UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-07938
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:
Richelle S. Maestro, 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: March 31, 2005
Item 1. Report to Stockholders
Delaware
Investments(R)
CLOSED END -----------------------------------
A member of Lincoln Financial Group
ANNUAL REPORT MARCH 31, 2005
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DELAWARE INVESTMENTS CLOSED-END
MUNICIPAL BOND FUNDS
[LOGO]POWERED BY RESEARCH.(SM)
TABLE
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARY 8
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SECTOR ALLOCATION 10
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FINANCIAL STATEMENTS:
Statements of Net Assets 13
Statements of Operations 27
Statements of Changes in Net Assets 29
Financial Highlights 31
Notes to Financial Statements 37
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 42
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BOARD OF TRUSTEES/DIRECTORS AND OFFICERS 43
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DIVIDEND REINVESTMENT PLANS
Each Fund offers an automatic dividend reinvestment program. If Fund shares are
registered in your name and you are not already reinvesting dividends but would
like to do so, contact the dividend plan agent, Mellon Investor Services,
L.L.C., at 800 851-9677. You will be asked to put your request in writing. If
you have shares registered in "street" name, contact your financial advisor or
the broker/dealer holding the shares.
Under the current policies of Arizona Municipal Income Fund, Florida Insured
Municipal Income Fund, Minnesota Municipal Income Fund I, and Minnesota
Municipal Income Fund II, all distributions of net investment income and capital
gains to common stock shareholders are automatically reinvested in additional
shares unless shareholders elect to receive all dividends and other
distributions in cash paid by check mailed directly to shareholders by the
dividend plan agent. Under the current policies of Colorado Insured Municipal
Income Fund and Minnesota Municipal Income Fund III, distributions of net
investment income and capital gains to common shareholders will be paid in cash
unless shareholders notify Mellon Investor Services, L.L.C. of their desire to
participate in the dividend reinvestment program.
After each Fund declares a dividend or determines to make a capital gains
distribution, the plan agent will, as agent for the participants, receive the
cash payment and use it to buy shares in the open market on the American Stock
Exchange. The Funds will not issue any new shares in connection with the plan.
You can contact Mellon at:
Mellon Investor Services, L.L.C.
Dividend Reinvestment Department
Overpeck Centre
85 Challenger Road
Ridgefield, NJ 07660
800 851-9677
Funds are not FDIC insured and are not guaranteed. It is possible to lose the
principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a series
of Delaware Management Business Trust, which is a registered investment advisor.
PORTFOLIO DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
MANAGEMENT REVIEW March 31, 2005
FUND MANAGERS
Andrew M. McCullagh
Senior Portfolio Manager
Arizona Municipal Income Fund,
Colorado Insured Municipal Income Fund
Denise Franchetti
Portfolio Manager
Minnesota Municipal Income Funds I, II, III,
Florida Insured Municipal Income Fund
Arizona Municipal Income Fund
Colorado Insured Municipal Income Fund
Joseph Baxter
Portfolio Manager
Arizona Municipal Income Fund,
Colorado Insured Municipal Income Fund,
Minnesota Municipal Income Funds I, II, III,
Florida Insured Municipal Income Fund
Robert Collins
Portfolio Manager
Arizona Municipal Income Fund,
Colorado Insured Municipal Income Fund,
Minnesota Municipal Income Funds I, II, III,
Florida Insured Municipal Income Fund
Q: PLEASE DESCRIBE THE OVERALL CONDITIONS IN THE MUNICIPAL BOND MARKETS DURING
THE FISCAL YEAR.
A: During the fiscal year, the Federal Reserve embarked upon a tightening
program to gradually eliminate the accommodative stance that has been in place
since 2002-03. Just prior to the start of the fiscal year, the market was
anticipating a higher federal funds rate, and rates across the yield curve moved
up. For example, the 10-year Treasury Note had yields increase by over 100 basis
points (a basis point equals 1/100th of a percent) from 3.68% on March 16, 2004
to a high of 4.87% on June 14, 2004. As bond yields and bond prices are
inversely related, this was a particularly difficult period for bondholders.
However, the municipal bond market dug in its heels and rallied over the next
several months, even while the Federal Reserve started its tightening program.
The June 30 hike in the fed funds rate from 1.00% to 1.25% was the first of
several moves during the fiscal year, with additional 25-basis point increases
coming in August, September, November, December, February and March. At the end
of the fiscal year, the rate was 2.75%.
A market rally in the face of a Federal Reserve tightening is unusual. Recent
tightenings have resulted in the bond markets making an initial move to higher
rates, similar to what we witnessed in the second quarter of 2004, followed by a
period of consolidation before resuming a march to even higher rates. This time
the rally started in June, before the first move by the Fed, and lasted over
four months, until the end of October. During this period, yields on the 10-year
Treasury Note decreased to 3.97%, nearly erasing all the market decline from
earlier in the fiscal year.
Since the end of September, the market has been range-bound with relatively
narrow market moves. One of the economic releases providing support to the
market against the tightening backdrop has been the monthly employment report.
It was higher-than-anticipated non-farm payroll data that spooked the market in
April, May and June, and several very weak releases that sparked the rally in
the months following. Slightly-below trend releases of late have kept the market
range-bound.
Late in the fiscal year, persistent declines in the weekly jobless
claims reports, along with higher commodity prices, contributed to market
weakness and, as of March 31, 2005, yields in the bond markets were rising and
threatening to break out of their recent range on the high side.
In the long maturities, tax-exempt bonds outperformed taxable bonds early in the
fiscal year, but since May, have steadily traded weaker against Treasury bonds,
as the yield ratio between the 30-year maturities moved from 92.3% in mid-May to
96.9% at the period's end. One of the factors leading to the underperformance of
long bonds in the municipal market was the lack of retail demand. Often, a 5%
yield for long, high-grade tax-exempt bonds is viewed as an on/off switch for
retail investors. When yields fall below 5%, we believe investors are much less
interested in buying. Since May, the yields have declined from just above 5% to
close the fiscal year at about 4.60%.
Finally, just as it did in fiscal year 2004, credit performed well as spreads
continued to compress. For intermediate and long-term tax-exempt bonds, the
yield offered to "buy" credit, as defined by the spreads between AAA and
BBB-rated securities, narrowed by nearly 25 basis points. This narrowing spread
helped A and BBB-rated sectors outperform the higher rated AA and AAA rated
sectors during the year. Over the last five years, there is very little
difference between the returns in the various rating categories, as the period
three and four years ago was difficult for states and municipalities (recall all
the fiscal stress and budget shortfalls), which caused their credit spreads to
widen.
1
MINNESOTA MUNICIPAL INCOME FUNDS I, II, AND III
Q: WHAT CONDITIONS PREVAILED IN THE MINNESOTA DEBT MARKET?
A: Consistent with activity the previous year, the Minnesota tax-exempt debt
market mirrored the national markets. Yields on long-term, high-grade Minnesota
bonds were virtually unchanged in the fiscal year, only moving three basis
points from 4.57% on March 31, 2004 to 4.60% on March 31, 2005 (source:
Municipal Marketing Data [Thompson]). During the 12 months ending March 31,
2005, the Minnesota portion of the Lehman Municipal Bond Index generated a 2.36%
total return, 31 basis points below the 2.67% total return of the overall index.
Fully half of that difference is due to the influence of California bonds on the
overall index. Since a state fiscal crisis in 2003, California bonds have come
off their depressed levels, tightened to the general market and posted
significantly higher returns. Over the last 12 months, the Lehman Municipal Bond
Index, excluding California, would have returned 2.51%.
The supply of new issues decreased nationally during 2004, while new issuance in
Minnesota held steady. Nationally, the supply was down 6.6%, but still
represented the third most active year in history, exceeded only by 2003 and
2002. During the same time period, Minnesota experienced a modest 2% increase
over 2003's new issuance. Some of the decline in issuance nationally was erased
in the first quarter of 2005, when the total volume of new issues set a record
in the first quarter, with more than $96 billion brought to market. In
Minnesota, issuance was up by over 38% from the volume in the first quarter of
last year.
Minnesota's fiscal condition improved during the year, with revenues increasing
by over 5.1% in fiscal 2004. Employment expanded at a 1.4% clip over the last
year, with manufacturing bucking the national downward trend and growing at an
even better 2.2% pace. Unemployment at fiscal year end stood at 4.2%, below the
national rate of 5.4%. Expectations of a budget shortfall continue to ratchet
down as the Legislature is in the midst of its biennial budget process. As part
of that process, the governor has proposed cutbacks in the eligibility for
Medicare, attempting to rein in the spending within the health and human
services area from its current 18% growth rate.
Recognizing the strong performance by the state, Standard & Poor's upgraded
Minnesota's school enhancement program bonds from AA+ to AAA, impacting about
$1.5 billion of school district bond issues, in the third quarter of 2004. A
positive change in statutory requirements for debt service reserves resulted in
Moody's upgrading general obligation ratings of numerous Minnesota cities and
counties. During calendar year 2004, the rating agencies upgrade-to-downgrade
ratio for Minnesota was over 20 to 1, with many of the upgrades for general
obligation bonds issued by counties, cities, and school districts.
Q: AGAINST THIS BACKDROP, HOW DID THE FUNDS PERFORM?
A: For the fiscal year ended March 31, 2005, the Delaware Investments Minnesota
Municipal Income Funds I, II, & III returned 2.87%, 4.03%, and 3.03%* (all
returns reflect shares at net asset value with distributions reinvested),
respectively, while the Lipper Minnesota Municipal Debt Funds universe average
returned 3.62%, and the Lehman Brothers Municipal Bond Index returned 2.67%
during the same period. The Funds' dividends from net investment income during
the past 12 months were exempt from federal income and Minnesota State personal
income taxes.
Q: WHAT STRATEGIES AFFECTED FUND PERFORMANCE?
A: The Funds hold a fair amount of seasoned, higher coupon bonds that trade
based on their short call dates (the date at which the issuer may call the bond
at par from investors). As portfolio managers, we must decide whether to sell
these bonds early, forfeit the higher coupon, and realize a capital gain in
order to seek better price performance. We did not believe the low-interest-rate
environment and the commencing of the Fed tightening cycle was the proper time
to sell early, and therefore, opted to allow our positions to roll down the
yield curve. By rolling down the yield curve, we allowed them to be called or
mature. This afforded us the opportunity to collect high coupon income as long
as possible, while minimizing realized capital gains in the portfolios. However,
these shorter bonds did impede price performance when yields declined in the
second half of 2004.
Normally, when the Fed begins to raise the fed funds rate, longer-term rates
begin to rise in tandem. However, this tightening cycle was unusual in the fact
that long-term rates actually declined. Federal Reserve Chairman Alan Greenspan
called this phenomenon a "conundrum" in recent testimony to Congress. Therefore,
as the bonds did roll off, we chose to invest the proceeds in premium bonds that
should act more defensively in a rising-rate environment. That rising-rate
environment was slow to develop in 2004, but rates have ended the first quarter
higher than calendar year-end.
*Past performance is not a guarantee of future results and a portion of the
income from tax-exempt funds may be subject to the alternative minimum tax.
2
Over the last two years, lower-rated bonds outperformed higher quality bonds.
For instance, over the last 12 months, in the Lehman Municipal Bond Index,
triple-A rated bonds returned 1.88%, while single-A bonds returned 3.41%, and
triple-B bonds returned 8.56%. Within the Minnesota Municipal Income Funds, Fund
II had a lower weighting in triple-A rated bonds than its counterparts.
Conversely, it had a higher weighting in lower-rated bonds, and thus superior
return.
Other key contributors to return in the Funds have been the hospital sector and
IDR/PCR sector, which includes corporate bonds. Our funds have always had a
strong commitment to the hospital sector, which over the trailing 12 months has
had the second highest sector return (+5.44%) in the Lehman index.
We have a smaller commitment to the corporate sector, but do favor certain
industrial development projects secured by companies, such as Potlatch and
International Paper. These securities have performed well for the funds.
Q: WHAT WAS YOUR STRATEGY IN MANAGING THE MINNESOTA FUNDS?
A: With interest rates at historically low levels throughout the period, we
anticipated an eventual rise in rates and continued to position the three
portfolios for such a scenario. Specifically, we kept the Funds' durations
relatively modest to make the portfolios less vulnerable in the event rates
increase (duration is a common measure of a bond or bond fund's sensitivity to
interest rate changes. The longer the duration, the more sensitive the bond or
bond fund is to changes in interest rates). The Funds' durations did naturally
lengthen throughout the past 12 months as bonds matured from the portfolios and
we were forced to reinvest the proceeds at lower prevailing yields. This
activity was manageable throughout the period, however, and as of March 31,
2005, we believed the Fund was well-positioned for the higher interest rates.
When making new investments, we continued to emphasize public-power revenue
bonds, which at period end made up 30.7%, 11.9%, and 21.8% of portfolio assets
in Minnesota Municipal Income Funds I, II, and III, respectively. Our focus was
on basic utilities, which provide essential services such as electric
generation, transmission, and distribution. Unlike their investor-owned
counterparts, the regulated utilities we favored provided relatively stable
revenue streams. We also liked that most bonds in this area are insured, giving
the Funds an extra layer of security. Because there was a healthy supply of
public power bonds during the period, we were able to add to our position in
this sector.
We also favored the hospital sector during the period. Following a number of
credit problems in the late 1990s and early 2000s, most hospitals have had
improvements in their financial strength. Despite these improvements, we believe
many hospital bonds are still trading at somewhat depressed levels, given the
steady credit improvements made. Through careful research, we have sought to
identify attractive value opportunities that we believe can offer higher yields
with only a modest amount of additional risk. By contrast, continuing care
retirement community (CCRC) bonds represented one area of the market that we
de-emphasized. We had concerns about the issuers' ability to meet lofty
occupancy-rate targets at these care facilities for seniors.
ARIZONA MUNICIPAL INCOME FUND
Q: WHAT CONDITIONS PREVAILED IN THE ARIZONA DEBT MARKET?
A: While the Arizona tax-exempt debt markets mirrored the national markets,
certain aspects of the municipal market within Arizona resulted in the state's
municipal bond market underperforming national averages. During the 12 months
ending March 31, 2005, the Arizona portion of the Lehman Brothers Municipal Bond
Index generated a 1.97% total return, 70 basis points below the 2.67% total
return of the overall Lehman index. Nationally, most bond issues come to market
with long-term bonds (typically due in 25 and 30 years) as part of the issue
structure. Within Arizona, a large percentage of the issuance comes with maximum
maturities of 20 years. As a result, the average maturity of the Arizona portion
of the index is approximately 1.5 years less than the overall index.
*Past performance is not a guarantee of future results and a portion of the
income from tax-exempt funds may be subject to the alternative minimum tax.
3
These short maturities in Arizona are important to note because the best
performing maturities within the tax-exempt market over the last 12 months have
been long bonds. As mentioned, the overall index had a total return of 2.67%
during the period. That compares with the Lehman Brothers Long Bond Index (bonds
over 22 years to maturity) return of 5.46% during the same time period. It is
easy to see why Arizona lagged behind the national market in such an
environment.
During the calendar year 2004, supply of new issues decreased nationally, but
was higher in Arizona. Nationally, the supply was down 6.6%, but still
represented the third most active year in history, exceeded only by 2003 and
2002. Arizona's new issuance rose by 15% for the year. These roles reversed in
the first quarter of 2005, with national supply setting a record and Arizona
experiencing a particularly dry period. The total volume of new issues set a
record for issuance in the first quarter, with more than $96 billion brought to
market. In Arizona, the issuance was down by over 40% from last year's levels.
Arizona's fiscal condition improved during the year, with revenues increasing by
more than 10% in fiscal 2004 and accelerated to 14% growth in the first quarter
of fiscal year 2005. Growth was driven by both the strong economic environment
and tax increases. Employment continues to expand at a rapid pace within the
state, with unemployment falling over the last 12 months from 5.3% to 4.4%. One
of the strongest areas of expansion is construction, with employment growth
surging 8.8% over the fiscal year. Overall, this growth has enabled the state to
generate a healthy balance in its general fund of 4% at the end of fiscal 2004.
The growth is not limited to the state. Pima County had its general obligation
rating raised by Standard & Poor's from A+ to AA- in the second quarter of 2004.
The rating agency noted the expansion of the county's tax base as a driver of
the higher rating.
Q: AGAINST THIS BACKDROP, HOW DID THE FUND PERFORM?
A: For the fiscal year ended March 31, 2005, the Delaware Investments Arizona
Municipal Income Fund returned 3.34%* (shares at net asset value with
distributions reinvested), underperforming the Lipper Other States Municipal
Debt Funds Average of 3.73%, but outperforming the Lehman Brothers Municipal
Bond Index return of 2.67% during the same period. The Fund's dividends from net
income during the past 12 months were exempt from federal income and Arizona
State personal income taxes.
Q: WHAT STRATEGIES AFFECTED FUND PERFORMANCE?
A: The Fund underperformed its Lipper peer group for two primary reasons - calls
of high coupon housing bonds and a heavy weighting in pre-refunded bonds. As the
portfolio has seasoned, several of its positions in housing bonds, both multi-
and single-family structures, were getting into the range where calls (the
issuer redeeming the bonds at 100 or a slight premium prior to final maturity)
were beginning to make economic sense for the issuer. In this most recent fiscal
year, many of these issues were called. Our exposure to the housing sectors
decreased during the year from 7.09% at the beginning to 5.8% as of March 31,
2005. The combined housing bond sectors generated a below-average return of
about 1.30% during the year. While this is low, it is important to recognize the
defensive nature of these bonds, with little price performance opportunities, up
or down.
Another factor affecting fund performance has been an overweighting in
pre-refunded bonds. Pre-refunded bonds are seasoned, higher coupon bonds that
trade to short calls. While they produce above-average income, their short
duration impedes price performance. As portfolio managers, we must decide
whether to sell these bonds early, forfeit the higher coupon, and realize a
capital gain in order to seek better price performance. We did not believe the
low interest rate environment and the commencing of the Fed tightening cycle was
the proper time to execute this strategy. Normally, when the Fed begins to raise
the fed funds rate, longer-term rates begin to rise in tandem. However, this
tightening cycle was unusual in the fact that long-term rates actually declined.
Federal Reserve Chairman Alan Greenspan called this a "conundrum" in recent
testimony to Congress.
One of the strategies that paid off during the year was an investment in mid-
and low-investment-grade bonds (A- and BBB-rated). Lower grade bonds have
performed well, and we have invested approximately 5.9% of the assets in
low-investment-grade issues, which generated a 5.56% total return over the last
12 months. It is important to note that the Fund has no exposure to
below-investment-grade issues.
*Past performance is not a guarantee of future results and a portion of the
income from tax-exempt funds may be subject to the alternative minimum tax.
4
In addition, we reinvested maturity and called bond proceeds in some longer-term
securities, which happened to be our best performers in the 12-month trailing
period. However, that did not represent a large enough portion of the portfolio
to have a significant impact on the Fund's return. Since Greenspan's testimony,
longer rates have now begun to rise.
FLORIDA INSURED MUNICIPAL INCOME FUND
Q: WHAT CONDITIONS PREVAILED IN THE FLORIDA DEBT MARKET?
