As filed with the U.S. Securities and Exchange Commission on September 15, 2005
File No. 811-07420
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ___
[ ] Post-Effective Amendment No. ___
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
--------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
(800) 523-1918
-------------------
Registrant's Telephone Number, Including Area Code
2005 Market Street, Philadelphia, Pennsylvania 19103-7094
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(Address of Principal Executive Offices)(Zip Code)
Richelle S. Maestro, Esquire, 2005 Market Street,
Philadelphia, Pennsylvania 19103-7094
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(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective under the Securities Act of 1933.
Calculation of Registration Fee under the Securities Act of 1933:
Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price per Aggregate Offering Registration Fee
Unit Price
Common Shares ($0.01 2,594,700 $14.85(1) $38,531,295 $4,536
par value)
Common Shares ($0.01 1,837,200 $14.70(2) $27,006,840 $3,179
par value)
Preferred Shares,
Series C 400 $50,000 $20,000,000 $2,354
($0.01 par value)
Preferred Shares,
Series D
($0.01 par value)
300 $50,000 $15,000,000 $1,766
- ----------------------- ----------------- ------------------- ----------------------------------------
Total Registration Fee $11,835
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(1) Average of high and low reported price for common shares of Delaware
Investments Minnesota Municipal Income Fund, Inc. on September 12, 2005.
(2) Average of high and low reported price for common shares of Delaware
Investments Minnesota Municipal Income Fund III, Inc. on September 12, 2005.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
Delaware Investments Minnesota Municipal Income Fund, Inc.
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Delaware Investments Minnesota Municipal Income Fund III, Inc.
Dear Shareholder:
Enclosed is a Notice of a Joint Special Meeting (the "Meeting") of
Shareholders of Delaware Investments Minnesota Municipal Income Fund, Inc.
("Minnesota I"), Delaware Investments Minnesota Municipal Income Fund III, Inc.
("Minnesota III" and, with Minnesota I, the "Acquired Funds") and Delaware
Investments Minnesota Municipal Income Fund II, Inc. ("Minnesota II" or the
"Acquiring Fund"). The Meeting has been called for December 9, 2005 at 3:00 p.m.
Eastern time at the offices of Delaware Investments, located at 2001 Market
Street, 2nd Floor Auditorium, Philadelphia, Pennsylvania 19103. The accompanying
Proxy Statement/Prospectus describes the proposals being presented for your
consideration and requests your prompt attention and vote by mail using the
enclosed proxy card, by telephone or by the Internet.
Please take a moment to vote!
The Meeting is critically important. Shareholders of each Acquired Fund and
the Acquiring Fund will be asked to approve an Agreement and Plan of Acquisition
(each, a "Plan"). If the shareholders of an Acquired Fund vote to approve their
Plan and shareholders of the Acquiring Fund also vote to approve that Plan,
substantially all of the assets of that Acquired Fund will be acquired by the
Acquiring Fund in exchange for shares of the Acquiring Fund (each such
transaction to be referred to as an "Acquisition").
The transactions above are being proposed because we believe that the
shareholders of the Funds potentially could be advantaged by the increase in
assets realized by combining the Funds. A larger combined Fund can potentially
realize cost savings due to economies of scale, as certain fixed costs may be
distributed over a larger asset base. Each of the Acquired Funds and the
Acquiring Fund have the same investment objective and substantially similar
investment policies, as described in detail in the attached Proxy
Statement/Prospectus. The Acquired Funds and the Acquiring Fund are all managed
by Delaware Management Company.
Please take the time to review this entire document and vote now! Whether
or not you plan to attend the Meeting, please vote your shares by mail or by
telephone or through the Internet. If you determine at a later date that you
wish to attend this Meeting, you may revoke your proxy and vote in person by
following the instructions in the Proxy Statement/Prospectus.
Thank you for your prompt attention and participation.
Sincerely,
Jude T. Driscoll
Chairman
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND, INC.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND III, INC.
2005 Market Street
Philadelphia, Pennsylvania 19103
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
To be held on December 9, 2005
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Joint Special Meeting (the "Meeting") of
Shareholders of Delaware Investments Minnesota Municipal Income Fund, Inc.
("Minnesota I"), Delaware Investments Minnesota Municipal Income Fund III, Inc.
("Minnesota III" and, with Minnesota I, the "Acquired Funds") and Delaware
Investments Minnesota Municipal Income Fund II, Inc. ("Minnesota II" or the
"Acquiring Fund") has been called by the Boards of Directors of the Funds and
will be held at the offices of Delaware Investments located at 2001 Market
Street, 2nd Floor Auditorium, Philadelphia, Pennsylvania 19103, on December 9,
2005 at 3:00 p.m. Eastern time. The Meeting is being called for the following
reasons:
1. For shareholders of Minnesota I, to approve an Agreement and Plan of
Acquisition between Minnesota I and Minnesota II that would result in
the acquisition by Minnesota II of substantially all of the property,
assets and goodwill of Minnesota I in exchange solely for full and
fractional Common and Preferred Shares of Minnesota II, as applicable,
followed by the dissolution of Minnesota I;
2. For shareholders of Minnesota III, to approve an Agreement and Plan of
Acquisition between Minnesota III and Minnesota II that would result
in the acquisition by Minnesota II of substantially all of the
property, assets and goodwill of Minnesota III in exchange solely for
full and fractional Common and Preferred Shares of Minnesota II, as
applicable, followed by the dissolution of Minnesota III; and
3. For shareholders of Minnesota II to approve each Agreement and Plan of
Acquisition between Minnesota II and each Acquired Fund, each of which
would result in the acquisition by Minnesota II of substantially all
of the property, assets and goodwill of each Acquired Fund in exchange
solely for full and fractional Common and Preferred Shares of
Minnesota II, as applicable.
4. To vote upon any other business that may properly come before the
Meeting or any adjournment thereof.
Holders of preferred shares of the Acquired Funds are entitled to assert
dissenters' rights of appraisal under Minnesota law. In order to do so, holders
must strictly follow the procedures set forth in Minnesota Statutes, Sections
302A.471 and 302A.473, copies of which are attached to the Proxy
Statement/Prospectus as Exhibit B. For more information, see the discussion
under the caption "Voting Information - Dissenters' Rights of Appraisal" in the
Proxy Statement/Prospectus.
Shareholders of record of each Fund as of the close of business on October
10, 2005 are entitled to notice of, and to vote at, the Meeting or any
adjournment thereof. Whether or not you plan to attend the Meeting, please vote
your shares by returning the Proxy Card by mail in the enclosed postage-paid
envelope provided, or by voting by telephone or over the Internet. Your vote is
important.
By Order of the Boards of Directors
Richelle S. Maestro
Secretary
October ___, 2005
To secure the largest possible representation and to save the expense of
further mailings, please mark your Proxy Card, sign it, and return it in the
enclosed envelope, which requires no postage if mailed in the United States. If
you prefer, you may instead vote by telephone or the Internet. You may revoke
your Proxy at any time at or before the Meeting or vote in person if you attend
the Meeting by following the instructions in the Proxy Statement/Prospectus.
[FRONT COVER PAGE]
Proxy Statement/Prospectus
Dated October ___, 2005
Acquisition of Substantially All of the Assets of
Delaware Investments Minnesota Municipal Income Fund, Inc. (ASE: VMN) and
Delaware Investments Minnesota Municipal Income Fund III, Inc. (ASE: VYM)
By, and In Exchange For Shares of,
Delaware Investments Minnesota Municipal Income Fund II, Inc. (ASE: VMM)
This proxy statement/prospectus ("Proxy Statement/Prospectus") solicits
proxies to be voted at a Joint Special Meeting of Shareholders (the "Meeting")
of Delaware Investments Minnesota Municipal Income Fund, Inc. ("Minnesota I"),
Delaware Investments Minnesota Municipal Income Fund III, Inc. ("Minnesota III"
and, with Minnesota I, the "Acquired Funds") and Delaware Investments Minnesota
Municipal Income Fund II, Inc. ("Minnesota II" or the "Acquiring Fund").
The Meeting will be held at the offices of Delaware Investments, 2001
Market Street, 2nd Floor Auditorium, Philadelphia, PA 19103, on December 9, 2005
at 3:00 p.m. Eastern Time. At the Meeting, shareholders of each Acquired Fund
and the Acquiring Fund will be asked to approve an Agreement and Plan of
Acquisition (each, a "Plan"). If the shareholders of an Acquired Fund and the
Acquiring Fund vote to approve their Plan, substantially all of the assets of
that Acquired Fund will be acquired by the Acquiring Fund in exchange for shares
of the Acquiring Fund (each such transaction to be referred to as an
"Acquisition").
The principal executive offices of each of the Acquired Funds and the
Acquiring Fund (collectively, the "Funds") are located at 2005 Market Street,
Philadelphia, PA 19103-7094. You can reach the offices of the Funds by telephone
by calling 1-800-523-1918.
The Boards of Directors of each of the Funds are soliciting these proxies.
