UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF
REGISTERED MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number: 811-07938
Exact name of registrant as specified in charter: Delaware Investments Minnesota Municipal Income
Fund III, Inc.
Address of principal executive offices: 2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service: David F. Connor, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: March 31
Date of reporting period: December 31, 2005
Item 1. Schedule of Investments.
Schedule of Investments (Unaudited)
Delaware Investments Minnesota Municipal Income Fund III, Inc.
--------------------------------------------------------------
December 31, 2005
Principal Market
Amount Value
Municipal Bonds - 154.89%
Airport Revenue Bonds - 9.60%
Minneapolis/St. Paul Metropolitan Airports Commission Revenue Series A
5.00% 1/1/28 (MBIA) $ 750,000 $ 776,640
5.00% 1/1/30 (AMBAC) 750,000 764,760
5.125% 1/1/25 (FGIC) 900,000 940,275
-------
2,481,675
---------
Continuing Care/Retirement Revenue Bonds - 7.38%
St. Paul Housing & Redevelopment Authority Revenue (Franciscan Health Project)
5.40% 11/20/42 (GNMA) (FHA) 1,820,000 1,908,325
---------
1,908,325
---------
Corporate-Backed Revenue Bonds - 7.52%
Cloquet Pollution Control Revenue (Potlatch Corp. Project) 5.90% 10/1/26 1,000,000 1,013,300
Minneapolis Community Development Agency Supported Development Revenue
(Pajor Graphics) Series 1 6.75% 12/1/25 (LOC - US Bank NA) (AMT) 865,000 929,451
-------
1,942,751
---------
Escrowed to Maturity Bonds - 12.06%
University of Minnesota Hospital & Clinics 6.75% 12/1/16 2,580,000 3,118,085
---------
3,118,085
---------
Higher Education Revenue Bonds - 7.21%
Minnesota State Higher Education Facilities Authority
(College of St. Benedict) Series 5-W 5.25% 3/1/24 300,000 313,359
(St. Thomas University) Series 4-A1 5.625% 10/1/21 1,010,000 1,023,898
University of the Virgin Islands Series A 5.375% 6/1/34 500,000 526,985
-------
1,864,242
---------
Hospital Revenue Bonds - 17.02%
Bemidji Health Care Facilities First Meeting Revenue (North County Health Services)
5.00% 9/1/24 (RADIAN) 500,000 517,730
Duluth Economic Development Authority Health Care Facilities Revenue (Benedictine
Health System-St. Mary's Hospital) 5.25% 2/15/33 500,000 513,775
Minneapolis Health Care System Revenue
(Allina Health Systems) Series A 5.75% 11/15/32 1,100,000 1,178,122
(Fairview Health Services) Series D 5.00% 11/15/34 (AMBAC) 750,000 780,810
Minnesota Agricultural & Economic Development Broad Revenue (Fairview Health Care System)
Series A 6.375% 11/15/29 40,000 43,469
Rochester Health Care Facilities Revenue (Mayo Foundation) Series B 5.50% 11/15/27 1,000,000 1,047,590
Shakopee Health Care Facilities Revenue (St. Francis Regional Medical Center) 5.25% 9/1/34 310,000 318,956
-------
4,400,452
---------
Library/Museum Revenue Bonds - 1.01%
Minneapolis Art Center Facilities Revenue (Walker Art Center Project) 5.125% 7/1/21 250,000 261,608
-------
261,608
-------
Multifamily Housing Revenue Bonds - 7.51%
Minneapolis Multifamily Housing Revenue
o(Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) 965,000 1,011,464
(Olson Townhomes Project) 6.00% 12/1/19 (AMT) 930,000 930,177
-------
1,941,641
---------
Municipal Lease Bonds - 2.13%
Puerto Rico Public Buildings Authority Guaranteed Government Facilities Revenue
Series D (Unrefunded Portion) Series D 5.25% 7/1/27 530,000 549,170
-------
549,170
Municipal Lease Revenue Bonds - 12.59%
Andover Economic Development Authority Public Facilities Lease Revenue (Andover
Community Center) 5.125% 2/1/24 500,000 521,140
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.125% 12/1/27 500,000 527,045
5.25% 12/1/27 1,000,000 1,062,140
(Robnert Street Office Building Project) 5.00% 12/1/27 500,000 523,775
Virginia Housing & Redevelopment Authority Health Care Facility (Lease Revenue)
5.375% 10/1/30 600,000 620,898
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3,254,998
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Parking Revenue Bonds - 5.99%
St. Paul Housing & Redevelopment Authority Parking Revenue (Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 1,450,000 1,546,991
---------
1,546,991
---------
Political Subdivision General Obligation Bonds - 14.68%
Metropolitan Council Waste Water Treatment Series B 5.00% 12/1/21 750,000 801,420
Minneapolis Sports Arena Project 5.125% 10/1/20 750,000 774,825
Moorhead Series B 5.00% 2/1/33 (MBIA) 1,250,000 1,307,875
Washington County Housing & Redevelopment Authority Series B 5.50% 2/1/22 (MBIA) 850,000 910,894
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3,795,014
---------
ss.Pre-Refunded Bonds - 18.05%
Minnesota Agricultural & Economic Development Broad Revenue (Fairview Health Care System)
Series A 6.375% 11/15/29-10 1,210,000 1,370,168
Minnesota Public Facilities Authority Water Pollution Control Revenue Series B 5.40% 3/1/15-06 2,200,000 2,207,699
Puerto Rico Commonwealth Highway & Transportation Authority Revenue
Series D 5.25% 7/1/38-12 1,000,000 1,087,950
---------
4,665,817
---------
Public Power Revenue Bonds - 22.59%