A: Consistent with activity the previous year, the Florida tax-exempt debt
markets mirrored the national markets. Yields on long-term high-grade Florida
bonds were virtually unchanged in the fiscal year, only moving one basis point
from a 4.65% on March 31, 2004 to 4.64% on March 31, 2005 (source: Municipal
Marketing Data [Thompson]). During the 12 months ending March 31, 2005, the
Florida portion of the Lehman Brothers Municipal Bond Index slightly
outperformed the overall index.
The supply of new issues decreased both nationally and in the state during
calendar year 2004. Nationally, the supply was down 6.6%, but still represented
the third most active year in history, exceeded only by 2003 and 2002. Florida's
new issuance was down dramatically, falling by nearly 40% for the year. Some of
the decline, nationally and specifically within Florida, was erased in the first
quarter of 2005. In fact, the total volume of new issues set a record for
issuance in the first quarter with more than $96 billion brought to market. In
Florida, issuance was up by more than 67% from the depressed levels of last
year.
Florida's fiscal condition improved during the year, with revenues increasing
9.1% in fiscal 2004 and accelerated with 12.7% growth the first quarter of
fiscal 2005. Employment continues to expand at a rapid pace within the state. It
rose while the rest of the nation lost jobs. As a result, unemployment was down
to 4.5% in February 2005. This has enabled state finances to remain strong and
the state benefited by generating the highest general fund balance of any state,
standing at $5.0 billion.
This strong performance by the state was recognized by the ratings agencies, and
both Moody's and Standard & Poor's rewarded Florida by upgrading its general
obligation bonds (to Aa1 and AAA, respectively) in the first quarter of 2005.
In his fiscal 2005-06 budget proposal, the governor has included a two-year
phase out of the state's Intangibles Tax. This tax was reduced in 1999 with an
intention of phasing it out, but the budget squeeze in the early 2000's forced
the state to keep the tax as an important revenue source. Elimination of the
state's intangibles tax would cost Florida approximately $300 million per year
in lost revenues. We are closely monitoring the situation.
Q: AGAINST THIS BACKDROP, HOW DID THE FUND PERFORM?
A: For the fiscal year ended March 31, 2005, the Delaware Investments Florida
Insured Municipal Income Fund returned 1.59%* (shares at net asset value with
distributions reinvested), underperforming both the Lipper Florida Municipal
Debt Funds Universe average of 3.72% and the Lehman Brothers Municipal Bond
Index return of 2.67% during the same period. The Fund's dividends from net
investment income during the past 12 months were exempt from federal income and
Florida tangible personal property taxes.
Q: WHAT STRATEGIES AFFECTED FUND PERFORMANCE?
A: The Fund underperformed its Lipper peer group and the Lehman Index primarily
due to the nature of the Fund being largely a triple-A insured fund. Over the
last two years, triple-A bonds have underperformed lower-rated securities. For
instance, over this 12-month period, in the Lehman Brothers Municipal Bond
Index, triple-A rated bonds returned 1.88%, while single-A bonds returned 3.41%,
and triple-B bonds returned 8.56%. Although we cannot change the insured mandate
of the Fund, we can state that we have found, over time, that these
discrepancies revert to the mean. For instance, over a five-year cumulative
period, the triple-A sector return for the Lehman Brothers Municipal Bond Index
was 34%, while the single-A sector return was 32%, and the triple-B sector was
39%.
*Past performance is not a guarantee of future results and a portion of the
income from tax-exempt funds may be subject to the alternative minimum tax.
5
Another factor affecting performance of the Fund has been an overweighting in
pre-refunded bonds. Pre-refunded bonds are seasoned, higher coupon bonds that
trade to short calls. While they produce above average income, their short
duration impedes price performance. As portfolio managers, we must decide
whether to sell these bonds early, forfeit the higher coupon, and realize a
capital gain in order to seek better price performance. We did not believe the
low-interest-rate environment and the commencing of the Fed tightening cycle was
the proper time to execute this strategy. Normally, when the Fed begins to raise
the fed funds rate, longer-term rates begin to rise in tandem. However, this
tightening cycle was unusual in that long-term rates actually declined. Federal
Reserve Chairman Alan Greenspan called this phenomenon a "conundrum" in recent
testimony to Congress.
We did, however, reinvest maturity and called bond proceeds in some longer-term
securities, which happened to be our best performers in the 12-month trailing
period. However, this did not represent a large enough portion of the portfolio
to have a significant impact on the Fund's return. Since Greenspan's testimony,
longer rates have now begun to rise.
COLORADO INSURED MUNICIPAL INCOME FUND
Q: WHAT CONDITIONS PREVAILED IN THE COLORADO DEBT MARKET?
A: After underperforming the general market substantially in the previous fiscal
year, the Colorado municipal market generated total returns that were close to
market levels. During the 12 months ending March 31, 2005, the Colorado portion
of the Lehman Index generated a 2.37% total return, 30 basis points below the
2.67% total return of the overall Lehman Brothers Municipal Bond Index. Fully
half of that difference is due to the influence of California bonds in the
overall index. Since its fiscal crisis in 2003, California bonds have come off
their depressed levels, tightened to the general market, and posted
significantly higher returns. In fact, over the last 12 months, the Lehman
index, excluding California, would have returned 2.51%.
During calendar year 2004, supply of new issues decreased nationally, but was
higher in Colorado. Nationally, the supply was down 6.6%, but still represented
the third most active year in history, exceeded only by 2003 and 2002.
Colorado's new issuance rose by 22% for the year. These roles reversed in first
quarter 2005, with national supply setting a record and Colorado experiencing a
particularly dry period. The total volume of new issues set a record for
issuance in the first quarter, with more than $96 billion brought to market. In
Colorado, the issuance was down by more than 20% from last year's levels.
Colorado is rebounding from the severe economic downturn it experienced at the
beginning of the decade due to the decline in telecommunications and technology.
State revenues increased 5.1% in fiscal 2004 after declining 5.1% in fiscal
2003. Revenue growth accelerated into this fiscal year, increasing 6.5% in the
first quarter of fiscal 2005. The state is starting to rebuild its general fund
balance, with a fiscal 2004-ending balance equaling about 3.9% of expenditures.
Unemployment has declined over the last year from 5.8% to 4.9%. The bond market
will be closely monitoring the budgeting process as the Governor has proposed an
$850 million tobacco settlement bond issue, part of the proceeds to go to
operating income and part to help create a "rainy day" fund.
Growth is not limited to state government. While there were not any significant
ratings changes within Colorado during the fiscal year, Moody's upgraded the
general obligation ratings of several school districts' bonds. In most of these
upgrades, the ratings agency noted the expansion of the tax base as one of the
drivers of the higher ratings.
Q: AGAINST THIS BACKDROP, HOW DID THE FUND PERFORM?
A: For the fiscal year ended March 31, 2005, the Delaware Investments Colorado
Insured Municipal Income Fund returned 2.56%* (shares at net asset value with
distributions reinvested), underperforming the Lipper Other States Municipal
Debt Funds Universe average of 3.73% and the Lehman Brothers Municipal Bond
Index return of 2.67% during this period. The Fund's dividends from net
investment income during the past 12 months were exempt from federal income and
Colorado State personal income taxes.
*Past performance is not a guarantee of future results and a portion of the
income from tax-exempt funds may be subject to the alternative minimum tax.
6
Q: WHAT STRATEGIES AFFECTED FUND PERFORMANCE?
A: The Fund underperformed its Lipper peer group primarily due to the nature of
the Fund being largely a triple-A insured fund. Over the last two years,
triple-A bonds have underperformed lower-rated securities. For instance, over
this 12-month period, in the Lehman Brothers Municipal Bond Index, triple-A
rated bonds returned 1.88%, while single-A bonds returned 3.41%, and triple-B
bonds returned 8.56%. Although we cannot change the insured mandate of the Fund,
we can state that we have found, over time, that these discrepancies revert to
the mean. For instance, over a cumulative five-year period, the triple-A sector
return for the Lehman Brothers Municipal Bond Index was 34%, while the single-A
sector return was 32%, and the triple-B sector 39%.
Another factor affecting performance has been an overweighting in bonds with
medium durations. Due to the seasoning of the portfolio, many bonds that were
originally purchased with 10-year call protection are now being priced based on
shorter calls that are now in the three- to seven-year range. The three- and
five-year portions of the Lehman index only returned 0.09% and 0.26% over the
period, the worst of any maturities. Longer bonds, with more than 22 years to
maturity, were the best-performing sector, with a 5.46% total return over the
fiscal year.
Seasoned bonds generally are higher coupon bonds that were purchased in a higher
yield environment. While they produce above-average income, their short duration
can impede price performance. As portfolio managers, we must decide whether to
sell these bonds early, forfeit the higher coupon, and realize a capital gain in
order to seek better price performance. We did not believe the low interest rate
environment and the commencing of the Fed tightening cycle was the proper time
to execute this strategy. Normally, when the Fed begins to raise the fed funds
rate, longer-term rates begin to rise in tandem. However, this tightening cycle
was unusual in that long-term rates actually declined. Federal Reserve Chairman
Alan Greenspan even called this a "conundrum" in recent testimony to Congress.
We did, however, reinvest maturity and called bond proceeds in some longer-term
securities, which happened to be among our best performers in the 12-month
trailing period. However, that did not represent a large enough portion of the
portfolio to have a significant impact on the Fund's return. Since Greenspan's
testimony, longer rates have now begun to rise. Currently, we are maintaining a
modestly defensive position, holding a duration (a measure of the portfolio's
sensitivity to interest rate changes) of 4.8 years, below that of both its
Lipper peer group (5.5 year average) and the Lehman Brothers Municipal Bond
Index (5.45 years).
*Past performance is not a guarantee of future results and a portion of the
income from tax-exempt funds may be subject to the alternative minimum tax.
7
PERFORMANCE SUMMARY
DELAWARE INVESTMENTS
MINNESOTA MUNICIPAL
INCOME FUNDS I, II, III
FUND BASICS
As of March 31, 2005
--------------------------------------------------------------------------------
FUND OBJECTIVE:
The Funds seek to provide current income exempt from both regular federal income
tax and Minnesota personal income tax, consistent with preservation of capital.
--------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
Fund I $37.74 million
Fund II $107.96 million
Fund III $25.72 million
--------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
Fund I 58
Fund II 93
Fund III 43
--------------------------------------------------------------------------------
FUND START DATE:
Fund I May 1, 1992
Fund II February 26, 1993
Fund III October 29, 1993
--------------------------------------------------------------------------------
YOUR FUND MANAGERS:
Joseph Baxter is vice president and senior portfolio manager of municipal bond
investments. Prior to joining Delaware in 1999, he held investment positions
with First Union. Most recently, he served as a municipal portfolio manager for
the Evergreen Funds. Mr. Baxter is a graduate of LaSalle University and joined
Delaware Investments in 1999.
Robert Collins is vice president and senior portfolio manager of municipal bond
development. Prior to joining Delaware Investments, Mr. Collins was a senior
vice president and director of portfolio management in the Municipal Investment
Group within PNC Advisors. Mr. Collins earned bachelor's degree in economics
from Ursinus College. He is a Chartered Financial Analyst and a member of the
Financial Analysts of Philadelphia.
Denise Franchetti received bachelor's and MBA degrees from LaSalle University.
Prior to joining Delaware Investments in 1997, Ms. Franchetti was a fixed-income
trader for Provident Mutual Life Insurance Company. Before that, she worked as
an investment analyst for General Accident Insurance Company. Ms. Franchetti, a
CFA Charterholder, is a member of the Association for Investment Management and
Research and the Financial Analysts of Philadelphia.
DELAWARE INVESTMENTS
ARIZONA MUNICIPAL INCOME FUND
FUND BASICS
As of March 31, 2005
--------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks to provide current income exempt from both regular federal income
tax and from Arizona personal income tax, consistent with preservation of
capital.
--------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$44.94 million
--------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
46
--------------------------------------------------------------------------------
FUND START DATE:
February 26, 1993
--------------------------------------------------------------------------------
YOUR FUND MANAGERS:
Andrew M. McCullagh joined Delaware Investments in 1997, after holding
investment management positions at Kirchner, Moore & Co. He holds a bachelor's
degree from Washington College and a graduate certificate in public finance
from the University of Michigan.
Joseph Baxter
Robert Collins
Denise Franchetti
--------------------------------------------------------------------------------
8
PERFORMANCE SUMMARY
DELAWARE INVESTMENTS
FLORIDA INSURED MUNICIPAL
INCOME FUND
FUND BASICS
As of March 31, 2005
--------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks to provide current income exempt from regular federal income tax
consistent with preservation of capital. The Fund will also seek to maintain its
portfolio so that the Fund's shares will be exempt from the Florida intangible
personal property tax.
--------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$37.17 million
--------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
35
--------------------------------------------------------------------------------
FUND START DATE:
February 26, 1993
--------------------------------------------------------------------------------
YOUR FUND MANAGERS:
Joseph Baxter
Robert Collins
Denise Franchetti
--------------------------------------------------------------------------------
DELAWARE INVESTMENTS
COLORADO INSURED MUNICIPAL
INCOME FUND
FUND BASICS
As of March 31, 2005
--------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks to provide current income exempt from both regular federal income
tax and Colorado state personal income tax, consistent with preservation of
capital.
--------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$75.36 million
--------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
49
--------------------------------------------------------------------------------
FUND START DATE:
July 29, 1993
--------------------------------------------------------------------------------
YOUR FUND MANAGERS:
Andrew M. McCullagh
Joseph Baxter
Robert Collins
Denise Franchetti
--------------------------------------------------------------------------------
9
SECTOR ALLOCATION As of March 31, 2005
The SEC adopted a requirement that all funds present their categories of
portfolio holdings in a table, chart, or graph format in their annual and
semiannual shareholder reports, whether or not a schedule of investments is
utilized. The following charts list the Fund's categories of portfolio holdings
as a percentage of total net assets and is provided in compliance with such
requirement.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND, INC.
PERCENTAGE
SECTOR OF NET ASSETS
---------------------------------------------------------------------------
MUNICIPAL BONDS 149.69%
---------------------------------------------------------------------------
Airport Revenue Bonds 10.34%
City General Obligation Bonds 4.12%
Continuing Care/Retirement Revenue Bonds 2.43%
Corporate-Backed Revenue Bonds 4.15%
Escrowed to Maturity Bonds 13.54%
Higher Education Revenue Bonds 5.74%
Hospital Revenue Bonds 17.42%
Miscellaneous Revenue Bonds 7.19%
Multifamily Housing Revenue Bonds 6.13%
Municipal Lease Revenue Bonds 4.60%
Parking Revenue Bonds 1.83%
Political Subdivision General Obligation Bonds 8.86%
Pre-Refunded Bonds 8.71%
Public Power Revenue Bonds 30.69%
School District General Obligation Bonds 17.08%
Single Family Housing Revenue Bonds 2.26%
State General Obligation Bonds 3.20%
Tax Increment/Special Assessment Bonds 1.40%
---------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 1.46%
---------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 151.15%
---------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 1.85%
---------------------------------------------------------------------------
LIQUIDATION VALUE OF PREFERRED STOCK (53.00%)
---------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
---------------------------------------------------------------------------
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
PERCENTAGE
SECTOR OF NET ASSETS
---------------------------------------------------------------------------
MUNICIPAL BONDS 148.99%
---------------------------------------------------------------------------
Airport Revenue Bonds 9.94%
City General Obligation Bonds 3.84%
Continuing Care/Retirement Revenue Bonds 2.31%
Corporate-Backed Revenue Bonds 5.51%
Escrowed to Maturity Bonds 15.17%
Higher Education Revenue Bonds 10.23%
Hospital Revenue Bonds 23.38%
Miscellaneous Revenue Bonds 3.80%
Multifamily Housing Revenue Bonds 9.35%
Municipal Lease Revenue Bonds 11.20%
Parking Revenue Bonds 1.23%
Political Subdivision General Obligation Bonds 6.66%
Pre-Refunded Bonds 12.94%
Public Power Revenue Bonds 11.93%
School District General Obligation Bonds 12.52%
Single Family Housing Revenue Bonds 2.57%
State General Obligation Bonds 4.36%
Tax Increment/Special Assessment Bonds 0.49%
Territorial General Obligation Bonds 1.07%
Territorial Revenue Bonds 0.49%
---------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 3.15%
---------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 152.14%
---------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 3.44%
---------------------------------------------------------------------------
LIQUIDATION VALUE OF PREFERRED STOCK (55.58%)
---------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
---------------------------------------------------------------------------
10
SECTOR ALLOCATION
(CONTINUED) As of March 31, 2005
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND III, INC.
PERCENTAGE
SECTOR OF NET ASSETS
---------------------------------------------------------------------------
MUNICIPAL BONDS 152.50%
---------------------------------------------------------------------------
Airport Revenue Bonds 9.58%
City General Obligation Bonds 5.04%
Continuing Care/Retirement Revenue Bonds 9.65%
Corporate-Backed Revenue Bonds 7.51%
Escrowed to Maturity Bonds 12.14%
Higher Education Revenue Bonds 5.26%
Hospital Revenue Bonds 21.10%
Miscellaneous Revenue Bonds 1.01%
Multifamily Housing Revenue Bonds 7.67%
Municipal Lease Revenue Bonds 10.12%
Parking Revenue Bonds 6.00%
Political Subdivision General Obligation Bonds 9.65%
Pre-Refunded Bonds 15.17%
Public Power Revenue Bonds 21.83%
School District General Obligation Bonds 4.07%
Single Family Housing Revenue Bonds 2.52%
Territorial General Obligation Bonds 2.02%
Territorial Revenue Bonds 2.16%
---------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 2.14%
---------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 154.64%
---------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 3.68%
---------------------------------------------------------------------------
LIQUIDATION VALUE OF PREFERRED STOCK (58.32%)
---------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
---------------------------------------------------------------------------
DELAWARE INVESTMENTS ARIZONA MUNICIPAL INCOME FUND, INC.
PERCENTAGE
SECTOR OF NET ASSETS
---------------------------------------------------------------------------
MUNICIPAL BONDS 148.26%
---------------------------------------------------------------------------
Airport Revenue Bonds 6.89%
City General Obligation Bonds 1.15%
Convention Center/Auditorium/Hotel Revenue Bonds 2.29%
Dedicated Tax & Fees Revenue Bonds 6.88%
Escrowed to Maturity Bonds 10.86%
Higher Education Revenue Bonds 5.88%
Hospital Revenue Bonds 19.21%
Miscellaneous Revenue Bonds 8.24%
Multifamily Housing Revenue Bonds 1.10%
Municipal Lease Revenue Bonds 9.54%
Political Subdivision General Obligation Bonds 3.51%
Pre-Refunded Bonds 18.15%
Public Power Revenue Bonds 3.44%
School District General Obligation Bonds 17.27%
Single Family Housing Revenue Bonds 4.67%
Territorial Revenue Bonds 23.80%
Water & Sewer Revenue Bonds 5.38%
---------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 148.26%
---------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 7.37%
---------------------------------------------------------------------------
LIQUIDATION VALUE OF PREFERRED STOCK (55.63%)
---------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
---------------------------------------------------------------------------
11
SECTOR ALLOCATION
(CONTINUED) As of March 31, 2005
DELAWARE INVESTMENTS FLORIDA INSURED MUNICIPAL INCOME FUND
PERCENTAGE
SECTOR OF NET ASSETS
---------------------------------------------------------------------------
MUNICIPAL BONDS 151.00%
---------------------------------------------------------------------------
Airport Revenue Bonds 2.83%
Dedicated Tax & Fees Revenue Bonds 16.89%
Higher Education Revenue Bonds 7.73%
Hospital Revenue Bonds 21.82%
Miscellaneous Revenue Bonds 2.76%
Multifamily Housing Revenue Bonds 23.18%
Municipal Lease Revenue Bonds 9.62%
Ports & Harbors Revenue Bonds 2.76%
Pre-Refunded Bonds 47.12%
Public Power Revenue Bonds 5.47%
Tax Increment/Special Assessment Bonds 0.82%
Water & Sewer Revenue Bonds 10.00%
---------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 151.00%
---------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 2.81%
---------------------------------------------------------------------------
LIQUIDATION VALUE OF PREFERRED STOCK (53.81%)
---------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
---------------------------------------------------------------------------
DELAWARE INVESTMENTS COLORADO INSURED MUNICIPAL INCOME FUND, INC.
