Voyageur Mutual Funds III (the “Trust”) is organized as a Delaware statutory trust and offers two series: Delaware Large Cap Core Fund and Delaware Select Growth Fund. These financial statements and the related notes pertain to Delaware Select Growth Fund (the “Fund”). The Trust is an open-end investment company. The Fund is considered diversified under the Investment Company Act of 1940, as amended, and offers Class A, Class B, Class C, Class R and Institutional Class shares. Class A shares are sold with a front-end sales charge of up to 5.75%. Class A share purchases of $1,000,000 or more will incur a contingent deferred sales charge of 1% if redeemed during the first year and 0.50% during the second year, provided that Delaware Distributors, L.P. (DDLP) paid a financial advisor a commission on the purchase of those shares. Class B shares are sold with a contingent deferred sales charge that declines from 4% to zero depending upon the period of time the shares are held. Class B shares will automatically convert to Class A shares on a quarterly basis approximately eight years after purchase. Class C shares are sold with a contingent deferred sales charge of 1%, if redeemed during the first 12 months. Class R and Institutional Class shares are not subject to a sales charge and are offered for sale exclusively to certain eligible investors.
The investment objective of the Fund is to seek long-term capital appreciation which the Fund attempts to achieve by investing primarily in equity securities of companies the manager believes have the potential for sustainable cash-flow growth.
The following accounting policies are in accordance with U.S. generally accepted accounting principles and are consistently followed by the Fund.
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 “Fair Value Measurements” (Statement 157). Statement 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. Statement 157 is intended to increase consistency and comparability among fair value estimates used in financial reporting. Statement 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of Statement 157 to have an impact on the amounts reported in the financial statements.
On July 13, 2006, the FASB released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. Recent SEC guidance allows implementing FIN 48 in fund net asset value calculations as late as the fund’s last net asset value calculation in the first required financial statement reporting period. As a result, the Fund will incorporate FIN 48 in its semiannual report on October 31, 2007. Although the Fund’s tax positions are currently being evaluated, management does not expect the adoption of FIN 48 to have a material impact on the Fund’s financial statements.
1. Significant Accounting Policies (continued)
the sale of investment securities are those of the specific securities sold. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. The Fund declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, annually.
In addition, in order to satisfy certain distribution requirements of the Tax Reform Act of 1986, the Fund may declare special year-end dividend and capital gains distributions during November or December to shareholders of record on a date in such month. Such distributions, if received by shareholders by January, are deemed to have been paid by the Fund and received by shareholders on the earlier of the date paid or December 31 of the prior year.
Subject to seeking best execution, the Fund may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Fund in cash. Such commission rebates are included in realized gain on investments in the accompanying financial statements and totaled $67,574 for the year ended April 30, 2007. In general, best execution refers to many factors, including the price paid or received for a security, the commission charged, the promptness and reliability of execution, the confidentiality and placement accorded the order, and other factors affecting the overall benefit obtained by the Fund on the transaction.
The Fund receives earnings credits from its custodian when positive cash balances are maintained, which are used to offset custody fees. The expense paid under this arrangement is included in custodian fees on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.”
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee which is calculated daily at the rate of 0.75% on the first $500 million of average daily net assets of the Fund, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and 0.60% on average daily net assets in excess of $2.5 billion.
Effective September 1, 2006, DMC has contractually agreed to waive that portion, if any, of its management fee and reimburse the Fund to the extent necessary to ensure that annual operating expenses, exclusive of taxes, interest, brokerage fees, 12b-1 fees, certain insurance costs and extraordinary expenses, do not exceed 1.23% of average daily net assets of the Fund through August 31, 2007. Prior to September 1, 2006, DMC had contractually agreed to waive its fees in order to prevent such expenses from exceeding 1.25% of the average daily net assets of the Fund.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting, administration, dividend disbursing and transfer agent services. The Fund pays DSC a monthly fee computed at the annual rate of 0.04% of the Fund’s average daily net assets for accounting and administration services. The Fund pays DSC a monthly fee based on the number of shareholder accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays DDLP, the distributor and an affiliate of DMC, an annual distribution and service fee not to exceed 0.25% of the average daily net assets of the Class A shares, 1.00% of the average daily net assets of the Class B and C shares and 0.60% of the average daily net assets of the Class R shares. Institutional Class shares pay no distribution and service expenses. DDLP has contracted to limit distribution and service fees through August 31, 2007 in order to prevent distribution and service fees of Class R shares from exceeding 0.50% of average daily net assets.
At April 30, 2007, the Fund had liabilities payable to affiliates as follows:
| Investment management fee payable to DMC | $ 204,624 |
| Dividend disbursing, transfer agent, accounting and | |
| administration fees and other expenses payable to DSC | 175,061 |
| Distribution fees payable to DDLP | 191,775 |
| Other expenses payable to DMC and affiliates* | 31,340 |
*DMC, as part of its administrative services, pays operating expenses on behalf of the Fund and is reimbursed on a periodic basis. Such expenses include items such as printing of shareholder reports, fees for audit, legal and tax services, registration fees and trustees’ fees. |
As provided in the investment management agreement, the Fund bears the cost of certain legal and tax services, including internal legal and tax services provided to the Fund by DMC and/or its affiliates’ employees. For the year ended April 30, 2007, the Fund was charged $20,212 for internal legal and tax services provided by DMC and/or its affiliates’ employees. For the year ended April 30, 2007, DDLP earned $31,009 for commissions on sales of the Fund’s Class A shares.
For the year ended April 30, 2007, DDLP received gross contingent deferred sales charge commissions of $7,796, $166,654 and $8,895 on redemption of the Fund’s Class A, Class B and Class C shares, respectively, and these commissions were entirely used to offset up-front commissions previously paid by DDLP to broker-dealers on sales of those shares.
Trustees’ Fees and benefits include expenses accrued by the Fund for each Trustee’s retainer, per meeting fees and retirement benefits. Independent Trustees with over five years of uninterrupted service were eligible to participate in a retirement plan that provided for the payment of benefits upon retirement. The amount of the retirement benefit was determined based on factors set forth in the plan, including the number of years of service. On November 16, 2006, the Board of Trustees of the Fund unanimously voted to terminate the retirement plan. Payments equal to the net present value of the earned benefits were made in 2007 to those independent trustees so entitled. The retirement benefit payout for the Fund was $54,849. Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust. These officers and trustees are paid no compensation by the Fund.
3. Investments
For the year ended April 30, 2007, the Fund made purchases of $221,904,041 and sales of $357,217,028 of investment securities other than short-term investments.
(continues) 17
Notes to financial statements
Delaware Select Growth Fund
3. Investments (continued)
At April 30, 2007, the cost of investments for federal income tax purposes was $404,636,157. At April 30, 2007, net unrealized appreciation was $68,921,420, of which $75,016,405 related to unrealized appreciation of investments and $6,094,985 related to unrealized depreciation of investments.
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, gains (losses) on foreign currency transactions and net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. There were no dividends and distributions paid for the years ended April 30, 2007 and 2006.
5. Components of Net Assets on a Tax Basis
As of April 30, 2007, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ 945,461,975 | |
| Post-October currency losses | (5,288 | ) |
| *Capital loss carryforwards | (631,239,612 | ) |
| Unrealized appreciation of investments | | |
| and foreign currencies | 68,921,420 | |
| Net assets | $ 383,138,495 | |
*The amount of this loss which can be utilized in subsequent years is subject to an annual limitation in accordance with the Internal Revenue Code due to the Fund merger with Delaware Technology and Innovation Fund in March 2004. |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales.
Post-October currency losses represent losses realized on foreign currency transactions from November 1, 2006 through April 30, 2007 that, in accordance with federal income tax regulations, the Fund has elected to defer and treat as having arisen in the following fiscal year.