Chaska Electric Revenue (Generating Facilities) Series A 5.25% 10/1/25 250,000 265,260
Minnesota State Municipal Power Agency Electric Revenue Series A
5.00% 10/1/34 750,000 767,018
5.25% 10/1/19 500,000 535,065
Southern Minnesota Municipal Power Agency Power Supply Systems Revenue Series A
5.25% 1/1/15 (AMBAC) 700,000 775,369
5.25% 1/1/16 (AMBAC) 500,000 555,685
&Southern Minnesota Municipal Power Agency Power Supply Systems Revenue, Inverse
Floater ROLs Series II-R-189-3 6.866% 1/1/14 (AMBAC) 1,500,000 1,809,719
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 460,000 477,742
Series B 5.00% 1/1/15 (MBIA) 600,000 653,268
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5,839,126
---------
Public Utility District Revenue Bonds - 2.92%
Laurentian Energy Authority I Series A 5.00% 12/1/21 750,000 755,280
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755,280
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School District General Obligation Bonds - 4.09%
Farmington Independent School District #192 Series B 5.00% 2/1/27 (FSA) 500,000 528,195
Princeton Independent School District #477 Series A 5.00% 2/1/24 (FSA) 500,000 529,745
-------
1,057,940
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Single Family Housing Revenue Bonds - 2.54%
Minnesota State Housing Finance Agency Single Family Mortgage Series B 5.35%
1/1/33 (AMT) 640,000 656,563
-------
656,563
-------
Total Municipal Bonds (cost $37,995,222) 40,039,678
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Total Market Value of Securities - 154.89%
(cost $37,995,222) 40,039,678
Receivables and Other Assets Net of Liabilities (See Notes) - 3.14% 810,565
Liquidation Value of Preferred Stock - (58.03%) (15,000,000)
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Net Assets Applicable to 1,837,200 Shares Outstanding - 100.00% $ 25,850,243
------------
oVariable rate securities. The interest rate shown is the rate as of December
31, 2005.
ss.Pre-Refunded Bonds. Municipals that are generally backed or secured by U.S.
Treasury bonds. For Pre-Refunded Bonds, the stated maturity is followed by the
year in which the bond is pre-refunded. See Note 3 in "Notes."
&An inverse floater bond is a type of bond with variable or floating interest
rates that move in the opposite direction of short-term interest rates. Interest
rate disclosed is in effect as of December 31, 2005. See Note 3 in "Notes."
Summary of Abbreviations:
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FSA - Insured by Financial Security Assurance
GNMA -Insured by Government National Mortgage Association
LOC- Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
--------------------------------------------------------------------------------
Notes
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by Delaware Investments
Minnesota Municipal Income Fund III, Inc. (the "Fund").
Security Valuation - Long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Fund's Board of
Trustees. In determining whether market quotations are readily available or fair
valuation will be used, various factors will be taken into consideration, such
as market closures, aftermarket trading or significant events after local market
trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
Federal Income Taxes - The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other - Expenses common to all funds within the Delaware Investments(R) Family
of Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date) for
financial reporting purposes. Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Interest income is recorded on the accrual basis. Discounts and premiums
are amortized to interest income over the lives of the respective securities.
The Fund declares and pays dividends from net investment income monthly and
distributions from net realized gain on investments, if any, annually. In
addition, in order to satisfy certain distribution requirements of the Tax
Reform Act of 1986, the Fund may declare special year-end dividend and capital
gains distributions during November or December to shareholders of record on a
date in such month. Such distributions, if received by shareholders by January
31, are deemed to have been paid by the Fund and received by shareholders on the
earlier of the date paid or December 31 of the prior year.
2. Investments
At December 31, 2005, the cost of investments for federal income tax purposes
has been estimated since the final tax characteristics cannot be determined
until fiscal year end. At December 31, 2005, the cost of investments and
unrealized appreciation (depreciation) for the Fund were as follows:
Cost of investments $37,995,222
-----------
Aggregate unrealized appreciation 2,074,786
Aggregate unrealized depreciation (30,330)
-----------
Net unrealized appreciation $ 2,044,456
-----------
3. Credit and Market Risk
The Fund uses leverage in the form of preferred shares. Leveraging may result in
a higher degree of volatility because the Fund's net asset value could be more
sensitive to fluctuations in short-term interest rates and changes in market
value of portfolio securities attributable to the leverage.