PERCENTAGE
SECTOR OF NET ASSETS
---------------------------------------------------------------------------
MUNICIPAL BONDS 150.37%
---------------------------------------------------------------------------
Airport Revenue Bonds 10.47%
City General Obligation Bonds 2.74%
Continuing Care/Retirement Revenue Bonds 3.56%
Convention Center/Auditorium/Hotel Revenue Bonds 4.08%
Dedicated Tax & Fees Revenue Bonds 11.29%
Higher Education Revenue Bonds 33.23%
Hospital Revenue Bonds 1.95%
Multifamily Housing Revenue Bonds 3.18%
Municipal Lease Revenue Bonds 15.70%
Parking Revenue Bonds 3.54%
Political Subdivision General Obligation Bonds 10.24%
Pre-Refunded Bonds 13.85%
School District General Obligation Bonds 10.24%
Turnpike/Toll Road Revenue Bonds 13.84%
Water & Sewer Revenue Bonds 12.46%
---------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 0.66%
---------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 151.03%
---------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 2.05%
---------------------------------------------------------------------------
LIQUIDATION VALUE OF PREFERRED STOCK (53.08%)
---------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
---------------------------------------------------------------------------
12
STATEMENTS DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND, INC.
OF NET ASSETS March 31, 2005
Principal Market
Amount Value
MUNICIPAL BONDS - 149.69%
Airport Revenue Bonds - 10.34%
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.00% 1/1/22 (MBIA) $1,000,000 $ 1,041,310
5.00% 1/1/30 (AMBAC) 250,000 253,460
Series C 5.25% 1/1/32 (FGIC) 2,500,000 2,609,075
-----------
3,903,845
-----------
City General Obligation Bonds - 4.12%
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,000,000 1,032,970
-----------
1,554,920
-----------
Continuing Care/Retirement Revenue Bonds - 2.43%
St. Paul Housing & Redevelopment
Authority Revenue
(Franciscan Health Project)
5.40% 11/20/42 (GNMA) (FHA) 880,000 917,426
-----------
917,426
-----------
Corporate-Backed Revenue Bonds - 4.15%
Anoka County Solid Waste Disposal
National Rural Co-Op Utility
(United Power Association)
Series A 6.95% 12/1/08 (AMT) 560,000 563,455
Sartell Environmental Improvement Revenue
(International Paper)
Series A 5.20% 6/1/27 1,000,000 1,003,290
-----------
1,566,745
-----------
Escrowed to Maturity Bonds - 13.54%
Dakota/Washington Counties
Housing & Redevelopment
Authority Bloomington Single
Family Residential Mortgage Revenue
8.375% 9/1/21 (GNMA) (FHA) (AMT) 2,555,000 3,715,762
Southern Minnesota Municipal
Power Agency Series B
5.50% 1/1/15 (AMBAC) 390,000 392,613
5.75% 1/1/11 (FGIC) 1,000,000 999,910
-----------
5,108,285
-----------
Higher Education Revenue Bonds - 5.74%
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict)
Series 5-W 5.00% 3/1/20 1,000,000 1,025,250
University of Minnesota Series A
5.50% 7/1/21 1,000,000 1,139,840
-----------
2,165,090
-----------
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Hospital Revenue Bonds - 17.42%
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) $1,000,000 $ 1,027,390
Duluth Economic Development
Authority Health Care
Facilities Revenue
(Benedictine Health System -
St. Mary's Hospital) 5.25% 2/15/33 1,250,000 1,268,963
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,100,000 1,164,262
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A
6.375% 11/15/29 1,750,000 1,902,740
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 500,000 505,160
St. Paul Housing & Redevelopment
Authority Health Care Facilities
Revenue (Regions Hospital Project)
5.30% 5/15/28 700,000 703,892
-----------
6,572,407
-----------
Miscellaneous Revenue Bonds - 7.19%
Minneapolis Art Center Facilities
Revenue (Walker Art Center Project)
5.125% 7/1/21 1,600,000 1,664,976
Minneapolis Community Development
Agency Supported Series G-3
5.45% 12/1/31 1,000,000 1,046,740
-----------
2,711,716
-----------
Multifamily Housing Revenue Bonds - 6.13%
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290
Southeastern Minnesota Multi
County Housing & Redevelopment
Authority (Winona County)
5.35% 1/1/28 300,000 301,974
Washington County Housing &
Redevelopment Authority Revenue
(Woodland Park Apartments Project)
4.70% 10/1/32 1,000,000 1,001,940
-----------
2,313,204
-----------
Municipal Lease Revenue Bonds - 4.60%
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.125% 12/1/27 500,000 522,445
5.25% 12/1/27 1,150,000 1,211,732
-----------
1,734,177
-----------
13
STATEMENTS DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND, INC.
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Parking Revenue Bonds - 1.83%
St. Paul Housing & Redevelopment
Authority Parking Revenue
(Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) $ 650,000 $ 691,867
-----------
691,867
-----------
Political Subdivision General Obligation Bonds - 8.86%
Hennepin County Series B
5.00% 12/1/18 1,300,000 1,375,595
Washington County Housing &
Redevelopment Authority Series B
5.50% 2/1/22 (MBIA) 855,000 909,669
5.50% 2/1/32 (MBIA) 1,000,000 1,058,500
-----------
3,343,764
-----------
*Pre-Refunded Bonds - 8.71%
Puerto Rico Commonwealth
6.00% 7/1/26-07 1,000,000 1,083,230
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 845,000 916,664
St. Francis Independent School District #15
Series A 6.30% 2/1/11-06 (FSA) 1,250,000 1,286,888
-----------
3,286,782
-----------
Public Power Revenue Bonds - 30.69%
Chaska Electric Revenue Series A
6.00% 10/1/25 1,000,000 1,093,430
Minnesota State Municipal Power Agency
Series A 5.25% 10/1/19 1,110,000 1,183,504
Rochester Electric Utility Revenue
5.25% 12/1/30 (AMBAC) 150,000 157,992
&Southern Minnesota Municipal
Power Agency, Inverse Floater ROLs
Series II-R-189-3 8.096% 1/1/14 (AMBAC) 2,500,000 3,001,874
Southern Minnesota Municipal Power
Agency Series A
5.00% 1/1/12 (AMBAC) 1,000,000 1,081,000
5.00% 1/1/13 (MBIA) 500,000 540,445
5.25% 1/1/15 (AMBAC) 570,000 631,150
5.25% 1/1/16 (AMBAC) 1,000,000 1,105,980
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,900,000 1,964,581
Series B 5.00% 1/1/15 (MBIA) 765,000 827,179
-----------
11,587,135
-----------
School District General Obligation Bonds - 17.08%
Centennial Independent School
District #012 Series A
5.00% 2/1/20 (FSA) 400,000 418,404
Farmington Independent School
District #192 5.00% 2/1/23 (FSA) 1,200,000 1,248,924
Lakeville Independent School
District #194-A 4.75% 2/1/22 (FSA) 500,000 511,295
Minneapolis Special School
District #001 5.00% 2/1/19 (FSA) 675,000 713,232
Morris Independent School
District #769 5.00% 2/1/28 (MBIA) 1,000,000 1,035,650
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
School District General Obligation Bonds (continued)
Mounds View Independent School
District #621 5.00% 2/1/23 (FSA) $1,020,000 $ 1,063,901
Robbinsdale Independent School
District #281 5.00% 2/1/21 (FSA) 500,000 521,165
St. Michael Independent School
District #885
5.00% 2/1/22 (FSA) 500,000 519,665
5.00% 2/1/24 (FSA) 400,000 413,056
-----------
6,445,292
-----------
Single Family Housing Revenue Bonds - 2.26%
Dakota County Housing & Redevelopment
Authority Single Family Mortgage
Revenue 5.85% 10/1/30
(GNMA) (FNMA) (AMT) 42,000 42,926
Minnesota State Housing Finance Agency
Single Family Mortgage Series J
5.90% 7/1/28 (AMT) 785,000 808,228
-----------
851,154
-----------
State General Obligation Bonds - 3.20%
Minnesota State 5.00% 8/1/21 1,150,000 1,207,857
-----------
1,207,857
-----------
Tax Increment/Special Assessment Bonds - 1.40%
Moorhead Economic Development
Authority Tax Increment Series A
5.25% 2/1/25 (MBIA) 500,000 529,535
-----------
529,535
-----------
TOTAL MUNICIPAL BONDS (cost $54,591,248) 56,491,201
-----------
SHORT-TERM INVESTMENTS - 1.46%
oVariable Rate Demand Notes - 1.46%
Midwest Consortium of Municipal Utilities
Series A 2.28% 1/1/25 250,000 250,000
Minneapolis Library 2.13% 12/1/32 300,000 300,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $550,000) 550,000
-----------
TOTAL MARKET VALUE OF SECURITIES - 151.15%
(cost $55,141,248) 57,041,201
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES- 1.85% 696,393
LIQUIDATION VALUE OF PREFERRED
STOCK - (53.00%) (20,000,000)
-----------
NET ASSETS APPLICABLE TO 2,594,700 SHARES
OUTSTANDING - 100.00% $37,737,594
===========
Net Asset Value Per Common Share
($37,737,594 / 2,594,700 Shares) $14.54
------
14
STATEMENTS DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND, INC.
OF NET ASSETS (CONTINUED)
COMPONENTS OF NET ASSETS AT MARCH 31, 2005:
Common Stock, $0.01 par value, 200 million shares
authorized to the Fund $35,426,619
Undistributed net investment income 389,101
Accumulated net realized gain on investments 21,921
Net unrealized appreciation of investments 1,899,953
-----------
Total net assets $37,737,594
===========
*Pre-Refunded Bonds are 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 6 in "Notes to Financial
Statements."
&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 March 31, 2005. Illiquid security
see Note 6 in "Notes to Financial Statements."
oVariable rate notes. The interest rate shown is the rate as of March 31, 2005.
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
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by the Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
See accompanying notes
15
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
March 31, 2005
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS - 148.99%
Airport Revenue Bonds - 9.94%
Minneapolis/St. Paul Metropolitan
Airports Commission Revenue
Series A 5.00% 1/1/22 (MBIA) $2,000,000 $ 2,082,620
Series A 5.00% 1/1/28 (MBIA) 1,370,000 1,414,758
Series A 5.00% 1/1/30 (AMBAC) 1,450,000 1,470,068
Series A 5.25% 1/1/16 (MBIA) 1,000,000 1,078,730
Series B 5.25% 1/1/24 (FGIC) (AMT) 1,000,000 1,030,150
Series C 5.25% 1/1/32 (FGIC) 3,500,000 3,652,705
-----------
10,729,031
-----------
City General Obligation Bonds - 3.84%
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950
Moorhead Series B 5.00% 2/1/33 (MBIA) 2,000,000 2,074,320
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,500,000 1,549,455
-----------
4,145,725
-----------
Continuing Care/Retirement Revenue Bonds - 2.31%
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project)
6.00% 10/1/27 1,565,000 1,489,285
Moorhead Economic Development
Authority Multifamily Revenue
(Eventide Lutheran Home Project)
Series B 6.00% 6/1/18 1,000,000 1,000,730
-----------
2,490,015
-----------
Corporate-Backed Revenue Bonds - 5.51%
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 1,430,000 1,415,228
Cloquet Pollution Control Revenue
(Potlatch Corporation Project)
5.90% 10/1/26 4,500,000 4,535,280
-----------
5,950,508
-----------
Escrowed to Maturity Bonds - 15.17%
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21
(GNMA) (FHA) (VA) 5,500,000 7,998,705
St. Paul Housing & Redevelopment
Authority Sales Tax (Civic Center Project)
5.55% 11/1/23 2,300,000 2,329,624
5.55% 11/1/23 (MBIA) 4,200,000 4,254,096
Western Minnesota Municipal Power
Agency 6.625% 1/1/16 1,535,000 1,801,583
-----------
16,384,008
-----------
Higher Education Revenue Bonds - 10.23%
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict) Series 5-W
5.00% 3/1/20 1,000,000 1,025,250
(St. Catherine College) Series 5-N1
5.375% 10/1/32 1,500,000 1,561,935
(St. Mary's University) Series 5-U
4.80% 10/1/23 1,400,000 1,400,490
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Higher Education Revenue Bonds (continued)
(St. Thomas University) Series 4-A1
5.625% 10/1/21 $1,000,000 $ 1,033,090
(St. Thomas University) Series 5-Y
5.25% 10/1/34 1,500,000 1,563,795
St. Cloud Housing & Redevelopment
Authority Revenue
(State University Foundation Project)
5.00% 5/1/23 1,000,000 1,035,830
University of Minnesota Series A
5.50% 7/1/21 3,000,000 3,419,520
-----------
11,039,910
-----------
Hospital Revenue Bonds - 23.38%
Duluth Economic Development Authority
Health Care Facilities Revenue
(Benedictine Health System -
St. Mary's Hospital) 5.25% 2/15/33 5,000,000 5,075,850
Minneapolis Health Care System Revenue
(Allina Health Systems) Series A
5.75% 11/15/32 1,000,000 1,058,420
(Fairview Health Services) Series A
5.625% 5/15/32 2,750,000 2,898,308
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital)
Series A 6.375% 11/15/29 3,300,000 3,588,024
Series 97A 5.75% 11/15/26 (MBIA) 5,550,000 5,956,704
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B
5.50% 11/15/27 3,365,000 3,570,904
St. Louis Park Health Care Facilities Revenue
(Park Nicollet Health Services)
Series B 5.25% 7/1/30 1,250,000 1,270,038
St. Paul Housing & Redevelopment
Authority Health Care Facilities Revenue
(Regions Hospital Project)
5.30% 5/15/28 300,000 301,668
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project)
Series A 6.10% 1/1/19 (RADIAN) 1,405,000 1,534,246
-----------
25,254,162
-----------
Miscellaneous Revenue Bonds - 3.80%
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project)
5.125% 7/1/21 2,400,000 2,497,464
Minneapolis Community Development
Agency (Supported Development Revenue
Limited Tax Common Bond Fund)
Series 5 5.70% 12/1/27 375,000 381,795
Series G1 5.70% 12/1/19 1,100,000 1,225,444
-----------
4,104,703
-----------
16
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Multifamily Housing Revenue Bonds - 9.35%
Chanhassen Multifamily Housing Revenue
(Heritage Park Project Section 8)
6.20% 7/1/30 (FHA) (AMT) $1,105,000 $ 1,141,454
Harmony Multifamily Housing
Revenue Refunding Section 8
(Zedakah Foundation Project)
Series A 5.95% 9/1/20 1,000,000 847,950
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 3,575,000 3,586,868
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 1,000,000 983,930
Series D 5.95% 2/1/18 (MBIA) 155,000 158,257
Southeastern Minnesota Multi County
Housing & Redevelopment Authority
(Winona County) 5.35% 1/1/28 870,000 875,725
Stillwater Multifamily Housing Revenue
(Stillwater Cottages)
(Orleans Homes Number One)
7.25% 11/1/27 (AMT) 1,540,000 1,490,951
-----------
10,094,425
-----------
Municipal Lease Revenue Bonds - 11.20%
Andover Economic Development Authority
Public Facilities Lease Revenue
(Andover Community Center)
5.20% 2/1/29 1,000,000 1,018,000
Minneapolis Development Revenue
(Limited Tax Supported Common
Bond Fund) 5.50% 12/1/24 (AMT) 1,000,000 1,043,730
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 2,385,000 2,483,429
5.25% 12/1/27 2,650,000 2,792,252
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 2,545,000 2,641,634
Series 9 5.25% 12/1/27 2,000,000 2,115,360
-----------
12,094,405
-----------
Parking Revenue Bonds - 1.23%
St. Paul Housing & Redevelopment
Authority Parking Revenue
(Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 1,250,000 1,330,513
-----------
1,330,513
-----------
Political Subdivision General Obligation Bonds - 6.66%
Hennepin County Series B 5.00% 12/1/18 1,000,000 1,058,150
Hennepin Regional Railroad Authority
5.00% 12/1/26 3,500,000 3,599,680
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 1,250,000 1,324,125
Washington County Housing &
Redevelopment Authority Series B
5.50% 2/1/32 (MBIA) 1,140,000 1,206,690
-----------
7,188,645
-----------
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
*Pre-Refunded Bonds - 12.94%
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) $ 550,000 $ 550,000
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 1,000,000 1,025,020
Minneapolis/St. Paul Housing &
Redevelopment Authority Health
Care Systems (Children's Health Care)
Series A 5.50% 8/15/25-05 (FSA) 1,400,000 1,444,114
Puerto Rico Commonwealth Public
Improvement Series A 5.00% 7/1/27-12 1,250,000 1,356,163
Puerto Rico Electric Power Authority
Power Revenue Series Z
5.25% 7/1/21-05 1,500,000 1,511,100
Puerto Rico Highway & Transportation
Authority Revenue Series Y
5.50% 7/1/26-06 2,000,000 2,100,480
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 625,000 678,006
Rosemount Independent School
District #196 Series A 5.70% 4/1/12-06 1,270,000 1,307,148
Southern Minnesota Municipal Power
Agency Supply Revenue Series A
5.75% 1/1/18-13 3,715,000 3,996,336
-----------
13,968,367
-----------
Public Power Revenue Bonds - 11.93%
Minnesota State Municipal Power Agency
Series A 5.00% 10/1/34 5,750,000 5,845,680
Rochester Electric Utility Revenue
5.25% 12/1/30 (AMBAC) 450,000 473,976
&Southern Minnesota Municipal Power
Agency Supply System Revenue
Inverse Floater ROLs
Series II-R-189-3 8.096% 1/1/14 (AMBAC) 3,000,000 3,602,250
Series II-R-189 8.096% 1/1/15 (AMBAC) 1,500,000 1,821,840
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,100,000 1,137,389
-----------
12,881,135
-----------
School District General Obligation Bonds - 12.52%
Centennial Independent School
District #012 Series A
5.00% 2/1/20 (FSA) 400,000 418,404
Elk River Independent School
District #728 5.00% 2/1/16 (FGIC) 1,500,000 1,615,200
Farmington Independent School
District #192 5.00% 2/1/23 (FSA) 1,080,000 1,124,032
Series B 5.00% 2/1/27 (FSA) 1,000,000 1,042,950
Lakeville Independent School
District #194-A 4.75% 2/1/22 (FSA) 1,500,000 1,533,885
Minneapolis Special School
District #001 5.00% 2/1/19 (FSA) 1,000,000 1,056,640
Morris Independent School
District #769 5.00% 2/1/28 (MBIA) 2,750,000 2,848,037
Mounds View Independent School
District #621 5.00% 2/1/23 (FSA) 1,000,000 1,043,040
17
STATEMENTS DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
School District General Obligation Bonds (continued)
Princeton Independent School
District #477 Series A
5.00% 2/1/24 (FSA) $ 500,000 $ 524,725
St. Michael Independent School
District #885
5.00% 2/1/22 (FSA) 1,500,000 1,558,995
5.00% 2/1/24 (FSA) 725,000 748,664
-----------
13,514,572
-----------
Single Family Housing Revenue Bonds - 2.57%
Minnesota State Housing Finance Agency
Single Family Housing Series 1992-C2
6.15% 7/1/23 (AMT) 920,000 922,585
Minnesota State Housing Finance
Agency Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 1,145,000 1,157,802
Series J 5.90% 7/1/28 (AMT) 670,000 689,825
-----------
2,770,212
-----------
State General Obligation Bonds - 4.36%
Minnesota State 5.00% 8/1/21 3,875,000 4,069,951
&Minnesota State, Inverse Floater ROLs
7.824% 11/1/17 570,000 631,936
-----------
4,701,887
-----------
Tax Increment/Special Assessment Bonds - 0.49%
Moorhead Economic Development
Authority Tax Increment Series A
5.25% 2/1/25 (MBIA) 500,000 529,535
-----------
529,535
-----------
Territorial General Obligation Bonds - 1.07%
Puerto Rico Commonwealth Public
Improvement Series A
5.50% 7/1/19 (MBIA) 1,000,000 1,151,650
-----------
1,151,650
-----------
Territorial Revenue Bonds - 0.49%
Virgin Islands Public Finance Authority
5.25% 10/1/23 500,000 525,375
-----------
525,375
-----------
TOTAL MUNICIPAL BONDS (cost $154,446,585) 160,848,783
-----------
SHORT-TERM INVESTMENTS - 3.15%
oVariable Rate Demand Notes - 3.15%
Midwest Consortium of Municipal
Utilities Series A 2.28% 1/1/25 250,000 250,000
Minneapolis Block E Buildings
Series A 2.13% 3/1/27 1,250,000 1,250,000
Minneapolis Library 2.13% 12/1/32 700,000 700,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 300,000 300,000
Minnesota State Higher Education Facilities
Authority (Carleton College)
Series 5-G 2.13% 11/1/29 900,000 900,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $3,400,000) 3,400,000
-----------
TOTAL MARKET VALUE OF SECURITIES - 152.14%
(cost $157,846,585) $164,248,783
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 3.44% 3,709,092
LIQUIDATION VALUE OF PREFERRED
STOCK - (55.58%) (60,000,000)
------------
NET ASSETS APPLICABLE TO 7,252,200 SHARES
OUTSTANDING - 100.00% $107,957,875
============
Net Asset Value Per Common Share
($107,957,875 / 7,252,200 Shares) $14.89
------
COMPONENTS OF NET ASSETS AT MARCH 31, 2005:
Common Stock, $0.01 par value, 200 million shares
authorized to the Fund $99,710,000
Undistributed net investment income 2,250,617
Accumulated net realized loss on investments (404,940)
Net unrealized appreciation of investments 6,402,198
------------
Total net assets $107,957,875
============
*Pre-Refunded Bonds are 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 6 in "Notes to Financial
Statements."