If the shareholders of an Acquired Fund vote to approve their Plan and
shareholders of the Acquiring Fund vote to approve that Acquisition, then each
holder of common stock of the Acquired Fund ("Acquired Fund Common Shares") will
receive Acquiring Fund common stock ("Acquiring Fund Common Shares") of
equivalent aggregate net asset value ("NAV") to the aggregate NAV of the
Acquired Fund Common Shares they own. In addition, each shareholder of preferred
stock of the Acquired Fund ("Acquired Fund Preferred Shares") will receive the
same number of shares of Acquiring Fund preferred stock ("Acquiring Fund
Preferred Shares") with the same liquidation preference as the Acquired Fund
Preferred Shares they own. No sales charge will be imposed on the Acquiring Fund
Common Shares or the Acquiring Fund Preferred Shares (collectively, "Acquiring
Fund Shares") received in connection with the Acquisitions, and the Acquisitions
are designed to be tax-free reorganizations. After the Acquisition of an
Acquired Fund is completed, the Acquired Fund will be liquidated and dissolved.
Each Acquired Fund is a non-diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Acquiring Fund is a diversified, closed-end management
investment company registered under the 1940 Act. The investment objective of
each Fund is to provide current income exempt from both regular federal income
tax and Minnesota state personal income tax, consistent with the preservation of
capital. The Acquired Fund Common Shares and the Acquiring Fund Common Shares
("Common Shares") are each listed on the American Stock Exchange, LLC (the
"Exchange") under the ticker symbols set forth above. Delaware Management
Company ("DMC"), a series of Delaware Management Business Trust, serves as
investment manager to each Fund. The Board of Directors of each Fund believes
that the Acquisition will benefit the shareholders of each Fund, as discussed
further in this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus will first be sent to shareholders on or
about October ___, 2005. It sets forth concisely the information about the
Acquiring Fund that a prospective investor ought to know before investing. It
should be retained for future reference. There is also a statement of additional
information about the Acquired Funds, the Acquiring Fund and the Acquisitions
dated October ___, 2005 (the "SAI") that is incorporated by reference into this
Proxy Statement/Prospectus in its entirety. The SAI and other information about
the Acquiring Fund has been filed with the Securities and Exchange Commission
(the "SEC") and is available upon oral or written request and without charge by
contacting the Acquiring Fund at the address or phone number given above. In
addition, reports, proxy material and other information concerning the Funds can
be inspected at the Exchange.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ACQUIRING FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT AGENCY. THE
ACQUIRING FUND SHARES INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
SUMMARY
This is only a summary of certain information contained in this Proxy
Statement/Prospectus. You should read the more complete information in the rest
of this Proxy Statement/Prospectus, including the Form of Plan (attached as
Exhibit A), the Applicable Minnesota Statutes (attached as Exhibit B), the
Statement of Rights and Preferences of Acquiring Fund Preferred Shares, Series C
(attached as Exhibit C), and the Statement of Rights and Preferences of
Acquiring Fund Preferred Shares, Series D (attached as Exhibit D).
KEY FEATURES OF THE FUNDS
Each of the Funds is organized as a Minnesota corporation. Each of the
Funds is also registered as a closed-end investment company under the 1940 Act,
and their common shares trade on the Exchange. Each Fund also issues a class of
preferred shares in one or more series. As of September 30, 2005, the total
asset levels for Funds (including assets attributable to the preferred shares)
were as follows:
Fund Assets
Minnesota I
Minnesota II
Minnesota III
KEY FEATURES OF THE ACQUISITIONS
The Board of Directors of each Fund has approved the Acquisitions as in the
best interests of each Fund's shareholders. The Board of Directors of each Fund
has approved submitting the applicable Plan to a vote of each Fund's
shareholders, and recommends that shareholders vote FOR approval of their Plan.
The Acquisitions
If the Plans and the Acquisitions are approved, then on the date that the
Acquisitions take place (the "Closing Date"), the Acquiring Fund will acquire
substantially all of the assets of each of the Acquired Funds. In return,
shareholders of each of the Acquired Funds will receive Acquiring Fund Shares on
the Closing Date in exchange for their Acquired Fund Shares, and will become
shareholders of the Acquiring Fund. The Acquired Funds will each retain
sufficient assets to pay off any of their remaining liabilities, if any. After
provision has been made for any remaining liabilities to be paid off, the
Acquired Funds will be dissolved. For more information about the Acquisitions,
see the section entitled "Information About the Acquisitions" below.
Common Shares
Each Plan provides that, on the Closing Date, holders of Acquired Fund
Common Shares will receive Acquiring Fund Common Shares having an aggregate NAV
equal to the aggregate NAV of the Acquired Fund Common Shares they held on the
Closing Date. As a result, the net asset value (not market value) of an Acquired
Fund shareholder's investment will be the same immediately after the Acquisition
as it had been immediately before the Acquisition. Similarly, the Acquisition
will have no effect on the value of an Acquiring Fund shareholder's investment
(based upon net asset value, not market value). This structure is designed to
avoid any "dilution" in the investments of holders of either Acquired Fund
Common Shares or Acquiring Fund Common Shares. For more information about the
Acquiring Fund Common Shares, see the section below entitled "Information About
the Acquisitions-- Material Features of the Acquisitions-- Description of the
Acquiring Fund Common Shares to be Issued."
Preferred Shares
Each of the Acquired Funds has issued Acquired Fund Preferred Shares. The
Acquiring Fund also has issued two series of Acquiring Fund Preferred Shares--
Series A and Series B. In anticipation of this transaction, the Board of
Directors of the Acquiring Fund has created two new series of Acquiring Fund
Preferred Shares-- Series C and Series D (any such Acquired Fund Preferred
Shares and Acquiring Fund Preferred Shares referred to as "Preferred Shares").
The rights, terms and preferences of the Series C Acquiring Fund Preferred
Shares are identical in all material respects (including the liquidation
preference) to the current rights and preferences of the Preferred Shares of
Minnesota I, and the rights, terms and preferences of the Series D Acquiring
Fund Preferred Shares are identical in all material respects (including the
liquidation preference) to the current rights and preferences of the Preferred
Shares of Minnesota III. On the Closing Date, holders of Minnesota I Preferred
Shares will receive the same number of Series C Acquiring Fund Preferred Shares
as the number of Minnesota I Preferred Shares that they held on the Closing
Date, and holders of Minnesota III Preferred Shares will receive the same number
of Series D Acquiring Fund Preferred Shares as the number of Minnesota III
Preferred Shares that they held on the Closing Date. In addition, the
Acquisitions have been structured so that holders of Acquired Fund Preferred
Shares will receive all dividends to which they are entitled through the Closing
Date and, after the Closing Date, will continue to earn dividends during the
initial dividend period ("Initial Dividend Period") of the Acquiring Fund
Preferred Shares at the same rate that had applied to the corresponding Acquired
Fund Preferred Shares immediately before the Acquisition. As with the Common
Shares, this structure is designed to avoid any "dilution" in the investments of
holders of either Acquired Fund Preferred Shares or the Acquiring Fund Preferred
Shares. For more information about the Acquiring Fund Preferred Shares, see the
section below entitled "Information About the Acquisitions-- Material Features
of the Acquisitions-- Description of Acquiring Fund Preferred Shares to be
Issued."
KEY FEATURES OF THE ACQUIRING FUND AND THE ACQUIRED FUNDS
Investment Objectives and Policies
Investment Objectives. The Funds all have the same investment objective--
namely, they seek to provide current income exempt from both regular federal
income tax and Minnesota state personal income tax, consistent with the
preservation of capital.
Investment Strategy. Each Fund seeks to achieve its investment objective by
investing substantially all (in excess of 80%) of its net assets in tax-exempt
"Minnesota Municipal Obligations" rated "investment grade" at the time of
investment. "Minnesota Municipal Obligations" are debt obligations issued by or
on behalf of the State of Minnesota, its agencies, instrumentalities and
political subdivisions and which bear interest that, in the opinion of bond
counsel or other counsel to the issuer, is exempt from both regular federal
income tax and Minnesota state personal income tax. "Investment grade" means
that, at the time of investment, the Minnesota Municipal Obligations had a
credit rating of at least (1) Baa by Moody's Investors Service, Inc.
("Moody's"), (2) BBB by Standard & Poor's, a division of The McGraw Hill
Companies, Inc. ("S&P" and, with Moody's, the "Rating Agencies"), or (3) in the
case of securities that have not been rated by the Rating Agencies-- or that are
unrated-- a credit quality that is equivalent to Baa or BBB by Moody's and S&P,
respectively, as determined by DMC. For more information about the investment
objectives and policies of the Funds, see the section below entitled
"Information About the Funds-- General Description." Each Fund intends to
emphasize investments in Minnesota Municipal Obligations with long-term
maturities in order to maintain an average portfolio maturity of 20 to 30 years,
although this may change based on market conditions.
Trading of Common Shares on the Exchange
Common shares of closed-end funds like the Funds are often traded on a
stock exchange-- in the case of the Funds, the American Stock Exchange. As a
general rule, when investors wish to purchase Common Shares of a Fund, they
enter into a purchase transaction on the Exchange through a broker-dealer (and
thus indirectly purchase Common Shares from a selling Fund shareholder).
Similarly, when a Fund shareholder wishes to sell Common Shares, the Common
Shares are sold on the Exchange through a broker-dealer (and thus are purchased
by another investor). Unlike a mutual fund (also called an "open-end" fund),
holders of Common Shares of a Fund generally do not purchase and sell Common
Shares from and to the Fund, either directly or through an intermediary such as
a broker-dealer.