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to tax treatment of net operating losses and gain (loss) on foreign currency transactions. Results of operations and net assets were not affected by these reclassifications. For the year ended April 30, 2007, the Fund recorded the following reclassifications.
| Accumulated net investment loss | $ 4,986,448 | |
| Accumulated net realized gain (loss) | 14,774 | |
| Paid-in Capital | (5,001,222 | ) |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $26,244,539 was utilized in 2007. Capital loss carry forwards remaining at April 30, 2007 will expire as follows: $425,889,120 expires in 2010, $186,820,081 expires in 2011, and $18,530,411 expires in 2012.
6. Capital Shares
Transactions in capital shares were as follows:
| | Year Ended |
| | 4/30/07 | | 4/30/06 |
| Shares sold: | | | | | |
| Class A | 1,585,444 | | | 2,395,515 | |
| Class B | 144,748 | | | 298,735 | |
| Class C | 359,148 | | | 1,018,825 | |
| Class R | 12,239 | | | 43,854 | |
| Institutional Class | 266,893 | | | 778,469 | |
| | 2,368,472 | | | 4,535,398 | |
| |
| Shares repurchased: | | | | | |
| Class A | (2,569,301 | ) | | (3,998,857 | ) |
| Class B | (3,035,143 | ) | | (3,003,725 | ) |
| Class C | (1,360,978 | ) | | (1,056,505 | ) |
| Class R | (13,902 | ) | | (20,825 | ) |
| Institutional Class | (653,370 | ) | | (645,005 | ) |
| | (7,632,694 | ) | | (8,724,917 | ) |
| Net decrease | (5,264,222 | ) | | (4,189,519 | ) |
For the years ended April 30, 2007 and 2006, 640,727 Class B shares were converted to 582,808 Class A shares valued at $15,805,165 and 254,674 Class B shares were converted to 233,153 Class A shares valued at $6,027,607, respectively. The respective amounts are included in Class B redemptions and Class A subscriptions in the table above and the Statements of Changes in Net Assets.
7. Line of Credit
The Fund, along with certain other funds in the Delaware Investments® Family of Funds (the “Participants”), participates in a $225,000,000 revolving line of credit facility to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of investor shares. The Participants are charged an annual commitment fee, which is allocated across the Participants on the basis of each Particpant’s allocation of the entire facility. The Participants may borrow up to a maximum of one third of their net assets under the agreement. The Fund had no amounts outstanding as of April 30, 2007, or at any time during the year then ended.
8. Foreign Currency Exchange Contracts
The Fund may enter into foreign currency exchange contracts as a way of managing foreign exchange rate risk. The Fund may enter into these contracts to fix the U.S. dollar value of a security that it has agreed to buy or sell for the period between the date the trade was entered into and the date the security is delivered and paid for. The Fund may also use these contracts to hedge the U.S. dollar value of securities it already owns that are denominated in foreign currencies. The change in value is recorded as an unrealized gain or loss. When the contract is closed, a realized gain or loss is recorded equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of foreign currency exchange contracts does not eliminate fluctuations
18
8. Foreign Currency Exchange Contracts (continued)
in the underlying prices of the securities, but does establish a rate of exchange that can be achieved in the future. Although foreign currency exchange contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. No foreign currency exchange contracts were outstanding at April 30, 2007.
9. Securities Lending
The Fund, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with Mellon Bank N.A. (“Mellon”). Initial security loans made pursuant to the Lending Agreement are required to be secured by U.S. government obligations and/or cash collateral not less than 102% of the value of the securities issued in the United States. With respect to each loan, if the aggregate value of the collateral held on any business day is less than the aggregate value of the securities which are the subject of such loan, the borrower will be notified to provide additional collateral not less than the applicable collateral requirements. Cash collateral received is invested in a collective investment vehicle (“Collective Trust”) established by Mellon for the purpose of investment on behalf of clients participating in its securities lending programs. The Collective Trust invests in fixed income securities, with a weighted average maturity not to exceed 90 days, rated in one of the top two tiers by Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc. or repurchase agreements collateralized by such securities. However, in the event of default or bankruptcy by the lending agent, realization and/or retention of the collateral may be subject to legal proceedings. In the event the borrower fails to return loaned securities and the collateral received is insufficient to cover the value of the loaned securities and provided such collateral shortfall is not the result of investment losses, the lending agent has agreed to pay the amount of the shortfall to the Fund, or at the discretion of the lending agent, replace the loaned securities. The Fund continues to record dividends on the securities loaned and is subject to change in value of the securities loaned that may occur during the term of the loan. The Fund has the right under the Lending Agreement to recover the securities from the borrower on demand. The security lending agent and the borrower retain a portion of the earnings from the collateral investments. The Fund records security lending income net of such allocation.
At April 30, 2007, the value of securities on loan was $85,907,443, for which cash collateral was received and invested in accordance with the Lending Agreement. Such investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral.”
10. Credit and Market Risk
The Fund invests a significant portion of its assets in small- and mid-sized companies and may be subject to certain risks associated with ownership of securities of such companies. Investments in small- or mid-sized companies may be more volatile than investments in larger companies for a number of reasons, which include more limited financial resources or a dependence on narrow product lines.
The Fund may invest up to 15% of its total assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Fund’s Board of Trustees has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Fund’s limitation on investments in illiquid assets. At April 30, 2007, there were no Rule 144A securities and no securities have been determined to be illiquid under the Fund’s Liquidity Procedures.
11. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.
12. Subsequent Event (unaudited)
As of the close of business on May 31, 2007, each Fund in the Delaware Investments® Family of Funds no longer accepts new or subsequent investments in Class B shares of the funds, other than a reinvestment of dividends or capital gains or permitted exchanges. Existing shareholders of Class B shares may continue to hold their Class B shares, reinvest dividends into Class B shares, and exchange their Class B shares of one Fund for Class B shares of another Fund, as permitted by existing exchange privileges. Existing Class B shareholders wishing to make subsequent purchases in a Fund’s shares will be permitted to invest in other classes of the Fund, subject to that class’ pricing structure and eligibility requirements, if any.
For Class B shares outstanding as of May 31, 2007 and Class B shares acquired upon reinvestment of dividends or capital gains, all Class B share attributes, including the contingent deferred sales charge (“CDSC”) schedules, conversion to Class A schedule, and distribution and service (12b-1) fees, will continue in their current form. However, as of the close of business on May 31, 2007, reinvestment of redeemed shares with respect to Class B shares (which, as described in the prospectus, permits you to reinvest within 12 months of selling your shares and have any CDSC you paid on such shares credited back to your account) has been discontinued. In addition, because a Fund’s or its distributor’s ability to assess certain sales charges and fees is dependent on the sale of new shares, the termination of new purchases of Class B shares could ultimately lead to the elimination and/or reduction of such sales charges and fees. A Fund may not be able to provide shareholders with advance notice of the reduction in these sales charges and fees. You will be notified via a Prospectus Supplement if there are any changes to any attributes, sales charges, or fees.
