. Options on securities indexes are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated to make delivery of
this amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in the Fund's
portfolio correlate with price movements of the index selected. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular security, whether the Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon movements
in the level of prices in the relevant underlying securities markets generally
or, in the case of certain indexes, in an industry market segment, rather than
movements in the price of a particular security. Accordingly, successful use by
the Fund of options on security indexes will be subject to Voyageur's ability to
predict correctly movements in the direction of the stock market or interest
rates market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. In the event Voyageur is unsuccessful in predicting the movements of
an index, the Fund could be in a worse position than had no hedge been
attempted.
Because exercises of index options are settled in cash, the Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When the Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker as collateral for the option, cash,
high-grade liquid debt securities or "qualified securities" with a market value
determined on a daily basis of not less than 100% of the current market value of
the option.
Options purchased and written by the Fund may be exchange traded or may
be options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by Voyageur. OTC options are illiquid and it may not be possible for the Fund to
dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when Voyageur believes it would be advantageous
to do so.
Futures Contracts and Options on Futures Contracts. The Fund may enter
into futures contracts and purchase and write options on these contracts,
including but not limited to interest rate and securities index contracts and
put and call options on these futures contracts. These contracts will be entered
into on domestic and foreign exchanges and boards of trade, subject to
applicable regulations of the Commodity Futures Trading Commission. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes.
In connection with transactions in futures contracts and writing
related options, the Fund will be required to deposit as "initial margin" a
specified amount of cash or short-term, U.S. Government securities. The initial
margin required for a futures contract is set by the exchange on which the
contract is traded. It is expected that the initial margin would be
approximately 1-1/2% to 5% of a contract's face value. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract. The Fund will not purchase
or sell futures contracts or related options if, as a result, the sum of the
initial margin deposit on the Fund's existing futures and related options
positions and premiums paid for options or futures contracts entered into for
other than bona fide hedging purposes would exceed 5% of the Fund's assets.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in indexes of securities and movements
in the prices of futures contracts, even a correct forecast of general market
trends may not result in a successful hedging transaction over a very short
period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by the Fund is subject to the
ability of Voyageur to predict correctly movements in the direction of interest
rates or the relevant underlying securities market. If the Fund has hedged
against the possibility of an increase in interest rates adversely affecting the
value of fixed-income securities held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its security which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
Liquidity of Futures Contracts. The Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. The Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Fund intends to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risks of Options. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium, which may
partially offset a decline in the value of the Fund's portfolio assets. By
writing a call option, the Fund becomes obligated to sell an underlying
instrument or a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option generates a premium, but
the Fund becomes obligated to purchase the underlying instrument or futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options may exceed the amount of the premium
received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when
Voyageur deems it desirable to do so. Although the Fund will enter into an
option position only if Voyageur believes that a liquid secondary market exists
for such option, there is no assurance that the Fund will be able to effect
closing transactions at any particular time or at an acceptable price. The
Fund's transactions involving options on futures contracts will be conducted
only on recognized exchanges.
The Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by Voyageur, which
could prove to be inaccurate. Even if the expectations of Voyageur are correct,
there may be an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Fund will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in
price of securities that the Fund anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Fund to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when Voyageur believes it would be advantageous to do so. Accordingly, OTC
options are subject to the Fund's limitation that a maximum of 15% of its net
assets be invested in illiquid securities. In the event of the bankruptcy of the
writer of an OTC option, the Fund could experience a loss of all or part of the
value of the option. Voyageur anticipates that options on Municipal Obligations
will consist primarily of OTC options.
ILLIQUID INVESTMENTS
The Fund is permitted to invest up to 15% of its net assets in illiquid
investments. An investment is generally deemed to be "illiquid" if it cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the investment company is valuing the
investment.
As set forth in the Prospectus, the Fund may invest in certain
restricted securities (securities which were originally sold in private
placements and which have not been registered under Securities Act of 1933 (the
"1933 Act")), commercial paper issued pursuant to Section 4(2) under the 1933
Act, and municipal lease obligations, and treat such securities as liquid when
they have been determined to be liquid by Voyageur subject to the oversight of
and pursuant to procedures adopted by the Fund's Board of Directors. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (c) dealer undertakings to make a market in the
security; and (d) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). With respect to restricted
securities, the liquidity of such securities increased as a result of the
adoption of Rule 144A under the 1933 Act, which provides a safe harbor exemption
from the registration requirements of the 1933 Act for resales of restricted
securities to "qualified institutional buyers," as defined in the rule.
Investing in such securities could have the effect of increasing the level of
Fund illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
DIVERSIFICATION
Although the Fund is characterized as a non-diversified fund under the
1940 Act, the Fund intends to conduct its operations so that it will qualify
under the Internal Revenue Code of 1986 as a "regulated investment company." In
order to qualify as a regulated investment company, the Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Code requires that not more than 25% in value of the Fund's total assets may be
invested in the securities of a single issuer at the close of each quarter of
the taxable year.
For purposes of such diversification, the identification of the issuer
of Municipal Obligations depends on the terms and conditions of the security. If
a State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond
is backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by the Fund
exceeds 10% of the value of the Fund's total assets, the guarantee is considered
a separate security and is treated as an issue of the guarantor. Investments in
municipal obligations refunded with escrowed U.S. Government securities will be
treated as investments in U.S. Government securities for purposes of determining
the Fund's compliance with the 1940 Act diversification requirements.
PORTFOLIO TURNOVER
Portfolio turnover for the Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by the Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of the Fund's
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned by the Fund during the year.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions set forth below
which, together with the investment objectives of the Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the 1940 Act, this means the lesser of
the vote of (1) 67% of the shares of the Fund at a meeting where more than 50%
of the outstanding shares of the Fund are present in person or by proxy or (2)
more than 50% of the outstanding shares of the Fund. The following investment
restrictions apply to the Fund. The Fund will not:
(1) Borrow money (provided that the Fund may enter into
reverse repurchase agreements with respect to not more than 10% of its
total assets), except from banks for temporary or emergency purposes in
an amount not exceeding 20% of the value of the Fund's total assets,
including the amount borrowed. The Fund may not borrow for leverage
purposes, provided that the Fund may enter into reverse repurchase
agreements for such purposes, and securities will not be purchased
while outstanding borrowings exceed 5% of the value of the Fund's total
assets.
(2) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of portfolio
investments, the Fund may be deemed to be an underwriter under federal
securities laws.
(3) Purchase or sell real estate, although it may purchase
securities which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in
which the Fund may invest consistent with its investment policies, and
through repurchase agreements.
(5) Invest 25% or more if its total assets in the securities
of any industry, although, for purposes of this limitation, tax-exempt
securities and U.S. Government obligations are not considered to be
part of any industry.
(6) Issue any senior securities (as defined in the 1940 Act),
except as set forth in investment restriction number (1) above, and
except to the extent that using options, futures contracts and options
on futures contracts, purchasing or selling on a when-issued or forward
commitment basis or using similar investment strategies may be deemed
to constitute issuing a senior security.
(7) Purchase or sell commodities or futures or options
contracts with respect to physical commodities. This restriction shall
not restrict the Fund from purchasing or selling, on a basis consistent
with any restrictions contained in its then-current Prospectus, any
financial contracts or instruments which may be deemed commodities
(including, by way of example and not by way of limitation, options,
futures, and options on futures with respect, in each case, to interest
rates, currencies, stock indices, bond indices or interest rate
indices).
The following non-fundamental investment restrictions may be changed by
the Board of the Fund at any time. The Fund will not:
(1) Invest more than 5% of its total assets in securities of
any single investment company, nor more than 10% of its total assets in
securities of two or more investment companies, except as part of a
merger, consolidation or acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(3) Write puts if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover such puts.
(4) Make short sales of securities or maintain a short
position for the account of the Fund, unless at all times when a short
position is open it owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as,
and equal in amount to, the securities sold short.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
BOARD MEMBERS AND EXECUTIVE OFFICERS OF THE FUND
The Board members and officers of the Fund, their position with the
Fund and their principal occupations during the past five years are set forth
below. Unless indicated otherwise, all positions have been held more than five
years. In addition to the occupations set forth below, the Directors and
officers also serve as directors and trustees or officers of various other
closed-end and open-end investment companies managed by Voyageur.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION PAST FIVE YEARS AND OTHER AFFILIATIONS
- ---------------------- -------- --------------------------------------
<S> <C> <C>
Clarence G. Frame, 78 Director Of counsel, Briggs & Morgan law firm. Mr. Frame
First National Bank Building, currently serves on the board of directors of
Tosco W-875 Corporation (an oil refining and marketing company),
332 Minnesota Street Milwaukee Land Company, and Independence One
St. Paul, Minnesota 55101 Mutual Funds.
Richard F. McNamara, 64 Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle #200 Minneapolis-based holding company consisting of
Minneapolis, Minnesota 55439 seventeen companies in industrial plastics, sheet metal,
automotive aftermarket, construction supply,
electronics and financial services, since 1966. Mr.
McNamara currently serves on the board of directors
of Rimage (electronics manufacturing) and Interbank.
Thomas F. Madison, 61 Director President and CEO of MLM Partners, Inc. since
200 South Fifth Street January 1993; previously, Vice Chairman--Office of
Suite 2100 the CEO, The Minnesota Mutual Life Insurance
Minneapolis, Minnesota 55402 Company from February to September 1994; President
of U.S. WEST Communications--Markets from 1988
to 1993. Mr. Madison currently serves on the board of
directors of Valmont Industries, Inc. (metal
manufacturing), Eltrax Systems, Inc. (data
communications integration), Minnegasco, Span Link
Communications (software), ACI Telecentrics
(outbound telemarketing and telecommunications) and
various civic and educational organizations.
James W. Nelson, 55 Director Chairman and Chief Executive Officer of Eberhardt
81 South Ninth Street Holding Company and its subsidiaries.
Suite 400
Minneapolis, Minnesota 55440
Robert J. Odegard, 76 Director Special Assistant to the President of the University of
University of Minnesota Minnesota.
Foundation
1300 South Second Street
Minneapolis, Minnesota 55454
John G. Taft, 42 President President of the Adviser; Director (since 1993) of
90 South Seventh Street the Adviser and the Underwriter; Executive
Suite 4400 Vice President (since 1995) of the Underwriter;
Minneapolis, Minnesota 55402 President of the Underwriter from 1991 to 1995;
Management committee member of the Adviser from
1991 to 1993.
Jane M. Wyatt, 42 Executive Chief Investment Officer and Director of the Adviser
90 South Seventh Street Vice since 1993; Director and Executive Vice President of
Suite 4400 President the Underwriter since 1993; Executive Vice President
Minneapolis, Minnesota 55402 and Portfolio Manager of the Adviser from 1992 to
1993.