&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 March 31, 2005. Illiquid security
see Note 6 in "Notes to Financial Statements."
oVariable rate notes. The interest rate shown is the rate as of March 31, 2005.
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 the Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
See accompanying notes
18
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND III, INC.
March 31, 2005
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS - 152.50%
Airport Revenue Bonds - 9.58%
Minneapolis/St. Paul Metropolitan
Airports Commission Revenue
Series A5.00% 1/1/28 (MBIA) $ 750,000 $ 774,503
5.00% 1/1/30 (AMBAC) 750,000 760,380
5.125% 1/1/25 (FGIC) 900,000 928,557
-----------
2,463,440
-----------
City General Obligation Bonds - 5.04%
Moorhead Series B 5.00% 2/1/33 (MBIA) 1,250,000 1,296,450
-----------
1,296,450
-----------
Continuing Care/Retirement Revenue Bonds - 9.65%
Minnesota Agriculture & Economic
Development Board Revenue
(Benedictine Health Systems)
5.75% 2/1/29 600,000 585,060
St. Paul Housing & Redevelopment
Authority Revenue
(Franciscan Health Project)
5.40% 11/20/42 (GNMA) (FHA) 1,820,000 1,897,405
-----------
2,482,465
-----------
Corporate-Backed Revenue Bonds - 7.51%
Cloquet Pollution Control Revenue
(Potlatch Corporation Project)
5.90% 10/1/26 1,000,000 1,007,840
Minneapolis Community Development
Agency Supported Development Revenue
(Pajor Graphics) Series 1
(LOC US Bank NA) 6.75% 12/1/25 (AMT) 865,000 924,382
-----------
1,932,222
-----------
Escrowed to Maturity Bonds - 12.14%
University of Minnesota Hospital & Clinics
6.75% 12/1/16 2,580,000 3,122,393
-----------
3,122,393
-----------
Higher Education Revenue Bonds - 5.26%
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict) Series 5-W
5.25% 3/1/24 300,000 309,888
(St.Thomas University) Series 4-A1
5.625% 10/1/21 1,010,000 1,043,421
-----------
1,353,309
-----------
Hospital Revenue Bonds - 21.10%
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) 500,000 513,695
Duluth Economic Development Authority
Health Care Facilities Revenue
(Benedictine Health System -
St. Mary's Hospital) 5.25% 2/15/33 1,000,000 1,015,170
Minneapolis Health Care System Revenue
(Allina Health Systems) Series A
5.75% 11/15/32 1,100,000 1,164,262
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A
6.375% 11/15/29 1,250,000 1,359,099
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Hospital Revenue Bonds (continued)
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B
5.50% 11/15/27 $1,000,000 $ 1,061,190
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 310,000 313,199
-----------
5,426,615
-----------
Miscellaneous Revenue Bonds - 1.01%
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project)
5.125% 7/1/21 250,000 260,153
-----------
260,153
-----------
Multifamily Housing Revenue Bonds - 7.67%
Minneapolis Multifamily Housing Revenue
o(Gaar Scott Loft Project)
5.95% 5/1/30 (AMT) 975,000 1,029,785
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 965,000 943,307
-----------
1,973,092
-----------
Municipal Lease Revenue Bonds - 10.12%
Andover Economic Development Authority
Public Facilities Lease Revenue
(Andover Community Center)
5.125% 2/1/24 500,000 508,850
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.125% 12/1/27 500,000 522,445
5.25% 12/1/27 1,000,000 1,053,680
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 500,000 518,985
-----------
2,603,960
-----------
Parking Revenue Bonds - 6.00%
St. Paul Housing & Redevelopment
Authority Parking Revenue
(Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 1,450,000 1,543,395
-----------
1,543,395
-----------
Political Subdivision General Obligation Bonds - 9.65%
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 750,000 794,475
Minneapolis Sports Arena Project
5.125% 10/1/20 750,000 782,033
Washington County Housing &
Redevelopment Authority Series B
5.50% 2/1/22 (MBIA) 850,000 904,349
-----------
2,480,857
-----------
*Pre-Refunded Bonds - 15.17%
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 1,645,000 1,645,000
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15-06 2,200,000 2,256,452
-----------
3,901,452
-----------
19
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND III, INC.
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Public Power Revenue Bonds - 21.83%
Minnesota State Municipal
Power Agency Series A
5.00% 10/1/34 $ 750,000 $ 762,480
5.25% 10/1/19 500,000 533,110
Southern Minnesota Municipal
Power Agency Series A
5.00% 1/1/13 (MBIA) 500,000 540,445
5.25% 1/1/15 (AMBAC) 700,000 775,096
5.25% 1/1/16 (AMBAC) 500,000 552,990
&Southern Minnesota Municipal
Power Agency Supply System Revenue
Inverse Floater ROLs Series II-R-189-3
8.096% 1/1/14 (AMBAC) 1,500,000 1,801,124
Western Minnesota Municipal
Power Agency Series B
5.00% 1/1/15 (MBIA) 600,000 648,768
-----------
5,614,013
-----------
School District General Obligation Bonds - 4.07%
Farmington Independent School
District #192 Series B
5.00% 2/1/27 (FSA) 500,000 521,475
Princeton Independent School
District #477 Series A
5.00% 2/1/24 (FSA) 500,000 524,725
-----------
1,046,200
------------
Single Family Housing Revenue Bonds - 2.52%
Minnesota State Housing Finance
Agency Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 640,000 647,155
-----------
647,155
-----------
Territorial General Obligation Bonds - 2.02%
University Virgin Islands Series A
5.375% 6/1/34 500,000 520,070
-----------
520,070
-----------
Territorial Revenue Bonds - 2.16%
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities
Revenue Series D (Unrefunded Portion)
5.25% 7/1/27 530,000 554,990
-----------
554,990
-----------
TOTAL MUNICIPAL BONDS (cost $37,578,090) 39,222,231
-----------
SHORT-TERM INVESTMENTS - 2.14%
Variable Rate Demand Notes - 2.14%
oCity of St. Cloud 2.18% 2/1/16 550,000 550,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $550,000) 550,000
-----------
TOTAL MARKET VALUE OF SECURITIES - 154.64%
(cost $38,128,090) $39,772,231
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES - 3.68% 947,514
LIQUIDATION VALUE OF PREFERRED
STOCK - (58.32%) (15,000,000)
-----------
NET ASSETS APPLICABLE TO 1,837,200 SHARES
OUTSTANDING - 100.00% $25,719,745
===========
Net Asset Value Per Common Share
($25,719,745 / 1,837,200 Shares) $14.00
------
COMPONENTS OF NET ASSETS AT MARCH 31, 2005:
Common Stock $0.01 par value, 200 million shares
authorized to the Fund $23,648,910
Undistributed net investment income 522,026
Accumulated net realized loss on investments (95,332)
Net unrealized appreciation of investments 1,644,141
-----------
Total net assets $25,719,745
===========
*Pre-Refunded Bonds are 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 6 in "Notes to Financial
Statements."
&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 March 31, 2005. Illiquid security
see Note 6 in "Notes to Financial Statements."
oVariable rate notes. The interest rate shown is the rate as of March 31, 2005.
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 the 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
See accompanying notes
20
DELAWARE INVESTMENTS ARIZONA MUNICIPAL INCOME FUND, INC.
March 31, 2005
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS - 148.26%
Airport Revenue Bonds - 6.89%
Phoenix Civic Improvement Corporation
Airport Revenue
Senior Lien Series A 5.00% 7/1/25 (FSA) $1,000,000 $ 1,024,920
Series B 5.25% 7/1/27 (FGIC)(AMT) 2,000,000 2,072,980
-----------
3,097,900
-----------
City General Obligation Bonds - 1.15%
DC Ranch Community Facilities
5.00% 7/15/27 (AMBAC) 500,000 517,980
-----------
517,980
-----------
Convention Center/Auditorium/Hotel Revenue Bonds - 2.29%
Arizona Tourism & Sports Authority Tax
Revenue Multipurpose Stadium Facilities
Series A 5.00% 7/1/31 (MBIA) 1,000,000 1,030,250
-----------
1,030,250
-----------
Dedicated Tax & Fees Revenue Bonds - 6.88%
Glendale Municipal Property Corporation
5.00% 7/1/33 (AMBAC) 3,000,000 3,092,820
-----------
3,092,820
-----------
Escrowed to Maturity Bonds - 10.86%
Puerto Rico Commonwealth Infrastructure
Financing Series A 5.50% 10/1/40 4,500,000 4,879,260
-----------
4,879,260
-----------
Higher Education Revenue Bonds - 5.88%
Arizona State University Certificates
of Participation (Research Infrastructure
Project) 5.00% 9/1/30 (AMBAC) 1,000,000 1,032,180
South Campus Group Student Housing
Revenue (Arizona State University South
Campus Project) 5.625% 9/1/35 (MBIA) 1,000,000 1,089,830
University of Arizona Certificates
of Participation (University of
Arizona Project) Series B
5.125% 6/1/22 (AMBAC) 500,000 522,420
-----------
2,644,430
-----------
Hospital Revenue Bonds - 19.21%
Maricopa County Industrial
Development Authority
(Catholic Healthcare West)
Series A 5.50% 7/1/26 430,000 449,621
(Mayo Clinic Hospital) 5.25% 11/15/37 2,000,000 2,084,760
Mohave County Industrial Development
Authority (Chris/Silver Ridge)
6.375% 11/1/31 (GNMA) 260,000 272,477
Scottsdale Industrial Development
Authority Hospital Revenue
(Scottsdale Healthcare) 5.80% 12/1/31 1,000,000 1,069,420
Show Low Industrial Development
Authority Hospital Revenue
(Navapache Regional Medical Center)
Series A 5.50% 12/1/17 (ACA) 1,600,000 1,661,456
University Medical Center Corporation
Arizona Hospital Revenue 5.00% 7/1/33 1,000,000 1,000,660
Yavapai County Industrial
Development Authority
(Yavapai Regional Medical Center)
5.25% 8/1/21 (RADIAN) 2,000,000 2,091,840
-----------
8,630,234
-----------
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Miscellaneous Revenue Bonds - 8.24%
Arizona School Facilities Board Revenue
(State School Improvement)
Series 2001 5.00% 7/1/19 $2,000,000 $ 2,109,180
Arizona Student Loan Acquisition
Authority Revenue Series A-1
5.90% 5/1/24 (AMT) 1,500,000 1,595,700
-----------
3,704,880
-----------
Multifamily Housing Revenue Bonds - 1.10%
Maricopa County Industrial Development
Authority Multifamily Housing Revenue
(Sly-Mar Apartments Projects)
6.10% 4/20/36 (GNMA) (AMT) 465,000 494,379
-----------
494,379
-----------
Municipal Lease Revenue Bonds - 9.54%
Greater Arizona Development Authority
Infrastructure Revenue Series A
5.00% 8/1/22 (MBIA) 500,000 525,725
Phoenix Civic Improvement Corporation
Excise Tax Senior Lien
(Municipal Courthouse Project)
Series A 5.25% 7/1/24 1,000,000 1,063,370
Prescott Valley Property Corporation
5.00% 1/1/27 (FGIC) 500,000 515,345
Tucson Certificates of Participation
5.60% 7/1/11 1,100,000 1,154,252
Yuma Municipal Property Corporation
5.00% 7/1/25 (AMBAC) 1,000,000 1,027,880
-----------
4,286,572
-----------
Political Subdivision General Obligation Bonds - 3.51%
Eagle Mountain Community Facilities
District Series A 6.40% 7/1/17 1,500,000 1,576,005
-----------
1,576,005
-----------
*Pre-Refunded Bonds - 18.15%
Arizona School Facilities Board
Certificates of Participation Series B
5.25% 9/1/19-14 (FSA) 1,000,000 1,108,170
Arizona State Transportation Board
Highway Revenue Refunding
5.75% 7/1/18-09 2,350,000 2,586,715
Arizona Water Infrastructure Finance
Authority Revenue Water Quality
Series A 5.05% 10/1/20-11 1,500,000 1,624,605
Oro Valley Municipal Property Corporation
Excise Tax 5.00% 7/1/20-11 (FGIC) 1,000,000 1,045,800
Puerto Rico Commonwealth Public
Improvement Series A
5.125% 7/1/31-11 250,000 271,810
Southern Arizona Capital Facilities
Finance Corporation
(University of Arizona Project)
5.00% 9/1/23-12 (MBIA) 1,150,000 1,247,095
Yuma Industrial Development Authority
Hospital Revenue
(Yuma Regional Medical Center)
5.00% 8/1/31-11 (FSA) 250,000 270,980
-----------
8,155,175
-----------
21
DELAWARE INVESTMENTS ARIZONA MUNICIPAL INCOME FUND, INC.
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Public Power Revenue Bonds - 3.44%
Salt River Project Arizona Agricultural
Improvement & Power District
Electric System Revenue
(Salt River Project) Series A
5.00% 1/1/31 $1,500,000 $ 1,545,045
-----------
1,545,045
-----------
School District General Obligation Bonds - 17.27%
Maricopa County School District #6
(Washington Elementary) Series A
5.375% 7/1/13 (FSA) 3,000,000 3,332,879
(Washington Elementary School
Improvement Project of 2001) Series B
5.00% 7/1/17 (FSA) 1,000,000 1,087,440
Maricopa County School District #78
(Madison Elementary)
5.00% 7/1/13 (FSA) 1,250,000 1,355,763
5.00% 7/1/14 (FSA) 825,000 896,528
Tempe Union High School District #213
5.00% 7/1/14 (FSA) 1,000,000 1,086,700
-----------
7,759,310
-----------
Single Family Housing Revenue Bonds - 4.67%
Phoenix Industrial Development Authority
Single Family Statewide
Series A 5.35% 6/1/20
(GNMA) (FNMA) (FHLMC) (AMT) 950,000 973,960
Series C 5.30% 4/1/20
(GNMA) (FNMA) (FHLMC) (AMT) 745,000 767,357
Pima County Industrial Development
Authority Single Family Mortgage
Revenue Series A 6.125% 11/1/33
(GNMA) (FNMA) (FHLMC) (AMT) 340,000 355,752
-----------
2,097,069
-----------
Territorial Revenue Bonds - 23.80%
Puerto Rico Commonwealth
Highway & Transportation Authority
Transportation Refunding Series D
5.00% 7/1/32 (FSA) 8,500,000 8,789,084
Puerto Rico Commonwealth Public
Improvement Series A 5.125% 7/1/31 500,000 513,535
Virgin Islands Public Finance Authority
Revenue Series A 6.125% 10/1/29 (ACA) 1,250,000 1,392,000
-----------
10,694,619
-----------
Water & Sewer Revenue Bonds - 5.38%
Phoenix Civic Improvement Corporation
Wastewater Systems Revenue
Junior Lien
5.00% 7/1/24 (FGIC) 1,590,000 1,640,212
5.00% 7/1/26 (FGIC) 750,000 775,508
-----------
2,415,720
-----------
TOTAL MUNICIPAL BONDS (cost $63,376,193) 66,621,648
-----------
TOTAL MARKET VALUE OF SECURITIES - 148.26%
(cost $63,376,193) $66,621,648
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES - 7.37%~ 3,314,111
LIQUIDATION VALUE OF PREFERRED STOCK - (55.63%) (25,000,000)
-----------
NET ASSETS APPLICABLE TO 2,982,200 SHARES
OUTSTANDING - 100.00% $44,935,759
===========
Net Asset Value Per Common Share
($44,935,759 / 2,982,200 Shares) $15.07
------
COMPONENTS OF NET ASSETS AT MARCH 31, 2005:
Common stock, $0.01 per value, 200 million
shares authorized to the Fund $40,838,893
Undistributed net investment income 765,316
Accumulated net realized gain on investments 86,095
Net unrealized appreciation of investments 3,245,455
-----------
Total net assets $44,935,759
===========
*Pre-Refunded Bonds are 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-funded. See Note 6 in "Notes to Financial
Statements."
~Of this amount, $2,353,234 represents cash as of March 31, 2005.