19
Report of independent
registered public accounting firm
To the Shareholders and Board of Trustees
Voyageur Mutual Funds III – Delaware Select Growth Fund
We have audited the accompanying statement of net assets of Delaware Select Growth Fund (one of the series constituting the Voyageur Mutual Funds III) (the “Fund”) as of April 30, 2007, and the related statement 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 periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund’s 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 Fund’s 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 Fund’s 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 April 30, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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 Delaware Select Growth Fund series of Voyageur Mutual Funds III at April 30, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
Philadelphia, Pennsylvania
June 13, 2007
20
Board of trustees/directors
and officers addendum
Delaware Investments® Family of Funds
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 who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | | Number of | |
| | | | | Portfolios in Fund | Other |
| Name, | | | | Complex Overseen | Directorships |
| Address, | Position(s) | Length of | Principal Occupation(s) | by Trustee | Held by |
| and Birth Date | Held with Fund(s) | Time Served | During Past 5 Years | or Officer | Trustee or Officer |
| Interested Trustees | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 83 | None |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | |
| Philadelphia, PA | Chief Executive | | at different times at | | |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| | Trustee | Chief Executive Officer | | | |
| April 14, 1963 | | since August 1, 2006 | | | |
| Independent Trustees | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 83 | None |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | Investment Manager — | | |
| | | | Morgan Stanley & Co. | | |
| October 4, 1947 | | | (January 1984–March 2004) | | |
| John A. Fry | Trustee | Since | President — | 83 | Director — |
| 2005 Market Street | | January 2001 | Franklin & Marshall College | | Community Health |
| Philadelphia, PA | | | (June 2002–Present) | | Systems |
| 19103 | | | | | |
| | | | Executive Vice President — | | Director — |
| May 28, 1960 | | | University of Pennsylvania | | Allied Barton |
| | | | (April 1995–June 2002) | | Security Holdings |
| Anthony D. Knerr | Trustee | Since | Founder and Managing Director — | 83 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| |
| December 7, 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Chief Investment Officer — | 83 | None |
| 2005 Market Street | | March 2005 | Assurant, Inc. | | |
| Philadelphia, PA | | | (Insurance) | | |
| 19103 | | | (2002–2004) | | |
| |
| June 24, 1947 | | | | | |
| Ann R. Leven | Trustee | Since | Consultant — | 83 | Director and |
| 2005 Market Street | | September 1989 | ARL Associates | | Audit Committee |
| Philadelphia, PA | | | (Financial Planning) | | Chairperson — Andy |
| 19103 | | | (1983–Present) | | Warhol Foundation |
| |
| November 1, 1940 | | | | | Director and Audit |
| | | | | | Committee Chair — |
| | | | | | Systemax, Inc. |
(continues) 21
| | | | | Number of | |
| | | | | Portfolios in Fund | Other |
| Name, | | | | Complex Overseen | Directorships |
| Address, | Position(s) | Length of | Principal Occupation(s) | by Trustee | Held by |
| and Birth Date | Held with Fund(s) | Time Served | During Past 5 Years | or Officer | Trustee or Officer |
| Independent Trustees (continued) | | | | |
| Thomas F. Madison | Trustee | Since | President and Chief | 83 | Director — |
| 2005 Market Street | | May 19973 | Executive Officer — | | CenterPoint Energy |
| Philadelphia, PA | | | MLM Partners, Inc. | | |
| 19103 | | | (Small Business Investing | | Director and Audit |
| | | | and Consulting) | | Committee Chair — |
| February 25, 1936 | | | (January 1993–Present) | | Digital River, Inc. |
| |
| | | | | | Director and Audit |
| | | | | | Committee Member — |
| | | | | | Rimage |
| | | | | | Corporation |
| |
| | | | | | Director — Valmont |
| | | | | | Industries, Inc. |
| Janet L. Yeomans | Trustee | Since | Vice President | 83 | None |
| 2005 Market Street | | April 1999 | (January 2003–Present) | | |
| Philadelphia, PA | | | and Treasurer | | |
| 19103 | | | (January 2006–Present) | | |
| | | | 3M Corporation | | |
| July 31, 1948 | | | | | |
| | | | Ms. Yeomans has held | | |
| | | | various management positions | | |
| | | | at 3M Corporation since 1983. | | |
| J. Richard Zecher | Trustee | Since | Founder — | 83 | Director and Audit |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | | Director and Audit |
| July 3, 1940 | | | Founder — | | Committee Member — |
| | | | Sutton Asset Management | | Oxigene, Inc. |
| | | | (Hedge Fund) | | |
| | | | (September 1998–Present) | | |
| Officers | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 83 | None4 |
| 2005 Market Street | Deputy General | September 21, 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | | October 2005 | since 2000. | | |
| December 2, 1963 | | | | | |
| David P. O’Connor | Senior Vice | Senior Vice President, | David P. O’Connor has served in | 83 | None4 |
| 2005 Market Street | President, | General Counsel, and | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Chief Legal Officer | capacities at different times | | |
| 19103 | and Chief | since | at Delaware Investments. | | |
| | Legal Officer | October 2005 | | | |
| February 21, 1966 | | | | | |
| John J. O’Connor | Senior Vice President | Treasurer | John J. O’Connor has served in | 83 | None4 |
| 2005 Market Street | and Treasurer | since | various executive capacities | | |
| Philadelphia, PA | | February 2005 | at different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| June 16, 1957 | | | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 83 | None4 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 1, 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| | Officer | | | | |
| October 4, 1963 | | | | | |
| 1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
| 2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
| 3 In 1997, several funds managed by Voyageur Fund Managers, Inc. (the “Voyageur Funds”) were incorporated into the Delaware Investments Family of Funds. Mr. Madison served as a director of the Voyageur Funds from 1993 until 1997. |
| 4 David F. Connor, David P. O’Connor, John J. O’Connor, and Richard Salus 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. John J. O’Connor also serves in a similar capacity for Lincoln Variable Insurance Products Trust, which has the same investment advisor as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
22
About the organization
This annual report is for the information of Delaware Select Growth Fund shareholders, but it may be used with prospective investors when preceded or accompanied by a current prospectus for Delaware Select Growth Fund and the Delaware Investments® Performance Update for the most recently completed calendar quarter. The prospectus sets forth details about charges, expenses, investment objectives, and operating policies of the Fund. You should read the prospectus carefully before you invest. The figures in this report represent past results that are not a guarantee of future results. The return and principal value of an investment in the Fund will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
| Board of trustees Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA Thomas L. Bennett
Private Investor
Rosemont, PA John A. Fry
President
Franklin & Marshall College
Lancaster, PA Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA Ann R. Leven
Consultant
ARL Associates
New York, NY Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ | Affiliated officers David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA David P. O’Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA John J. O’Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA Richard Salus
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA | Contact information Investment manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA National distributor
Delaware Distributors, L.P.
Philadelphia, PA Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094 For shareholders
800 523-1918 For securities dealers and financial
institutions representatives only
800 362-7500 Web site
www.delawareinvestments.com |
Delaware Investments is the marketing name of Delaware Management Holdings, Inc. and its subsidiaries.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities are available without charge (i) upon request, by calling 800 523-1918; (ii) on the Fund’s Web site at http://www.delawareinvestments.com; and (iii) on the Commission’s Web site at http://www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C.; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Fund’s Web site at http://www.delawareinvestments.com; and (ii) on the Commission’s Web site at http://www.sec.gov.
23
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- Hassle-free investing — Make online purchases and redemptions at any time.
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- Less mail clutter — Get instant access to your fund materials online with Delaware eDelivery.
Register for Account Access today! Please visit us at www.delawareinvestments.com, select Individual Investors, and click Account Access.
Please call our Shareholder Service Center at 800 523-1918 Monday through Friday from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any questions.
| (1880) | Printed in the USA |
| AR-316 [4/07] CGI 6/07 | MF-07-05-007 PO 11899 |
| ANNUAL REPORT 2007 | April 30, 2007 |
| Delaware Large Cap Core Fund | |
Portfolio Management Review
May 14, 2007
Q: What kind of economic and market environment did you encounter in the last four months of 2006 and the first four months of 2007?
A: The broad stock market, as measured by the S&P 500 Index, enjoyed strong performance. The index rose steadily throughout the period, except for a significant but short-lived downturn lasting from late February through mid-March 2007.
The Federal Reserve’s stable interest rate was one factor driving gains among equity investments, with short-term rates steady at 5.25% throughout the period. Another positive influence on stock prices was investors’ increased confidence that the economy was achieving its desired “soft landing” — meaning a gentle deceleration in economic growth as opposed to a sudden and unwelcome shift into a recession. A substantial amount of liquidity in the marketplace also helped. With more cash on hand, corporations had significant flexibility to engage in shareholder-friendly transactions such as stock buybacks and dividend increases. The greater liquidity also led to an increase in mergers, acquisitions, and leveraged buyouts. Purchasing companies often found themselves paying premium prices that further lifted stock values.
These positive conditions were counterbalanced by a series of less favorable market influences, which included a slowing U.S. economy, weaker corporate profit growth compared to the prior year, and a major decline in the U.S. housing market that, coupled with rising energy costs, threatened to depress consumer spending power. Despite these difficulties, the S&P 500 finished the period close to a seven-year high.