Andrew M. McCullagh, Jr., 48 Executive Senior Tax Exempt Portfolio Manager of the Adviser;
717 Seventeenth Street Vice previously, Director of the Adviser and the
Denver, Colorado 80202 President Underwriter from 1993 to 1995.
Elizabeth H. Howell, 35 Vice Senior Tax Exempt Portfolio Manager of the Adviser.
90 South Seventh Street President
Suite 4400
Minneapolis, Minnesota 55402
James C. King, 56 Vice Senior Equity Portfolio Manager of the Adviser since
90 South Seventh Street President 1993; previously, Director of the Adviser and the
Suite 4400 Underwriter from 1993 to 1995.
Minneapolis, Minnesota 55402
Steven P. Eldredge, 41 Vice Senior Tax Exempt Portfolio Manager of the Adviser
90 South Seventh Street President since 1995; previously, portfolio manager for ABT
Suite 4400 Mutual Funds, Palm Beach, Florida, from 1989 to
Minneapolis, Minnesota 55402 1995.
Kenneth R. Larsen, 34 Treasurer Treasurer of the Adviser and the Underwriter;
90 South Seventh Street previously, Director, Secretary and Treasurer of the
Suite 4400 Adviser and the Underwriter from 1993 to 1995.
Minneapolis, Minnesota 55402
Thomas J. Abood, 33 Secretary Senior Vice President and General Counsel of
90 South Seventh Street Dougherty Financial Group, Inc. (since 1995);
Suite 4400 Senior Vice President of the Adviser, the Underwriter
Minneapolis, Minnesota 55402 and Voyageur Companies, Inc. since 1995; previously,
Vice President of the Adviser and Voyageur
Companies, Inc. from 1994 to 1995; associated with
the law firm of Skadden, Arps, Slate, Meagher &
Flom, Chicago, Illinois from 1988 to 1994.
</TABLE>
The Fund does not compensate its officers. Each director or trustee
(who is not an employee of Voyageur or any of its affiliates) will receive a
total annual fee of $26,000 for serving as a director or trustee for each of the
open-end and closed-end investment companies (the "Fund Complex") for which
Voyageur acts as investment adviser, plus a $500 fee for each special in-person
meeting attended by such director. These fees are allocated among each series or
fund in the Fund Complex based on the relative average net asset value of each
series or fund. Currently the Fund Complex consists of ten open-end investment
companies comprising 33 series or funds and six closed-end investment companies.
In addition, each director or trustee who is not an employee of Voyageur or any
of its affiliates is reimbursed for expenses incurred in connection with
attending meetings. The following table sets forth the aggregate compensation
received by each director from the Fund Complex during the calendar year ended
December 31, 1996. As of the date of this Statement of Additional Information,
the Fund had not paid any compensation to directors.
DIRECTOR TOTAL COMPENSATION FROM FUND COMPLEX
- -------- ------------------------------------
Clarence G. Frame $25,500
Richard F. McNamara $25,500
Thomas F. Madison $25,500
James W. Nelson $25,500
Robert J. Odegard $25,500
THE INVESTMENT ADVISER AND UNDERWRITER
Voyageur Fund Managers, Inc., a Minnesota corporation ( "Voyageur"),
has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as the Fund's investment adviser, subject to the authority of
the Board of Directors. Voyageur and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group Inc. ("DFG"), which is
owned approximately 49% by Michael E. Dougherty, 49% by Pohlad Companies and
less than 1% by certain retirement plans for the benefit of DFG employees. Mr.
Dougherty co-founded the predecessor of DFG in 1977 and has served as DFG's
Chairman of the Board and Chief Executive Officer since inception. Pohlad
Companies is a holding company owned in equal parts by each of James O. Pohlad,
Robert C. Pohlad and William M. Pohlad. Certain key employees of DFG and its
subsidiaries and an employee benefit plan benefitting the employees of such
companies have been offered the opportunity to purchase voting common shares of
DFG through stock options granted with respect thereto, with the shareholdings
of Pohlad Companies and Mr. Dougherty each to be diluted proportionately by any
such purchases. Following any such purchases, Mr. Dougherty and Pohlad Companies
would each continue to own greater than 25% of the outstanding voting common
shares of DFG, and no other person or entity would own greater than 25% of such
shares. The principal executive offices of Voyageur are located at 90 South
Seventh Street, Suite 4400, Minneapolis, Minnesota, 55402.
Voyageur Fund Distributors, Inc. (the "Underwriter") is the principal
distributor of the Fund's shares. With regard to the Underwriter, Mr. Frank
Tonnemaker is the President and a director and Mr. Taft and Ms. Wyatt are each
Executive Vice Presidents and directors. Mr. Abood is Senior Vice President and
Mr. Larsen is Treasurer.
INVESTMENT ADVISORY AGREEMENT
The Fund does not maintain its own research department. The Fund has
contracted with Voyageur for investment advice and management. Pursuant to an
Investment Advisory Agreement, Voyageur has the sole and exclusive
responsibility for the management of the Fund's portfolio and the making and
execution of all investment decisions for the Fund subject to the objective and
investment policies and restrictions of the Fund and subject to the supervision
of the Fund's Board of Directors. Voyageur also furnishes, at its own expense,
office facilities, equipment and personnel for servicing the investments of the
Fund. Voyageur has agreed to arrange for officers and employees of Voyageur to
serve without compensation from the Fund as directors, officers or employees of
the Fund if duly elected to such positions by the shareholders or directors of
the Fund.
As compensation for Voyageur's services, the Fund is obligated to pay
to Voyageur a monthly investment advisory and management fee equivalent on an
annual basis to .65 of 1% of its average daily net assets, respectively. The fee
is based on the average daily value of the Fund's net assets at the close of
each business day. For the fiscal years ended July 31, 1996, 1995 and 1994, the
Fund's predecessor paid advisory fees of $322,677, $342,193 and $353,208,
respectively. For the period from August 1, 1996 to December 31, 1996, the Fund
paid $140,548 in advisory fees.
The Investment Advisory Agreement continues from year to year only if
approved annually (a) by the Fund's Board or by vote of a majority of the
outstanding voting securities of the Fund and (b) by vote of a majority of board
members of the Fund who are not parties to such Investment Advisory Agreement or
interested persons (as defined in the 1940 Act) of any such party, cast in
person at a meeting of the Board called for the purpose of voting on such
approval. The Investment Advisory Agreement may be terminated by either party on
60 days' notice to the other party and terminates automatically upon its
assignment. The Investment Advisory Agreement also provides that amendments to
the Agreement may be affected if approved by the Board (including a majority of
the directors who are not interested persons of Voyageur or the Fund), unless
the 1940 Act requires that any such amendment must be submitted for approval by
the Fund's shareholders and that all proposed assignments of such agreement are
subject to approval by the Board of Directors (unless the 1940 Act otherwise
requires shareholder approval).
ADMINISTRATIVE SERVICES AGREEMENT
Voyageur also acts as the Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement. Pursuant to the Administrative Services Agreement, Voyageur
provides the Fund all dividend disbursing, transfer agency, administrative and
accounting services required by the Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of the Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of the Fund's
shares or the receipt of redemption requests with respect to the Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon the Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of the Fund to be received by
each shareholder of the Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of the Fund as the Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of the Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
the Fund and Voyageur may from time to time agree upon. Pursuant to the
Administrative Services Agreement, Voyageur also provides such regulatory,
reporting and compliance related services and tasks as the Fund may reasonably
request.
As compensation for these services, the Fund pays Voyageur a monthly
fee based upon the Fund's average daily net assets and the number of shareholder
accounts then existing. This fee is equal to the sum of (i) $1.33 per
shareholder account per month, (ii) $1,000 per month if the Fund's average daily
net assets do not exceed $50 million, $1,250 per month if the Fund's average
daily net assets are greater than $50 million but do not exceed $100 million,
and $1,500 per month if the Fund's average daily net assets exceed $100 million,
and (iii) 0.11% per annum of the first $50 million of the Fund's average daily
net assets, 0.06% per annum of the next $100 million of the Fund's average daily
net assets, 0.035% per annum of the next $250 million of the Fund's average
daily net assets, 0.03% per annum of the next $300 million of the Fund's average
daily net assets and 0.02% per annum of the Fund's average daily net assets in
excess of $700 million. For purposes of calculating average daily net assets, as
such term is used in the Administrative Services Agreements, the Fund's net
assets equal its total assets minus its total liabilities. The Fund also
reimburses Voyageur for its out-of-pocket expenses in connection with Voyageur's
provision of services under the Fund's Administrative Services Agreement. For
the period from August 1, 1996 to December 31, 1996, the Fund paid $28,025 in
administrative service fees.
The Administrative Services Agreement is renewable from year to year if
the directors approve it in the same way they approve the Investment Advisory
Agreement. The Administrative Services Agreement can be terminated by either
party on 60 days' notice to the other party and the Agreement terminates
automatically upon its assignment. The Administrative Services Agreement also
provides that amendments to the Agreement may be effected if approved by the
Board (including a majority of the board members who are not interested persons
of Voyageur or the Fund), unless the 1940 Act requires that any such amendment
must be submitted for approval by the Fund's shareholders and that all proposed
assignments of such agreement are subject to approval by the Board (unless the
1940 Act otherwise requires shareholder approval thereof).
EXPENSES OF THE FUND
Voyageur is contractually obligated to pay the operating expenses of
the Fund (excluding interest, taxes, brokerage fees and commissions and Rule
12b-1 fees, if any) which exceed 1% of the Fund's average daily net assets on an
annual basis up to the amount of the investment advisory and management fee, and
the dividend disbursing, administrative and accounting services fee. In
addition, Voyageur reserves the right to voluntarily waive its fees in whole or
part and to voluntarily absorb certain other of the Fund's expenses. Any such
waiver or absorption, however, is in Voyageur's sole discretion and may be
lifted or reinstated at any time.
All costs and expenses (other than those specifically referred to as
being borne by Voyageur or the Underwriter) incurred in the operation of the
Fund are borne by the Fund. These expenses include, among others, fees of the
Board members who are not employees of Voyageur or any of its affiliates,
expenses of directors' and shareholders' meetings, including the cost of
printing and mailing proxies, expenses of insurance premiums for fidelity bond
and other coverage and expenses of redemption of shares, expenses of issue and
sale of shares (to the extent not borne by the Underwriter under its agreement
with the Fund), expenses of printing and mailing stock certificates representing
shares of the Fund, association membership dues, charges of the Fund's
custodian, and bookkeeping, auditing and legal expenses. The Fund will also pay
the fees and bear the expense of registering and maintaining the registration of
the Fund and its shares with the Securities and Exchange Commission and
registering or qualifying its shares under state or other securities laws and
the expense of preparing and mailing prospectuses, reports and statements to
shareholders.