Preferred Shares
Unlike the Funds' Common Shares, the Funds' Preferred Shares do not trade
on the Exchange. Rather, the Funds' Preferred Shares are purchased and sold in
private transactions conducted by a remarketing agent (the "Remarketing Agent").
Each Fund's Preferred Shares have a dividend period that is 28 days long (the
"Dividend Period"). Investors purchase the Funds' Preferred Shares for the
Dividend Period at a dividend rate (the "Applicable Dividend Rate"). At the end
of the Dividend Period, the holders of Preferred Shares receive the dividend on
the Preferred Shares at the Applicable Dividend Rate that was declared for the
Dividend Period. A new Applicable Dividend Rate is then set for the next
Dividend Period. At that time, a holder of Preferred Shares may choose either to
continue to hold the Preferred Shares for the next Dividend Period or to sell
the Preferred Shares back to the Remarketing Agent. Each Fund's Preferred Shares
are purchased and sold from and to the Remarketing Agent at a liquidation
preference of $50,000 per share (the "Liquidation Preference") plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared).
If a holder of Preferred Shares chooses to sell a Fund's Preferred Shares back
to the Remarketing Agent, the Remarketing Agent will attempt to sell the
Preferred Shares to another holder of Preferred Shares or to a new investor.
PRIMARY CONSEQUENCES OF THE PROPOSED ACQUISITIONS
If the Plans and the Acquisitions are approved by Fund shareholders and the
Acquisitions are completed on the Closing Date, then the Acquiring Fund will
acquire substantially all of the assets of the Acquired Funds and all of the
Funds' shareholders will become shareholders of the Acquiring Fund. The
Acquiring Fund will continue to operate as a closed-end fund managed by DMC and
investing substantially all of its assets in Minnesota Municipal Obligations.
Acquiring Fund Common Shares will continue to trade on the Exchange. After the
Acquisitions, the Acquiring Fund will have four series of Preferred Shares
issued and outstanding: its two original series-- Series A and Series B-- and
two new series-- Series C (issued to holders of Minnesota I's Preferred Shares
in the Acquisition) and Series D (issued to holders of Minnesota III's Preferred
Shares in the Acquisition) (collectively "Series"). All of the Acquiring Fund
Preferred Shares will continue to be remarketed through the Remarketing Agent
for 28-day Dividend Periods.
If the Plans are approved by shareholders and the Acquisitions take place
on the anticipated Closing Date, the Acquiring Fund will hold an annual meeting
in 2006, but the Acquired Funds will not hold an annual meeting in 2006. If the
Plans are not approved by shareholders, the Board will announce the date of the
2006 annual meetings for the Funds at a future date.
If Fund shareholders approve the Acquisition for one of the Acquired Funds
but not the other, the Boards of Directors of the Funds currently anticipate
proceeding with the approved Acquisition. If a Plan and the related Acquisition
is not approved by Fund shareholders, the Board of Directors of the Acquired
Fund whose Plan or Acquisition was not approved may consider alternative
actions, which may include liquidation of that Acquired Fund.
PRIMARY FEDERAL TAX CONSEQUENCES
It is expected that the shareholders of the Funds will not recognize any
gain or loss for federal income tax purposes as a result of the Acquisitions.
Shareholders should, however, consult their own tax adviser regarding the
effect, if any, of the Acquisitions in light of their individual circumstances.
Shareholders should also consult their tax adviser about state and local tax
consequences, if any, because the information about tax consequences in this
Proxy Statement/Prospectus relates only to the federal income tax consequences.
This discussion of "Primary Federal Tax Consequences" is not intended or written
to be used as, and should not be considered a substitute for, tax advice.
PRINCIPAL RISK FACTORS
INVESTMENT RISKS
The risks associated with an investment in any of the Funds are
substantially similar. As with most investments, investments in the Funds
involve risks, including the risk that shareholders may receive little or no
return on their investment, and the risk that shareholders may lose part or all
of the money they invest. There can be no guarantee against losses resulting
from an investment in any of the Funds, nor can there be any assurance that any
of the Funds will achieve their investment objectives. The achievement of a
Fund's objective depends on market conditions generally and on the investment
manager's analytical and portfolio management skills. Before investing in any of
the Funds, potential shareholders should carefully evaluate the risks. Because
of the nature of the Funds, shareholders should consider their investment in any
of the Funds to be a long-term investment that typically provides the best
results when held for a number of years. Following are the chief risks that
shareholders assume when investing in the Funds.
Interest Rates The Funds are affected primarily by changes in interest
rates. When interest rates rise, the value of bonds in a Fund's portfolio will
likely decline. This generally affects securities with longer maturities more
than those with shorter maturities. Because interest rate movements can be
unpredictable, DMC does not try to increase return by aggressively capitalizing
on interest rate moves. DMC does attempt to manage the duration of a Fund in
order to take advantage of DMC's market outlook, especially on a longer term
basis.
Municipal Bonds The Funds concentrate their investments in securities
issued by municipalities in Minnesota. The value of these investments may be
adversely affected by new legislation in Minnesota, regional or local economic
conditions, and differing levels of supply and demand for municipal bonds. DMC
maintains a long-term investment approach and focuses on bonds it believes will
provide a steady income stream regardless of interim market fluctuations. DMC
does not try to predict overall market movements and generally does not trade
for short-term purposes.
Credit Risk The Funds may also be affected by the ability of individual
municipalities to pay interest and repay principal on the bonds they issue. Weak
economic conditions in Minnesota may hinder that ability. This risk is often
referred to as "credit risk."
Many municipalities insure repayment for their obligations. This insurance
is designed to minimize credit risks to the Funds by increasing the likelihood
that the Funds would still receive payment even if an issuer defaulted. Although
bond insurance reduces the risk of loss due to default by an issuer, the bonds
remain subject to the risk that market value may fluctuate for other reasons and
there is no assurance that the insurance company will meet its obligations.
To help reduce credit risk, DMC conducts careful credit analysis of
individual bonds. DMC focuses on high quality bonds and limits the Funds'
holdings of bonds rated below investment grade. DMC also expects to hold a
number of different bonds in each Fund's portfolio.
High Yield ("Junk") Bonds Credit risk is even greater for non-investment
grade, high-yield municipal bonds. Investing in so-called "junk" bonds entails
the risk of principal loss, which may be greater than the risk involved in
investment grade bonds. Issuers of these bonds are generally considered to be in
a less secure financial situation and may be affected more by adverse economic
conditions, and therefore high-yield bonds tend to exhibit more price
volatility. High-yield bonds are sometimes issued by municipalities with lesser
financial strength and therefore less ability to make projected debt payments on
the bonds. A protracted economic downturn could adversely affect the value of
outstanding bonds and the ability of high-yield issuers to repay principal and
interest. In particular, for a high-yield revenue bond, adverse economic
conditions to the particular project or industry which backs the bond would pose
a significant risk. In striving to manage these risks, DMC limits the amount of
each Fund's portfolio which may be invested in lower quality, higher yielding
bonds. Each Fund holds a number of different bonds representing a variety of
industries and municipal projects, seeking to minimize the effect that any one
bond may have on the Fund.
Geographic Concentration Geographic concentration risk is the heightened
sensitivity to regional, state and local political and economic conditions in
Minnesota that could adversely affect the holdings in a Fund. There is also a
risk that there could be an inadequate supply of municipal bonds in Minnesota.
DMC carefully monitors the Minnesota economy and in general believes that it is
broad enough to satisfy the Funds' investment needs. In addition, the Funds have
the flexibility to invest in issuers in Puerto Rico and the Virgin Islands and
Guam whose bonds are also free of individual state income taxes.
Sector Risk A Fund may focus its investments in a particular sector-- such
as the housing, health care and/or utility industries, or in industrial
development bonds-- when the supply of bonds in other sectors does not suit its
investment needs. This will expose a Fund to greater industry and security risk.
DMC attempts to spread each Fund's assets across different types of municipal
bonds and among bonds representing different industries and regions within
Minnesota. DMC also follows a rigorous selection process before choosing
securities for the Funds' portfolios.
Non-Diversification Each Acquired Fund is a non-diversified investment
company under the 1940 Act and may therefore be subject to greater risk than if
it were a diversified fund like the Acquiring Fund. A non-diversified investment
company is not limited by the 1940 Act in the amount that it may invest in a
single issuer. Each Acquired Fund nonetheless restricts the amount that it
invests in a single issuer in order to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Under
the Code, non-diversified investment companies generally have the flexibility to
invest as much as 50% of their assets in as few as two issuers provided no
single issuer accounts for more than 25% of the portfolio. With certain
exceptions, the remaining 50% of the portfolio must be diversified so that no
more than 5% of an Acquired Fund's assets are invested in the securities of a
single issuer. Because a non-diversified fund may invest its assets in fewer
issuers than a diversified fund, the value of fund common shares may increase or
decrease more rapidly than if a fund were fully diversified. If an Acquired Fund
were to invest a large portion of its assets in a single issuer, the Acquired
Fund could be significantly affected if that issuer was unable to satisfy its
financial obligations. Nevertheless, the Acquired Funds typically hold
securities from a variety of different issuers, representing different sectors
and different types of municipal projects. DMC also performs extensive credit
analysis on all securities. DMC is particularly diligent in reviewing the credit
status of bonds that represent a larger percentage of Acquired Fund portfolio
assets.