Q: How did Delaware Large Cap Core Fund perform between its inception date of Aug. 31, 2006, and the end of its fiscal year on April 30, 2007?
A: During this period, Delaware Large Cap Core Fund Class A shares returned +14.81% with all distributions reinvested and +8.19% with the sales charge included and all distributions reinvested (Class A shares at maximum offer price). In comparison, this performance modestly trailed that of our benchmark, the S&P 500, which returned +15.02% during the same time frame. For complete performance information, please see the table on page 4.
Stock selection, rather than sector selection, had the greatest impact on the Fund’s performance during the past eight months. This was not surprising, given our overall portfolio management approach. Specifically, weaker-than-expected stock selection in the healthcare, utility, and energy sectors had the largest negative impact on our overall performance. More positive results came from stock selection in the basic materials, consumer discretionary, and financial sectors.
The views expressed are current as of the date of this report and are subject to change.
| AR-562 [4/07] PDF 6/07 | | | (1908) PO11900 MF-07-05-008 |
1
Q: How would you describe your overall investment approach? How did you apply that approach during this eight-month period?
A: We follow a disciplined investment process that combines quantitative analysis and fundamental research. This process involves four main steps.
First, with the help of our quantitative research team, we screen and then rank our entire universe of large-cap stocks — the market’s largest companies — based on measures of quality, growth expectations, and value. We run these screens on a daily basis to narrow our list of potential investments to a manageable number.
Second, we conduct thorough fundamental research on the stocks that passed our initial screens. This research includes, among other items, extensive financial analysis, meetings with company management, and an evaluation of the sustainability of companies’ business models.
With our third step — portfolio construction — we assemble a diversified collection of investments that pass our previous requirements. To manage the portfolio’s risk, we keep our sector and individual stock weightings relatively close to those found in the Fund’s benchmark.
The final part of our process is determining when to sell stocks — a decision that we believe is just as important as our initial decision to buy a company’s securities. We may sell an investment for a variety of reasons. For example, the stock may reach our target price. It may also be that one of our reasons for buying the stock is no longer relevant, or we may simply conclude that better investment opportunities can be found elsewhere.
As a result of our stock selection approach, we were overly invested in or less invested in various sectors compared to benchmark. For example, we owned more capital goods stocks because we found a handful of investment opportunities benefiting from increased energy spending and strong international demand. In contrast, we were less invested relative to the benchmark in utility stocks. This allocation detracted from our performance, as utilities generally performed well during the period. However, we believed that most companies in this sector were fully valued and offered limited future appreciation potential.
Q: What stocks detracted from the Fund’s performance compared to its benchmark?
A: The Fund’s performance relative to the S&P 500 Index was hurt by technology holdings such as a position in Motorola, a leading maker of wireless communications products. Motorola’s shares fell steadily beginning in November 2006. The company’s financial results were disappointing, primarily because the company lacked a successful follow-up to its popular RAZR mobile phone. Another disappointing stock was Quest Diagnostics, which provides laboratory testing services for healthcare providers. Quest Diagnostics stock declined after the company unexpectedly lost a large contract to a competitor. Also in healthcare, the Fund’s position in biotechnology company Amgen detracted from relative performance. Investors worried about the company’s earnings growth in light of safety concerns surrounding Aranesp and Epogen, Amgen’s top-selling anemia drugs.
Q: What stocks contributed to the Fund’s results?
A: A position in luxury goods manufacturer and retailer Coach added to performance. Coach benefited from its product focus on wealthier consumers, who have been relatively unaffected by a slowing economy, higher interest rates, and rising gas costs. Also adding to results was Goodrich, a component and service provider to the commercial and general aviation airplane markets. Goodrich performed well as the airline industry’s health improved, as well as the company’s success in boosting its earnings through effective cost management. We were also pleased with the performance of Steel Dynamics. Thanks to a favorable balance between supply and demand, steel prices remained high, which in turn added to the company’s profits.
Q: As of April 30, 2007, how was the Fund positioned?
A: Given the market’s long rise, coupled with a number of risks to future economic growth, we see increased potential for a downward correction in stock prices over the short term. However, we continue to believe that the market backdrop may be favorable over the mid-to-long term. Although we do see short-term risks on the horizon, we remain optimistic about the portfolio’s individual holdings and the long-term outlook for the large-cap core stocks that make up our investment universe.
2
Fund managers
Christopher S. Adams, CFA
Vice President, Portfolio Manager, Senior Equity Analyst
Mr. Adams, who joined Delaware Investments in 1995, is a portfolio manager on the firm’s Core Equity team. He also performs analysis and research to support the portfolio management function. From 1995 to 1998, he served as the firm’s vice president, strategic planning. Prior to joining Delaware Investments, Mr. Adams had approximately 10 years of experience in the financial services industry in the U.S. and U.K., including positions with Coopers & Lybrand, The Sumitomo Bank, Bank of America, and Lloyds Bank. Mr. Adams holds both bachelor’s and master’s degrees in history and economics from Oxford University, England, and received an MBA with dual concentrations in finance and insurance/risk management from The Wharton School of the University of Pennsylvania. Mr. Adams is a director and past president of The CFA Society of Philadelphia.
Francis X. Morris, CFA
Senior Vice President, Chief Investment Officer — Core Equity
Mr. Morris joined Delaware Investments in 1997 and is currently the chief investment officer for Core Equity investments. Prior to joining the firm, Mr. Morris served as vice president and director of equity research at PNC Asset Management. He received a bachelor’s degree from Providence College and holds an MBA from Widener University. Mr. Morris is a past president of the CFA Society of Philadelphia and is a member of the CFA Institute. In addition, he is a former officer of the National Association of Petroleum Investment Analysts.
Donald G. Padilla, CFA
Vice President, Portfolio Manager, Senior Equity Analyst
Mr. Padilla joined Delaware Investments in 1994 and is a member of the portfolio construction group within the firm’s Core Equity team. He also performs analysis and research to support the portfolio management function. Mr. Padilla joined Delaware Investments as an assistant controller in the firm’s treasury function, responsible for managing corporate cash investments, developing financial models, and overseeing the financial operations of the Lincoln Life 401(k) annuities segment. Prior to joining Delaware Investments, he held various positions at The Vanguard Group. Mr. Padilla holds a bachelor’s degree in accounting from Lehigh University, and he is a member of The CFA Society of Philadelphia.
Michael S. Morris, CFA
Vice President, Portfolio Manager, Senior Equity Analyst
Mr. Morris, who joined Delaware Investments in 1999, is a portfolio manager on the firm’s Core Equity team. He also performs analysis and research to support the portfolio management function. Prior to joining the firm, he worked as a senior equity analyst at Newbold’s Asset Management, covering financial stocks. Mr. Morris began his investment career in 1993 at Ohio Casualty. He earned his bachelor’s degree in finance from Indiana University and an MBA with a concentration in finance from The Wharton School of the University of Pennsylvania. He is a member of the Bank and Financial Analysts Association.
3
Performance summary
Delaware Large Cap Core Fund
The performance data quoted represent past performance; past performance does not guarantee future results. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please obtain the performance data for the most recent month end by calling 800 523-1918 or visiting our Web site at www.delawareinvestments.com/performance.
You should consider the investment objectives, risks, charges, and expenses of the investment company carefully before investing. The Delaware Large Cap Core Fund prospectus contains this and other important information about the Fund. Please request a prospectus through your financial advisor or by calling 800 523-1918 or visiting our Web site at www.delawareinvestments.com. Read the prospectus carefully before you invest or send money.
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted below, and they are subject to change.
An expense limitation was in effect for all classes during the periods shown below and on the next page. Performance would have been lower had the expense limitation not been in effect.
The Fund offers Class A and Institutional Class shares. Class A shares are sold with a maximum front-end sales charge of 5.75% and have an annual distribution and service fee of up to 0.25% of average daily net assets. Please see the fee table in the prospectus and your financial professional for a more complete explanation of sales charges.