RULE 12b-1 PLAN OF DISTRIBUTION; DISTRIBUTION AGREEMENT
The Fund has adopted a Plan of Distribution (the "Plan") relating to
the payment of certain expenses pursuant to Rule 12b-1 under the 1940 Act. Rule
12b-1(b) provides that any payments made by a Fund in connection with the
distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing.
Rule 12b-1(b)(1) requires that such plan be approved by a vote of at
least a majority of the Fund's outstanding shares, and Rule 12b-1(b)(2) requires
that such plan, together with any related agreements, be approved by a vote of
the Board of Directors and of the directors who are not interested persons of
the Fund and have no direct or indirect financial interest in the operation of
the plan or in any agreements related to the plan, cast in person at a meeting
called for the purpose of voting on such plan or agreements. Rule 12b-1(b)(3)
requires that the plan or agreement provide, in substance:
(1) that it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such continuance is
specifically approved at least annually in the manner described in paragraph
(b)(2) of Rule 12b-1;
(2) that any person authorized to direct the disposition of monies paid
or payable by a Fund pursuant to its plan or any related agreement shall provide
to the Board of Directors, and the directors shall review, at least quarterly, a
written report of the amount so expended and the purposes for which such
expenditures were made; and
(3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the Board of Directors who are not
interested persons of the Fund and have no direct or indirect financial interest
in the operation of the plan or in any agreements related to the plan or by vote
of a majority of the outstanding voting securities of a Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1 (c) provides that
the Fund may rely upon Rule 12b-1 only if the selection and nomination of that
Fund's disinterested directors are committed to the discretion of such
disinterested directors. Rule 12b-1(e) provides that the Fund may implement or
continue a plan pursuant to Rule 12b-1(b) only if the directors who vote to
approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under state
law, and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable
likelihood that the plan will benefit the Fund and its shareholders.
The Fund has entered into a Distribution Agreement with the
Underwriter, pursuant to which the Underwriter acts as the principal underwriter
of the Fund's shares. The Distribution Agreement and Plan provide that the
Underwriter agrees to provide, and shall pay costs which it incurs in connection
with providing, administrative or accounting services to shareholders of the
Fund (such costs are referred to as "Shareholder Servicing Expenses") and that
the Underwriter shall also pay all costs of distributing the shares of the Fund
("Distribution Expenses"). Shareholder Servicing Expenses include all expenses
of the Underwriter incurred in connection with providing administrative or
accounting services to shareholders of the Fund, including, but not limited to,
an allocation of the Underwriter's overhead and payments made to persons,
including employees of the Underwriter, who respond to inquiries of shareholders
regarding their ownership of Fund shares, or who provide other administrative or
accounting services not otherwise required to be provided by the Fund's
investment adviser or dividend disbursing, transfer, administrative and
accounting services agent. Distribution Expenses include, but are not limited
to, initial and ongoing sales compensation (in addition to sales loads) paid to
investment executives of the Underwriter and to other broker-dealers and
participating financial institutions; expenses incurred in the printing of
prospectuses, statements of additional information and reports used for sales
purposes; expenses of preparation and distribution of sales literature; expenses
of advertising of any type; an allocation of the Underwriter's overhead;
payments to and expenses of persons who provide support services in connection
with the distribution of Fund shares; and other distribution-related expenses.
Pursuant to the provisions of the Distribution Agreement, the
Underwriter is entitled to receive a total fee each quarter at an annual rate of
.25% of the average daily net assets attributable to the Fund's Class A shares,
1.00% of the average daily net assets attributable to the Fund's Class B shares
and 1.00% of the average daily net assets attributable to the Fund's Class C
shares to pay distribution expenses. As determined from time to time by the
Board, a portion of such fees shall be designated as a "shareholder servicing
fee" and a portion shall be designated as a "distribution fee." The Board has
determined that all of the fee payable with respect to Class A shares shall be
designated a shareholder servicing fee. With respect to fees payable with
respect to Class B shares and Class C shares, that portion of the fee equal to
.25% of average daily net assets attributable to each of the Fund's Class B
shares and Class C shares is designated a shareholder servicing fee and that
portion of the fee equal to .75% of average daily net assets attributable to
each of the Fund's Class B shares and Class C shares is designated a
distribution fee. Amounts payable to the Underwriter under the Distribution
Agreement may exceed or be less than the Underwriter's actual distribution
expenses and shareholder servicing expenses. In the event such distribution
expenses and shareholder servicing expenses exceed amounts payable to the
Underwriter under the Plan, the Underwriter shall not be entitled to
reimbursement by the Fund. In addition to being paid shareholder servicing and
distribution fees, the Underwriter also receives for its services the sales
charge on sales of Fund shares set forth in the Prospectus. For the fiscal years
ended July 31, 1996, 1995 and 1994, the Fund's predecessor Distributors earned
distribution fees of $120,396, $126,890 and $140,340 and voluntarily waived
distribution fees of $73,210, $78,426 and $71,584, respectively. For the period
from August 1, 1996 to December 31, 1996, the Fund paid $72,184 in 12b-1 fees.
The Fund's Distribution Agreement is renewable from year to year if the
Fund's Board approves the Agreement and the Fund's Plan. The Fund or the
Underwriter can terminate its Distribution Agreement on 60 days' notice to the
other party, and the Distribution Agreement terminates automatically upon its
assignment. In the Fund's Distribution Agreement, the Underwriter agrees to
indemnify the Fund against all costs of litigation and other legal proceedings
and against any liability incurred by or imposed on the Fund in any way arising
out of or in connection with the sale or distribution of the Fund's shares,
except to the extent that such liability is the result of information which was
obtainable by the Underwriter only from persons affiliated with the Fund but not
the Underwriter.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
As the Fund's portfolio is composed exclusively of debt, rather than
equity securities, most portfolio transactions are effected with dealers without
the payment of brokerage commissions, but rather at net prices which usually
include a spread or markup. In effecting such portfolio transactions on behalf
of the Fund, Voyageur seeks the most favorable net price consistent with the
best execution. However, frequently, Voyageur selects a dealer to effect a
particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the bond market and the
desire of Voyageur to accept a particular price for a security because the price
offered by the dealer meets its guidelines for profit, yield or both.
Decisions with respect to placement of the Fund's portfolio
transactions are made by Voyageur. The primary consideration in making these
decisions is efficiency in the execution of orders and obtaining the most
favorable net prices for the Fund. When consistent with these objectives,
business may be placed with broker-dealers who furnish investment research
services to Voyageur. Such research services include advice, both directly and
in writing, as to the value of securities; the advisability of investing in,
purchasing or selling securities; and the availability of securities, or
purchasers or sellers of securities; as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. This allows Voyageur to supplement its own
investment research activities and enables Voyageur to obtain the views and
information of individuals and research staffs of many different securities
firms prior to making investment decisions for the Fund. To the extent portfolio
transactions are effected with broker-dealers who furnish research services to
Voyageur, Voyageur receives a benefit, not capable of evaluation in dollar
amounts, without providing any direct monetary benefit to the Fund from these
transactions.
Voyageur has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's portfolio transactions in exchange
for research services provided Voyageur, except as noted below. However,
Voyageur does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Fund's business, in
order to encourage certain broker-dealers to provide Voyageur with research
services which Voyageur anticipates will be useful to it. Because the list is
merely a general guide, which is to be used only after the primary criterion for
the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. In the
event any transactions are executed on an agency basis, Voyageur will authorize
the Fund to pay an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker-dealer would have charged
only if Voyageur determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or Voyageur's overall responsibilities with respect to the accounts
as to which it exercises investment discretion. If the Fund executes any
transactions on an agency basis, it will generally pay higher than the lowest
commission rates available.
The Fund will not effect any brokerage transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with
Voyageur, unless such transactions, including the frequency thereof, the receipt
of commissions payable in connection therewith and the selection of the
affiliated broker-dealer effecting such transactions are not unfair or
unreasonable to the shareholders of the Fund. In determining the commissions to
be paid to a broker-dealer affiliated with Voyageur, it is the policy of the
Fund that such commissions will, in the judgment of Voyageur, subject to review
by the Board of Directors, be both (a) at least as favorable as those which
would be charged by other qualified brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period of time, and (b) at least as favorable as commissions
contemporaneously charged by such affiliated broker-dealers on comparable
transactions for their most favored comparable unaffiliated customers. While the
Fund does not deem it practicable and in its best interest to solicit
competitive bids for commission rates on each transaction, consideration will
regularly be given to posted commission rates as well as to other information
concerning the level of commissions charged on comparable transactions by other
qualified brokers.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Fund may purchase securities from an underwriting
syndicate of which an affiliated broker-dealer is a member (but not directly
from such affiliated broker-dealer itself). Such conditions relate to the price
and amount of the securities purchased, the commission or spread paid and the
quality of the issuer. The rules further require that such purchases take place
in accordance with procedures adopted and reviewed periodically by the Board of
Directors, particularly those Board members who are not interested persons of
the Fund.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Fund's directors may
determine, Voyageur may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
OTHER INFORMATION
Conversion of Class B Shares. In addition to information regarding
conversion set forth in the Prospectus, the conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that payment of different
dividends by each of the classes of shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the Code
and that such conversions do not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
Signature Guaranty. In addition to information regarding redemption of
shares and signature guaranty set forth in the Prospectus, a signature guaranty
will be required when redemption proceeds: (1) exceed $50,000 (unless it is
being wired to a pre-authorized bank account, in which case a guarantee is not
required), (2) are to be paid to someone other than the registered shareholder
or (3) are to be mailed to an address other than the address of record or wired
to an account other than the pre-authorized bank or brokerage account. On joint
account redemptions of the type previously listed, each signature must be
guaranteed. A signature guarantee may not be provided by a notary public. Please
contact your investment executive for instructions as to what institutions
constitute eligible signature guarantors.
Valuation of Portfolio Securities. Generally, trading in certain
securities such as tax-exempt securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the primary close of trading on the Exchange. The values
of such securities used in determining the net asset value of Fund shares are
computed as of such times. Occasionally events affecting the value of such
securities may occur between such times and the primary close of trading on the
Exchange which are not reflected in the computation of net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities are valued at their fair market value as
determined in good faith by Voyageur in accordance with procedures adopted by
the Board of Directors.