The Fund concentrates its investments in securities issued by municipalities.
The value of these investments may be adversely affected by new legislation
within the state, regional or local economic conditions, and differing levels of
supply and demand for municipal bonds. Many municipalities insure repayment for
their obligations. Although bond insurance reduces the risk of loss due to
default by an issuer, such bonds remain subject to the risk that market value
may fluctuate for other reasons and there is no assurance that the insurance
company will meet its obligations. These securities have been identified in the
Schedule of Investments.
The Fund may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Schedule of Investments.
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased
bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding". "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates. Bonds are considered "pre-refunded" when
the refunding issue's proceeds are escrowed only until a permitted call date or
dates on the refunded issue with the refunded issue being redeemed at the
time, including any required premium. Bonds become "defeased" when the rights
and interests of the bondholders and of their lien on the pledged revenues or
other security under the terms of the bond contract are substituted with an
alternative source of revenues (the escrow securities) sufficient to meet
payments of principal and interest to maturity or to the first call dates.
Escrowed secured bonds will often receive a rating of AAA from Moody's, S&P,
and/or Fitch due to the strong credit quality of the escrow securities and the
irrevocable nature of the escrow deposit agreement.
The Fund may invest up to 15% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Fund's Board of Directors has delegated to
Delaware Management Company the day-to-day functions of determining whether
individual securities are liquid for purposes of the Fund's limitation on
investments in illiquid assets. At December 31, 2005, no securities have been
determined to be illiquid under the Fund's Liquidity Procedures.
4. Other Fund Information
On February 24, 2006 Delaware Investments Minnesota Municipal Income Fund II,
Inc. ("Minnesota II") acquired substantially all of the assets of Delaware
Investments Minnesota Municipal Income Fund, Inc. (ASE: VMN) ("Minnesota I") and
Delaware Investments Minnesota Municipal Income Fund III, Inc. (ASE: VYM)
("Minnesota III"). The acquisition of substantially all of the assets of
Minnesota I and Minnesota III in exchange for common and preferred shares, as
applicable, of Minnesota II was approved by shareholders of the three closed-end
funds at the reconvened Special Meeting of Shareholders held on January 12, 2006
and was structured as a tax-free transaction.
Minnesota II will continue to trade and to be listed on the American Stock
Exchange. Beginning on February 27, 2006 and going forward, however, Minnesota I
and Minnesota III will no longer trade or be listed on the American Stock
Exchange, and their corporate existence will be liquidated and dissolved. In
January 2007, shareholders of Minnesota I and Minnesota III will receive Form
1099-DIV that will report the amount and character of each fund's distributions
paid in calendar year 2006.
Item 2. Controls and Procedures.
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There were no significant changes in the registrant's internal control
over financial reporting that occurred during the registrant's last fiscal
quarter (the registrant's second fiscal half-year in the case of an annual
report) that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 3. Exhibits.
File as exhibits as part of this Form a separate certification for each
principal executive officer and principal financial officer of the registrant as
required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)), exactly as set
forth below:
CERTIFICATION
-------------
I, Jude T. Driscoll, certify that:
1. I have reviewed this report on Form N-Q of Delaware Investments
Minnesota Municipal Income Fund III, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the schedules of investments included in
this report fairly present in all material respects the
investments of the registrant as of the end of the fiscal quarter
for which the report is filed;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940) and internal control over financial reporting
(as defined in Rule 30a-3(d) under the Investment Company Act of
1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of a date within 90 days prior
to the filing date of this report, based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed
to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize, and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Jude T. Driscoll
---------------------------------------
By: Jude T. Driscoll
Title: Chief Executive Officer
Date: February 28, 2006
CERTIFICATION
-------------
I, Michael P. Bishof, certify that:
1. I have reviewed this report on Form N-Q of Delaware Investments
Minnesota Municipal Income Fund III, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the schedules of investments included in
this report fairly present in all material respects the
investments of the registrant as of the end of the fiscal quarter
for which the report is filed;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940) and internal control over financial reporting
(as defined in Rule 30a-3(d) under the Investment Company Act of
1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of a date within 90 days prior
to the filing date of this report, based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize, and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Michael P. Bishof
---------------------------------------
By: Michael P. Bishof
Title: Chief Financial Officer
Date: February 28, 2006
SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND III, INC.
Jude T. Driscoll
---------------------------------------
By: Jude T. Driscoll
Title: Chief Executive Officer
Date: February 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Jude T. Driscoll
---------------------------------------
By: Jude T. Driscoll
Title: Chief Executive Officer
Date: February 28, 2006
Michael P. Bishof
---------------------------------------
By: Michael P. Bishof
Title: Chief Financial Officer
Date: February 28, 2006