Management has voluntarily agreed to reimburse expenses and/or waive its management fees. This agreement can be terminated or changed at any time. The Fund's net expense ratios for Class A and Institutional Class shares are 0.95% and 0.95%, respectively. The total operating expenses for Class A and Institutional Class shares were 5.27% and 5.02%, respectively.
Institutional Class shares were first made available Aug. 31, 2006, and are available without sales or asset-based distribution charges only to certain eligible institutional accounts.
Fund performance
Cumulative total returns
Through April 30, 2007
| | 3 months | | 6 months | | Lifetime |
| Class A (Est. Aug. 31, 2006) | | | | | |
| Excluding sales charge | +4.53% | | +9.04% | | +14.81% |
| Including sales charge | -1.52% | | +2.72% | | + 8.19% |
The performance table above and the graph on the next page do not reflect the deduction of taxes the shareholder would pay on Fund distributions or redemptions of Fund shares.
4
Fund basics
As of April 30, 2007
Fund objective
Delaware Large Cap Core Fund seeks long-term capital appreciation.
Total Fund net assets
$2.3 million
Number of holdings
87
Fund start date
Aug. 31, 2006
| | Nasdaq symbols | | CUSIPs |
| Class A | DDCAX | | 246118582 |
| Institutional Class | DDCIX | | 246118558 |
| | | Starting value | | Ending value |
| | | (Aug. 31, 2006) | | (April 30, 2007) |
| S&P 500 Index | | $10,000 | | | $11,502 |
| Delaware Large Cap Core Fund — Class A Shares | | $9,425 | | | $10,819 |
Chart assumes $10,000 invested on Aug. 31, 2006, and includes the effect of a 5.75% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and expenses.
The chart also assumes $10,000 invested in the S&P 500 Index as of Aug. 31, 2006. The S&P 500 Index measures the performance of 500 widely held, mostly large-cap common stocks weighted by market value.
An index is unmanaged and does not reflect the costs of operating a mutual fund, such as the costs of buying, selling, and holding securities. You cannot invest directly in an index.
Past performance is not a guarantee of future results.
5
Disclosure of Fund expenses
For the period November 1, 2006 to April 30, 2007
As a shareholder of a the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees, and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period November 1, 2006 to April 30, 2007.
Actual Expenses
The first section of the table shown, “Actual Fund Return,” provides information about actual account values and actual expenses. You may use the information in this section of the table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second section of the table shown, “Hypothetical 5% Return,” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher. The Fund’s actual expenses shown in the table reflect fee waivers in effect. The expenses shown in the table assume reinvestment of all dividends and distributions.
| Delaware Large Cap Core Fund - Expense Analysis of an Investment of $1,000 | | |
| | | Beginning | | Ending | | Annualized | | Expenses |
| | | Account | | Account | | Expense | | Paid During |
| | | Value | | Value | | Ratios | | Period |
| | | 11/01/06 | | 4/30/07 | | | | 11/01/06 to |
| | | | | | | | | 4/30/07* |
| Actual Fund Return | | | | | | | | |
| Class A | | $1,000.00 | | | $1,090.40 | | | 0.97% | | $5.03 | |
| Institutional Class | | 1,000.00 | | | 1,090.40 | | | 0.97% | | 5.03 | |
| |
| Hypothetical 5% Return (5% return before expenses) | | | | | | |
| Class A | | $1,000.00 | | | $1,019.98 | | | 0.97% | | $4.86 | |
| Institutional Class | | 1,000.00 | | | 1,019.98 | | | 0.97% | | 4.86 | |
*”Expenses Paid During Period” are equal to the Fund’s annualized expense ratios, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period).
6
| Sector Allocation and Top 10 Holdings | As of April 30, 2007 |
Delaware Large Cap Core Fund
Sector designations may be different than the sector designations presented in other Fund materials.
| | Percentage | |
| Sector | of Net Assets | |
| Common Stock | 99.77% | |
| Basic Materials | 4.13% | |
| Business Services | 0.94% | |
| Capital Goods | 12.37% | |
| Communication Services | 2.59% | |
| Consumer Discretionary | 4.27% | |
| Consumer Services | 2.84% | |
| Consumer Staples | 6.51% | |
| Credit Cyclicals | 0.66% | |
| Energy | 8.49% | |
| Financials | 22.52% | |
| Health Care | 10.73% | |
| Media | 3.07% | |
| Real Estate | 0.70% | |
| Technology | 17.85% | |
| Transportation | 1.06% | |
| Utilities | 1.04% | |
| Total Value of Securities | 99.77% | |
| Receivables and Other Assets Net of Liabilities | 0.23% | |
| Total Net Assets | 100.00% | |
Holdings are for informational purposes only and are subject to change at any time. They are not a recommendation to buy, sell, or hold any security.
| | Percentage | |
| Top 10 Holdings | of Net Assets | |
| Citigroup | 2.74% | |
| Exxon Mobil | 2.54% | |
| Microsoft | 2.54% | |
| Procter & Gamble | 2.51% | |
| Johnson & Johnson | 2.50% | |
| American International Group | 2.42% | |
| Bank of America | 2.23% | |
| PepsiCo | 2.06% | |
| JPMorgan Chase | 2.03% | |
| Cisco Systems | 1.93% | |
7
Statement of Net Assets
Delaware Large Cap Core Fund
April 30, 2007
| | Number of | | |
| | Shares | | Value |
| Common Stock– 99.77% | | | |
| Basic Materials – 4.13% | | | | |
| Dow Chemical | 550 | | | $24,535 |
| Freeport-McMoRan Copper & Gold | 350 | | | 23,506 |
| Lubrizol | 360 | | | 21,578 |
| Steel Dynamics | 260 | | | 11,521 |
| United States Steel | 140 | | | 14,216 |
| | | | | 95,356 |
| Business Services – 0.94% | | | | |
| Manpower | 140 | | | 11,235 |
| Republic Services | 375 | | | 10,474 |
| | | | | 21,709 |
| Capital Goods – 12.37% | | | | |
| †AGCO | 300 | | | 12,519 |
| Caterpillar | 590 | | | 42,845 |
| Deere & Co. | 170 | | | 18,598 |
| DRS Technologies | 150 | | | 7,547 |
| General Electric | 1,050 | | | 38,703 |
| Goodrich | 660 | | | 37,514 |
| †Grant Prideco | 590 | | | 30,409 |
| Northrop Grumman | 400 | | | 29,444 |
| Textron | 340 | | | 34,568 |
| United Technologies | 500 | | | 33,565 |
| | | | | 285,712 |
| Communication Services – 2.59% | | | | |
| Embarq | 180 | | | 10,807 |
| †Qwest Communications International | 1,220 | | | 10,834 |
| Verizon Communications | 1,000 | | | 38,180 |
| | | | | 59,821 |
| Consumer Discretionary – 4.27% | | | | |
| Abercrombie & Fitch Class A | 300 | | | 24,498 |
| Best Buy | 550 | | | 25,658 |
| †Coach | 500 | | | 24,415 |
| Federated Department Stores | 550 | | | 24,156 |
| | | | | 98,727 |
| Consumer Services – 2.84% | | | | |
| Burger King Holdings | 600 | | | 14,082 |
| Marriott International Class A | 550 | | | 24,866 |
| McDonald's | 550 | | | 26,554 |
| | | | | 65,502 |
| Consumer Staples – 6.51% | | | | |
| CVS/Caremark | 600 | | | 21,744 |
| Fortune Brands | 290 | | | 23,229 |
| PepsiCo | 720 | | | 47,585 |
| Procter & Gamble | 900 | | | 57,879 |
| | | | 150,437 |
8
| Credit Cyclicals – 0.66% | | | |
| †Jarden | 360 | | | 15,170 |
| | | | | 15,170 |
| Energy – 8.49% | | | | |
| Chevron | 320 | | | 24,893 |
| ConocoPhillips | 550 | | | 38,143 |
| EOG Resources | 300 | | | 22,032 |
| Exxon Mobil | 740 | | | 58,741 |
| †National Oilwell Varco | 300 | | | 25,455 |
| Occidental Petroleum | 530 | | | 26,871 |
| | | | | 196,135 |
| Financials – 22.52% | | | | |
| †Affiliated Managers Group | 140 | | | 16,468 |
| AFLAC | 300 | | | 15,402 |
| American International Group | 800 | | | 55,927 |
| Bank of America | 1,010 | | | 51,408 |
| Bear Stearns | 100 | | | 15,570 |
| Berkley (W.R.) | 520 | | | 16,895 |
| Capital One Financial | 350 | | | 25,991 |
| CIT Group | 350 | | | 20,878 |
| Citigroup | 1,180 | | | 63,271 |
| Freddie Mac | 260 | | | 16,843 |
| JPMorgan Chase | 900 | | | 46,890 |