Bank Purchases. Banks, acting as agents for their customers and not for
the Fund or the Underwriter, from time to time may purchase Fund shares for the
accounts of such customers. Generally, the Glass-Steagall Act prohibits banks
from engaging in the business of underwriting, selling or distributing
securities. Should the activities of any bank, acting as agent for its customers
in connection with the purchase of any Fund's shares, be deemed to violate the
Glass-Steagall Act, management will take whatever action, if any, is appropriate
in order to provide efficient services for the Fund. Management does not believe
that a termination in the relationship with a bank would result in any material
adverse consequences to the Fund. In addition, state securities laws on this
issue may differ and banks and financial institutions may be required to
register as dealers pursuant to state law. Fund shares are not deposits or
obligations of, or guaranteed or endorsed by, any bank and are not insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other federal agency.
TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), all
or a portion of the interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as the Fund, will not be deductible by a shareholder. Indebtedness may be
allocated to shares of the Fund even though not directly traceable to the
purchase of such shares.
The Fund's present policy is to designate exempt-interest dividends at
each daily distribution of net interest income. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns.
An exchange of shares in one Voyageur fund for shares in another fund
pursuant to exercise of the Exchange Privilege is considered to be a sale of the
shares for federal tax purposes that may result in a taxable gain or loss. If a
shareholder incurs a sales charge in acquiring shares and then, after holding
those shares not more than 90 days, exchanges them pursuant to the Exchange
Privilege for shares of another Voyageur fund, the shareholder may not take into
account the initial sales charge (to the extent that the otherwise applicable
sales charge on the later-acquired shares is reduced) for purposes of
determining the shareholder's gain or loss on the exchange of the first held
shares. To the extent that the sales charge is disregarded upon the exchange of
the first shares, however, it may be taken into account in determining gain or
loss on the eventual sale or exchange of the later-acquired shares.
The Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, the Fund must declare dividends by the end of the calendar year
representing 98% of the Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long and short term capital gain) for the
12-month period ending on October 31 of such year. For purposes of the excise
tax, any income on which the Fund has paid corporate-level tax is considered to
have been distributed. The Fund intends to make sufficient distributions each
year to avoid the payment of the excise tax.
Under a special provision of the Revenue Reconciliation Act of 1993,
all or a portion of the gain that the Fund realizes on the sale of a Municipal
Obligation that it purchased at a market discount may have to be treated as
ordinary income rather than capital gain.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Exempt-interest
dividends attributable to interest income on certain Municipal Obligations
issued after August 7, 1986 to finance private activities are treated as an item
of tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers and the federal
environmental tax on corporations. In addition, all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings for purposes of determining the federal corporate
AMT and the environmental tax imposed on corporations by Section 59A of the
Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Fund. The Fund will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in the Fund's portfolio lost its exempt status,
the Fund would make every effort to dispose of such investment on terms that are
not detrimental to the Fund.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which the Fund
may purchase options. To the extent the Fund engages in short-term trading and
enters into options transactions, the likelihood of violating this 30%
requirement is increased.
Gain or loss on options is taken into account when realized by entering
into a closing transaction or by exercise. In addition, with respect to many
types of options held at the end of a Fund's taxable year, unrealized gain or
loss on such contracts is taken into account at the then current fair market
value thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from such options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by the
Fund in a subsequent sale or other disposition of such options will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale under the "marked-to-market, 60/40
system."
SPECIAL PURCHASE PLANS
Automatic Investment Plan. As a convenience to investors, shares may be
purchased through a pre-authorized automatic investment plan. Such
pre-authorized investments (at least $100) may be used to purchase shares of the
Fund at the public offering price next determined after the Fund receives the
investment (normally the 20th of each month, or the next business day
thereafter). Further information is available from the Underwriter.
Combined Purchase Privilege. The following persons (or groups of
persons) may qualify for reductions from the front end sales charge ("FESC")
schedule for Class A shares set forth in the Fund's prospectus by combining
purchases of any class of shares of any one or more of the Voyageur funds which
bears a FESC (and, in certain circumstances, purchases of FESC shares of certain
other open-end investment companies) if the combined purchase of all such funds
totals at least $50,000.
(i) an individual, or a "company" as defined in Section
2(a)(8) of the 1940 Act;
(ii) an individual, his or her spouse and their children under
age 21, purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single
trust estate or single fiduciary account (including a pension,
profit-sharing or other employee benefit trust) created pursuant to a
plan qualified under Section 401 of the Code;
(iv) tax-exempt organizations enumerated in Section 501(c)(3)
of the Code;
(v) employee benefit plans of a single employer or of
affiliated employers;
(vi) any organized group which has been in existence for more
than six months, provided that it is not organized for the purpose of
buying redeemable securities of a registered investment company, and
provided that the purchase is made through a central administration, or
through a single dealer, or by other means which result in economy of
sales effort or expense. An organized group does not include a group of
individuals whose sole organizational connection is participation as
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer, or clients of an
investment adviser.
Cumulative Quantity Discount (Right of Accumulation). A purchase of
Class A shares may qualify for a Cumulative Quantity Discount. The applicable
FESC will then be based on the total of:
(i) the amount of the current purchase; and
(ii) the amount previously invested (valued at the time of
investment) in shares of any class of one or more Voyageur Funds which
has a FESC owned by the investor; and
(iii) the amount previously invested (valued at the time of
investment) in shares of any classes of one or more Voyageur Funds
which has a FESC owned by another shareholder eligible to participate
with the investor in a "Combined Purchase Privilege" (see above).
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through an investment dealer, when
each purchase is made the investor or dealer must provide the Fund with
sufficient information to verify that the purchase qualifies for the privilege
or discount.
Letter of Intention. Investors may also obtain the reduced front end
sales charges shown in the Fund's prospectus by means of a written Letter of
Intention, which expresses the investor's intention to invest not less than
$50,000 (including certain "credits," as described below) within a period of 13
months in any one or more of the Voyageur funds which has a FESC. Each purchase
of shares under a Letter of Intention will be made at the public offering price
applicable at the time of such purchase to a single transaction of the dollar
amount indicated in the Letter. A Letter of Intention may include purchases of
shares made not more than 90 days prior to the date that an investor signs a
Letter; however, the 13-month period during which the Letter is in effect will
begin on the date of the earliest purchase to be included. Investors qualifying
for the Combined Purchase Privilege described above may purchase shares under a
single Letter of Intention.
If, for example, on the date an investor signs a Letter of Intention to
invest at least $50,000 as set forth above and the investor and the investor's
spouse and children under age 21 have previously invested $20,000 in shares
which are still held by such persons, it will only be necessary to invest a
total of $30,000 during the 13 months following the first date of purchase of
such shares in order to qualify for the sales charges applicable to investments
of $50,000. The cumulative purchase would have to total at least $50,000 to
qualify for a reduced sales charge for the Fund.
The Letter of Intention is not a binding obligation upon the investor
to purchase the full amount indicated. The minimum initial investment under a
Letter of Intention is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased. When the full amount indicated has been purchased, the escrow will be
released. To the extent that an investor purchases more than the dollar amount
indicated on the Letter of Intention and qualifies for further reduced sales
charges, the sales charges will be adjusted for the entire amount purchased at
the end of the 13-month period. The difference in sales charges will be used to
purchase additional shares at the then current offering price applicable to the
actual amount of the aggregate purchases.
Investors electing to take advantage of the Letter of Intention should
carefully review the appropriate provisions on the authorization form attached
to the Prospectus.
Shares of other open-end investment companies bearing a FESC will be
included with Voyageur Fund shares bearing a FESC in a Combined Purchase
Privilege, Cumulative Quantity Discount or Letter of Intention only if such
shares are owned by customers of dealers that Voyageur or the Underwriter has
engaged to provide administration or accounting services to Fund omnibus
accounts in connection with the offering of the Fund as part of such other
investment companies' family of funds. Additionally, the maximum reduction of
the Fund's FESC that may result from the inclusion of shares of such other
investment companies in a Combined Purchase Privilege, Cumulative Quantity
Discount or Letter of Intention shall be a reduction to the front-end sales
charge applicable to purchases of $500,000 but less than $1,000,000 (as set
forth in the sales charge table in the Prospectus).
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares,
which is equal to the net asset value per share plus the applicable sales
charge, if any, is summarized in the Prospectus. The net asset value of the
Fund's shares is determined on each day on which the New York Stock Exchange is
open, provided that the net asset value need not be determined on days when no
Fund shares are tendered for redemption and no order for Fund shares is
received. The New York Stock Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, President's Day, Good Friday, Memorial Day, July 4th, Labor Day,
Thanksgiving and Christmas.
Net asset value data of the Fund as of December 31, 1996 was calculated
as follows:
Class A Net Assets ($59,104,609)
--------------------
Shares Outstanding (5,684,868) = Net Asset Value Per Share ($10.40)
Maximum Public Offering Price = $10.40 + 3.75% of POP = $10.81
Class B Net Assets ($88,367) = Net Asset Value Per Share ($10.40)
--------------------
Shares Outstanding (8,498)
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may refer to
"yield," "taxable equivalent yield," "average annual total return" and
"cumulative total return." Yield, taxable equivalent yield, average annual total
return and cumulative total return are calculated as follows.
Effective with the close of business on November 8, 1996, the Fund
acquired the assets and assumed all identified liabilities of Great Hall
National Tax-Exempt Fund, in a tax-free exchange by issuing new shares. The Fund
had no assets or liabilities prior to the acquisition. Consequently, the
information presented for the Fund represents the financial history of Great
Hall National Tax-Exempt Fund.
The performance data provided of the Fund for periods prior to November
8, 1996 is that of the Great Hall Fund as of July 31, 1996.
YIELD
Yield is computed by dividing the net investment income per share
deemed earned during the computation period by the maximum offering price per
share on the last day of the period, according to the following formula:
FUNC {YIELD = 2 LEFT [LEFT ({ a-b} OVER cd + 1 RIGHT )SUP 6 - 1 RIGHT]}
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends;
and
d = the maximum offering price per share on the last day
of the period.
The Fund's yield for the 30-day period ended December 31, 1996 was
5.35% (5.19% absent voluntary fee waivers) for Class A shares and 4.84% (4.60%
absent voluntary fee waivers) for Class B shares.
TAXABLE EQUIVALENT YIELD
Taxable equivalent yield is computed by dividing that portion of the
yield of the Fund (as computed above) which is tax-exempt by one minus a stated
marginal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
The taxable equivalent yield is based on current Federal marginal
income tax rates for a single taxpayer. The marginal rates do not reflect
federal rules concerning the phase-out of personal exemptions and limitations on
the allowance of itemized deductions for certain high-income taxpayers.