SUMMARY OF ABBREVIATIONS:
ACA - Insured by American Capital Access
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHLMC - Insured by the Federal Home Loan Mortgage Corporation
FNMA - Insured by Federal National Mortgage Association
FSA - Insured by the Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
See accompanying notes
22
DELAWARE INVESTMENTS FLORIDA INSURED MUNICIPAL INCOME FUND
March 31, 2005
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS - 151.00%
Airport Revenue Bonds - 2.83%
Dade County Aviation Revenue
Series 96B 5.60% 10/1/26 (MBIA) $1,000,000 $ 1,051,980
-----------
1,051,980
-----------
Dedicated Tax & Fees Revenue Bonds - 16.89%
Florida Department of Transportation
5.00% 7/1/31 (FGIC) 1,525,000 1,575,371
Jacksonville Sales Tax Revenue
5.00% 10/1/30 (MBIA) 1,500,000 1,547,685
Jacksonville Transportation Revenue
5.25% 10/1/29 (MBIA) 2,000,000 2,101,540
Miami Beach Resort Tax Revenue
5.50% 10/1/16 (AMBAC) 1,000,000 1,055,910
-----------
6,280,506
-----------
Higher Education Revenue Bonds - 7.73%
Florida Agriculture & Mechanical
University Revenue
(Student Apartment Facility)
5.625% 7/1/21 (MBIA) 1,250,000 1,301,463
Volusia County Educational
Facilities Authority
(Stetson University Project) Series A
5.50% 6/1/17 (MBIA) 1,500,000 1,572,630
-----------
2,874,093
-----------
Hospital Revenue Bonds - 21.82%
Escambia County Health Facilities Authority
(Florida Health Care Facilities -
VHA Program) 5.95% 7/1/20 (AMBAC) 3,075,000 3,132,810
Lee County Memorial Health
System Board of Directors
5.00% 4/1/20 (FSA) 1,000,000 1,036,120
Orange County Health Facilities
Authority Revenue
(Adventist Health Systems)
5.75% 11/15/25 (AMBAC) 1,500,000 1,553,250
(Orlando Regional Healthcare)
Series A 6.25% 10/1/18 (MBIA) 2,000,000 2,386,060
-----------
8,108,240
-----------
Miscellaneous Revenue Bonds - 2.76%
Florida State Municipal Loan
(Council Revenue) Series A
5.00% 2/1/35 (MBIA) 1,000,000 1,027,710
-----------
1,027,710
-----------
Multifamily Housing Revenue Bonds - 23.18%
Broward County Housing
Finance Authority
(St. Croix Apartments Project) Series A
5.45% 11/1/36 (FSA) (AMT) 1,000,000 1,012,080
Florida Housing Finance Agency
(Homeowner Mortgage) Series 2
5.90% 7/1/29 (MBIA) (AMT) 760,000 783,279
(Leigh Meadows Apartments Section 8)
Series N 6.30% 9/1/36 (AMBAC) (AMT) 2,510,000 2,583,493
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Multifamily Housing Revenue Bonds (continued)
(Woodbridge Apartments Project)
Series L
6.05% 12/1/16 (AMBAC) (AMT) $1,120,000 $ 1,163,635
6.25% 6/1/36 (AMBAC) (AMT) 1,500,000 1,545,375
Volusia County Multifamily Housing
Finance Authority (San Marco Apartments)
Series A 5.60% 1/1/44 (FSA) (AMT) 1,500,000 1,529,100
-----------
8,616,962
-----------
Municipal Lease Revenue Bonds - 9.62%
Broward School Board Certificates
of Participation Series A
5.25% 7/1/24 (FSA) 1,000,000 1,056,020
Orange County School Board
Certificates of Participation Series A
5.00% 8/1/27 (MBIA) 1,250,000 1,285,838
Palm Beach County School Board
Certificates of Participation Series D
5.00% 8/1/28 (FSA) 1,200,000 1,232,904
-----------
3,574,762
-----------
Ports & Harbors Revenue Bonds - 2.76%
Florida Ports Financing Commission
State Transportation Trust Fund
5.375% 6/1/27 (MBIA) (AMT) 1,000,000 1,024,640
-----------
1,024,640
-----------
*Pre-Refunded Bonds - 47.12%
Dade County School Board
Certificates of Participation Series B
5.60% 8/1/17-06 (AMBAC) 1,000,000 1,048,170
Escambia County School Board
Certificates of Participation Series 2
5.50% 2/1/22-06 (MBIA) 5,000,000 5,196,299
Florida State Board of Education
(Capital Outlay Public Education)
Series C 6.00% 6/1/21-10 (FGIC) 2,000,000 2,267,080
Indian River County Water & Sewer Revenue
5.50% 9/1/16-06 (FGIC) 1,000,000 1,054,110
Orange County Public Service Tax Revenue
6.00% 10/1/24-05 (FGIC) 3,000,000 3,113,340
Sunrise Utility System Revenue Series A
5.75% 10/1/26-06 (AMBAC) 2,500,000 2,636,700
Tampa Utility Tax Improvement Series A
6.125% 10/1/19-09 (AMBAC) 1,000,000 1,128,330
Village Center Community Development
District Recreational Revenue Series A
5.85% 11/1/16-06 (MBIA) 1,000,000 1,067,940
-----------
17,511,969
-----------
Public Power Revenue Bonds - 5.47%
JEA Electric Systems Revenue Series 3-A
5.00% 10/1/34 (FSA) 2,000,000 2,031,940
-----------
2,031,940
-----------
23
DELAWARE INVESTMENTS FLORIDA INSURED MUNICIPAL INCOME FUND
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Tax Increment/Special Assessment Bonds - 0.82%
Julington Creek Plantation Community
Development District Special Assessment
5.00% 5/1/29 (MBIA) $ 295,000 $ 303,381
-----------
303,381
-----------
Water & Sewer Revenue Bonds - 10.00%
Dade County Water & Sewer System
Revenue 5.50% 10/1/25 (FGIC) 1,100,000 1,134,441
JEA Florida Water & Sewer Systems
Revenue Sub-Second Crossover
5.00% 10/1/25 (MBIA) 1,000,000 1,038,700
Village Center Community Development
District Florida Utility Revenue
5.00% 10/1/36 (MBIA) 1,500,000 1,542,960
-----------
3,716,101
-----------
TOTAL MUNICIPAL BONDS (cost $53,141,451) 56,122,284
-----------
TOTAL MARKET VALUE OF SECURITIES - 151.00%
(cost $53,141,451) 56,122,284
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES - 2.81% 1,043,769
LIQUIDATION VALUE OF PREFERRED
STOCK - (53.81%) (20,000,000)
-----------
NET ASSETS APPLICABLE TO 2,422,200 SHARES
OUTSTANDING - 100.00% $37,166,053
===========
Net Asset Value Per Common Share
($37,166,053 / 2,422,200 Shares) $15.34
------
COMPONENTS OF NET ASSETS AT MARCH 31, 2005:
Common stock, $0.01 par value, unlimited shares
authorized to the Fund $33,361,389
Undistributed net investment income 799,507
Accumulated net realized gain on investments 24,324
Net unrealized appreciation of investments 2,980,833
-----------
Total net assets $37,166,053
===========
*Pre-Refunded Bonds are 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-funded. See Note 6 in "Notes to Financial
Statements."
SUMMARY OF ABBREVIATIONS:
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by the Financial Security Assurance
MBIA - Insured by the Municipal Bond Insurance Association
See accompanying notes
24
DELAWARE INVESTMENTS COLORADO INSURED MUNICIPAL INCOME FUND, INC.
March 31, 2005
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS - 150.37%
Airport Revenue Bonds - 10.47%
Denver City & County Airport Series E
5.25% 11/15/23 (MBIA) $7,500,000 $ 7,888,125
-----------
7,888,125
-----------
City General Obligation Bonds - 2.74%
Bowles Metropolitan District
5.00% 12/1/33 (FSA) 2,000,000 2,064,460
-----------
2,064,460
-----------
Continuing Care/Retirement Revenue Bonds - 3.56%
Colorado Health Facilities Authority Revenue
(Porter Place) Series A
6.00% 1/20/36 (GNMA) 2,515,000 2,686,322
-----------
2,686,322
-----------
Convention Center/Auditorium/Hotel Revenue Bonds - 4.08%
Denver Convention Center Series A
5.00% 12/1/33 (XLCA) 3,000,000 3,072,930
-----------
3,072,930
-----------
Dedicated Tax & Fees Revenue Bonds - 11.29%
Broomfield County Sales & Use Tax
Revenue Refunding & Improvement
Series A 5.00% 12/1/31 (AMBAC) 650,000 668,077
Denver City & County Excise Tax Revenue
(Colorado Convention Center Project)
Series A 5.00% 9/1/20 (FSA) 6,500,000 6,783,530
Golden Sales & Use Tax Revenue
Improvement Series B
5.10% 12/1/20 (AMBAC) 1,000,000 1,058,600
-----------
8,510,207
-----------
Higher Education Revenue Bonds - 33.23%
Boulder County Development Revenue
(University Corporation for Atmospheric
Research) 5.00% 9/1/26 (MBIA) 4,500,000 4,622,760
Colorado Educational & Cultural
Facilities Authority
(Johnson & Wales University Project)
Series A 5.00% 4/1/28 (XLCA) 3,000,000 3,082,590
(University of Colorado
Foundation Project)
5.00% 7/1/27 (AMBAC) 4,000,000 4,118,560
(University of Denver Project)
5.50% 3/1/21 (AMBAC) 3,200,000 3,475,136
(University of Northern Colorado)
5.00% 7/1/31 (MBIA) 2,500,000 2,554,300
Colorado Springs Revenue
(Colorado College Project)
5.375% 6/1/32 (MBIA) 5,000,000 5,339,499
Colorado State University Systems
Series B 5.00% 3/1/35 (AMBAC) 1,800,000 1,850,022
-----------
25,042,867
-----------
Hospital Revenue Bonds - 1.95%
Colorado Health Facilities Authority
(North Colorado Medical Center)
5.95% 5/15/12 (MBIA) 1,420,000 1,469,558
-----------
1,469,558
-----------
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
Multifamily Housing Revenue Bonds - 3.18%
Burlingame Multifamily Housing Revenue
Series A 6.00% 11/1/29 (MBIA) $2,290,000 $ 2,400,264
-----------
2,400,264
-----------
Municipal Lease Revenue Bonds - 15.70%
Arapahoe County Library District
Certificates of Participation
5.70% 12/15/10 (MBIA) 2,000,000 2,092,260
Aurora Certificates of Participation
5.50% 12/1/30 (AMBAC) 2,000,000 2,151,700
Broomfield City & County
Certificates of Participation
5.75% 12/1/24 (AMBAC) 1,500,000 1,639,335
Eagle County Certificates of Participation
5.40% 12/1/18 (MBIA) 1,000,000 1,076,860
Lakewood Certificates of Participation
5.375% 12/1/22 (AMBAC) 2,000,000 2,152,780
Westminster Building Authority
Certificates of Participation
5.25% 12/1/22 (MBIA) 1,555,000 1,652,887
Westminster Certificates of Participation
(Ice Centre Project)
5.40% 1/15/23 (AMBAC) 1,000,000 1,064,030
-----------
11,829,852
-----------
Parking Revenue Bonds - 3.54%
Auraria Higher Education Center
Parking Facilities System Revenue
5.50% 4/1/26 (AMBAC) 2,485,000 2,665,212
-----------
2,665,212
-----------
Political Subdivision General Obligation Bonds - 10.24%
Arapahoe County Water & Wastewater
Public Improvement District Refunding
Series A 5.125% 12/1/32 (MBIA) 1,000,000 1,038,700
Centennial Downs Metropolitan District
5.00% 12/1/28 (AMBAC) 1,000,000 1,037,590
G V R Metropolitan District
5.75% 12/1/19 (AMBAC) 1,000,000 1,095,820
Pueblo County 5.80% 6/1/11 (MBIA) 1,405,000 1,453,149
Pueblo County (Library District Project)
5.80% 11/1/19 (AMBAC) 1,395,000 1,530,664
Sand Creek Metropolitan District
Refunding & Improvement
5.00% 12/1/31 (XLCA) 500,000 512,875
Stonegate Village Metropolitan District
Refunding & Improvement Series A
5.50% 12/1/21 (FSA) 1,000,000 1,047,360
-----------
7,716,158
-----------
*Pre-Refunded Bonds - 13.85%
Archuleta & Hinsdale Counties
School District #50JT
5.55% 12/1/20-06 (MBIA) 4,000,000 4,222,520
Denver City & County Certificates
of Participation Series B
5.50% 12/1/25-10 (AMBAC) 2,000,000 2,229,940
El Paso County School District #20
5.625% 12/15/16-06 (AMBAC) 2,800,000 2,935,128
5.625% 12/15/16-06 (MBIA) 1,000,000 1,048,260
-----------
10,435,848
-----------
25
DELAWARE INVESTMENTS COLORADO INSURED MUNICIPAL INCOME FUND, INC.
STATEMENTS
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
MUNICIPAL BONDS (continued)
School District General Obligation Bonds - 10.24%
Adams & Arapahoe Counties
School District #28J
5.00% 12/1/22 (FSA) $2,000,000 $ 2,095,120
Adams County School District #1
5.00% 12/1/16 (FSA) 1,490,000 1,595,328
Douglas County School District #Re-1
(Douglas & Elbert Counties)
5.00% 12/15/21 (MBIA) 1,000,000 1,038,860
Larimer Weld & Boulder Counties
School Districts #R-2J
5.00% 12/15/15 (FSA) 1,950,000 2,117,641
Weld & Adams Counties
School District RE-3J
5.00% 12/15/24 (FSA) 830,000 869,276
-----------
7,716,225
-----------
Turnpike/Toll Road Revenue Bonds - 13.84%
E-470 Public Highway Authority Series A
5.75% 9/1/29 (MBIA) 3,000,000 3,330,900
5.75% 9/1/35 (MBIA) 1,700,000 1,887,510
Northwest Parkway Public Highway
Authority Series A 5.25% 6/15/41 (FSA) 5,000,000 5,214,500
-----------
10,432,910
-----------
Water & Sewer Revenue Bonds - 12.46%
Colorado Water Resources & Power
Development Authority Small
Water Resources Revenue Series A
5.80% 11/1/20 (FGIC) 2,000,000 2,212,160
Colorado Water Resources & Power
Development Authority Water
Resources Revenue
(Parker Water & Sanitation District)
5.125% 9/1/34 (MBIA) 1,500,000 1,564,125
5.25% 9/1/43 (MBIA) 2,000,000 2,098,680
Lafayette Water Revenue Series A
5.00% 12/1/27 (MBIA) 1,100,000 1,140,238
Ute Utility Water Conservancy District
Water Revenue 5.75% 6/15/20 (MBIA) 2,155,000 2,377,418
-----------
9,392,621
-----------
TOTAL MUNICIPAL BONDS (cost $106,882,293) 113,323,559
-----------
SHORT-TERM INVESTMENTS - 0.66%
Variable Rate Demand Notes - 0.66%
oColorado Health Facilities Authority
Revenue 2.28% 12/1/20 500,000 500,000
-----------
TOTAL SHORT-TERM INVESTMENTS (cost $500,000) 500,000
-----------
TOTAL MARKET VALUE OF SECURITIES - 151.03%
(cost $107,382,293) $113,823,559
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES - 2.05% 1,540,463
LIQUIDATION VALUE OF PREFERRED STOCK - (53.08%) (40,000,000)
------------
NET ASSETS APPLICABLE TO 4,837,100 SHARES
OUTSTANDING - 100.00% $75,364,022
===========
Net Asset Value Per Common Share
($75,364,022 / 4,837,100 Shares) $15.58
------
COMPONENTS OF NET ASSETS AT MARCH 31, 2005:
Common stock, $0.01 par value, 200 million shares
authorized to the Fund $67,238,110
Undistributed net investment income 1,685,741
Accumulated net realized loss on investments (1,095)
Net unrealized appreciation of investments 6,441,266
-----------
Total net assets $75,364,022
===========
*Pre-Refunded Bonds are 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-funded. See Note 6 in "Notes to Financial
Statements."
oVariable rate notes. The interest rate shown is the rate as of March 31, 2005.
SUMMARY OF ABBREVIATIONS:
AMBAC - Insured by the AMBAC Assurance Corporation
FGIC - Insured by the Financial Guaranty - Insured by the Federal Housing
Administration
FSA - Insured by the Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
MBIA - Insured by the Municipal Bond Insurance Association
XLCA - Insured by XL Capital Assurance
See accompanying notes
26
STATEMENTS DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
OF OPERATIONS Year Ended March 31, 2005
Delaware Delaware Delaware
Investments Investments Investments
Minnesota Minnesota Minnesota
Municipal Municipal Municipal
Income Income Income
Fund, Inc. Fund II, Inc. Fund III, Inc.
INVESTMENT INCOME:
Interest $2,805,252 $8,517,640 $2,110,341
---------- ---------- ----------
EXPENSES:
Management fees 232,006 674,164 163,520
Accounting and administration expenses 85,000 85,000 60,500
Remarketing Agent fees 50,354 150,815 37,070
Dividend disbursing and transfer agent fees and expenses 40,318 58,423 21,842
Legal and professional fees 38,703 47,348 32,198
Rating Agency fees 9,000 6,416 9,417
Reports and statements to shareholders 7,387 22,481 7,868
Taxes (other than taxes on income) 6,948 17,237 3,760
Directors'/Trustees' Fees 4,571 7,953 3,915
Pricing fees 3,454 5,973 2,192
Custodian fees 2,279 4,888 1,728
Stock exchange fees 2,258 6,282 1,595
Other 995 2,988 1,444
---------- ---------- ----------
483,273 1,089,968 347,049
Less expenses paid indirectly (2,197) (4,763) (1,712)
---------- ---------- ----------
Total expenses 481,076 1,085,205 345,337
---------- ---------- ----------
NET INVESTMENT INCOME 2,324,176 7,432,435 1,765,004
---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 268,227 257,523 114,703
Net change in unrealized appreciation/depreciation of investments (1,027,949) (2,017,417) (762,302)
---------- ---------- ----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (759,722) (1,759,894) (647,599)
---------- ---------- ----------
DIVIDENDS ON PREFERRED STOCK (305,320) (927,702) (235,128)
---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,259,134 $4,744,839 $ 882,277
========== ========== ==========
See accompanying notes
27
STATEMENTS DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
OF OPERATIONS (CONTINUED)
Delaware Delaware Delaware
Investments Investments Investments
Arizona Florida Insured Colorado Insured
Municipal Municipal Municipal
Income Income Income
Fund, Inc. Fund Fund, Inc.