| Mellon Financial | 440 | | | 18,889 |
| Morgan Stanley | 320 | | | 26,883 |
| PMI Group | 280 | | | 13,572 |
| Prudential Financial | 270 | | | 25,650 |
| U.S. Bancorp | 640 | | | 21,984 |
| UnitedHealth Group | 500 | | | 26,530 |
| Washington Mutual | 510 | | | 21,410 |
| †WellPoint | 250 | | | 19,743 |
| | | | | 520,204 |
| Health Care – 10.73% | | | | |
| Abbott Laboratories | 420 | | | 23,780 |
| †Amgen | 380 | | | 24,373 |
| †Cytyc | 320 | | | 11,274 |
| †Express Scripts Class A | 200 | | | 19,110 |
| †Gen-Probe | 250 | | | 12,778 |
| †Gilead Sciences | 300 | | | 24,516 |
| Johnson & Johnson | 900 | | | 57,798 |
| Medtronic | 470 | | | 24,877 |
| Quest Diagnostics | 160 | | | 7,822 |
| Wyeth | 750 | | | 41,625 |
| | | | | 247,953 |
| Media – 3.07% | | | | |
| CBS Class B | 670 | | | 21,286 |
| †Comcast Class A | 750 | | | 19,995 |
| Disney (Walt) | 850 | | | 29,733 |
| | | | | 71,014 |
| Real Estate – 0.70% | | | | |
| ProLogis | 250 | | | 16,200 |
| | | | | 16,200 |
9
| Technology – 17.85% | | | |
| Applied Materials | 1,050 | | 20,181 |
| †BEA Systems | 1,230 | | 14,502 |
| †Cisco Systems | 1,670 | | 44,656 |
| †Corning | 1,130 | | 26,804 |
| †EMC | 1,550 | | 23,529 |
| †Google Class A | 60 | | 28,283 |
| Hewlett-Packard | 830 | | 34,976 |
| Intel | 1,830 | | 39,345 |
| International Business Machines | 420 | | 42,928 |
| †Metropcs Communications | 200 | | 5,610 |
| Microsoft | 1,960 | | 58,682 |
| Motorola | 1,060 | | 18,370 |
| QUALCOMM | 650 | | 28,470 |
| Texas Instruments | 760 | | 26,121 |
| | | 412,457 |
| Transportation – 1.06% | | | |
| Norfolk Southern | 460 | | 24,490 |
| | | 24,490 |
| Utilities – 1.04% | | | |
| Exelon | 320 | | 24,131 |
| | | 24,131 |
| Total Common Stock (cost $2,062,505) | | | 2,305,018 |
| |
| Total Value of Securities – 99.77% | | | |
| (cost $2,062,505) | | | 2,305,018 |
| Receivables and Other Assets Net of Liabilities – 0.23% | | | 5,211 |
| Net Assets Applicable to 238,163 Shares Outstanding – 100.00% | | | $2,310,229 |
| |
| Net Asset Value – Delaware Large Cap Core Fund Class A ($13,996 / 1,443 Shares) | | | $9.70 |
| Net Asset Value – Delaware Large Cap Core Fund Institutional Class ($2,296,233 / 236,720 Shares) | | | $9.70 |
| |
| Components of Net Assets at April 30, 2007: | | | |
| Shares of beneficial interest (unlimited authorization - no par) | | | $2,025,977 |
| Undistributed net investment income | | | 3,354 |
| Accumulated net realized gain investments | | | 38,385 |
| Net unrealized appreciation of investments | | | 242,513 |
| Total net assets | | | $2,310,229 |
| |
| †Non-income producing security for the year ended April 30, 2007. | | | |
| |
| Net Asset Value and Offering Price Per Share – | | | |
| Delaware Large Cap Core Fund | | | |
| Net asset value Class A (A) | | | $9.70 |
| Sales charge (5.75% of offering price) (B) | | | | 0.59 |
| Offering price | | | | $10.29 |
| (A) | | Net asset value per share, as illustrated, is the amount which would be paid upon redemption or repurchase of shares. |
| (B) | | See the current prospectus for purchases of $50,000 or more. |
See accompanying notes10
Statement of Operations
Delaware Large Cap Core Fund
August 31, 2006* to April 30, 2007
| Investment Income: | | | | | | |
| Dividends | $ | 21,858 | | | | |
| Interest | | 1,122 | | $ | 22,980 | |
| |
| Expenses: | | | | | | |
| Legal fees | | 38,109 | | | | |
| Audit and tax fees | | 10,711 | | | | |
| Management fees | | 9,315 | | | | |
| Reports and statements to shareholders | | 7,102 | | | | |
| Registration fees | | 3,045 | | | | |
| Pricing fees | | 1,748 | | | | |
| Custodian fees | | 1,002 | | | | |
| Accounting and administration expenses | | 571 | | | | |
| Trustees' fees and benefits | | 163 | | | | |
| Insurance fees | | 82 | | | | |
| Dividend disbursing and transfer agent fees and expenses | | 65 | | | | |
| Dues and services | | 48 | | | | |
| Consulting fees | | 30 | | | | |
| Trustees' expenses | | 9 | | | | |
| Distribution expenses – Class A | | 8 | | | | |
| Taxes (other than taxes on income) | | 2 | | | 72,010 | |
| Less expenses absorbed or waived | | | | | (58,267 | ) |
| Less waiver of distribution expenses – Class A | | | | | (8 | ) |
| Total operating expenses | | | | | 13,735 | |
| Net Investment Income | | | | | 9,245 | |
| |
| Net Realized and Unrealized Gain on Investments: | | | | | | |
| Net realized gain on investments | | | | | 45,454 | |
| Net change in unrealized appreciation/depreciation of investments | | | | 242,513 | |
| Net Realized and Unrealized Gain on Investments | | | | | 287,967 | |
| |
| Net Increase in Net Assets Resulting from Operations | | | | $ | 297,212 | |
*Date of commencement of operations.See accompanying notes
11
| Statement of Changes in Net Assets |
| |
| Delaware Large Cap Core Fund |
| 8/31/06* |
| to |
| 4/30/07 |
| Increase in Net Assets from Operations: | | | |
| Net investment income | $ | 9,245 | |
| Net realized gain on investments | | 45,454 | |
| Net change in unrealized appreciation/depreciation of investments | | 242,513 | |
| Net increase in net assets resulting from operations | | 297,212 | |
| |
| Dividends and Distributions to Shareholders from: | | | |
| Net investment income: | | | |
| Class A | | (9 | ) |
| Institutional Class | | (5,882 | ) |
| |
| Net realized gain on investments: | | | |
| Class A | | (10 | ) |
| Institutional Class | | (7,059 | ) |
| | | (12,960 | ) |
| Capital Share Transactions: | | | |
| Proceeds from shares sold: | | | |
| Class A | | 13,008 | |
| Institutional Class | | 2,000,009 | |
| |
| Net asset value of shares issued upon reinvestment of dividends and distributions: | | |
| Class A | | 19 | |
| Institutional Class | | 12,941 | |
| | | 2,025,977 | |
| Increase in net assets derived from capital share transactions | | 2,025,977 | |
| Net Increase in Net Assets | | 2,310,229 | |
| |
| Net Assets: | | | |
| Beginning of year | | - | |
| End of year (including undistributed net investment income of $3,354) | $ | 2,310,229 | |
| |
| |
| *Date of commencement of operations. | | | |
| |
| See accompanying notes | | | |
12
| Financial Highlights |
| |
| Selected data for each share of the Fund outstanding throughout the period was as follows: |
| |
| | Delaware Large Cap Core Fund |
| | Class A | | Institutional Class |
| | 8/31/061 | | 8/31/061 |
| to | | to |
| 4/30/07 | | 4/30/07 |
| Net asset value, beginning of period | $8.500 | | | $8.500 | |
| |
| Income from investment operations: | | | | | |
| Net investment income2 | 0.039 | | | 0.039 | |
| Net realized and unrealized gain on investments | 1.216 | | | 1.216 | |
| Total from investment operations | 1.255 | | | 1.255 | |
| |
| Less dividends and distributions from: | | | | | |
| Net investment income | (0.025 | ) | | (0.025 | ) |
| Net realized gain on investments | (0.030 | ) | | (0.030 | ) |
| Total dividends and distributions | (0.055 | ) | | (0.055 | ) |
| |
| Net asset value, end of period | $9.700 | | | $9.700 | |
| |
| Total return3 | 14.81 | % | | 14.81 | % |
| |
| Ratios and supplemental data: | | | | | |
| Net assets, end of period (000 omitted) | $14 | | | $2,296 | |
| Ratio of expenses to average net assets | 0.96 | % | | 0.96 | % |
| Ratio of expenses to average net assets | | | | | |
| prior to fees waived and expense paid indirectly | 5.27 | % | | 5.02 | % |
| Ratio of net investment income to average net assets | 0.64 | % | | 0.64 | % |
| Ratio of net investment loss to average net assets | | | | | |
| prior to fees waived and expense paid indirectly | (3.67 | %) | | (3.42 | %) |
| Portfolio turnover | 30 | % | | 30 | % |
1Date of commencement of operations; ratios and portfolio turnover have been annualized and total return has not been annualized.