The Fund's taxable equivalent yields for the 30-day period ended
December 31, 1996 were 7.43%, 7.75%, 8.36% and 8.86% for Class A shares and
6.72%, 7.01%, 7.56% and 8.01% for Class B shares assuming a federal marginal
income tax rate of 28%, 31%, 36% and 39.6%, respectively. Absent voluntary fee
waivers the Fund's taxable equivalent 30-day yields would have been 7.21%,
7.52%, 8.11% and 8.59% for Class A shares and 6.39%, 6.67%, 7.19% and 7.62% for
Class B shares, respectively.
TAX-EXEMPT VS. TAXABLE INCOME
The table below shows the approximate yields that taxable securities
must earn to equal federally tax-exempt yields under selected federal income tax
brackets. The 39.6% federal rate is the highest rate in effect for individuals
in 1996.
<TABLE>
<CAPTION>
Equivalent Taxable Yield
---------------------------------------------------------------------------------
Tax-Free 28% 31% 36% 39.6%
Yield Federal Bracket Federal Bracket Federal Bracket Federal Bracket
- -------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
4.00% 5.56% 5.80% 6.25% 6.62%
4.50 6.25 6.52 7.03 7.45
5.00 6.94 7.25 7.81 8.28
5.50 7.64 7.97 8.59 9.11
6.00 8.33 8.70 9.38 9.93
6.50 9.03 9.42 10.16 10.76
7.00 9.72 10.14 10.94 11.59
7.50 10.42 10.87 11.72 12.42
8.00 11.11 11.59 12.50 13.25
</TABLE>
This chart does not take into consideration any federal alternative
minimum tax. In addition, the chart is based upon yields that are derived solely
from tax-exempt income. To the extent the Fund's advertised yield is derived
from taxable income, the Fund's equivalent taxable yield will be less than set
forth in the chart. The tax-free yields used in these charts should not be
considered as representations of any particular rates of return and are for
purposes of illustration only.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The following table sets forth the average annual total returns for the
fund for the periods indicated and ended December 31, 1996.
<TABLE>
<CAPTION>
Average Annual Total Return
----------------------------------------------------------------
Absent Voluntary
Actual Fee Waivers
---------------------------- -------------------------------
Since Since
1 Year 5 Year Inception 1 Year 5 Year Inception
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Class A (Inception 9/22/86) 2.40% 7.01% 7.52%+ 2.14% 6.82% 7.26%
Class B (Inception 12/18/96) ** ** 0.43% ** ** 0.22%
** Not in existence for the period.
+ Average annual total return for 10 years.
</TABLE>
CUMULATIVE TOTAL RETURN
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
FUNC {CTR = LEFT( {ERV-P } OVER P RIGHT ) 100 }
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period; and
P = initial payment of $1,000
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
Cumulative Total Return Since Inception
---------------------------------------
Absent Voluntary
Actual Fee Waivers
------ ----------------
Class A (Inception 9/22/86) 112.64% 110.07%
Class B (Inception 12/18/96) 0.43% 0.22%
MONTHLY CASH WITHDRAWAL PLAN
Any investor who owns or buys shares of the Fund valued at $10,000 or
more at the current offering price may open a Withdrawal Plan and have a
designated sum of money paid monthly to the investor or another person. Shares
are deposited in a Withdrawal Plan account and all distributions are reinvested
in additional shares of the Fund at net asset value or distributed in cash.
Shares in a Withdrawal Plan account are then redeemed to make each withdrawal
payment. Deferred sales charges may apply to monthly redemptions of Class B and
Class C shares (or to redemptions of Class A shares in connection with initial
purchases of $1,000,000 or more which were not subject to a FESC). Redemptions
for the purpose of withdrawal are made on the 25th of the month (or on the
preceding business day if the 25th falls on a weekend or is a holiday) at that
day's closing net asset value and checks are mailed on the next business day.
Payments will be made to the registered shareholder. As withdrawal payments may
include a return on principal, they cannot be considered a guaranteed annuity or
actual yield of income to the investor. The redemption of shares in connection
with a Withdrawal Plan may result in a gain or loss for tax purposes. Continued
withdrawals in excess of income will reduce and possibly exhaust invested
principal, especially in the event of a market decline. The maintenance of a
Withdrawal Plan concurrently with purchases of additional Class A shares of the
Fund would normally be disadvantageous to the investor because of the FESC
payable on such purchases. For this reason, an investor may not maintain a plan
for the accumulation of Class A shares of the Fund (other than through
reinvestment of distributions) and a Withdrawal Plan at the same time. The cost
of administering Withdrawal Plans is borne by the Fund as an expense of all
shareholders. The Fund or the Underwriter may terminate or change the terms of
the Withdrawal Plan at any time. The Withdrawal Plan is fully voluntary and may
be terminated by the shareholder at any time without the imposition of any
penalty.
Since the Withdrawal Plan may involve invasion of capital, investors
should consider carefully with their own financial advisers whether the
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in
their circumstances. The Fund makes no recommendations or representations in
this regard.
ADDITIONAL INFORMATION
Information regarding certain record and beneficial ownership of Fund
shares as of March 31, 1997 which equals or exceeds 5% of any class of Fund
shares is available without charge by calling 800-525-6584.
Organizational costs, if any, in connection with start-up and initial
registration will be amortized over 60 months on a straight-line basis. If
Voyageur redeems any or all of its shares of the Fund prior to the end of the
Fund's 60-month amortization period, the redemption proceeds will be reduced by
its pro rata portion of such Fund's unamortized organizational costs. If the
Fund liquidates prior to the date such costs are fully amortized, Voyageur will
bear all unamortized organizational costs of the Fund.
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A., Sixth Street & Marquette Avenue,
Minneapolis, Minnesota 55479, acts as custodian of the Fund's assets and
portfolio securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, serves as counsel for the Fund.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as independent auditors for the Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director owes certain fiduciary duties to the
Fund and to its shareholders. Minnesota law provides that a director "shall
discharge the duties of the position of director in good faith, in a manner the
director reasonably believes to be in the best interest of the corporation, and
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances." Fiduciary duties of a director of a Minnesota
corporation include, therefore, both a duty of "loyalty" (to act in good faith
and act in a manner reasonably believed to be in the best interests of the
corporation) and a duty of "care" (to act with the care an ordinarily prudent
person in a like position would exercise under similar circumstances). Minnesota
law authorizes corporations to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of the fiduciary duty of "care". Minnesota law does not, however, permit a
corporation to eliminate or limit the liability of directors (i) for any breach
of the directors' duty of "loyalty" to the corporation or its shareholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for authorizing a dividend, stock
repurchase or redemption or other distribution in violation of Minnesota law or
for violation of certain provisions of Minnesota securities law, or (iv) for any
transaction from which the directors derived an improper personal benefit. The
Articles of Incorporation of the Fund limit the liability of the Fund's
directors to the fullest extent permitted by Minnesota statutes, except to the
extent that such liability cannot be limited as provided in the 1940 Act (which
Act prohibits any provisions which purport to limit the liability of directors
arising from such directors' willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their role as
directors).
SHAREHOLDER MEETINGS
The Fund is not required under Minnesota law to hold annual or
periodically scheduled regular meetings of shareholders. Regular and special
shareholder meetings are held only at such times and with such frequency as
required by law. Minnesota corporation law provides for the Board of Directors
to convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, a shareholder or shareholders holding three percent or
more of the voting shares of the Fund may demand a regular meeting of
shareholders of the Fund by written notice of demand given to the chief
executive officer or the chief financial officer of the Fund. Within ninety days
after receipt of the demand, a regular meeting of shareholders must be held at
the expense of the Fund. Additionally, the 1940 Act requires shareholder votes
for all amendments to fundamental investment policies and restrictions and for
amendments to investment advisory contracts and Rule 12b-1 distribution plans.
FINANCIAL INFORMATION
The audited Financial Statements and accompanying report of independent
accountants for the Fund for the period ended December 31, 1996 are incorporated
herein by reference from the annual report of the Fund as filed with the
Securities and Exchange Commission. No other portion of the annual report is so
incorporated. Please call (800) 553-2143 to obtain a copy of the most recent
annual report of the Fund at no charge. Effective with the close of business on
November 8, 1996, the Fund acquired the assets and assumed all identified
liabilities of Great Hall National Tax-Exempt Fund, in a tax-free exchange by
issuing new shares. The Fund had no assets or liabilities prior to the
acquisition. Consequently, the information presented for the Fund represents the
financial history of Great Hall National Tax-Exempt Fund.
APPENDIX A
DESCRIPTIONS OF BOND RATINGS
Description of Standard and Poor's Ratings Services ("S&P"), Moody's
Investors Service, Inc. ("Moody's") and Fitch Investors Service LP ("Fitch")
ratings:
S&P's Ratings for Municipal Bonds
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. S&P's
letter ratings may be modified by the addition of a plus or minus sign, which is
used to show relative standing within the major rating categories, except in the
AAA (Prime Grade) category.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA
AAA is the highest rating assigned by S&P. An issuer's capacity to pay
interest and repay the principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A
Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BBB
Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B
Debt rated BB and B (as well as debt rated CCC, C and C) is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation within this category, B represents a
somewhat higher degree of speculation and C represents the highest degree of
speculation of these ratings.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal repayments.
Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
C1
The rating C1 is reserved for income bonds on which no interest is
being paid.
D
Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-)
The ratings from AA to CCC may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
NR
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
S&P Ratings for Municipal Notes
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest.
Moody's Ratings for Municipal Bonds
Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are considered of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated CA represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated
When no rating has been assigned or when a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. A short-term rating designated VMIG, may also be assigned an issue having
a demand feature. The municipal obligations bearing the designation MIG 1/VMIG 1
are of the best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. The municipal obligations bearing the designation are
ample although not so large as in the preceding group.
Description of S&P A-1+
and
A-1 Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must possess overwhelming safety
characteristics regarding timely payment. Commercial paper rated A-1 must have a
degree of safety that is either overwhelming or very strong.
Description of
Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and will normally be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation and well established access
to a range of financial markets and assured sources of alternate liquidity.
Fitch's Ratings for Municipal Bonds
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
AAA
Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA
Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+".
A
Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB
Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
BB
Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
B
Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirement, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC
Bonds have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC
Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C
Bonds are in imminent default in payment of interest or principal.
DDD, DD and D
Bonds are in default on interest and/or principal payments. Such bonds
are extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. 'DDD' represents
the highest potential for recovery on these bonds, and 'D' represents the lowest
potential for recovery.
Plus(+) Minus(-)
Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
NR
Indicates that Fitch does not rate the specific issue.