Leverage Leverage is essentially a "borrowing" by a fund where the amount
"borrowed" is invested in portfolio securities. Examples of leverage include
bank loans, issuing short-term or long-term debt, or issuing preferred shares
with a liquidation preference. Each of the Funds uses leverage in the form of
preferred shares. Leverage is a tool that can be an important contributor to
each Fund's income and capital appreciation potential. However, there is no
guarantee that leveraging will benefit any of the Funds. Leveraging may result
in a higher degree of volatility because a Fund's NAV could be more sensitive to
fluctuations in short-term interest rates. DMC believes this volatility risk is
reasonable given the benefits of higher income potential.
Inverse Floaters The Funds may invest in inverse floating rate securities
("inverse floaters"), a type of derivative tax-exempt obligation with floating
or variable interest rates that move in the opposite direction of short-term
interest rates, usually at an accelerated speed. Consequently, the market values
of inverse floaters will generally be more volatile than other tax-exempt
investments. This risk is somewhat higher for Minnesota III because it may
invest in inverse floaters to a greater extent than the other Funds.
Derivatives In addition to inverse floaters, the Funds may invest in a
number of other kinds of derivatives, including: interest rate swaps, caps and
floors; futures contracts; and options on Municipal Obligations and futures
contracts. While the Funds generally use these derivative instruments for
hedging purposes, the extent to which such hedges are successful depends in
large part on DMC's skill in using these instruments and its ability to
accurately foresee the financial and market conditions that the instruments are
designed to hedge. Unsuccessful hedges could result in greater losses to the
Funds than if no hedges had been used in the first place. The guidelines imposed
by the Rating Agencies as a condition for rating the Funds' Preferred Shares
limit the extent to which the Funds can invest in derivatives.
Call Risk Call risk is the risk that a bond issuer will prepay the bond
during periods of low interest rates, forcing investors to reinvest their money
at interest rates that might be lower than rates on the called bond. DMC takes
into consideration the likelihood of prepayment when it selects bonds and, when
appropriate, DMC looks for bonds that have protection against early prepayment.
This may have the added benefit of improving a Fund's investment performance in
a declining interest rate environment.
Illiquid Securities Each Fund may invest up to 15% of its net assets in
illiquid securities, which may include securities with contractual restrictions
on resale, certain securities exempt from registration under the Securities Act
of 1933, as amended, and other securities which may not be readily marketable.
The relative illiquidity of these securities may prevent a Fund from disposing
of them in a timely manner and at a fair price when it is necessary or desirable
to do so.
Discount Risk Common shareholders are subject to the risk that a Fund's
common shares may trade at a discount to NAV. See "Information About the Funds--
General Description-- Share Price Data" below.
Alternative Minimum Tax Each Fund may invest in securities the income from
which is subject to the federal or Minnesota alternative minimum tax ("AMT").
Income from these securities would be taxable to shareholders who are subject to
the federal or Minnesota AMT.
For federal income tax purposes, an AMT is imposed on taxpayers to the
extent such tax exceeds a taxpayer's regular income tax liability (with certain
adjustments). Exempt-interest dividends attributable to interest income on
certain tax-exempt obligations to finance private activities are treated as an
item of tax preference that is included in the alternative minimum taxable
income for purposes of computing the federal AMT for all taxpayers and the
federal environmental tax on corporations. In addition, all other tax-exempt
interest received by a corporation, including exempt-interest dividends, will be
included in adjusted current earnings and in earnings and profits for purposes
of determining the federal corporate AMT and the federal environmental tax
imposed on corporations.
Because liability for AMT will depend upon the regular tax liability and
tax preference items of a specific taxpayer, the extent, if any, to which the
tax preference items resulting from an investment in a Fund would be subject to
the tax will depend upon each taxpayer's individual situation. It is possible
that an investor not otherwise subject to AMT could become subject to AMT as a
result of an investment in a Fund. For shareholders with substantial tax
preferences, AMT could reduce the after-tax benefits of an investment in a Fund.
Each shareholder is advised to consult a tax adviser with respect to the
possible effects of tax preference items. In addition, exempt-interest dividends
are taken into account when determining the taxable portion of an investor's
Social Security or railroad retirement benefits for federal income tax purposes.
Exempt-interest dividends attributable to interest on certain private
activity bonds may also be subject to Minnesota AMT on individuals, estates and
trusts.
Contractual Indemnifications The Funds enter into contracts in the normal
course of business that contain a variety of indemnifications. The Funds'
maximum exposure under these arrangements is unknown. However, the Funds have
not had prior claims or losses pursuant to these contracts. DMC has reviewed the
Funds' existing contracts and expects the risk of loss to be remote.
POTENTIAL RESTRICTIONS ON ACQUIRING FUND'S PAYMENT OF DIVIDENDS
Because the Acquiring Fund uses leverage in the form of the Acquiring Fund
Preferred Shares, there are certain circumstances in which it would not be
permitted to pay dividends on Acquiring Fund Common Shares. Under the 1940 Act,
the Acquiring Fund may not declare dividends (other than dividends payable in
Acquiring Fund Common Shares), make any other distributions on Acquiring Fund
Common Shares, or purchase any Acquiring Fund Common Shares if, after giving
effect to the declaration, distribution or purchase, the "1940 Act Asset
Coverage" with respect to the Acquiring Fund Preferred Shares would be less than
200%. For these purposes, "1940 Act Asset Coverage" means the ratio of total
assets less all liabilities (other than liabilities attributable to the
Acquiring Fund Preferred Shares) to the aggregate Liquidation Preference of the
Acquiring Fund Preferred Shares. The Acquiring Fund intends, to the extent
possible, to purchase or redeem Acquiring Fund Preferred Shares from time to
time to the extent necessary to maintain a 1940 Act Asset Coverage of the
Acquiring Fund Preferred Shares of at least 200%.
In addition, under the Acquiring Fund's Articles of Incorporation, as
amended from time to time (the "Articles"), the Acquiring Fund will not declare
or pay any dividend or other distribution on Acquiring Fund Common Shares (other
than a dividend or distribution paid in Acquiring Fund Common Shares), or
purchase any Acquiring Fund Common Shares or Acquiring Fund Preferred Shares,
unless full cumulative dividends on the Acquiring Fund Preferred Shares through
the most recently ended Dividend Period shall have been paid (or have been
declared and sufficient funds have been deposited with the paying agent for the
Acquiring Fund Preferred Shares (the "Paying Agent")), and the Acquiring Fund
has redeemed the number of Acquiring Fund Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the Articles.
See "Information About the Acquisitions-- Material Features of the
Acquisitions-- Description of Acquiring Fund Shares to be Issued-- Mandatory
Redemption."
The Acquiring Fund's Articles also provide that the Acquiring Fund will not
declare or pay any dividend or other distribution on Acquiring Fund Common
Shares or Acquiring Fund Preferred Shares (other than a dividend or distribution
paid in Acquiring Fund Common Shares), or purchase any Acquiring Fund Common
Shares or Acquiring Fund Preferred Shares, unless immediately after the
transaction the value of the Acquiring Fund's portfolio securities meeting the
credit quality requirements of the Rating Agencies would at least be equal to
the "Preferred Share Basic Maintenance Amount." For these purposes, the
"Preferred Share Basic Maintenance Amount" is a calculation measuring the
Acquiring Fund's liabilities, including liabilities with respect to payment of
dividends on the Acquiring Fund Preferred Shares and the Liquidation Preference.
This test thus requires the Acquiring Fund to have sufficient high credit
quality portfolio securities in excess of certain of its liabilities before it
can pay cash dividends on, or purchase, Acquiring Fund Common Shares or
Acquiring Fund Preferred Shares.
CURRENT AND PRO FORMA FEES
The tables below describe the fees and expenses that shareholders may pay
if they buy and hold Common Shares of the Funds. The tables also show the
estimated fees and expenses for the Acquiring Fund Common Shares after the
Acquisitions. The purpose of the tables is to assist shareholders in
understanding the various costs and expenses that they will bear directly or
indirectly as a holder of Acquiring Fund Common Shares.
Fees and Expenses for Acquiring Fund Common Shares
and Acquired Fund Common Shares
Actual* Projected**
Minnesota I Minnesota III Minnesota II Minnesota II
After the
Acquisitions
Shareholder Transaction Expenses
Sales Load (1) N/A N/A N/A N/A
(as a percentage of offering price)
Dividend Reinvestment Plan Fees (2) N/A N/A N/A N/A
Annual Expenses (as a percentage of net
assets attributable to Common Shares)
Management Fees 0.61% 0.63% 0.62% 0.62%
Interest Payments on Borrowed Funds 0.81% 0.90% 0.86% 0.85%
Other Expenses 0.66% 0.70% 0.38% 0.36%
---------------- ----------------- ---------------- ------------------
Total Annual Expenses 2.08% 2.23% 1.86% 1.83%
================ ================= ================ ==================
* Information for the Funds is provided for their fiscal year ended March 31,
2005.