2The average shares outstanding method has been applied for per share information.
3Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value, and, for Class A shares, does not reflect the impact of a sales charge. Total investment return reflects voluntary waivers and payment of fees by the manager and distributor, as applicable. Performance would have been lower had the expense limitation not been in effect.
See accompanying notes
13
Notes to Financial Statements
April 30, 2007
Voyageur Mutual Funds III (the “Trust”) is organized as a Delaware statutory trust and offers two series, Delaware Large Cap Core Fund and Delaware Select Growth Fund. These financial statements and the related notes pertain to Delaware Large Cap Core Fund (the “Fund”). The Trust is an open-end investment company. The Fund is considered diversified under the Investment Company Act of 1940, as amended, and offers Class A, Class C, Class R and Institutional Class shares. Class A shares are sold with a front-end sales charge of up to 5.75%. Class A share purchases of $1,000,000 or more will incur a contingent deferred sales charge (CDSC) of 1% if redeemed during the first year and 0.50% during the second year, provided that Delaware Distributors, L.P. (DDLP) paid a financial advisor a commission on the purchase of those shares. Class C shares are sold with a contingent deferred sales charge of 1%, if redeemed during the first 12 months. Class R and Institutional Class shares are not subject to a sales charge and are offered for sale only to certain eligible investors. As of April 30, 2007, Class C and Class R have not commenced operations.
The investment objective of the Fund is to seek long-term capital appreciation.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles and are consistently followed by the Fund.
Security Valuation – Equity securities, except those traded on the Nasdaq Stock Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time of the regular close of the New York Stock Exchange (NYSE) on the valuation date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq Official Closing Price, which may not be the last sales price. If on a particular day an equity security does not trade, then the mean between the bid and asked prices will be used. Short-term debt securities having less than 60 days to maturity are valued at amortized cost, which approximates market value. Other securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Fund’s Board of Trustees. In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures, or with respect to foreign securities, aftermarket trading or significant events after local market trading (e.g., government actions or pronouncements, trading volume or volatility on markets, exchanges among dealers, or news events).
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 “Fair Value Measurements” (Statement 157). Statement 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. Statement 157 is intended to increase consistency and comparability among fair value estimates used in financial reporting. Statement 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of Statement 157 to have an impact on the amounts reported in the financial statements.
Federal Income Taxes – The Fund intends 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.
On July 13, 2006, the FASB released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority.
14
Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. Recent SEC guidance allows implementing FIN 48 in fund’s net asset value calculations as late as the fund’s last net asset value calculation in the first required financial statement reporting period. As a result, the Fund will incorporate FIN 48 in its semiannual report on October 31, 2007. Although the Fund’s tax positions are currently being evaluated, management does not expect the adoption of FIN 48 to have a material impact on the Fund’s financial statements.
Class Accounting – Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Distribution expenses relating to a specific class are charged directly to that class.
Repurchase Agreements - The Fund may invest in a pooled cash account along with members of the Delaware Investments® Family of Funds pursuant to an exemptive order issued by the Securities and Exchange Commission. The aggregate daily balance of the pooled cash account is invested in repurchase agreements secured by obligations of the U.S. government. The respective collateral is held by the Fund’s custodian bank until the maturity of the respective repurchase agreements. Each repurchase agreement is at least 102% collateralized. However, in the event of default or bankruptcy by the counterparty to the agreement, realization of the collateral may be subject to legal proceedings.
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 directly attributable to the Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated amongst such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. The Fund declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, annually.
In addition, in order to satisfy certain distribution requirements of the Tax Reform Act of 1986, the Fund may declare special year-end dividend and capital gains distributions during November or December to shareholders of record on a date in such month. Such distributions, if received by shareholders by January, are deemed to have been paid by the Fund and received by shareholders on the earlier of the date paid or December 31 of the prior year.
Subject to seeking best execution, the Fund may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Fund in cash. For the period August 31, 2006 to April 30, 2007, there were no such commission rebates. In general, best execution refers to many factors, including the price paid or received for a security, the commission charged, the promptness and reliability of execution, the confidentiality and placement accorded the order, and other factors affecting the overall benefit obtained by the Fund on the transaction.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee which is calculated daily at the rate of 0.65% on the first $500 million of average daily net assets of the Fund, 0.60% on the next $500 million, 0.55% on the next $1.5 billion and 0.50% on average daily net assets in excess of $2.5 billion.
DMC has voluntarily agreed to waive that portion, if any, of its management fee and reimburse the Fund to the extent necessary to ensure that annual operating expenses, exclusive of taxes, interest, brokerage commissions, 12b-1 plan expense, certain insurance costs and non-routine expenses or costs, do not exceed 0.95% of average daily net assets of the Fund. This agreement can be terminated or changed at any time.
15
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting, administration, dividend disbursing and transfer agent services. The Fund pays DSC a monthly fee computed at the annual rate of 0.04% of the Fund’s average daily net assets for accounting and administration services. The Fund pays DSC a monthly fee based on the number of shareholder accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays DDLP, the distributor and an affiliate of DMC, an annual distribution and service fee not to exceed 0.25% of the average daily net assets of the Class A shares, 1.00% of the average daily net assets of Class C shares and 0.60% of the average daily net assets of Class R shares. Institutional Class shares pay no distribution and services expenses. DDLP has elected voluntarily to waive such distribution and service fees at this time.
At April 30, 2007, the Fund had receivables due from affiliates as follows:
| Receivables from DMC under limitation agreement | $1,442 |
DMC, as part of its administrative services, pays operating expenses on behalf of the Fund and is reimbursed on a periodic basis. Such expenses include items such as printing of shareholder reports, fees for audit, legal and tax services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of certain legal and tax services, including internal legal and tax services provided to the Fund by DMC and/or its affiliates’ employees. For the period August 31, 2006 to April 30, 2007, the Fund was charged $81 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees' fees and benefits include expenses accrued by the Fund for each Trustee's retainer, per meeting fees and retirement benefits. Independent Trustees with over five years of uninterrupted service were eligible to participate in a retirement plan that provided for the payment of benefits upon retirement. The amount of the retirement benefit was determined based on factors set forth in the plan including the number of years of service. On November 16, 2006, the Board of Trustees unanimously voted to terminate the retirement plan. Payments equal to the net present value of the earned benefits were made in 2007 to those independent trustees so entitled. The retirement benefit payout for the Fund was $98. Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust. These officers and trustees are paid no compensation by the Fund.