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS
OF OPTIONS AND FUTURES
GENERAL. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," the Fund may purchase and sell options on
the securities in which it may invest and the Fund may purchase and sell options
on futures contracts (as defined below) and may purchase and sell futures
contracts. The Fund intends to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Fund's investment
objective, to seek to hedge against the effects of market conditions and to seek
to stabilize the value of its assets. The Fund will engage in hedging and risk
management transactions from time to time in Voyageur's discretion, and may not
necessarily be engaging in such transactions when movements in interest rates
that could affect the value of the assets of the Fund occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Fund will employ any of the
techniques or strategies described below. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the "CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Fund does not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and attendant
risks, are discussed below.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which the Fund may invest. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities, or
the cash value of an index, called for by the contract at a specified price
during a specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. The Fund
may also purchase and sell (write) call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during, or at the termination of, the
period specified in the terms of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. The
Fund would be required to deposit with its custodian initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. The Fund's
ability to establish and close out positions in futures contracts and options on
futures contracts will be subject to the liquidity of the market. Although the
Fund generally will purchase or sell only those futures contracts and options
thereon for which there appears to be a liquid market, there is no assurance
that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. Where it is not possible to
effect a closing transaction in a contract or to do so at a satisfactory price,
the Fund will have to make or take delivery under the futures contract, or, in
the case of a purchased option, exercise the option. The Fund may incur
brokerage fees when it purchases or sells futures contracts.
At the time a futures contract is purchased or sold, the Fund must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts the Fund may purchase or sell may range from approximately
1.5% to approximately 5% of the value of the securities (or the securities
index) underlying the contract. In certain circumstances, however, such as
during periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Initial margin requirements
may be increased generally in the future by regulatory action. An outstanding
futures contract is valued daily in a process known as "marking to market." If
the market value of the futures contract has changed, the Fund will be required
to make or will be entitled to receive a payment in cash or specified high
quality debt securities in an amount equal to any decline or increase in the
value of the futures contract. These additional deposits or credits are
calculated and required on a daily basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of
the futures contract the Fund purchases or sells and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts, even if Voyageur correctly forecasts market
trends the Fund's hedging strategy may not be successful. If this should occur,
the Fund could lose money on the futures contracts and also on the value of its
portfolio securities.
Although the Fund believes that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Fund's
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Fund seeks
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Fund may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
OPTIONS ON SECURITIES. The Fund may purchase and sell (write) options
on securities, which options may be either exchange-listed or over-the-counter
options. The Fund may write call options only if the call option is "covered." A
call option written by the Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Fund may write put
options only if the put option is "secured." A put option written by the Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
The Fund may purchase and sell options that are exchange-traded or that
are traded over-the-counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when the Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although the Fund will enter into OTC options only with dealers that
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Fund's ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Fund may be unable to liquidate an OTC
option. In the case of options written by the Fund, the inability to enter into
a closing purchase transaction may result in material losses to the Fund.
REGULATORY RESTRICTIONS. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the Fund
will maintain, in a segregated account, cash or liquid high-grade securities
equal to the value of such contracts. Compliance with such segregation
requirements may restrict the Funds' ability to invest in intermediate- and
long-term Municipal Obligations.
The Fund intends to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that futures and options
positions be used (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Fund currently does not
intend to engage in transactions in futures contracts or options thereon for
speculation.
ACCOUNTING CONSIDERATIONS. When the Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When the Fund purchases an option, the premium paid by the Fund is recorded as
an asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the
Fund. an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset subsequently is adjusted to reflected changes in the amount
of the deposit as well as changes in the value of the contract.
PART C
OTHER INFORMATION
VOYAGEUR MUTUAL FUNDS, INC.
(VOYAGEUR ARIZONA TAX FREE FUND,
VOYAGEUR CALIFORNIA TAX FREE FUND,
VOYAGEUR IDAHO TAX FREE FUND,
VOYAGEUR NATIONAL TAX FREE FUND,
VOYAGEUR IOWA TAX FREE FUND,
VOYAGEUR WISCONSIN TAX FREE FUND AND
VOYAGEUR NEW YORK TAX FREE FUND)
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
Included in Part A:
1. Fees and Expenses
2. Financial Highlights
Included in Part B: None
(b) EXHIBITS
1.1 Articles of Incorporation of Voyageur Mutual Funds, Inc.,
dated April 14, 1993, incorporated by reference to
Post-Effective Amendment No. 16 to the Registrant's
Registration Statement on Form N-1A.
1.2 Certificate of Designation of Class B Common Shares of Series
B and Class B Common Shares of Series C and Class B Common
Shares of Series E and Series F Common Shares and Series G
Common Shares and Series H Common Shares of Voyageur Mutual
Funds, Inc., dated February 27, 1995, incorporated by
reference to Post-Effective Amendment No. 16 to the
Registrant's Registration Statement on Form N-1A.
1.3 Certificate of Designation of Class A and C Common Shares of
Series B and Class A and C Common Shares of Series C of
Voyageur Mutual Funds, Inc., dated November 30, 1994,
incorporated by reference to Post-Effective Amendment No. 16
to the Registrant's Registration Statement on Form N-1A.
1.4 Certificate of Designation of Series E Common Shares of
Voyageur Mutual Funds, Inc., dated November 30, 1994,
incorporated by reference to Post-Effective Amendment No. 16
to the Registrant's Registration Statement on Form N-1A.
2. Bylaws of Voyageur Mutual Funds, Inc as amended by the Board
of Directors on May 14, 1996, filed as an exhibit to
Post-Effective Amendment No. 10 to Registrant's Form N1-A on
May 31, 1996, and incorporated herein by reference.
3. Not Applicable
4. Specimen Security for company incorporated under the laws of
the State of Minnesota, incorporated by reference to
Post-Effective Amendment No. 16 to the Registrant's
Registration Statement on Form N-1A.
5. Investment Advisory Agreement , dated November 1, 1993,
incorporated by reference to Post-Effective Amendment No. 14
to the Registrant's Registration Statement on Form N-1A filed
November 12, 1996.
6.1 Distribution Agreement dated March 1, 1995, incorporated by
reference to Post-Effective Amendment No. 15 to the
Registrant's Registration Statement on Form N-1A filed
November 20, 1996.
6.2 Form of Dealer Sales Agreement, incorporated by reference to
Post-Effective Amendment No. 8 to the Registrant's
Registration Statement on Form N-1A filed April 30, 1996.
6.3 Form of Bank Agreement, incorporated by reference to
Post-Effective Amendment No. 8 to the Registrant's
Registration Statement on Form N-1A filed April 30, 1996.
7. Not Applicable.
8. Custodian Agreement dated August 27, 1993, incorporated by
reference to Post-Effective Amendment No. 14 to the
Registrant's Registration Statement on Form N-1A filed
November 12, 1996.
9. Administrative Services Agreement dated October 27, 1994,
incorporated by reference to Post-Effective Amendment No. 14
to the Registrant's Registration Statement on Form N-1A filed
November 12, 1996.
10. Opinion and Consent of Dorsey & Whitney, filed as an Exhibit
to Pre-Effective Amendment No.1 to Form N-1A on August 27,
1993, File No.33-63238, and incorporated herein by reference.
11. Consent of KPMG Peat Marwick LLP, dated April 28, 1997, filed
as an exhibit hereto.
12. Financial Statements contained in the Annual Report to
Shareholders for fiscal year end December 31, 1996, filed
pursuant to Rule 30d-1 of the Investment Company Act of 1940,
incorporated herein by reference.
13. Letter of Investment Intent, filed as an Exhibit to
Pre-Effective Amendment No. 1 to Form N- 1A on August 27,
1993, File No 33-63238, and incorporated herein by reference.
14. Not Applicable.
15. Plan pursuant to Rule 12b-1 under the Investment Company Act
of 1940, incorporated by reference to Post-Effective Amendment
No. 14 to the Registrant's Registration Statement on Form
N-1A.
16. Schedule for Computation of Performance Data, incorporated by
reference to Post-Effective Amendment No. 16 to the
Registrant's Registration Statement on Form N-1A.
17 Power of Attorney, dated January 24, 1995, incorporated by
reference to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A filed
April 30, 1996.
18. Plan pursuant to Rule 18f-3 under the Investment Company Act
of 1940, incorporated by reference to Post-Effective Amendment
No. 8 to the Registrant's Registration Statement on Form N-1A.
Item 25. Persons Controlled by or Under Common Control with Registrant
Voyageur serves as investment manager to the following closed-end and
open-end management investment companies:
CLOSED-END INVESTMENT COMPANIES
Voyageur Arizona Municipal Income Fund, Inc.
Voyageur Colorado Insured Municipal Income Fund, Inc.
Voyageur Florida Insured Municipal Income Fund
Voyageur Minnesota Municipal Income Fund, Inc.
Voyageur Minnesota Municipal Income Fund II, Inc.
Voyageur Minnesota Municipal Income Fund III, Inc.
OPEN-END INVESTMENT COMPANIES AND SERIES THEREOF
Voyageur Funds, Inc.
Voyageur U.S. Government Securities Fund
Voyageur Financial Institutions Short Duration Portfolio
Voyageur Financial Institutions Intermediate Duration Portfolio
Voyageur Financial Institutions Core Portfolio
Voyageur Insured Funds, Inc.
Voyageur Minnesota Insured Fund
Voyageur Arizona Insured Tax Free Fund
Voyageur National Insured Tax Free Fund
Voyageur Colorado Insured Tax Free Fund
Voyageur Intermediate Tax Free Funds, Inc.
Voyageur Minnesota Limited Term Tax Free Fund
Voyageur National Limited Term Tax Free Fund
Voyageur Arizona Limited Term Tax Free Fund
Voyageur Colorado Limited Term Tax Free Fund
Voyageur California Limited Term Tax Free Fund
Voyageur Investment Trust
Voyageur California Insured Tax Free Fund
Voyageur Florida Insured Tax Free Fund
Voyageur Kansas Tax Free Fund
Voyageur Missouri Insured Tax Free Fund
Voyageur New Mexico Tax Free Fund
Voyageur Oregon Insured Tax Free Fund
Voyageur Utah Tax Free Fund
Voyageur Washington Insured Tax Free Fund
Voyageur Florida Tax Free Fund
Voyageur Investment Trust II
Voyageur Florida Limited Term Tax Free Fund
Voyageur Tax Free Funds, Inc.
Voyageur Minnesota Tax Free Fund
Voyageur North Dakota Tax Free Fund
Voyageur Mutual Funds, Inc.