INVESTMENT INCOME:
Interest $3,387,872 $3,030,906 $5,710,088
---------- ---------- ----------
EXPENSES:
Management fees 280,164 231,637 463,133
Accounting and administration expenses 85,000 85,000 85,000
Remarketing Agent fees 62,851 50,299 101,094
Legal and professional fees 38,420 41,301 42,866
Dividend disbursing and transfer agent fees and expenses 22,475 26,477 28,880
Reports and statements to shareholders 15,262 13,189 22,806
Rating Agency fees 12,381 11,663 11,884
Taxes (other than taxes on income) 6,424 695 9,725
Directors'/Trustees' Fees 3,163 5,156 6,105
Custodian fees 2,861 2,213 3,909
Pricing fees 2,759 2,369 3,391
Stock exchange fees 1,970 2,742 6,244
Other 1,655 1,046 298
---------- ---------- ----------
535,385 473,787 785,335
Less expenses paid indirectly (2,861) (2,156) (3,586)
---------- ---------- ----------
Total expenses 532,524 471,631 781,749
---------- ---------- ----------
NET INVESTMENT INCOME 2,855,348 2,559,275 4,928,339
---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 83,408 286,142 80,722
Net change in unrealized appreciation/depreciation of investments (1,080,216) (1,915,443) (2,143,648)
---------- ---------- ----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (996,808) (1,629,301) (2,062,926)
---------- ---------- ----------
DIVIDENDS ON PREFERRED STOCK (361,013) (297,142) (615,308)
---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,497,527 $ 632,832 $2,250,105
========== ========== ==========
See accompanying notes
28
STATEMENTS DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
OF CHANGES IN NET ASSETS
Delaware Delaware
Investments Minnesota Investments Minnesota
Municipal Income Municipal Income
Fund, Inc. Fund II, Inc.
Year Ended Year Ended
3/31/05 3/31/04 3/31/05 3/31/04
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 2,324,176 $ 2,592,109 $ 7,432,435 $ 7,924,672
Net realized gain on investments 268,227 650,891 257,523 1,299,317
Net change in unrealized appreciation/depreciation of investments (1,027,949) (316,556) (2,017,417) 221,686
Dividends on preferred stock (305,320) (262,664) (927,702) (595,374)
----------- ----------- ------------ ------------
Net increase in net assets resulting from operations 1,259,134 2,663,780 4,744,839 8,850,301
----------- ----------- ------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (2,471,452) (2,432,531) (7,614,810) (7,234,070)
Net realized gain on investments (28,542) (1,375,191) -- --
----------- ----------- ------------ ------------
(2,499,994) (3,807,722) (7,614,810) (7,234,070)
----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS (1,240,860) (1,143,942) (2,869,971) 1,616,231
NET ASSETS:
Beginning of period 38,978,454 40,122,396 110,827,846 109,211,615
----------- ----------- ------------ ------------
End of period $37,737,594 $38,978,454 $107,957,875 $110,827,846
=========== =========== ============ ============
Undistributed net investment income $389,101 $805,302 $2,250,617 $3,358,447
======== ======== ========== ==========
Delaware Delaware
Investments Minnesota Investments Arizona
Municipal Income Municipal Income
Fund III, Inc. Fund, Inc.
Year Ended Year Ended
3/31/05 3/31/04 3/31/05 3/31/04
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,765,004 $ 1,898,759 $ 2,855,348 $ 3,042,361
Net realized gain on investments 114,703 562,903 83,408 315,397
Net change in unrealized appreciation/depreciation of investments (762,302) (350,631) (1,080,216) 501,711
Dividends on preferred stock (235,128) (152,709) (361,013) (271,690)
----------- ----------- ----------- -----------
Net increase in net assets resulting from operations 882,277 1,958,322 1,497,527 3,587,779
----------- ----------- ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (1,763,712) (1,616,736) (2,862,911) (2,862,912)
Net realized gain on investments -- -- (128,235) (462,241)
----------- ----------- ----------- -----------
(1,763,712) (1,616,736) (2,991,146) (3,325,153)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS (881,435) 341,586 (1,493,619) 262,626
NET ASSETS:
Beginning of period 26,601,180 26,259,594 46,429,378 46,166,752
----------- ----------- ----------- -----------
End of period $25,719,745 $26,601,180 $44,935,759 $46,429,378
=========== =========== =========== ===========
Undistributed net investment income $522,026 $758,251 $765,316 $1,126,683
======== ======== ======== ==========
See accompanying notes
29
DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
STATEMENTS
OF CHANGES IN NET ASSETS (CONTINUED)
Delaware Delaware
Investments Florida Investments Colorado
Insured Municipal Insured Municipal
Income Fund Income Fund, Inc.
Year Ended Year Ended
3/31/05 3/31/04 3/31/05 3/31/04
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 2,559,275 $ 2,634,312 $ 4,928,339 $ 5,047,366
Net realized gain on investments 286,142 52,390 80,722 223,885
Net change in unrealized appreciation/depreciation of investments (1,915,443) (362,616) (2,143,648) 1,336,193
Dividends on preferred stock (297,142) (209,938) (615,308) (435,224)
----------- ----------- ----------- -----------
Net increase in net assets resulting from operations 632,832 2,114,148 2,250,105 6,172,220
----------- ----------- ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (2,470,644) (2,410,089) (4,643,616) (4,643,616)
Net realized gain on investments (239,798) (111,421) (145,113) (614,312)
----------- ----------- ----------- -----------
(2,710,442) (2,521,510) (4,788,729) (5,257,928)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS (2,077,610) (407,362) (2,538,624) 914,292
NET ASSETS:
Beginning of period 39,243,663 39,651,025 77,902,646 76,988,354
----------- ----------- ----------- -----------
End of period $37,166,053 $39,243,663 $75,364,022 $77,902,646
=========== =========== =========== ===========
Undistributed net investment income $799,507 $985,998 $1,685,741 $2,003,077
======== ======== ========== ==========
30
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
------------------------------------------------------------------------------------------------------------------------
Delaware Investments Minnesota Municipal Income Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
Year Ended
3/31/05 3/31/04 3/31/03 3/31/02(1) 3/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $15.020 $15.460 $14.640 $14.790 $14.060
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.896 0.999 1.119 1.191 1.155
Net realized and unrealized gain (loss) on investments (0.294) 0.130 0.758 (0.323) 0.732
Dividends on preferred stock from:
Net investment income (0.117) (0.054) (0.094) (0.178) (0.317)
Net realized gain on investments (0.001) (0.047) (0.008) -- --
------- ------- ------- ------- -------
Total dividends on preferred stock (0.118) (0.101) (0.102) (0.178) (0.317)
------- ------- ------- ------- -------
Total from investment operations 0.484 1.028 1.775 0.690 1.570
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (0.953) (0.938) (0.890) (0.840) (0.840)
Net realized gain on investments (0.011) (0.530) (0.065) -- --
------- ------- ------- ------- -------
Total dividends and distributions (0.964) (1.468) (0.955) (0.840) (0.840)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $14.540 $15.020 $15.460 $14.640 $14.790
======= ======= ======= ======= =======
MARKET VALUE, END OF PERIOD $15.070 $16.600 $16.000 $14.450 $14.300
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value (3.52%) 13.86% 17.74% 7.00% 12.09%
Net asset value 2.88% 6.62% 12.29% 4.81% 11.83%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period
(000 omitted) $37,738 $38,978 $40,122 $37,996 $33,386
Ratio of expenses to average net assets applicable to
common shares(3) 1.27% 1.20% 1.21% 1.13% 1.23%
Ratio of net investment income to average net assets
applicable to common shares(3) 6.12% 6.57% 7.35% 8.00% 8.22%
Ratio of net investment income to average net assets
applicable to common shares net of dividends to
preferred shares(4) 5.31% 5.90% 6.68% 6.84% 6.00%
Portfolio turnover 12% 50% 38% 15% 6%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding (000 omitted) $20,000 $20,000 $20,000 $20,000 $20,000
Net asset coverage per share of preferred shares, end
of period $144,344 $147,445 $150,306 $144,989 $145,964
Liquidation value per share of preferred shares(5) $50,000 $50,000 $50,000 $50,000 $50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the year ended March 31, 2002 was an increase in net
investment income per share of $0.006, a decrease in net realized and
unrealized gain (loss) per share of $0.006, and an increase in the ratio of
net investment income to average net assets of 0.04%. Per share data and
ratios for periods prior to April 1, 2001 have not been restated to reflect
this change in accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed for
the purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on net asset value will be lower than total investment return based on
market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of such periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders from net investment income divided by average net assets
applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
See accompanying notes
31
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
-------------------------------------------------------------------------------------------------------------------------
Delaware Investments Minnesota Municipal Income Fund II, Inc.
-------------------------------------------------------------------------------------------------------------------------
Year Ended
3/31/05 3/31/04 3/31/03 3/31/02(1) 3/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $15.280 $15.060 $14.280 $14.450 $13.590
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 1.025 1.093 1.143 1.163 1.168
Net realized and unrealized gain (loss) on investments (0.237) 0.207 0.689 (0.313) 0.850
Dividends on preferred stock from:
Net investment income (0.128) (0.082) (0.112) (0.182) (0.340)
------- ------- ------- ------- -------
Total dividends on preferred stock (0.128) (0.082) (0.112) (0.182) (0.340)
------- ------- ------- ------- -------
Total from investment operations 0.660 1.218 1.720 0.668 1.678
------- ------- ------- ------- -------
LESS DIVIDENDS TO COMMON SHAREHOLDERS FROM:
Net investment income (1.050) (0.998) (0.940) (0.838) (0.818)
------- ------- ------- ------- -------
Total dividends (1.050) (0.998) (0.940) (0.838) (0.818)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $14.890 $15.280 $15.060 $14.280 $14.450
======= ======= ======= ======= =======
MARKET VALUE, END OF PERIOD $16.370 $16.800 $15.300 $14.050 $14.080
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value 4.02% 16.87% 15.84% 5.75% 20.37%
Net asset value 4.03% 7.99% 12.19% 4.73% 13.06%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period
(000 omitted) $107,958 $110,828 $109,212 $103,573 $104,775
Ratio of expenses to average net assets applicable to
common shares(3) 1.00% 0.93% 1.03% 1.06% 1.01%
Ratio of net investment income to average net assets
applicable to common shares(3) 6.85% 7.23% 7.74% 8.03% 8.42%
Ratio of net investment income to average net assets
applicable to common shares net of dividends to
preferred shares(4) 6.00% 6.69% 6.99% 6.79% 5.96%
Portfolio turnover 15% 34% 22% 7% 3%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding (000 omitted) $60,000 $60,000 $60,000 $60,000 $60,000
Net asset coverage per share of preferred shares, end
of period $139,965 $142,357 $141,010 $136,311 $137,312
Liquidation value per share of preferred shares(5) $50,000 $50,000 $50,000 $50,000 $50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the year ended March 31, 2002 was an increase in net
investment income per share of $0.003, a decrease in net realized and
unrealized gain (loss) per share of $0.003, and an increase in the ratio of
net investment income to average net assets of 0.02%. Per share data and
ratios for periods prior to April 1, 2001 have not been restated to reflect
this change in accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed for
the purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on net asset value will be lower than total investment return based on
market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of such periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders from net investment income divided by average net assets
applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
See accompanying notes
32
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
-------------------------------------------------------------------------------------------------------------------------
Delaware Investments Minnesota Municipal Income Fund III, Inc.
-------------------------------------------------------------------------------------------------------------------------
Year Ended
3/31/05 3/31/04 3/31/03 3/31/02(1) 3/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $14.480 $14.290 $13.230 $13.420 $12.560
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.961 1.034 1.084 1.064 1.065
Net realized and unrealized gain (loss) on investments (0.353) 0.119 0.918 (0.306) 0.889
Dividends on preferred stock from:
Net investment income (0.128) (0.083) (0.112) (0.183) (0.336)
------- ------- ------- ------- -------
Total dividends on preferred stock (0.128) (0.083) (0.112) (0.183) (0.336)
------- ------- ------- ------- -------
Total from investment operations 0.480 1.070 1.890 0.575 1.618
------- ------- ------- ------- -------
LESS DIVIDENDS TO COMMON SHAREHOLDERS FROM:
Net investment income (0.960) (0.880) (0.830) (0.765) (0.758)
------- ------- ------- ------- -------
Total dividends (0.960) (0.880) (0.830) (0.765) (0.758)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $14.000 $14.480 $14.290 $13.230 $13.420
======= ======= ======= ======= =======
MARKET VALUE, END OF PERIOD $15.620 $16.160 $14.800 $13.000 $13.000
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value 3.00% 15.76% 20.72% 5.93% 17.57%
Net asset value 3.03% 7.43% 14.53% 4.43% 13.54%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period
(000 omitted) $25,720 $26,601 $26,260 $24,306 $24,659
Ratio of expenses to average net assets applicable to
common shares(3) 1.33% 1.23% 1.32% 1.49% 1.42%
Ratio of net investment income to average net assets
applicable to common shares(3) 6.82% 7.20% 7.80% 7.88% 8.30%
Ratio of net investment income to average net assets
applicable to common shares net of dividends to
preferred shares(4) 5.92% 6.62% 6.99% 6.56% 5.68%
Portfolio turnover 12% 41% 23% 5% 5%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding (000 omitted) $15,000 $15,000 $15,000 $15,000 $15,000
Net asset coverage per share of preferred shares, end
of period $135,732 $138,670 $137,532 $131,007 $132,197
Liquidation value per share of preferred shares(5) $50,000 $50,000 $50,000 $50,000 $50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the year ended March 31, 2002 was an increase in net
investment income per share of $0.007, a decrease in net realized and
unrealized gain (loss) per share of $0.007, and an increase in the ratio of
net investment income to average net assets of 0.04%. Per share data and
ratios for periods prior to April 1, 2001 have not been restated to reflect
this change in accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed for
the purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on net asset value will be lower than total investment return based on
market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of such periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders from net investment income divided by average net assets
applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
See accompanying notes
33
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
-----------------------------------------------------------------------------------------------------------------------
Delaware Investments Arizona Municipal Income Fund, Inc.
-----------------------------------------------------------------------------------------------------------------------
Year Ended
3/31/05 3/31/04 3/31/03 3/31/02(1) 3/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $15.570 $15.480 $14.650 $14.970 $14.000
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.956 1.020 1.067 1.113 1.124
Net realized and unrealized gain (loss) on investments (0.332) 0.276 0.988 (0.257) 0.965
Dividends on preferred stock from:
Net investment income (0.118) (0.075) (0.103) (0.164) (0.346)
Net realized gain on investments (0.003) (0.016) (0.018) (0.051) --
------- ------- ------- ------- -------
Total dividends on preferred stock (0.121) (0.091) (0.121) (0.215) (0.346)
------- ------- ------- ------- -------
Total from investment operations 0.503 1.205 1.934 0.641 1.743
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (0.960) (0.960) (0.940) (0.817) (0.773)
Net realized gain on investments (0.043) (0.155) (0.164) (0.144) --
------- ------- ------- ------- -------
Total dividends and distributions (1.003) (1.115) (1.104) (0.961) (0.773)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $15.070 $15.570 $15.480 $14.650 $14.970
======= ======= ======= ======= =======
MARKET VALUE, END OF PERIOD $15.390 $16.560 $15.490 $14.750 $14.250
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value (0.78%) 14.64% 12.74% 10.22% 19.28%
Net asset value 3.34% 7.86% 13.44% 4.21% 13.00%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period
(000 omitted) $44,936 $46,429 $46,167 $43,703 $44,637
Ratio of expenses to average net assets applicable to
common shares(3) 1.18% 1.05% 1.16% 1.19% 1.18%
Ratio of net investment income to average net assets
applicable to common shares(3) 6.34% 6.63% 6.96% 7.41% 7.86%
Ratio of net investment income to average net assets
applicable to common shares net of dividends to
preferred shares(4) 5.54% 6.04% 6.18% 5.99% 5.44%
Portfolio turnover 8% 30% 24% 43% 24%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding (000 omitted) $25,000 $25,000 $25,000 $25,000 $25,000
Net asset coverage per share of preferred shares, end
of period $139,872 $142,858 $142,334 $137,405 $139,274
Liquidation value per share of preferred shares(5) $50,000 $50,000 $50,000 $50,000 $50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the year ended March 31, 2002 was an increase in net
investment income per share of $0.002, a decrease in net realized and
unrealized gain (loss) per share of $0.002, and an increase in the ratio of
net investment income to average net assets of 0.02%. Per share data and
ratios for periods prior to April 1, 2001 have not been restated to reflect
this change in accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed for
the purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on net asset value will be lower than total investment return based on
market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of such periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders from net investment income divided by average net assets
applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
See accompanying notes
34
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
---------------------------------------------------------------------------------------------------------------------------
Delaware Investments Florida Insured Municipal Income Fund, Inc.
---------------------------------------------------------------------------------------------------------------------------
Year Ended
3/31/05 3/31/04 3/31/03 3/31/02(1) 3/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $16.200 $16.370 $15.150 $15.400 $14.340
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 1.057 1.088 1.084 1.071 1.087
Net realized and unrealized gain (loss) on investments (0.675) (0.130) 1.186 (0.337) 1.068
Dividends on preferred stock from:
Net investment income (0.114) (0.082) (0.109) (0.179) (0.337)
Net realized gain on investments (0.009) (0.005) -- -- --
------- ------- ------- ------- -------
Total dividends on preferred stock (0.123) (0.087) (0.109) (0.179) (0.337)
------- ------- ------- ------- -------
Total from investment operations 0.259 0.871 2.161 0.555 1.818
------- ------- ------- ------- -------
LESS DIVIDENDS TO COMMON SHAREHOLDERS FROM:
Net investment income (1.020) (0.995) (0.941) (0.805) (0.758)
Net realized gain on investments (0.099) (0.046) -- -- --
------- ------- ------- ------- -------
Total dividends (1.119) (1.041) (0.941) (0.805) (0.758)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $15.340 $16.200 $16.370 $15.150 $15.400
======= ======= ======= ======= =======
MARKET VALUE, END OF PERIOD $15.050 $16.650 $15.050 $14.020 $13.180
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value (3.02%) 18.04% 14.17% 12.63% 19.06%
Net asset value 1.59% 5.59% 14.92% 4.16% 13.99%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period
(000 omitted) $37,166 $39,244 $39,651 $36,696 $37,300
Ratio of expenses to average net assets applicable to
common shares(3) 1.24% 1.11% 1.18% 1.34% 1.32%
Ratio of net investment income to average net assets
applicable to common shares(3) 6.75% 6.70% 6.81% 6.95% 7.38%
Ratio of net investment income to average net assets
applicable to common shares net of dividends to
preferred shares(4) 5.97% 6.16% 6.13% 5.79% 5.10%
Portfolio turnover 11% 3% 13% 13% 8%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding (000 omitted) $20,000 $20,000 $20,000 $20,000 $20,000
Net asset coverage per share of preferred shares, end
of period $142,915 $148,110 $149,128 $141,740 $143,249
Liquidation value per share of preferred shares(5) $50,000 $50,000 $50,000 $50,000 $50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. This change
in accounting had no effect on the Fund's results of operations for the year
ended March 31, 2002. Per share data and ratios for the periods prior to
April 1, 2001 have not been restated to reflect this change in accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed for
the purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on net asset value will be lower than total investment return based on
market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of such periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders from net investment income divided by average net assets
applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
See accompanying notes
35
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
---------------------------------------------------------------------------------------------------------------------------
Delaware Investments Colorado Insured Municipal Income Fund, Inc.