3. Investments
For the period August 31, 2006 to April 30, 2007, the Fund made purchases of $2,445,590 and sales of $428,539 of investment securities other than short-term investments.
At April 30, 2007, the cost of investments for federal income tax purposes was $2,062,505. At April 30, 2007, net unrealized appreciation was $242,513, of which $258,187 related to unrealized appreciation of investments and $15,674 related to unrealized depreciation of investments.
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 period August 31, 2006 to April 30, 2007 was as follows:
| | 8/31/06* |
| to |
| 4/30/07 |
| Ordinary Income | $12,960 |
| |
| *Date of commencement of operations. | |
16
5. Components of Net Assets on a Tax Basis
As of April 30, 2007, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $2,025,977 |
| Undistributed ordinary income | 41,739 |
| Unrealized appreciation of investments | 242,513 |
| Net assets | $2,310,229 |
6. Capital Shares
Transactions in capital stock shares were as follows:
| | 8/31/06* |
| to |
| 4/30/07 |
| Shares sold: | |
| Class A | 1,441 |
| Institutional Class | 235,295 |
| |
| Shares issued upon reinvestment of dividends | |
| and distributions: | |
| Class A | 2 |
| Institutional Class | 1,425 |
| Net Increase | 238,163 |
*Date of commencement of operations.
7. Line of Credit
The Fund, along with certain other funds in the Delaware Investments® Family of Funds (the “Participants”), participates in a $225,000,000 revolving line of credit facility to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of investor shares. The Participants are charged an annual commitment fee, which is allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants may borrow up to a maximum of one third of their net assets under the agreement. The Fund had no amounts outstanding as of April 30, 2007, or at any time during the period then ended.
8. Credit and Market Risk
The Fund may invest up to 15% of its total assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Fund’s Board of Trustees has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Fund's limitation on investments in illiquid assets. At April 30, 2007, there were no Rule 144A securities and no securities have been determined to be illiquid under the Fund’s Liquidity Procedures.
9. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.
17
10. Tax Information (Unaudited)
The information set forth below is for the Fund’s fiscal year 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 period August 31, 2006 to April 30, 2007, the Fund designates distributions paid during the year as follows:
| (A) | | (B) | | | | |
| Long-Term | | Ordinary | | | | |
| Capital Gains | | Income | | Total | | (C) |
| Distributions | | Distributions* | | Distributions | | Qualifying |
| (Tax Basis) | | (Tax Basis) | | (Tax Basis) | | Dividends1 |
| - | | 100% | | 100% | | 39% |
(A) and (B) are based on a percentage of the Fund’s total distributions.
(C) is based on a percentage of the Fund’s ordinary income distributions.
1 Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
* For the period August 31, 2006 to April 30, 2007, certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate up to a maximum amount $12,960 to be taxed at a maximum rate of 15%. Complete information will be computed and reported in conjunction with your 2007 Form 1099-DIV.
18
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
Voyageur Mutual Funds III – Delaware Large Cap Core Fund
We have audited the accompanying statement of net assets of Delaware Large Cap Core Fund (one of the series constituting Voyageur Mutual Funds III) (the “Fund”) as of April 30, 2007, and the related statement of operations, statement of changes in net assets, and financial highlights for the period from August 31, 2006 (commencement of operations) to April 30, 2007. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit 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 Fund’s internal control over financial reporting. Our audit 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 Fund’s 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 April 30, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides 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 Delaware Large Cap Core Fund series of Voyageur Mutual Funds III at April 30, 2007, and the results of its operations, the changes in its net assets, and its financial highlights for the period from August 31, 2006 (commencement of operations) to April 30, 2007, in conformity with U.S. generally accepted accounting principles.
Philadelphia, Pennsylvania
June 13, 2007
19
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 $34,000 for the fiscal year ended April 30, 2007.
____________________
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 has 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.
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 $26,900 for the fiscal year ended April 30, 2006.
(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 $0 for the fiscal year ended April 30, 2007.
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 $19,074 for the registrant’s fiscal year ended April 30, 2007. 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 reports concerning transfer agent's system of internal accounting control pursuant to Rule 17Ad-13 of the Securities Exchange Act.
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 $0 for the fiscal year ended April 30, 2006.
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 $33,700 for the registrant’s fiscal year ended April 30, 2006. 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 reports concerning transfer agent's system of internal accounting control pursuant to Rule 17Ad-13 of the Securities Exchange Act; and issuance of agreed upon procedures report to the registrant's Board in connection with the pass-through of internal legal cost 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 $6,500 for the fiscal year ended April 30, 2007. 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 returns and review of annual excise distribution calculations.
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 April 30, 2007.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant were $5,300 for the fiscal year ended April 30, 2006. 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 April 30, 2006.
(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 April 30, 2007.
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 April 30, 2007.
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 April 30, 2006.
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 April 30, 2006.
(e) The registrant’s Audit Committee has established pre-approval policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of Regulation S-X (the “Pre-Approval Policy”) with respect to services provided by the registrant’s independent auditors. Pursuant to the Pre-Approval Policy, the Audit Committee has pre-approved the services set forth in the table below with respect to the registrant up to the specified fee limits. Certain fee limits are based on aggregate fees to the registrant and other registrants within the Delaware Investments Family of Funds.
| Service | Range of Fees |
| Audit Services | |
| Statutory audits or financial audits for new Funds | up to $25,000 per Fund |
| Services associated with SEC registration statements (e.g., Form N-1A, Form N-14, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings (e.g., comfort letters for closed-end Fund offerings, consents), and assistance in responding to SEC comment letters | up to $10,000 per Fund |
| Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit-related services” rather than “audit services”) | up to $25,000 in the aggregate |
| Audit-Related Services | |
| Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and /or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit services” rather than “audit-related services”) | up to $25,000 in the aggregate |
| Tax Services | |
| U.S. federal, state and local and international tax planning and advice (e.g., consulting on statutory, regulatory or administrative developments, evaluation of Funds’ tax compliance function, etc.) | up to $25,000 in the aggregate |
| U.S. federal, state and local tax compliance (e.g., excise distribution reviews, etc.) | up to $5,000 per Fund |
| Review of federal, state, local and international income, franchise and other tax returns | up to $5,000 per Fund |
Under the Pre-Approval Policy, the Audit Committee has also pre-approved the services set forth in the table below with respect to the registrant’s investment adviser and other entities controlling, controlled by or under common control with the investment adviser that provide ongoing services to the registrant (the “Control Affiliates”) up to the specified fee limit. This fee limit is based on aggregate fees to the investment adviser and its Control Affiliates.
| Service | Range of Fees |
| Non-Audit Services | |
| Services associated with periodic reports and other documents filed with the SEC and assistance in responding to SEC comment letters | up to $10,000 in the aggregate |
The Pre-Approval Policy requires the registrant’s independent auditors to report to the Audit Committee at each of its regular meetings regarding all services initiated since the last such report was rendered, including those services authorized by the Pre-Approval Policy.
(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 $251,582 and $201,260 for the registrant’s fiscal years ended April 30, 2007 and April 30, 2006, 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
Not applicable.
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
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company 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: Voyageur Mutual Funds III
| |
| PATRICK P. COYNE |
| By: | Patrick P. Coyne |
| Title: | Chief Executive Officer |
| Date: | July 6, 2007 |
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.
| |
| PATRICK P. COYNE |
| By: | Patrick P. Coyne |
| Title: | Chief Executive Officer |
| Date: | July 6, 2007 |
| |
| |
| RICHARD SALUS |
| By: | Richard Salus |
| Title: | Chief Financial Officer |
| Date: | July 6, 2007 |