Voyageur Iowa Tax Free Fund
Voyageur Wisconsin Tax Free Fund
Voyageur Idaho Tax Free Fund
Voyageur Arizona Tax Free Fund
Voyageur California Tax Free Fund
Voyageur National Tax Free Fund
Voyageur Mutual Funds II, Inc.
Voyageur Colorado Tax Free Fund
Voyageur Mutual Funds III , Inc.
Voyageur Growth Stock Fund
Voyageur International Equity Fund
Voyageur Aggressive Growth Fund
Voyageur Growth and Income Fund
Voyageur Tax Efficient Equity Fund
VAM Institutional Funds, Inc.
Short Government Agency Fund
Intermediate Government Agency Fund
Government Mortgage Fund
Short Duration Total Return Fund
Intermediate Duration Total Return Fund
Intermediate Municipal Fund
Item 26. Number of Holders of Securities
The following sets forth the number of holders of shares of each class
and series (then in existence) of each Registrant as of March 31, 1997.
Class A Class B Class C
Common Common Common
Name of Fund Shares Shares Shares
------------ ------ ------ ------
Voyageur Iowa Tax Free Fund 1,699 51 32
Voyageur Wisconsin Tax Free Fund 806 46 21
Voyageur Idaho Tax Free Fund 516 129 40
Voyageur California Tax Free Fund 30 21 3
Voyageur Arizona Tax Free Fund 127 73 2
Voyageur National Tax Free Fund 70 18 3
Voyageur New York Tax Free Fund 480 14 3
Item 27. Indemnification
The Articles of Incorporation and Bylaws of the Registrant provide that
the Registrant shall indemnify such persons, for such expenses and liabilities,
in such manner, under such circumstances, and to the full extent permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended,
provided that no such indemnification may be made if it would be in violation of
Section 17(h) of the Investment Company Act of 1940, as now enacted or hereafter
amended. Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding against judgments, penalties, fines, settlements and
reasonable expenses, including attorneys' fees and disbursements, incurred by
the person in connection with the proceeding, if, with respect to the acts or
omissions of the person complained of in the proceeding, the person: (i) has not
been indemnified by another organization for the same judgments, penalties,
fines, settlements and reasonable expenses incurred by the person in connection
with the proceeding with respect to the same acts or omissions; (ii) acted in
good faith; (iii) received no improper personal benefit; (iv) complied with the
Minnesota Statute dealing with directors' conflicts of interest, if applicable;
(v) in the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful; and (vi) reasonably believed that the conduct was in the
best interests of the corporation or, in certain circumstances, reasonably
believed that the conduct was not opposed to the best interests of the
corporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions (or otherwise), the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
No indemnification will be made in violation of the 1940 Act and the
rules, regulations and releases thereunder.
Item 28. Business and Other Connections of Investment Adviser
The name and principal occupations(s) during the past two fiscal years
of each director and officer of the Adviser are set forth below. The business
address of each is 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota
55402.
NAME AND ADDRESS POSITION WITH ADVISER PRINCIPAL OCCUPATION(S)
- ---------------- --------------------- -----------------------
Michael E. Dougherty Chairman Chairman of the Board, President
and Chief Executive Officer of
Dougherty Financial Group, Inc.
("DFG") and Chairman of Voyageur
and the Underwriter.
John G. Taft Director and See biographical information in
President Part B of the Registration
Statement.
Jane M. Wyatt Director and See biographical information in
Chief Investment Part B of the Registration
Officer Statement.
Edward J. Kohler Director and Director and Executive Vice
Executive Vice President of the Voyageur and
President Director of the Underwriter since
1995; previously, President and
Director of Piper Capital
Management Incorporated from 1985
to 1995.
Kenneth R. Larsen Treasurer See biographical information in
Part B of the Registration
Statement.
Thomas J. Abood General Counsel See biographical information in
and Senior Vice Part B of the Registration
President Statement.
Steven P. Eldredge Senior Vice See biographical information in
President Part B of the Registration
Statement.
Information on the business of Registrant's Adviser is contained in the
section of the Prospectus entitled "Management" and in the section of the
Statement of Additional Information entitled "The Investment Adviser and
Underwriter" filed as part of this Registration Statement.
Item 29. Principal Underwriters
(a) Voyageur Fund Distributors, Inc., the underwriter of the
Registrant's shares, is principal underwriter for the shares of Voyageur Tax
Free Funds, Inc., Voyageur Insured Funds, Inc., Voyageur Intermediate Tax Free
Funds, Inc., Voyageur Investment Trust, Voyageur Investment Trust II, Voyageur
Mutual Funds, Inc., Voyageur Mutual Funds II, Inc., Voyageur Mutual Funds III,
Inc. and VAM Institutional Funds, Inc., affiliated open-end management
investment companies.
(b) The directors of the Underwriter are the same as the directors of
the Adviser as set forth above in Item 28. The executive officers of the
Underwriter (who are also not directors of the Adviser) and the positions of
these individuals with respect to the Registrant are:
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANTS
- ---- ---------------- ----------------
Michael E. Dougherty Chairman None
Steven B. Johansen Secretary None
Kenneth R. Larsen Treasurer Treasurer
Thomas J. Abood General Counsel Secretary
The address of each of the executive officers is 90 South Seventh Street, Suite
4400, Minneapolis, Minnesota 55402.
(c) Not applicable.
Item 30. Location of Accounts and Records
The custodian for the Registrant is Norwest Bank Minnesota, N.A., Sixth
Street & Marquette Avenue, Minneapolis, Minnesota 55402. The dividend
disbursing, administrative and accounting services agent of the Registrant is
Voyageur Fund Managers, Inc. The address of Voyageur Fund Managers, Inc. and the
Registrant is 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report of such series, and such Annual Report will be
furnished without charge.
PART C
VOYAGEUR MUTUAL FUNDS, INC.
(VOYAGEUR MINNESOTA HIGH YIELD MUNICIPAL BOND FUND)
(VOYAGEUR NATIONAL HIGH YIELD MUNICIPAL BOND FUND)
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
Included in Part A: Financial Highlights
Included in Part B: None
(b) EXHIBITS
1. Articles of Incorporation of Voyageur Mutual Funds, Inc.,
dated April 14, 1993, filed as an Exhibit to Post-Effective
Amendment Nos. 8 and 9 to Form N-1A, on April 30, 1996, File
Nos. 33-63238 and 811-7742 respectively, and incorporated
herein by reference.
1.2 Certificate of Designation of Series I, filed as an exhibit to
Registrant's Post-Effective Amendment No. 10 to Form N-1A on
May 31, 1996 and incorporated herein by reference.
1.3 Certificate of Designation of Series K filed as an exhibit to
Registrant's Post-Effective Amendment No. 14 to Form N-1A on
November 12, 1996 and incorporated herein by reference.
1.4 Certificate of Designation of Series J, filed as an exhibit to
Registrant's Post-Effective Amendment No. 15 to Form N1-A on
November 20, 1996 and incorporated herein by reference.
2. Bylaws of Voyageur Mutual Funds, Inc as amended by the Board
of Directors on May 14, 1996, filed as an exhibit to
Registrant's Post-Effective Amendment No. 10 to Form N-1A on
May 31, 1996 and incorporated herein by reference.
3. Not Applicable
4. Specimen Security for company incorporated under the laws of
the State of Minnesota, filed as an Exhibit to Post-Effective
Amendment Nos. 8 and 9 to Form N-1A, on April 30, 1996, File
Nos. 33-63238 and 811-7742 respectively, and incorporated
herein by reference.
5. Investment Advisory Agreement , dated November 1, 1993, filed
as an exhibit to Registrant's Post-Effective Amendment No. 14
to Form N-1A on November 12, 1996 and incorporated herein by
reference.
6.1 Distribution Agreement, filed as an exhibit to Registrant's
Post-Effective Amendment No. 15 to Form N-1A on November 20,
1996 and incorporated herein by reference.
6.2 Form of Dealer Sales Agreement, filed as an Exhibit to
Post-Effective Amendment Nos. 8 and 9 to Form N-1A, on April
30, 1996, File Nos. 33-63238 and 811-7742 respectively, and
incorporated herein by reference.
6.3 Form of Bank Agreement, filed as an Exhibit to Post-Effective
Amendment Nos. 8 and 9 to Form N-1A, on April 30, 1996, File
Nos. 33-63238 and 811-7742 respectively, and incorporated
herein by reference.
7. Not Applicable.
8. Custodian Agreement effective August 27, 1993, filed as an
exhibit to Registrant's Post-Effective Amendment No. 14 to
Form N-1A on November 12, 1996 and incorporated herein by
reference.
9. Administrative Services Agreement dated October 27, 1994,
filed as an exhibit to Registrant's Post-Effective Amendment
No. 14 to Form N-1A on November 12, 1996 and incorporated
herein by reference.
10. Opinion and Consent of Dorsey & Whitney, filed as an Exhibit
to Pre-Effective Amendment No.1 to Form N-1A on August 27,
1993, File No.33-63238, and incorporated herein by reference.
10.1 Opinion and Consent of Dorsey & Whitney LLP, with respect to
the registration of Voyageur Minnesota High Yield Municipal
Bond Fund, Series I, Class A, B, and C shares, filed as an
exhibit to Registrant's Post-Effective Amendment No. 10 to
Form N-1A on June 3, 1996 and incorporated herein by
reference.
10.2 Opinion and consent of Dorsey & Whitney LLP with respect to
the registration of Series J, Class A, B and C shares, filed
as an exhibit to Registrant's Post-Effective Amendment No. 15
to Form N-1A on November 20, 1996 and incorporated herein by
reference.
10.3 Opinion and consent of Dorsey & Whitney LLP with respect to
the registration of Series K, Class A, B and C shares, filed
as an exhibit to Registrant's Post-Effective Amendment No. 14
to Form N1-A on November 12, 1996 and incorporated herein by
reference.
11. Consent of KPMG Peat Marwick.*
12. Not Applicable.
13. Letter of Investment Intent, filed as an Exhibit to
Pre-Effective Amendment No. 1 to Form N-1A on August 27, 1993,
File No 33-63238, and incorporated herein by reference.
14. Not Applicable.
15. Plan pursuant to Rule 12b-1 under the Investment Company Act
of 1940, filed as an exhibit to Registrant's Post-Effective
Amendment No. 14 to Form N-1A on November 12, 1996 and
incorporated herein by reference.
16. Schedule for Computation of Performance Data, filed as an
exhibit to Registrant's Post-Effective Amendment No. 10 to
Form N-1A on June 3, 1996 and incorporated herein by
reference.