** Projected expenses based on current and anticipated Acquiring Fund
expenses, including the estimated costs of the Acquisitions to be borne by
the Funds. The pro forma combined expenses are based on the net assets
attributable to the Common Shares of the Funds as of March 31, 2005.
Assumes approval and completion of both Acquisitions.
(1) No sales charges will be applicable to Acquiring Fund Common Shares
received by the Acquired Funds' shareholders in connection with the
Acquisitions.
(2) The Funds pay the expenses of the dividend reinvestment plan ("DRIP"), but
participating shareholders pay their pro rata share of the brokerage
commissions incurred by the DRIP agent's open market purchases.
Example
This example compares the cost of investing in Acquiring Fund Common Shares
with the cost of investing in Acquired Fund Common Shares, both before and after
the Acquisitions. It assumes:
o An investment at NAV of $1,000 for the periods shown;
o A 5% investment return each year;(1)
o The Funds' operating expenses remain the same each year; and
o All dividends and distributions are reinvested at NAV.
The Example should not be considered a representation of future expenses.
Although actual costs may be higher or lower than those shown, based on these
assumptions the costs would be:
1 Year 3 Years 5 Years 10 Years
Minnesota I $211 $652 $1,119 $2,410
Minnesota III $226 $697 $1,195 $2,565
Minnesota II $189 $585 $1,006 $2,180
Minnesota II (after the Acquisitions)* $186 $576 $990 $2,148
* Assumes approval and completion of both Acquisitions
(1) The Funds' actual returns may be greater or less than the hypothetical 5%
return used.
INFORMATION ABOUT THE ACQUISITIONS
This is only a summary of the Plans. You should read the Form of Plan,
which is attached as Exhibit A, for more complete information about the
Acquisitions.
MATERIAL FEATURES OF THE ACQUISITIONS
Under each Plan, the corresponding Acquisition will consist of:
o The acquisition by the Acquiring Fund of substantially all of the
property, assets and goodwill of the Acquired Fund in exchange solely
for full and fractional Acquiring Fund Common Shares and Acquiring
Fund Preferred Shares;
o The pro rata distribution of Acquiring Fund Shares to the shareholders
of the Acquired Fund according to their respective interests in
complete liquidation of the Acquired Fund; and
o The dissolution of the Acquired Fund as soon as is practicable after
the Closing.
Terms of the Plans
Conveyance of Acquired Fund Assets Under each Plan, the Acquired Fund will
convey to the Acquiring Fund at the Closing all of the Acquired Fund's then
existing assets, free and clear of any liens, except for cash, bank deposits or
cash equivalent securities in an estimated amount necessary to:
o Pay the Acquired Fund's costs and expenses of carrying out the Plan
(including, but not limited to, fees of counsel and accountants, and
expenses of its liquidation and dissolution), which costs and expenses
shall be established on the Acquired Fund's books as liability
reserves;
o Discharge the Acquired Fund's unpaid liabilities on its books as of
the date of the Closing Date, including, but not limited to, its
income dividends and capital gains distributions, if any, payable for
the period prior to, and through, the Closing Date; and
o Pay such contingent liabilities as the Board of Directors of the
Acquired Fund or its officers may reasonably expect to exist against
the Acquired Fund, if any, as of the Closing Date, for which
contingent and other appropriate liability reserves shall be
established on the Acquired Fund's books.
Delivery of Acquiring Fund Shares Each Plan provides that the Acquiring
Fund will deliver to the Acquired Fund at the Closing:
o The number of Acquiring Fund Common Shares having an aggregate NAV
equal to the aggregate NAV of the Acquired Fund Common Shares as of
the Closing Date; and
o The number of Acquiring Fund Preferred Shares of the appropriate
Series equal to the number of corresponding Acquired Fund Preferred
Shares, the aggregate Liquidation Preference of which shall equal the
aggregate Liquidation Preference of the Acquired Fund Preferred
Shares.
Liquidation and Distribution of Acquiring Fund Shares Immediately following
the Closing, each Acquired Fund shall liquidate and distribute:
o Pro rata to holders of Acquired Fund Common Shares of record as of the
close of business on the Closing Date, the Acquiring Fund Common
Shares received by Acquired Fund, in exchange for Acquired Fund Common
Shares held by those shareholders; and
o To holders of Acquired Fund Preferred Shares of record as of the close
of business on the Closing Date, one Acquiring Fund Preferred Share,
in exchange for each Acquired Fund Preferred Share held by those
shareholders.
Acquired Fund Share Certificates As promptly as is practicable after the
Closing, each holder of any outstanding certificate or certificates representing
Acquired Fund Shares shall be entitled to surrender those certificates to the
Acquiring Fund's transfer agent in exchange for the respective number of
applicable Acquiring Fund Shares. Until surrendered, each outstanding Acquired
Fund Share certificate shall be deemed for all of the Acquiring Fund's purposes
to evidence ownership of the applicable number of Acquiring Fund Shares.
Acquired Fund Dividends At or prior to the Closing, each Acquired Fund will
declare a dividend and/or other distribution to be paid to the holders of
Acquired Fund Common Shares so that, upon such payment, it will have distributed
all of its investment company taxable income (computed without regard to any
deduction for dividends paid), net tax-exempt income and realized net capital
gains, if any, earned or anticipated to be earned through and including the
Closing Date.
Dividends on Acquired Fund Preferred Shares shall accumulate up to and
including the Closing Date and then cease to accumulate. At or prior to the
Closing, each Acquired Fund will declare all accumulated but unpaid dividends on
the Acquired Fund Preferred Shares up to and including the Closing Date. These
dividends will be paid to the holders of Acquired Fund Preferred Shares on the
Dividend Payment Date for the Initial Dividend Period of the Acquiring Fund
Preferred Shares. The Applicable Dividend Rate for the Initial Dividend Period
for each new Series of Acquiring Fund Preferred Shares shall accumulate from and
including the day after the Closing Date at the same rate borne on the Closing
Date by the corresponding Acquired Fund Preferred Shares.
Dissolving the Acquired Funds The Acquired Funds shall be dissolved
promptly following the Closing, the liquidating distribution of the respective
Acquiring Fund Shares, payment of any dividends or distributions and resolution
of any other contingent liabilities.
Valuation The value of the Funds' portfolio securities and NAV shall be
determined as of 4:00 p.m. Eastern Time on the Closing Date in a manner
consistent with the valuation procedures described in each Fund's filings with
the SEC. The value of each Fund's portfolio securities and NAV shall be
calculated net of the Liquidation Preference (including accumulated and unpaid
dividends).
Closing Date The Closing Date is expected to be March 15, 2006, or such
other date as the Boards of Directors of the Funds may mutually agree, provided
that the Closing Date shall not be on a Remarketing Date for the Acquired Fund
Preferred Shares. The Closing shall take place at the principal executive
offices of the Funds at 5:00 p.m. Eastern Time on the Closing Date.
Representations, Warranties and Covenants The execution of the Plans and
the consummation of the Acquisitions are conditioned on each of the Acquired
Funds and the Acquiring Fund providing each other with certain representations,
warranties and covenants relating to, among other things, the corporate good
standing of each Fund, the legal characteristics of the Acquired and Acquiring
Fund Shares, and agreements by each Fund to file any required tax returns.
Conditions Precedent The consummation of each Plan is subject to the
conditions precedent that, among other things:
o All the representations and warranties of each Fund contained in the
Plan shall be true and correct as of the Closing;
o Each Fund shall have performed all obligations required by the Plan to
be performed by it prior to the Closing;
o The Plan and the Acquisition shall have been adopted and approved by
the appropriate action of the shareholders of the Acquired Fund, and
the Acquisition shall have been approved by the appropriate action of
the shareholders of Acquiring Fund, at a shareholders meeting or any
adjournment thereof;
o Certain opinions of counsel relating to tax, corporate and federal
securities matters will have been delivered to each Fund;
o The Exchange shall have approved the listing of the additional
Acquiring Fund Common Shares to be issued to holders of Acquired Fund
Common Shares in connection with the Acquisitions;
o The preferences, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of
the Acquiring Fund Preferred Shares shall be identical in all material
respects to those of the Acquired Fund Preferred Shares; and
o The Acquiring Fund shall have obtained written confirmation from both
Rating Agencies that:
o consummation of the transactions contemplated by the Plan will
not impair the ratings assigned by the Rating Agencies to the
existing Acquiring Fund Preferred Shares, Series A and Series B;
and
o the Acquiring Fund Preferred Shares to be issued pursuant to the
Acquisition will be rated "Aaa" by Moody's and "AAA" by S&P.
Fees and Expenses The expenses of entering into and carrying out the Plans
and the Acquisitions shall be borne 25% by the Acquiring Fund, 25% by each
Acquired Fund, and 25% by DMC.
Termination; Postponement; Waiver; Order Each Plan may be terminated and
the corresponding Acquisition abandoned at any time (whether before or after
shareholder approval) prior to the Closing, or the Closing may be postponed, by:
o Mutual consent of the Acquired Fund and the Acquiring Fund;
o The Acquiring Fund, if any of the conditions precedent to its
obligations under the Plan have not been fulfilled or waived; or
o The Acquired Fund, if any of the conditions precedent to its
obligations under the Plan have not been fulfilled or waived.