--------------------------------------------------------------------------------------------------------------------------
Year Ended
3/31/05 3/31/04 3/31/03 3/31/02(1) 3/31/01
NET ASSET VALUE, BEGINNING OF PERIOD $16.110 $15.920 $14.780 $15.260 $13.870
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 1.019 1.043 1.068 1.094 1.105
Net realized and unrealized gain (loss) on investments (0.432) 0.324 1.324 (0.401) 1.373
Dividends on preferred stock from:
Net investment income (0.124) (0.077) (0.098) (0.172) (0.342)
Net realized gain on investments (0.003) (0.013) (0.023) (0.051) --
------- ------- ------- ------- -------
Total dividends on preferred stock (0.127) (0.090) (0.121) (0.223) (0.342)
------- ------- ------- ------- -------
Total from investment operations 0.460 1.277 2.271 0.470 2.136
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (0.960) (0.960) (0.940) (0.818) (0.746)
Net realized gain on investments (0.030) (0.127) (0.191) (0.132) --
------- ------- ------- ------- -------
Total dividends and distributions (0.990) (1.087) (1.131) (0.950) (0.746)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $15.580 $16.110 $15.920 $14.780 $15.260
======= ======= ======= ======= =======
MARKET VALUE, END OF PERIOD $17.180 $16.960 $16.650 $14.700 $14.560
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value 7.42% 8.76% 21.31% 7.52% 22.42%
Net asset value 2.56% 8.05% 15.37% 3.15% 16.21%
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period
(000 omitted) $75,364 $77,903 $76,988 $71,506 $73,817
Ratio of expenses to average net assets applicable to
common shares(3) 1.03% 1.01% 1.05% 1.01% 1.06%
Ratio of net investment income to average net assets
applicable to common shares(3) 6.51% 6.54% 6.83% 7.18% 7.68%
Ratio of net investment income to average net assets
applicable to common shares net of dividends to
preferred shares(4) 5.69% 5.98% 6.08% 5.71% 5.31%
Portfolio turnover 5% 13% 14% 37% 56%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding (000 omitted) $40,000 $40,000 $40,000 $40,000 $40,000
Net asset coverage per share of preferred shares, end
of period $144,205 $147,379 $146,235 $139,382 $142,272
Liquidation value per share of preferred shares(5) $50,000 $50,000 $50,000 $50,000 $50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. This change
in accounting had no effect on the Fund's results of operations for the year
ended March 31, 2002. Per share data and ratios for the periods prior to
April 1, 2001 have not been restated to reflect this change in accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed for
the purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on net asset value will be lower than total investment return based on
market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of such periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders from net investment income divided by average net assets
applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
See accompanying notes
36
NOTES DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS March 31, 2005
Delaware Investments Minnesota Municipal Income Fund, Inc. ("Minnesota Municipal
Fund"); Delaware Investments Minnesota Municipal Income Fund II, Inc.
("Minnesota Municipal Fund II"); Delaware Investments Minnesota Municipal Income
Fund III, Inc. ("Minnesota Municipal Fund III"); Delaware Investments Arizona
Municipal Income Fund, Inc. ("Arizona Municipal Fund"); and Delaware Investments
Colorado Insured Municipal Income Fund, Inc. ("Colorado Insured Municipal Fund")
are organized as Minnesota corporations and Delaware Investments Florida Insured
Municipal Income Fund ("Florida Insured Municipal Income Fund") is organized as
a Massachusetts Business Trust (each referred to as a "Fund" and collectively as
the "Funds"). The Minnesota Municipal Fund II, Florida Insured Municipal Fund
and Arizona Municipal Fund are diversified closed-end management investment
companies and Minnesota Municipal Fund, Minnesota Municipal Fund III and
Colorado Insured Municipal Fund are non-diversified closed-end management
investment companies under the Investment Company Act of 1940, as amended. The
Funds' shares trade on the American Stock Exchange.
The investment objective of each Fund is to provide high current income exempt
from federal income tax and from the personal income tax of its state, if any,
consistent with the preservation of capital. Florida Insured Municipal Fund will
generally seek investments that will enable its shares to be exempt from
Florida's intangible personal property tax. Each Fund will seek to achieve its
investment objective by investing substantially all of its net assets in
investment grade, tax-exempt municipal obligations of its respective state.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Funds.
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 Funds' Board of
Trustees/Directors.
Federal Income Taxes -- Each 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 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).
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. Each 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 Funds 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
Funds and received by shareholders on the earlier of the date paid or December
31 of the prior year.
Expenses Paid Indirectly -- The Funds receive earnings credits from their
custodian when positive cash balances are maintained, which are used to offset
custody fees. The expense paid under the above arrangement is included in
custodian fees on the Statements of Operations with the corresponding expense
offset shown as expenses paid indirectly. The amount of the expense for each
Fund for the year ended March 31, 2005 was as follows:
Minnesota Minnesota Minnesota Arizona Florida Insured Colorado Insured
Municipal Municipal Municipal Municipal Municipal Municipal
Fund Fund II Fund III Fund Fund Fund
--------- --------- --------- --------- --------------- ------------------
Earnings credits $2,197 $4,763 $1,712 $2,861 $2,156 $3,586
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its respective investment management agreement,
each Fund pays Delaware Management Company (DMC), a series of Delaware
Management Business Trust and the investment manager, an annual fee of 0.40%
which is calculated daily based on the average daily net assets of each Fund,
including assets attributable to any preferred stock that may be outstanding.
As of September 1, 2004, DMC has voluntarily agreed to waive that portion, if
any, of its management fee and reimburse the Minnesota Municipal Fund to the
extent necessary to ensure that annual operating expenses, exclusive of taxes,
interest, brokerage commissions, remarketing and rating agency fees, certain
insurance costs and extraordinary expenses, do not exceed 0.72% of average daily
net assets of the Fund, including assets attributable to any preferred stock
that may be outstanding, through September 30, 2005. This waiver may be revoked
at any time.
The Funds have engaged Delaware Service Company, Inc., (DSC), an affiliate of
DMC, to provide accounting and administration services which are based on
average net assets and paid on a monthly basis, subject to certain minimums.
37
NOTES DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
At March 31, 2005, the Funds had liabilities payable to affiliates as follows:
Minnesota Minnesota Minnesota Arizona Florida Insured Colorado Insured
Municipal Municipal Municipal Municipal Municipal Municipal
Fund Fund II Fund III Fund Fund Fund
--------- --------- --------- ---------- --------------- ----------------
Investment management fee payable to DMC $19,357 $56,242 $13,631 $23,429 $19,109 $38,639
Accounting, administration, and
other expenses payable to DSC 15,125 16,903 22,735 15,302 15,741 16,704
Other expenses payable to DMC and affiliates* 6,388 15,336 3,844 7,292 3,410 9,569
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Funds and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, stock exchange fees, custodian fees, and director/trustees fees.
As provided in the investment management agreement, the Funds bear the cost of
certain legal services expenses, including internal legal services provided to
the Funds by DMC employees. For the year ended March 31, 2005, the Delaware
Investments Minnesota Municipal Income Fund, Delaware Investments Minnesota
Municipal Income Fund II, Delaware Investments Minnesota Municipal Income Fund
III, Delaware Investments Arizona Municipal Income Fund, Delaware Investments
Florida Insured Municipal Income Fund, and Delaware Investments Colorado Insured
Municipal Income Fund were charged $1,263, $2,959, $765, $1,230, $1,064, and
$2,209, respectively, for internal legal services provided by DMC.
Certain officers of DMC and DSC are officers, and or directors/trustees of the
Funds. These officers and directors/trustees are paid no compensation by the
Funds.
3. INVESTMENTS
For the year ended March 31, 2005, the Funds made purchases and sales of
investment securities other than short-term investments as follows:
Minnesota Minnesota Minnesota Arizona Florida Insured Colorado Insured
Municipal Municipal Municipal Municipal Municipal Municipal
Fund Fund II Fund III Fund Fund Fund
---------- ----------- ---------- ----------- -------------- ----------------
Purchases $6,788,141 $24,615,474 $4,725,790 $5,794,702 $6,003,561 $5,996,702
Sales 7,483,510 28,404,831 5,829,100 7,485,212 6,458,760 6,507,750
At March 31, 2005, the cost of investments and unrealized appreciation
(depreciation) for federal income tax purposes for each Fund were as follows:
Minnesota Minnesota Minnesota Arizona Florida Insured Colorado Insured
Municipal Municipal Municipal Municipal Municipal Municipal
Fund Fund II Fund III Fund Fund Fund
----------- ------------ ----------- ----------- --------------- ----------------
Cost of investments $55,128,768 $157,691,301 $38,006,719 $63,354,559 $53,141,451 $107,383,388
=========== ============ =========== =========== =========== ============
Aggregate unrealized appreciation $ 2,121,448 $ 7,168,613 $ 1,868,447 $ 3,421,433 $ 2,995,979 $ 6,505,219
Aggregate unrealized depreciation (209,015) (611,131) (102,935) (154,344) (15,146) (65,048)
----------- ------------ ----------- ----------- ----------- ------------
Net unrealized appreciation $ 1,912,433 $ 6,557,482 $ 1,765,512 $ 3,267,089 $ 2,980,833 $ 6,440,171
=========== ============ =========== =========== =========== ============
38
NOTES DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The tax character of dividends and distributions paid during the years
ended March 31, 2005 and 2004 was as follows:
Minnesota Municipal Fund Minnesota Municipal Fund II
------------------------- ---------------------------
3/31/05 3/31/04 3/31/05 3/31/04
Tax-exempt income $2,744,238 $2,538,026 $8,535,622 $7,775,641
Ordinary income 30,198 122,453 6,890 53,803
Long-term capital gain 30,878 1,409,907 -- --
---------- ---------- ---------- ----------
Total $2,805,314 $4,070,386 $8,542,512 $7,829,444
========== ========== ========== ==========
Minnesota Municipal Fund III Arizona Municipal Fund
---------------------------- --------------------------
3/31/05 3/31/04 3/31/05 3/31/04
Tax-exempt income $1,998,840 $1,750,401 $3,210,970 $3,072,779
Ordinary Income -- 19,044 84,725 178,072
Long-term capital gain -- -- 56,464 345,992
---------- ---------- ---------- ----------
Total $1,998,840 $1,769,445 $3,352,159 $3,596,843
========== ========== ========== ==========
Florida Insured Municipal Fund Colorado Insured Municipal Fund
------------------------------ -------------------------------
3/31/05 3/31/04 3/31/05 3/31/04
Tax-exempt income $2,745,766 $2,608,022 $5,245,675 $5,016,217
Ordinary Income -- -- 14,636 63,831
Long-term capital gain 261,818 123,426 143,726 613,104
---------- ---------- ---------- ----------
Total $3,007,584 $2,731,448 $5,404,037 $5,693,152
========== ========== ========== ==========
As of March 31, 2005, the components of net assets on a tax basis were as
follows:
Minnesota Municipal Fund Minnesota Municipal Fund II Minnesota Municipal Fund III
------------------------ --------------------------- ----------------------------
Paid in capital $35,426,619 $ 99,710,000 $23,648,910
Undistributed tax-exempt income 389,101 2,250,617 522,026
Undistributed long-term gains 9,441 -- --
Capital loss carry forward -- (560,224) (216,703)
Unrealized appreciation 1,912,433 6,557,482 1,765,512
----------- ------------ -----------
Net assets $37,737,594 $107,957,875 $25,719,745
=========== ============ ===========
Arizona Municipal Fund Florida Insured Municipal Fund Colorado Insured Municipal Fund
---------------------- ------------------------------ -------------------------------
Paid in capital $40,838,893 $33,361,389 $67,238,110
Undistributed tax-exempt income 765,316 799,507 1,685,741
Undistributed long-term gains 64,461 24,324 --
Unrealized appreciation 3,267,089 2,980,833 6,440,171
----------- ----------- -----------
Net assets $44,935,759 $37,166,053 $75,364,022
=========== =========== ===========
The difference between book basis and tax basis components of net assets are
primarily attributable to tax treatment of market discounts on debt instruments.
39
NOTES DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
4. DIVIDEND AND DISTRIBUTION INFORMATION (CONTINUED)
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. For the year ended March 31,
2005, the Funds recorded the following reclassifications. Reclassifications are
primarily due to tax treatment of market discounts on certain debt instruments
and the expiration of capital loss carryforwards. Results of operations and net
assets were not affected by these reclassifications.
Minnesota Municipal Fund Minnesota Municipal Fund II Minnesota Municipal Fund III
------------------------ --------------------------- ----------------------------
Undistributed net investment income $34,059 $2,247 $(2,389)
Accumulated realized gain (loss)
on investments (34,059) (2,247) 338,608
Paid-in capital -- -- (336,219)
Arizona Municipal Fund Colorado Municipal Fund
---------------------- -----------------------
Undistributed net investment income $(3,156) $(127)
Accumulated realized gain (loss) on investments 3,156 127
For federal income tax purposes in 2005, certain Funds had accumulated capital
losses as of March 31, 2005, which may be carried forward and applied against
future capital gains. Such capital loss carryforward amounts will expire as
follows:
2006 2008 2009 2010 Total
------- -------- -------- ------ -------
Minnesota Municipal Fund II $ -- $376,004 $175,804 $8,416 $560,224
Minnesota Municipal Fund III 6,539 56,856 153,308 -- 216,703
For federal income tax purposes, in 2005 Minnesota Municipal Income Funds II and
Minnesota Municipal Income Funds III utilized $266,585 and $119,447,
respectively, of capital loss carryforwards from prior years. Capital loss
carryforward of $336,219 expired in 2005 for Minnesota Municipal Income Fund
III.
5. CAPITAL STOCK
Pursuant to their articles of incorporation, Minnesota Municipal Fund, Minnesota
Municipal Fund II, Minnesota Municipal Fund III, Arizona Municipal Fund and
Colorado Insured Municipal Fund each have 200 million shares of $0.01 par value
common shares authorized. Florida Insured Municipal Fund has been authorized to
issue an unlimited amount of $0.01 par value common shares. The Funds did not
repurchase any shares under the Share Repurchase Program during the year ended
March 31, 2005. Shares issuable under the Funds' dividend reinvestment plan are
purchased by the Funds' transfer agent, Mellon Investor Services, LLC, in the
open market.
For the year ended March 31, 2005, the Funds did not have any transactions in
common shares.
The Funds each have one million shares of $0.01 par value preferred shares
authorized, except for Florida Insured Municipal Fund, which has an unlimited
amount of $0.01 par value preferred shares authorized. Under resolutions adopted
by the Board of Directors, Minnesota Municipal Fund is allowed to issue up to
400 preferred shares, of which the entire amount was issued on August 6, 1992.
On May 14, 1993, Minnesota Municipal Fund II, Arizona Municipal Fund and Florida
Insured Municipal Fund issued 1,200, 500 and 400 preferred shares, respectively.
On December 10, 1993, Minnesota Municipal Fund III issued 300 preferred shares
and on September 23, 1993, Colorado Insured Municipal Fund issued 800 preferred
shares. The preferred shares of each Fund have a liquidation preference of
$50,000 per share plus an amount equal to accumulated but unpaid dividends.
Dividends for the outstanding preferred shares of each Fund are cumulative at a
rate established at the initial public offering and are typically reset every 28
days based on the results of an auction. Dividend rates (adjusted for any
capital gain distributions) ranged during the year ended March 31, 2005 as
follows:
Fund Low High
---- --- ----
Minnesota Municipal Fund 1.02% to 2.60%
Minnesota Municipal Fund II 1.00% to 2.40%
Minnesota Municipal Fund III 1.05% to 2.40%
Arizona Municipal Fund 0.95% to 2.30%
Florida Insured Municipal Fund 0.95% to 2.40%
Colorado Insured Municipal Fund 0.97% to 2.35%
Salomon Smith Barney, Inc. and Merrill Lynch Pierce, Fenner & Smith Inc.
(Colorado Insured Municipal Fund only), as the remarketing agents, receive an
annual fee from each of the Funds of 0.25% of the average amount of preferred
stock outstanding.
Under the 1940 Act, the Funds may not declare dividends or make other
distributions on common shares or purchase any such shares if, at the time of
the declaration, distribution or purchase, asset coverage with respect to the
outstanding preferred stock is less than 200%. The preferred shares are
redeemable at the option of the Funds, in whole or in part, on any dividend
payment date at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared. The preferred shares are also subject to mandatory
redemption at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared, if certain requirements relating to the composition of
the assets and liabilities of each Fund are not satisfied. The holders of
preferred shares have voting rights equal to the holders of common shares (one
vote per share) and will vote together with holders of common shares as a single
class. However, holders of preferred shares are also entitled to elect two of
each Fund's Directors. In addition, the 1940 Act requires that along with
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding preferred shares, voting separately as
a class, would be required to (a) adopt any plan of reorganization that would
adversely affect the preferred shares, and (b) take any action requiring a vote
of security holders pursuant of Section 13(a) of the 1940 Act, including, among
other things, changes in each of the Fund's subclassification as a closed-end
investment company or changes in their fundamental investment restrictions.
40
NOTES DELAWARE INVESTMENTS CLOSED-END MUNICIPAL BOND FUNDS
TO FINANCIAL STATEMENTS (CONTINUED)
6. CREDIT AND MARKET RISKS
The Funds concentrate their investments in securities issued by municipalities.
The value of these investments may be adversely affected by new legislation
within the states, regional or local economic conditions, and differing levels
of supply and demand for municipal bonds. Many municipalities insure repayment
for their obligations. Although bond insurance reduces the risk of loss due to
default by an issuer, such bonds remain subject to the risk that market value
may fluctuate for other reasons and there is no assurance that the insurance
company will meet its obligations. These securities have been identified in the
Statements of Net Assets.
The Funds 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 Statements of Net Assets.
The Funds may invest in advanced refunded bonds, escrow secured bonds or
defeased bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding". "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates. Bonds are considered "pre-refunded" when
the refunding issue's proceeds are escrowed only until a permitted call date or
dates on the refunded issue with the refunded issue being redeemed at that time,
including any required premium. Bonds become "defeased" when the rights and
interests of the bondholders and 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.
Each Fund may invest up to 15% of its net 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.
Such securities are denoted on the Statements of Net Assets.
7. CONTRACTUAL OBLIGATIONS
The Funds enter into contracts in the normal course of business that contain a
variety of indemnifications. The Funds' maximum exposure under these
arrangements is unknown. However, the Funds have not had prior claims or losses
pursuant to these contracts. Management has reviewed the Funds' existing
contracts and and expects the risk of loss to be remote.
8. TAX INFORMATION (UNAUDITED)
The information set forth is for each Fund's fiscal year end as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended March 31, 2005, each Fund designates distributions
paid during the year as follows:
Long-Term Ordinary Tax Total
Capital Gains Income Exempt Distributions
Distributions Distributions Income (Tax Basis)
------------- ------------- ------ --------------
Minnesota Municipal Fund 1% 1% 98% 100%
Minnesota Municipal Fund II -- 1% 99% 100%
Minnesota Municipal Fund III -- -- 100% 100%
Arizona Municipal Fund 2% 3% 95% 100%
Florida Insured Municipal Fund 9% -- 91% 100%
Colorado Insured Municipal Fund 3% -- 97% 100%
41
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors/Trustees
Delaware Investments Minnesota Municipal Income Fund, Inc.
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Delaware Investments Minnesota Municipal Income Fund III, Inc.
Delaware Investments Arizona Municipal Income Fund, Inc.
Delaware Investments Florida Insured Municipal Income Fund
Delaware Investments Colorado Insured Municipal Income Fund, Inc.