17. Power of Attorney, dated January 24, 1995, filed as an Exhibit
to Post-Effective Amendment Nos. 8 and 9 to Form N-1A, File
Nos. 33-63238 and 811-7742 respectively, and incorporated
herein by reference.
18. Plan pursuant to Rule 18f-3 under the Investment Company Act
of 1940, filed as an Exhibit to Post-Effective Amendment Nos.
8 and 9 to Form N-1A, File Nos. 33-63238 and 811-7742
respectively, and incorporated herein by reference.
* Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
Voyageur serves as investment manager to the following closed-end and
open-end management investment companies:
CLOSED-END INVESTMENT COMPANIES
Voyageur Arizona Municipal Income Fund, Inc.
Voyageur Colorado Insured Municipal Income Fund, Inc.
Voyageur Florida Insured Municipal Income Fund
Voyageur Minnesota Municipal Income Fund, Inc.
Voyageur Minnesota Municipal Income Fund II, Inc.
Voyageur Minnesota Municipal Income Fund III, Inc.
OPEN-END INVESTMENT COMPANIES AND SERIES THEREOF Voyageur Funds, Inc.
Voyageur U.S. Government Securities Fund
VFI Short Duration Portfolio
VFI Intermediate Duration Portfolio
VFI Core Portfolio
Voyageur Insured Funds, Inc.
Voyageur Minnesota Insured Fund
Voyageur Arizona Insured Tax Free Fund
Voyageur National Insured Tax Free Fund
Voyageur Colorado Insured Tax Free Fund
Voyageur Intermediate Tax Free Funds, Inc.
Voyageur Minnesota Limited Term Tax Free Fund
Voyageur National Limited Term Tax Free Fund
Voyageur Arizona Limited Term Tax Free Fund
Voyageur Colorado Limited Term Tax Free Fund
Voyageur California Limited Term Tax Free Fund
Voyageur Investment Trust
Voyageur Florida Insured Tax Free Fund
Voyageur California Insured Tax Free Fund
Voyageur Kansas Tax Free Fund
Voyageur Missouri Insured Tax Free Fund
Voyageur New Mexico Tax Free Fund
Voyageur Oregon Insured Tax Free Fund
Voyageur Utah Tax Free Fund
Voyageur Washington Insured Tax Free Fund
Voyageur Florida Tax Free Fund
Voyageur Investment Trust II
Voyageur Florida Limited Term Tax Free Fund
Voyageur Tax Free Funds, Inc.
Voyageur Minnesota Tax Free Fund
Voyageur North Dakota Tax Free Fund
Voyageur Mutual Funds, Inc.
Voyageur Iowa Tax Free Fund
Voyageur Wisconsin Tax Free Fund
Voyageur Idaho Tax Free Fund
Voyageur Arizona Tax Free Fund
Voyageur California Tax Free Fund
Voyageur National Tax Free Fund
Voyageur National Yield Municipal Bond Fund
Voyageur New York Tax Free Fund
Voyageur Minnesota High Yield Municipal Bond Fund
Voyageur Mutual Funds II, Inc.
Voyageur Colorado Tax Free Fund
Voyageur Mutual Funds III , Inc.
Voyageur Growth Stock Fund
Voyageur International Equity Fund
Voyageur Aggressive Growth Fund
Voyageur Growth and Income Fund
Voyageur Tax Efficient Equity Fund
VAM Institutional Funds, Inc.
VAM Short Government Agency Fund
VAM Intermediate Government Agency Fund
VAM Government Mortgage Fund
VAM Short Duration Total Return Fund
VAM Intermediate Duration Total Return Fund
VAM Intermediate Municipal Fund
Item 26. Number of Holders of Securities
As of March 31, 1997, the number of shareholders of the Fund's shares
were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Voyageur Minnesota High Yield Municipal Bond Fund 269 128 44
Voyageur National High Yield Municipal Bond Fund 1087 10 0
</TABLE>
Item 27. Indemnification
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons, for such expenses and liabilities, in
such manner, under such circumstances, and to such extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereinafter amended, and any rules, regulations or releases promulgated
thereunder.
The Registrant may indemnify its officers and directors and other
"persons" acting in an "official capacity" (as such terms are defined in Section
302A.521) pursuant to a determination by the board of directors or shareholders
of the Registrant as set forth in Section 302A.521, by special legal counsel
selected by the board or a committee thereof for the purpose of making such a
determination, or by a Minnesota court upon application of the person seeking
indemnification. If a director is seeking indemnification for conduct in the
capacity of director or officer of the Registrant, then such director generally
may not be counted for the purpose of determining either the presence of a
quorum or such director's eligibility to be indemnified.
In any case, indemnification is proper only if the eligibility
determining body decides that the person seeking indemnification has (a) not
received indemnification for the same conduct from any other party or
organization; (b) acted in good faith; (c) received no improper personal
benefit; (d) in the case of criminal proceedings, had no reasonable cause to
believe the conduct was unlawful; (e) reasonably believed that the conduct was
in the best interest of the Registrant, or in certain contexts, was not opposed
to the best interest of the Registrant; and (f) had not otherwise engaged in
conduct which precludes indemnification under either Minnesota or Federal law
(including, but not limited to, conduct constituting willful misfeasance, bad
faith, gross negligence, or reckless disregard of duties as set forth in Section
17(h) and (I) of the Investment Company Act of 1940).
If a person is made or threatened to be made a party to a proceeding,
the person is entitled, upon written request to the Registrant, to payment or
reimbursement by the Registrant of reasonable expenses, including attorneys'
fees and disbursements, incurred by the person in advance of the final
disposition of the proceeding, (a) upon receipt by the Registrant of a written
affirmation by the person of a good faith belief that the criteria for
indemnification set forth in Section 302A.521 have been satisfied and a written
undertaking by the person to repay all amounts so paid or reimbursed by the
Registrant, if it is ultimately determined that the criteria for indemnification
have not been satisfied, and (b) after a determination that the facts then known
to those making the determination would not preclude indemnification under
Section 302A.521. The written undertaking required by clause (a) is an unlimited
general obligation of the person making it, but need not be secured and shall be
accepted without reference to financial ability to make the repayment.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant undertakes to comply with the indemnification
requirements of Investment Company Release 7221 (June 9, 1972) and Investment
Company Release 11330 (September 2, 1980).
Item 28. Business and Other Connections of Investment Adviser
The name and principal occupation(s) during the past two fiscal years
of each director and the executive officers of the Adviser are set forth below.
The business address of each is 90 South Seventh Street, Suite 4400,
Minneapolis, Minnesota 55402, except that the principal business address of Mr.
McCullagh is 717 Seventeenth Street, Denver, Colorado 80202.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH ADVISER PRINCIPAL OCCUPATION(S)
- ---------------- --------------------- -----------------------
<S> <C> <C>
Michael E. Dougherty Chairman Chairman of the Board, President and Chief
Executive Officer of Dougherty Financial Group,
Inc. ("DFG") and Chairman of Voyageur and the
Underwriter.
John G. Taft Director and President See biographical information in Part B of the
Registration Statement.
Jane M. Wyatt Director and Chief See biographical information in Part B of the
Investment Officer Registration Statement.
Edward J. Kohler Director and Executive Director and Executive Vice President of the
Vice President Adviser and Director of the Underwriter since
1995; previously, President and Director of Piper
Capital Management Incorporated from 1985 to
1995.
Thomas J. Abood Senior Vice President See biographical information in Part B of the
and General Counsel Registration Statement.
Kenneth R. Larsen Treasurer See biographical information in Part B of the
Registration Statement.
Steven P. Eldredge Senior Vice President See biographical information in Part B of the
Registration Statement.
</TABLE>
Information on the business of Registrant's Adviser is contained in the
section of the Prospectus entitled "Management" and in the section of the
Statement of Additional Information entitled "The Investment Adviser and
Underwriter" filed as part of this Registration Statement.
Item 29. Principal Underwriters
(a) Voyageur Fund Distributors, Inc., the underwriter of the
Registrant's shares, is principal underwriter for the shares of Voyageur Tax
Free Funds, Inc., Voyageur Insured Funds, Inc., Voyageur Intermediate Tax Free
Funds, Inc., Voyageur Investment Trust, Voyageur Investment Trust II, Voyageur
Mutual Funds, Inc., Voyageur Mutual Funds II, Inc., Voyageur Mutual Funds III,
Inc. and VAM Institutional Funds, Inc., affiliated open-end management
investment companies.
(b) The directors of the Underwriter are the same as the directors of
the Adviser as set forth above in Item 28). The executive officers of the
Underwriter (who are also not directors of the Underwriter) and the positions of
these individuals with respect to the Registrant are:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- ---- ---------------------- ---------------------
<S> <C> <C>
Michael E. Dougherty Chairman None
Steven B. Johansen Secretary and Chief Financial None
Officer
Kenneth R. Larsen Treasurer Treasurer
Thomas J. Abood Senior Vice President and
General Counsel Secretary
</TABLE>
The address of each of the executive officers is 90 South Seventh Street, Suite
4400, Minneapolis, Minnesota 55402.
(c) Not applicable.
Item 30. Location of Accounts and Records
The custodian for Registrant is Norwest Bank Minnesota, N.A., Sixth
Street & Marquette Avenue, Minneapolis, Minnesota 55402. The dividend
disbursing, administrative and accounting services agent of Registrant is
Voyageur Fund Managers, Inc. The address of Voyageur Fund Managers, Inc. and the
Registrant is 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report of such series, and such Annual Report will be
furnished without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis and State of
Minnesota on the 28th day of April 1997.
VOYAGEUR MUTUAL FUNDS, INC.
By /s/ John G. Taft
John G. Taft, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ John G. Taft President (Principal April 28, 1997
John G. Taft Executive Officer)
/s/ Kenneth R. Larsen Treasurer (Principal April 28, 1997
Kenneth R. Larsen Financial and Accounting
Officer)
James W. Nelson* Director
Clarence G. Frame* Director
Robert J. Odegard* Director
Richard F. McNamara* Director
Thomas F. Madison * Director
*/s/ Thomas J. Abood Attorney-in-Fact April 28, 1997
Thomas J. Abood
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Voyageur Tax Free Funds, Inc.
Voyageur Intermediate Tax Free Funds, Inc.
Voyageur Insured Funds, Inc.
Voyageur Investment Trust
Voyageur Investment Trust II
Voyageur Mutual Funds, Inc.
Voyageur Mutual Funds II, Inc.
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the headings "FINANCIAL HIGHLIGHTS" in Part A and
"ADDITIONAL INFORMATION - Custodian; Counsel; Independent Auditors" in Part B
of the Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 28, 1997