An election by the Acquired Fund or the Acquiring Fund to terminate the
Plan and to abandon the Acquisition shall be exercised by the Board of Directors
of the Acquired Fund or the Acquiring Fund, respectively. If the transactions
contemplated by a Plan have not been consummated by December 31, 2006, the Plan
shall automatically terminate on that date, unless a later date is agreed to by
both Funds' Boards. In the event of the termination of a Plan, it shall become
void and have no further effect, and neither the Acquired Fund nor the Acquiring
Fund, nor their directors, officers, agents or shareholders shall have any
liability under the Plan.
At any time prior to the Closing, any of the terms or conditions of a Plan
may be waived by the Board of Directors of the Acquiring Fund or the Acquired
Fund, as the case may be, if, in the judgment of the Board, such action or
waiver will not have a material adverse effect on the applicable Fund's
shareholders. If the SEC issues an order with respect to a Plan prior to the
Closing and imposes any terms or conditions that are determined by the Boards of
Directors of the Acquired Fund and the Acquiring Fund to be acceptable, then
those terms and conditions shall become binding as if they were a part of the
Plan without any further vote or approval of the shareholders of the Acquiring
Fund or the Acquired Fund. If the SEC terms and conditions result in a change in
the method of computing the number of Acquiring Fund Shares to be issued to the
Acquired Funds, however, then the Acquisition shall not be consummated and the
Plan shall terminate, unless either the SEC terms and conditions have already
been included in the proxy solicitation material furnished to the Funds'
shareholders prior to the Meeting, or the Funds promptly call a special meeting
of their shareholders at which the SEC terms and conditions are submitted for
approval.
Amendments and Assignments The Plans may be amended only by mutual consent
of the Funds in writing. Neither a Plan nor any interest in a Plan may be
assigned without the prior written consent of the other Fund.
Description of Acquiring Fund Common Shares to be Issued
General The Acquiring Fund is authorized by its Articles to issue up to
200,000,000 Acquiring Fund Common Shares, par value $0.01 per share. As of the
date of this Proxy Statement/Prospectus, the Acquiring Fund had issued and
outstanding 7,252,200 Acquiring Fund Common Shares listed on the Exchange. Under
the terms of the Plans, the Acquiring Fund will issue additional Acquiring Fund
Common Shares to the holders of Acquired Fund Common Shares on the Closing Date
in connection with the Acquisitions. The number of additional Acquiring Fund
Common Shares to be issued will be based on the relative NAVs of the Acquiring
Fund and the Acquired Funds as of the Closing Date. All Acquiring Fund Common
Shares to be issued in exchange for Acquired Fund Common Shares pursuant to the
Plans will be fully paid and non-assessable, and will be listed for trading on
the Exchange.
The terms of the Acquiring Fund Common Shares to be issued in the
Acquisition will be identical to the terms of the Acquiring Fund Common Shares
that are already outstanding. All of the Acquiring Fund Common Shares have equal
rights with respect to the payment of dividends and the distribution of assets
upon liquidation. The Acquiring Fund Common Shares have no preemptive,
conversion or exchange rights, nor any right to cumulative voting.
Distributions The Acquiring Fund makes monthly distributions to holders of
Acquiring Fund Common Shares of substantially all of its net investment income
remaining after the payment of dividends on any outstanding Acquiring Fund
Preferred Shares. Net realized capital gains, if any, are expected to be
distributed to holders of Acquiring Fund Common Shares at least annually.
Distributions will be taxable to the extent made out of taxable income of the
Acquiring Fund. Net income consists of all interest income accrued on portfolio
assets less all expenses of the Acquiring Fund. Expenses of the Acquiring Fund
are accrued each day.
At any time when Acquiring Fund Preferred Shares are outstanding, holders
of Acquiring Fund Common Shares will not be entitled to receive any net income
or other distributions from the Acquiring Fund unless all accrued dividends on
the Acquiring Fund Preferred Shares have been paid, and unless the 1940 Act
Asset Coverage is at least 200% after giving effect to the distribution. The
Acquiring Fund's Articles set forth certain additional restrictions on the
payment of dividends or other distributions in respect of the Acquiring Fund
Common Shares that apply for so long as the Acquiring Fund Preferred Shares are
issued and outstanding. See "Principal Risk Factors-- Potential Restrictions on
Acquiring Fund's Payment of Dividends" above.
Upon any failure by the Acquiring Fund to pay dividends on the Acquiring
Fund Preferred Shares for two years or more, the holders of Acquiring Fund
Preferred Shares will acquire certain additional voting rights, including the
ability to exclusively elect a majority of the Acquiring Fund's Board of
Directors. These voting rights are the exclusive remedy of the holders of
Acquiring Fund Preferred Shares upon any failure to pay dividends on the
Acquiring Fund Preferred Shares. See "Description of Acquiring Fund Preferred
Shares to be Issued" below.
Dividend Reinvestment Plan Under the Acquiring Fund's Dividend Reinvestment
Plan (the "DRIP"), all distributions of dividends and capital gains to holders
of Acquiring Fund Common Shares will automatically be reinvested by Mellon
Investor Services, LLC (the "DRIP Agent"), in additional Acquiring Fund Common
Shares unless an election is made to receive distributions in cash. The DRIP
Agent will purchase Acquiring Fund Common Shares in the open market-- the
Acquiring Fund will not issue any new shares in connection with the DRIP.
Holders of Acquired Fund Common Shares who participate in the dividend
reinvestment plan of the respective Acquired Funds will automatically be
enrolled in the Acquiring Fund DRIP upon completion of the Acquisitions, and any
dividends paid at that time will be reinvested in Acquiring Fund Common Shares
as if subject to the DRIP. Other holders of Acquired Fund Common Shares will be
given the opportunity to enroll in the DRIP following the Closing Date.
If Acquiring Fund Common Shares are registered in a shareholder's name and
the shareholder is not already reinvesting dividends but would like to do so,
the shareholder may contact the DRIP Agent at 800-851-9677. The shareholder will
be asked to put the request in writing. If holders of Acquiring Fund Common
Shares have shares registered in "street" name, the shareholder should contact
their financial adviser or the broker/dealer holding the shares. Additional
information about the DRIP may be obtained by contacting the DRIP Agent at the
phone number above or by writing to Mellon Investor Services, LLC, Dividend
Reinvestment Department, Overpeck Centre, 85 Challenger Road, Ridgefield, NJ
07660.
The DRIP Agent maintains each shareholder's account in the DRIP and
furnishes monthly written confirmations of all transactions in the account,
including information needed by shareholders for personal and tax records.
Acquiring Fund Common Shares are held by the DRIP Agent in non-certificated form
in the name of the participant, and each shareholder's proxy will include
Acquiring Fund Common Shares purchased through the DRIP.
The DRIP Agent's fees for the reinvestment of dividends and distributions
will be paid by the Acquiring Fund. However, each participant will pay a pro
rata share of the brokerage commissions incurred in the DRIP Agent's open market
purchases. There are no other charges to DRIP participants except for these
brokerage commissions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any state or federal income tax that may be payable or required
to be withheld on such dividends or distributions.
Participants may withdraw from the DRIP upon written notice to the DRIP
Agent. When a participant withdraws from the DRIP or upon termination of the
DRIP, certificates for whole Acquiring Fund Common Shares credited to the
participant's account under the DRIP will be issued and a cash payment will be
made for any fractional Acquiring Fund Common Shares credited to the account.
Holders of Acquiring Fund Common Shares who do not elect to participate in the
DRIP receive all dividends and capital gains distributions in cash paid by check
mailed directly to the shareholder of record by Mellon Investor Services, LLC as
dividend disbursing agent.
The Acquiring Fund reserves the right to amend or terminate the DRIP on at
least 90 days' written notice to all DRIP participants.
Description of Acquiring Fund Preferred Shares to be Issued
The following is a brief description of the terms of the Acquiring Fund
Preferred Shares, Series C and Series D, to be issued pursuant to the
Acquisitions. This description is not complete and is subject to, and qualified
in its entirety by reference to, the more detailed description in the Statements
Establishing and Fixing the Rights and Preferences of Municipal Income Preferred
Shares, Series C and Series D (the "Statements"), contained in Exhibits C and D,
respectively, of this Proxy Statement/Prospectus.
General The Acquiring Fund's Articles authorize the issuance of up to
1,000,000 Acquiring Fund Preferred Shares, par value $0.01 per share. The
Articles provide that Acquiring Fund Preferred Shares may be issued from time to
time in such series and with such rights, preferences and restrictions as are
determined by resolution of the Acquiring Fund's Board of Directors. The
Acquiring Fund currently has outstanding 600 shares of Acquiring Fund Preferred
Shares, Series A ("Series A Preferred Shares") and 600 shares of Acquiring Fund
Preferred Shares, Series B ("Series B Preferred Shares"). If the Acquisitions
are approved and completed, the Acquiring Fund will issue an additional 400
shares of Acquiring Fund Preferred Shares, Series C ("Series C Preferred
Shares") to preferred shareholders of Minnesota I and 300 shares of Acquiring
Fund Preferred Shares, Series D ("Series D Preferred Shares") to preferred
shareholders of Minnesota III. The Series C and D Preferred Shares issued
pursuant to the Acquisitions will each have a Liquidation Preference of $50,000
per share plus an amount equal to any accumulated but unpaid dividends (whether
or not earned or declared).