We have audited the accompanying statements of net assets of Delaware
Investments Minnesota Municipal Income Fund, Inc., Delaware Investments
Minnesota Municipal Income Fund II, Inc., Delaware Investments Minnesota
Municipal Income Fund III, Inc., Delaware Investments Arizona Municipal Income
Fund, Inc., Delaware Investments Florida Insured Municipal Income Fund and
Delaware Investments Colorado Insured Municipal Income Fund, Inc. ("the Funds"),
as of March 31, 2005, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Funds' internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of March 31, 2005, by correspondence with the custodian and
brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
respective Funds at March 31, 2005, the results of their operations for the year
then ended, the changes in their net assets for each of the two years in the
period then ended, and their financial highlights for each of the five years in
the period then ended, in conformity with U.S. generally accepted accounting
principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
May 12, 2005
42
DELAWARE INVESTMENTS FAMILY OF FUNDS
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors ("Trustees"), which
has oversight responsibility for the management of a fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor and others that perform services for the
fund. The independent fund trustees, in particular, are advocates for
shareholder interests. The following is a list of the Trustees and Officers with
certain background and related information.
NUMBER OF OTHER
PRINCIPAL PORTFOLIOS IN FUND DIRECTORSHIPS
NAME, POSITION(S) OCCUPATION(S) COMPLEX OVERSEEN HELD BY
ADDRESS HELD WITH LENGTH OF TIME DURING BY TRUSTEE TRUSTEE
AND BIRTHDATE FUND(S) SERVED PAST 5 YEARS OR OFFICER OR OFFICER
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
JUDE T. DRISCOLL(2) Chairman, 5 Years - Since August 2000, 92 None
2005 Market Street President, Executive Officer Mr. Driscoll has served in
Philadelphia, PA Chief Executive various executive capacities
19103 Officer and 1 Year - at different times at
Trustee(2) Trustee Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
THOMAS L. BENNETT Trustee Since Private Investor - 92 None
2005 Market Street March 23, 2005 (March 2004 - Present)
Philadelphia, PA
19103 Investment Manager -
Morgan Stanley & Co.
October 4, 1947 (January 1984 - March 2004)
JOHN A. FRY Trustee 4 Years President - 92 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
May 28, 1960 University of Pennsylvania
(April 1995 - June 2002)
ANTHONY D. KNERR Trustee 12 Years Founder/Managing Director - 92 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
LUCINDA S. LANDRETH Trustee Since Chief Investment Officer - 92 None
2005 Market Street March 23, 2005 Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002 - 2004)
June 24, 1947
ANN R. LEVEN Trustee 16 Years Treasurer/Chief Fiscal Officer - 92 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
November 1, 1940 Director and Audit
Committee Member -
Systemax Inc.
43
NUMBER OF OTHER
PRINCIPAL PORTFOLIOS IN FUND DIRECTORSHIPS
NAME, POSITION(S) OCCUPATION(S) COMPLEX OVERSEEN HELD BY
ADDRESS HELD WITH LENGTH OF TIME DURING BY TRUSTEE TRUSTEE
AND BIRTHDATE FUND(S) SERVED PAST 5 YEARS OR OFFICER OR OFFICER
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
THOMAS F. MADISON Trustee 11 Years President/Chief 92 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director and Audit
and Consulting) Committee Member -
February 25, 1936 (January 1993 - Present) CenterPoint Energy
Director and Audit
Committee Member -
Digital River Inc.
Director and Audit
Committee Member -
Rimage
Corporation
Director - Valmont
Industries, Inc.
JANET L. YEOMANS Trustee 6 Years Vice President/Mergers & 92 None
2005 Market Street Acquisitions - 3M Corporation
Philadelphia, PA (January 2003 - Present)
19103
Ms. Yeomans has held
July 31, 1948 various management positions
at 3M Corporation since 1983.
J. RICHARD ZECHER Trustee Since Founder - 92 Director and Audit
2005 Market Street March 23, 2005 Investor Analytics Committee Member -
Philadelphia, PA (Risk Management) Investor Analytics
19103 (May 1999 - Present)
Director and Audit
July 3, 1940 Committee Member -
Oxigene, Inc.
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS
MICHAEL P. BISHOF Senior Chief Financial Mr. Bishof has served in 92 None(3)
2005 Market Street Vice President Officer since various executive capacities
Philadelphia, PA and February 17, 2005 at different times at
19103 Chief Financial Delaware Investments.
Officer
August 18, 1962
RICHELLE S. MAESTRO Executive Vice President, 2 Years Ms. Maestro has served in 92 None(3)
2005 Market Street Chief Legal Officer various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
JOHN J. O'CONNOR Senior Vice President Treasurer Mr. O'Connor has served in 92 None(3)
2005 Market Street and Treasurer since various executive capacities
Philadelphia, PA February 17, 2005 at different times at
19103 Delaware Investments.
June 16, 1957
(1) Delaware Investments is the marketing name for Management Holdings, Inc. and
its subsidiaries, including the Fund's(s') investment advisor, principal
underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's(s') manager and distributor.
(3) Mr. Bishof, Ms. Maestro and Mr. O'Connor also serve in similar capacities
for the six portfolios of the Optimum Fund Trust, which have the same
investment advisor, principal underwriter, and transfer agent as the
registrant.
The Statement of Additional Information for the Fund(s) includes additional
information about the Trustees/Directors and Officers and is available, without
charge, upon request by calling 800 523-1918.
44
Delaware
Investments(R)
-----------------------------------
A member of Lincoln Financial Group
This annual report is for the information of Delaware Investments Closed-End
Municipal Bond Funds shareholders. The return and principal value of an
investment in each Fund will fluctuate so that shares, when sold, may be worth
more or less than their original cost. Notice is hereby given in accordance with
Section 23(c) of the Investment Company Act of 1940 that the Funds may, from
time-to-time, purchase shares of their common stock on the open market at market
prices.
BOARD OF TRUSTEES AFFILIATED OFFICERS CONTACT INFORMATION
JUDE T. DRISCOLL MICHAEL P. BISHOF INVESTMENT MANAGER
Chairman Senior Vice President and Delaware Management Company
Delaware Investments Family of Funds Chief Financial Officer Philadelphia, PA
Philadelphia, PA Delaware Investments Family of Funds
Philadelphia, PA PRINCIPAL OFFICE OF THE FUNDS
THOMAS L. BENNETT 2005 Market Street
Private Investor RICHELLE S. MAESTRO Philadelphia, PA 19103-7057
Rosemont, PA Executive Vice President,
Chief Legal Officer and Secretary INDEPENDENT REGISTERED PUBLIC
JOHN A. FRY Delaware Investments Family of Funds ACCOUNTING FIRM
President Philadelphia, PA Ernst & Young LLP
Franklin & Marshall College 2001 Market Street
Lancaster, PA JOHN J. O'CONNOR Philadelphia, PA 19103
Senior Vice President and Treasurer
ANTHONY D. KNERR Delaware Investments Family of Funds REGISTRAR AND STOCK TRANSFER AGENT
Managing Director Philadelphia, PA Mellon Investor Services, L.L.C.
Anthony Knerr & Associates Overpeck Centre
New York, NY ----------------------------------- 85 Challenger Road
Each Fund files its complete Ridgefield Park, NJ 07660
LUCINDA S. LANDRETH schedule of portfolio holdings with 800 851-9677
Former Chief Investment Officer the Securities and Exchange
Assurant, Inc. Commission for the first and third FOR SECURITIES DEALERS AND FINANCIAL
Philadelphia, PA quarters of each fiscal year on INSTITUTIONS REPRESENTATIVES
Form N-Q. Each Fund's Forms N-Q, as 800 362-7500
ANN R. LEVEN well as a description of the
Former Treasurer/Chief Fiscal Officer policies and procedures that each WEB SITE
National Gallery of Art Fund uses to determine how to vote www.delawareinvestments.com
Washington, DC proxies (if any) relating to
portfolio securities is available NUMBER OF RECORDHOLDERS AS OF
THOMAS F. MADISON without charge (i) upon request, by MARCH 31, 2005:
President and Chief Executive Officer calling 800 523-1918; (ii) on each Minnesota Municipal Income Fund I 311
MLM Partners, Inc. Fund's Web site at Minnesota Municipal Income Fund II 491
Minneapolis, MN http://www.delawareinvestments.com; Minnesota Municipal Income Fund III 117
and (iii) on the Commission's Web Arizona Municipal Income Fund 98
JANET L. YEOMANS site at http://www.sec.gov. Each Florida Insured Municipal Income Fund 153
Vice President/Mergers & Acquisitions Fund's Forms N-Q may be reviewed Colorado Insured Municipal
3M Corporation and copied at the Commission's Income Fund 174
St. Paul, MN Public Reference Room in
Washington, DC; information on the
J. RICHARD ZECHER operation of the Public Reference
Founder Room may be obtained by calling
Investor Analytics 1-800-SEC-0330.
Scottsdale, AZ
Information (if any) regarding how
Thomas F. Madison and Janet L. each Fund voted proxies relating to
Yeomans were elected by the portfolio securities during the
preferred shareholders of the most recently disclosed 12-month
Delaware Investments Closed-End period ended June 30 is available
Municipal Bond Funds. without charge (i) through each
Fund's Web site at
http://www.delawareinvestments.com;
and (ii) on the Commission's Web
site at http://www.sec.gov.
-----------------------------------
(9357) Printed in the USA
AR-CEMUNI [3/05] IVES 5/05 J10138
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a
third party. A copy of the registrant's Code of Business Ethics has been posted
on Delaware Investments' internet website at www.delawareinvestments.com. Any
amendments to the Code of Business Ethics, and information on any waiver from
its provisions granted by the registrant, will also be posted on this website
within five business days of such amendment or waiver and will remain on the
website for at least 12 months.
Item 3. Audit Committee Financial Expert
The registrant's Board of Trustees/Directors has determined that each
member of the registrant's Audit Committee is an audit committee financial
expert, as defined below. For purposes of this item, an "audit committee
financial expert" is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant's financial statements, or
experience actively supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
An "audit committee financial expert" shall have acquired such attributes
through:
a. Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant, or auditor or experience in
one or more positions that involve the performance of similar functions;
b. Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor, or person
performing similar functions;
c. Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing, or evaluation of
financial statements; or
d. Other relevant experience.
The registrant's Board of Trustees/Directors has also determined that
each member of the registrant's Audit Committee is independent. In order to be
"independent" for purposes of this item, the Audit Committee member may not: (i)
other than in his or her capacity as a member of the Board of Trustees/Directors
or any committee thereof, accept directly or indirectly any consulting, advisory
or other compensatory fee from the issuer; or (ii) be an "interested person" of
the registrant as defined in Section 2(a)(19) of the Investment Company Act of
1940.
The names of the audit committee financial experts on the registrant's
Audit Committee are set forth below:
Thomas L. Bennett (1)
Thomas F. Madison
Janet L. Yeomans (1)
J. Richard Zecher
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
----------
The aggregate fees billed for services provided to the registrant by
its independent auditors for the audit of the registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $18,950 for
the fiscal year ended March 31, 2005.
The aggregate fees billed for services provided to the registrant by
its independent auditors for the audit of the registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $16,950 for
the fiscal year ended March 31, 2004.
_______________________
(1) The instructions to Form N-CSR require disclosure on the relevant experience
of persons who qualify as audit committee financial experts based on "other
relevant experience." The Board of Trustees/Directors had determined that Mr.
Bennett qualifies as an audit committee financial expert by virtue of his
education, Chartered Financial Analyst designation, and his experience as a
credit analyst, portfolio manager and the manager of other credit analysts and
portfolio managers. The Board of Trustees/Directors has determined that Ms.
Yeomans qualifies as an audit committee financial expert by virtue of her
education and experience as the Treasurer of a large global corporation.
(b) Audit-related fees.
------------------
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the registrant's financial
statements and not reported under paragraph (a) of this Item were $6,700 for the
fiscal year ended March 31, 2005. The percentage of these fees relating to
services approved by the registrant's Audit Committee pursuant to the de minimis
exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of
Regulation S-X was 0%. These audit-related services were as follows: agreed upon
procedures with respect to the preferred stock rating agency reports.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the registrant's investment adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $21,350 for the registrant's fiscal year ended
March 31, 2005. The percentage of these fees relating to services approved by
the registrant's Audit Committee pursuant to the de minimis exception from the
pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These audit-related services were as follows: issuance of agreed-upon procedures
reports to the registrant's Board in connection with the annual fund accounting
service agent contract renewal and the pass-through of internal legal costs
relating to the operations of the registrant.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the registrant's financial
statements and not reported under paragraph (a) of this Item were $9,900 for the
fiscal year ended March 31, 2004. The percentage of these fees relating to
services approved by the registrant's Audit Committee pursuant to the de minimis
exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of
Regulation S-X was 0%. These audit-related services were as follows: quarterly
agreed upon procedures with respect to the preferred stock rating agency
reports.
The aggregate fees billed by the registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the registrant's investment adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $15,750 for the registrant's fiscal year ended
March 31, 2004. The percentage of these fees relating to services approved by
the registrant's Audit Committee pursuant to the de minimis exception from the
pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These audit-related services were as follows: issuance of agreed-upon procedures
reports to the registrant's Board in connection with the annual fund accounting
service agent contract renewal and the pass-through of internal legal costs
relating to the operations of the registrant.
(c) Tax fees.
--------
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $1,750 for the fiscal year
ended March 31, 2005. The percentage of these fees relating to services approved
by the registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: review of income tax return and
review of annual excise distribution calculation.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's investment adviser and other
service providers under common control with the adviser and that relate directly
to the operations or financial reporting of the registrant were $0 for the
registrant's fiscal year ended March 31, 2005.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant were $1,250 for the fiscal year
ended March 31, 2004. The percentage of these fees relating to services approved
by the registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: review of income tax return and
review of annual excise distribution calculation.
The aggregate fees billed by the registrant's independent auditors for
tax-related services provided to the registrant's adviser and other service
providers under common control with the adviser and that relate directly to the
operations or financial reporting of the registrant were $0 for the registrant's
fiscal year ended March 31, 2004.
(d) All other fees.
--------------
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended March 31, 2005.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the registrant's independent
auditors to the registrant's adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $0 for the registrant's fiscal year ended March
31, 2005.
The aggregate fees billed for all services provided by the independent
auditors to the registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended March 31, 2004.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the registrant's independent
auditors to the registrant's adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the registrant were $0 for the registrant's fiscal year ended March
31, 2004.
(e) The registrant's Audit Committee has not established pre-approval
policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of
Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant's independent
auditors for services rendered to the registrant and to its investment adviser
and other service providers under common control with the adviser were $235,084
and $166,625 for the registrant's fiscal years ended March 31, 2005 and March
31, 2004, respectively.
(h) In connection with its selection of the independent auditors, the
registrant's Audit Committee has considered the independent auditors' provision
of non-audit services to the registrant's investment adviser and other service
providers under common control with the adviser that were not required to be
pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit
Committee has determined that the independent auditors' provision of these
services is compatible with maintaining the auditors' independence.
Item 5. Audit Committee of Listed Registrants
The registrant has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The members of the registrant's Audit Committee are Thomas L.
Bennett, Thomas F. Madison, Janet L. Yeomans and J. Richard Zecher.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
The registrant has formally delegated to its investment adviser(s)
(including any sub-adviser) (the "Adviser") the ability to make all proxy voting
decisions in relation to portfolio securities held by the registrant. If and
when proxies need to be voted on behalf of the registrant, the Adviser will vote
such proxies pursuant to its Proxy Voting Policies and Procedures (the
"Procedures"). The Adviser has established a Proxy Voting Committee (the
"Committee") which is responsible for overseeing the Adviser's proxy voting
process for the registrant. One of the main responsibilities of the Committee is
to review and approve the Procedures to ensure that the Procedures are designed
to allow the Adviser to vote proxies in a manner consistent with the goal of
voting in the best interests of the registrant.
In order to facilitate the actual process of voting proxies, the
Adviser has contracted with Institutional Shareholder Services ("ISS") to
analyze proxy statements on behalf of the registrant and other Adviser clients
and vote proxies generally in accordance with the Procedures. The Committee is
responsible for overseeing ISS's proxy voting activities. If a proxy has been
voted for the registrant, ISS will create a record of the vote. Information (if
any) regarding how the registrant voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available without charge
(i) through the registrant's website at http://www.delawareinvestments.com; and
(ii) on the Commission's website at http://www.sec.gov.
The Procedures contain a general guideline that recommendations of
company management on an issue (particularly routine issues) should be given a
fair amount of weight in determining how proxy issues should be voted. However,
the Adviser will normally vote against management's position when it runs
counter to its specific Proxy Voting Guidelines (the "Guidelines"), and the
Adviser will also vote against management's recommendation when it believes that
such position is not in the best interests of the registrant.
As stated above, the Procedures also list specific Guidelines on how to
vote proxies on behalf of the registrant. Some examples of the Guidelines are as
follows: (i) generally vote for shareholder proposals asking that a majority or
more of directors be independent; (ii) generally vote against proposals to
require a supermajority shareholder vote; (iii) votes on mergers and
acquisitions should be considered on a case-by-case basis, determining whether
the transaction enhances shareholder value; (iv) generally vote against
proposals to create a new class of common stock with superior voting rights; (v)
generally vote re-incorporation proposals on a case-by-case basis; (vi) votes
with respect to management compensation plans are generally determined on a
case-by-case basis; (vii) generally vote for reports on the level of greenhouse
gas emissions from a company's operations and products; and (viii) generally
vote for proposals requesting the company to report on its policies and
practices related to social, environmental and economic sustainability.
Because the registrant has delegated proxy voting to the Adviser, the
registrant is not expected to encounter any conflict of interest issues
regarding proxy voting and therefore does not have procedures regarding this
matter. However, the Adviser does have a section in its Procedures that
addresses the possibility of conflicts of interest. Most proxies which the
Adviser receives on behalf of the registrant are voted by ISS in accordance with
the Procedures. Because almost all registrant proxies are voted by ISS pursuant
to the pre-determined Procedures, it normally will not be necessary for the
Adviser to make an actual determination of how to vote a particular proxy,
thereby largely eliminating conflicts of interest for the Adviser during the
proxy voting process. In the very limited instances where the Adviser is
considering voting a proxy contrary to ISS's recommendation, the Committee will
first assess the issue to see if there is any possible conflict of interest
involving the Adviser or affiliated persons of the Adviser. If a member of the
Committee has actual knowledge of a conflict of interest, the Committee will
normally use another independent third party to do additional research on the
particular proxy issue in order to make a recommendation to the Committee on how
to vote the proxy in the best interests of the registrant. The Committee will
then review the proxy voting materials and recommendation provided by ISS and
the independent third party to determine how to vote the issue in a manner which
the Committee believes is consistent with the Procedures and in the best
interests of the registrant.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable to Form N-CSRs filed for fiscal years ending on or after
December 31, 2005.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There were no significant changes in the registrant's internal control
over financial reporting that occurred during the second fiscal quarter of the
period covered by the report to stockholders included herein (i.e., the
registrant's fourth fiscal quarter) that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940
are attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are
furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf, by the undersigned, thereunto duly authorized.
NAME OF REGISTRANT: DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME
FUND III, INC.
JUDE T. DRISCOLL
------------------------------
By: Jude T. Driscoll
-----------------------
Title: Chief Executive Officer
Date: June 7, 2005
-----------------------
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: June 7, 2005
-----------------------
MICHAEL P. BISHOF
By: Michael P. Bishof
Title: Chief Financial Officer
Date: June 7, 2005
-----------------------