The Series C and D Preferred Shares issued pursuant to the Acquisitions
will rank on parity with the Series A and B Preferred Shares as to the payment
of dividends and the distribution of assets upon liquidation. The Series C and D
Preferred Shares will carry one vote per share on all matters on which such
shares are entitled to vote. The Series C and D Preferred Shares will be, when
issued in accordance with the Plans and their respective Statements, fully paid
and non-assessable and have no preemptive, conversion or exchange rights or
rights to cumulative voting.
Initial Dividend Period and Initial Dividend Rate Although it is not
currently anticipated that it will be necessary to do so, each Acquired Fund may
set a special dividend period for the last remarketing prior to the Closing Date
that will be the sum of the number of days remaining to the Closing Date and the
Initial Dividend Period for the corresponding Series of Acquired Fund Preferred
Shares. If the Closing Date occurs as anticipated on March 15, 2006, then the
Acquiring Fund currently anticipates that the Initial Dividend Period for the
Series C Preferred Shares will be fifteen (15) days and that the Initial
Dividend Period for the Series D Preferred Shares will be one (1) day. The
Initial Dividend Period for each of the Series C and D Preferred Shares will be
set so that, for the Dividend Periods following the Initial Dividend Period,
each of the four Series of Acquiring Fund Preferred Shares will mature and be
remarketed on a different week during any 28-day period. The initial Dividend
Rate for the Series C and D Preferred Shares for the Initial Dividend Period
will be the same as the dividend rate in effect on the Closing Date for the
corresponding Acquired Fund Preferred Shares.
Subsequent Dividend Periods After the Initial Dividend Period for the
Series C and D Preferred Shares, a new Dividend Period will commence on each
Dividend Payment Date. The Acquiring Fund currently anticipates that each
subsequent Dividend Period will be 28 days long. The Board of Directors of the
Acquiring Fund or the Remarketing Agent may lengthen or shorten the Dividend
Periods. The Acquiring Fund's Board of Directors may at any time designate a
Dividend Period as a Special Dividend Period consisting of a number of days or
whole years as the Board of Directors shall specify, subject to certain
conditions.
Dividend Payment Dates Dividends on each Series C and Series D Preferred
Share will accumulate from the first day of a Dividend Period and will be
payable, when, as and if declared by the Acquiring Fund's Board of Directors,
out of funds legally available therefor, on the applicable Dividend Payment
Date. The Dividend Payment Date will generally be the next business day after
the last day of the Dividend Period. In the event that the Board has declared a
Special Dividend Period of more than 28 days, however, the Dividend Payment Date
will be the first business day of each calendar month after the designation of
the Special Dividend Period. The dividend will be paid by the Acquiring Fund to
the securities depository for the Acquiring Fund Preferred Shares (the
"Securities Depository") on the business day before the applicable Dividend
Payment Date.
Dividend Payments So long as there is a Securities Depository for the
Series C and D Preferred Shares, each dividend on such shares will be paid to
the Securities Depository or its nominee as the record holder of those shares.
The Securities Depository will credit the accounts of the "Agent Members" of the
beneficial owners of Series C and D Preferred Shares in accordance with the
Securities Depository's normal procedures. An "Agent Member" is a designated
member of the Securities Depository that maintains records for the beneficial
owners of the Series C or Series D Preferred Shares. Each Agent Member will be
responsible for holding or disbursing dividend payments to the holders of the
Series C and D Preferred Shares.
Non-Payment Period Late Charge A "Non-Payment Period" will occur if the
Acquiring Fund fails to pay, or arrange payment for, the full amount of any
dividend on the Series C or Series D Preferred Shares required to be paid on a
Dividend Payment Date. If the Series C or Series D Preferred Shares have been
called for redemption, a Non-Payment Period will also occur if the Acquiring
Fund fails to pay, or arrange payment for, the $50,000 per share Liquidation
Preference plus any additional premium required by the Articles and the full
amount of any dividends (whether or not earned or declared) accumulated but
unpaid to the redemption date.
The Non-Payment Period will begin on the applicable Dividend Payment Date
or redemption date and will end on the business day when, by 12:00 noon, New
York City time, all unpaid dividends and unpaid redemption prices have been
deposited or have otherwise been made available to the applicable holders in
same-day funds. A Non-Payment Period will not end until the Acquiring Fund has
given advance written notice to the Paying Agent, the Remarketing Agent and the
Securities Depository and all holders of Series C and D Preferred Shares.
Each Dividend Period for Series C and D Preferred Shares during a
Non-Payment Period will be a seven-day Dividend Period. The Applicable Dividend
Rate for each Dividend Period during a Non-Payment Period will be equal to the
Non-Payment Period Rate. The Non-Payment Period Rate will be 250% of the
"Reference Rate" for any Dividend Period that is 90 days or less. However, if
the Acquiring Fund has notified the Remarketing Agent of its intent to allocate
federally taxable income to the Series C or D Preferred Shares, then the
Non-Payment Period Rate will be 300% of the "Reference Rate." The "Reference
Rate" is a rate established in the Statements based on commercial paper or
municipal bond rates for Dividend Periods of less than one year, or on Treasury
securities rates for Special Dividend Periods of more than one year.
If the dividend or redemption price is paid to the eligible holders of
Series C or D Preferred Shares on any of the first three Business Days after a
Dividend Payment Date or due date, the Acquiring Fund will pay a late charge.
The late charge shall be the Non-Payment Period Rate applied to the amount of
such non-payment, based on the actual number of days that the payment was late
divided by 365.
Restrictions on Dividends and Other Payments As discussed above under
"Principal Risk Factors-- Potential Restrictions on Acquiring Fund's Payment of
Dividends," there are certain circumstances under the 1940 Act or the Acquiring
Fund's Articles in which the Acquiring Fund will not be permitted to make
dividends or distributions to holders of Acquiring Fund Common or Preferred
Shares. Upon any failure to pay dividends on the Acquiring Fund Preferred Shares
for two years or more, the holders of Acquiring Fund Preferred Shares will
acquire certain additional voting rights, including the right to elect a
majority of the Acquiring Fund's Board of Directors. These rights are the
exclusive remedy of the holders of Acquiring Fund Preferred Shares upon any
failure to pay dividends on Acquiring Fund Preferred Shares.
Additional Dividends If the Acquiring Fund allocates to the Series C or
Series D Preferred Shares any net capital gains or other income that is taxable
for federal income tax purposes ("Retroactive Taxable Allocation") without
having given advance notice to the Paying Agent and the Remarketing Agent, then
the Acquiring Fund must make certain payments to the affected holders of the
Series C or Series D Preferred Shares in order to offset the tax effect of the
Retroactive Taxable Allocation. Within 270 days after the end of the Acquiring
Fund's taxable year in which the Retroactive Taxable Allocation is made, the
Acquiring Fund must provide notice to the Paying Agent, the Remarketing Agent
and to each holder of Series C or Series D Preferred Shares during that taxable
year. Within 30 days after the notice is given, the Acquiring Fund must pay
"Additional Dividends" to the Paying Agent out of legally available funds. The
Paying Agent will then distribute the "Additional Dividends" to the applicable
holders of Series C or Series D Preferred Shares.
An "Additional Dividend" means a payment to a holder of Series C or Series
D Preferred Shares of an amount which, after taking into account the Retroactive
Taxable Allocations made to the holder, would cause the holder's dividends to be
equal to the amount that would have been received if the Retroactive Taxable
Allocations had not been made. The Additional Dividend shall be calculated:
o Without consideration being given to the time value of money;
o Assuming that no holder of Series C or Series D Preferred Shares is
subject to the federal or Minnesota AMT with respect to dividends
received from the Acquiring Fund; and
o Assuming that the portion of the dividend to which each Retroactive
Taxable Allocation applies would be taxable in the hands of each
holder of Series C or Series D Preferred Shares at:
o in the case of an allocation of capital gains, the maximum
marginal combined regular federal and Minnesota income tax rate
(taking into account the federal income tax deductibility of
state taxes paid or incurred) on net capital gains applicable to
individuals or corporations in effect during the taxable year in
question, whichever is greater; or
o in the case of an allocation attributable to ordinary income, the
maximum marginal combined regular federal and Minnesota income
tax rate (taking into account the federal income tax
deductibility of state taxes paid or incurred) on ordinary income
applicable to individuals or corporations in effect during the
taxable year in question, whichever is greater.
1940 Act Asset Coverage The Articles provide that, as of the last business
day of each month, the Acquiring Fund must maintain a 1940 Act Asset Coverage of
at least 200% with respect to all the outstanding Acquiring Fund Preferred
Shares, including the Series C and D Preferred Shares. If the Acquiring Fund
fails to maintain its 1940 Act Asset Coverage and that failure is not cured as
of the last business day of the following calendar month (the "1940 Act Cure
Date"), the Acquiring Fund may be required to redeem some of the outstanding
Acquiring Fund Preferred Shares, including some of the Series C and D Preferred
Shares. See "Mandatory Redemption" below.
Preferred Share Basic Maintenance Amount The Articles require the Acquiring
Fund to maintain, as of each business day, assets having in the aggregate a
"Discounted Value" at least equal to the Preferred Share Basic Maintenance
Amount calculated with respect to all outstanding Acquiring Fund Preferred
Shares. The "Discounted Value" of the Acquiring Fund's assets is calculated
according to a formula established by each Rating Agency. If the Acquiring Fund
fails to meet this requirement on any business day and the failure is not cured
within three business days (the "Preferred Shares Basic Maintenance Cure Date"),
the Acquiring Fund may be required to redeem some of its outstanding Acquiring
Fund Preferred Shares, including some of the Series C and D Preferred Shares.
See "Mandatory Redemption" below.
Mandatory Redemption The Acquiring Fund will be required to redeem, at a
redemption price equal to $50,000 per share plus accumulated but unpaid
dividends to the date fixed by the Board of Directors for redemption (whether or
not earned or declared), some or all of the Acquiring Fund Preferred Shares--
including Series C or Series D Preferred Shares-- to the extent permitted under
the 1940 Act and Minnesota law, if the Acquiring Fund fails to maintain:
o On each business day, assets having in the aggregate a Discounted
Value at least equal to the Preferred Share Basic Maintenance Amount,
and such failure is not cured on or before the Preferred Share Basic
Maintenance Cure Date; or
o As of the last Business Day of any calendar month, the 1940 Asset
Coverage, and such failure is not cured on or before the 1940 Act Cure
Date.
The number of Acquiring Fund Preferred Shares to be redeemed will be the
lesser of:
o The minimum number of Acquiring Fund Preferred Shares, the redemption
of which, if deemed to have occurred immediately prior to the opening
of business on the applicable Cure Date, would result in the
satisfaction of the Preferred Share Basic Maintenance Amount or the
1940 Act Asset Coverage, as the case may be; and
o The maximum number of Acquiring Fund Preferred Shares that can be
redeemed out of funds expected to be legally available therefor.
If there is no such minimum number of Preferred Shares, the redemption of
which would result in the satisfaction of the Preferred Share Basic Maintenance
Amount or the 1940 Act Asset Coverage, as the case may be, then all outstanding
Acquiring Fund Preferred Shares will be redeemed. If less than 100 shares of any
Series of Acquiring Fund Preferred Shares would remain outstanding following a
partial redemption, the Remarketing Agent may direct the Acquiring Fund to
redeem all of the shares of such Series then outstanding. To the extent
practicable, each Series of Acquiring Fund Preferred Shares shall participate in
any such redemption on a pro rata basis.
Optional Redemption After the Initial Dividend Period, the Acquiring Fund
at its option may redeem Series C or D Preferred Shares, in whole or in part, on
any scheduled Dividend Payment Date applicable to the Series called for
redemption. The redemption must be paid for out of legally available funds at a
redemption price of $50,000 per share plus an amount equal to any accumulated
but unpaid dividends up to the redemption date (whether or not earned or
declared). If a Special Dividend Period has been declared for a period of 365
days or more, the Acquiring Fund may have to pay an additional premium.
The Series C and Series D Preferred Shares will not be subject to optional
redemption during any portion of a Special Dividend Period of 365 days or more
that the Board of Directors of the Acquiring Fund, after consultation with the
Remarketing Agent, has designated to be a "Non-Call Period." Similarly, the
Series C and D Preferred Shares may not be redeemed in part without the consent
of the Remarketing Agent if, after the partial redemption, fewer than 100 shares
of the Series remain outstanding.
Allocation If fewer than all the outstanding Series C or D Preferred Shares
are to be redeemed, the number of Series C or D Preferred Shares to be redeemed
will be determined by the Board of Directors. The Acquiring Fund will give a
notice of redemption to the Securities Depository, who shall determine by lot
the number of Series C or D Preferred Shares to be redeemed from the account of
each Agent Member. The Securities Depository shall immediately notify the Paying
Agent of such determination, who will in turn determine by lot the number of
shares to be redeemed from the accounts of holders of Series C or D Preferred
Shares whose Agent Members have been selected by the Securities Depository. In
doing so, the Paying Agent may determine that shares will be redeemed from the
accounts of some holders of Series C or D Preferred Shares without shares being
redeemed from the accounts of other holders. If any certificates for Series C or
D Preferred Shares are not held by the Securities Depository, the shares to be
redeemed will be selected by the Acquiring Fund by lot.
Minimum Liquidity Level The Acquiring Fund is required to have, on each
business day, "Deposit Securities" with maturity or tender dates not later than
the day before the next Dividend Payment Date for any Series having a value of
not less than the "Dividend Coverage Amount" (the "Minimum Liquidity Level").
"Deposit Securities" include:
o Cash;
o Receivables for Municipal Obligations that have been sold and that
become due prior to the Dividend Payment Date;
o Interest on Municipal Obligations that is payable to the Acquiring
Fund prior to or on the Dividend Payment Date; and
o Municipal Obligations meeting certain Rating Agency credit quality
requirements.
The "Dividend Coverage Amount" on any business day means:
o The aggregate amount of dividends that will accumulate on each Series
of Acquiring Fund Preferred Shares to (but not including) the next
Dividend Payment Date plus any liabilities of the Acquiring Fund that
are required to be paid on or prior to that Dividend Payment Date;
less
o The combined value of Deposit Securities irrevocably deposited for the
payment of dividends on each Series.
If, as of each business day, the Acquiring Fund does not have the required
Dividend Coverage Amount, the Acquiring Fund shall, as soon as practicable,
adjust its portfolio in order to meet the Minimum Liquidity Level.
Liquidation Upon a liquidation, dissolution or winding up of affairs of the
Acquiring Fund, whether voluntary or involuntary, the holders of Acquiring Fund
Preferred Shares, including Series C and D Preferred Shares, will be entitled to
be paid an amount equal to the Liquidation Preference, whether from capital or
surplus, before any assets of the Acquiring Fund will be distributed among or
paid over to the holders of the Acquiring Fund Common Shares or any other class
of stock of the Acquiring Fund junior to the Acquiring Fund Preferred Shares.
After any such payment, the holders of Series C and D Preferred Shares will not
be entitled to any further participation in any distribution of assets of the
Acquiring Fund.
If, upon any such liquidation, dissolution or winding up of the Acquiring
Fund, the assets of the Acquiring Fund are insufficient to make full payments to
the holders of Acquiring Fund Preferred Shares and to the holder of any other
shares of preferred stock with preference rights ranking as to liquidation,
dissolution or winding up on a parity with the Acquiring Fund Preferred Shares,
then such assets will be distributed pro rata among the holders of Acquiring
Fund Preferred Shares and any other such preferred stock.
Voting Rights Except as otherwise indicated in this Proxy
Statement/Prospectus, the Articles (including the Statements) and as otherwise
required by applicable law, holders of Series C and D Preferred Shares will have
equal voting rights with holders of Common Shares, Series A and B Preferred
Shares, and any other shares of preferred stock that may be issued in the future
(one vote per share), and will vote together as a single class with holders of
Common Shares, Series A and B Preferred Shares, and any other shares of
preferred stock that may be issued in the future.
Unless a higher percentage is specifically provided for in the Articles,
the affirmative vote of the holders of a majority of the outstanding Acquiring
Fund Preferred Shares, voting as a separate class, shall be required to approve
any plan of reorganization (as such term is defined in Section 2(a)(33) of the
1940 Act) adversely affecting such shares or any action requiring shareholder
approval to change the Acquiring Fund's fundamental investment policies or
restrictions.
The 1940 Act requires that the holders of all Acquiring Fund Preferred
Shares, voting together as a separate class, have the right to elect at least
two directors at all times and to elect a majority of the directors at any time
that two full years' dividends on any Acquiring Fund Preferred Shares are
unpaid. In the event that holders of Acquiring Fund Preferred Shares are
entitled to elect a majority of the Board of Directors, the terms of office of
the persons who are Directors at the time of that election will continue. If the
Acquiring Fund subsequently pays (or sets aside for payment) all dividends
payable on all outstanding Acquiring Fund Preferred Shares for all past dividend
periods, these special voting rights shall end, and the terms of office of all
of the additional Directors elected by the holders of Acquiring Fund Preferred
Shares will terminate automatically (but the terms of office of the Directors
previously elected by the holders of Acquiring Fund Common Shares and the two
Directors previously elected by the holders of Acquiring Fund Preferred Shares
will not terminate).
So long as any Acquiring Fund Preferred Shares are outstanding, the
Acquiring Fund shall not, without the affirmative vote or consent of the holders
of a majority of the outstanding Acquiring Fund Preferred Shares in person or by
proxy, either in writing or at a meeting (voting separately as one class):
o Authorize, create or issue any class or series of stock ranking prior
to or on a parity with the Acquiring Fund Preferred Shares with
respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Acquiring
Fund, or increase the authorized amount of any Series of Acquiring
Fund Preferred Shares, except that the Board of Directors, without the
vote or consent of the holders of Acquiring Fund Preferred Shares, may
from time to time authorize and create, and the Acquiring Fund may
from time to time issue, classes or series of preferred stock ranking
on a parity with the Acquiring Fund Preferred Shares, subject to:
o Continuing compliance by the Acquiring Fund with the 1940 Act
Asset Coverage and Preferred Share Basic Maintenance Amount
requirements; and
o Receipt by the Acquiring Fund of written confirmation from
Moody's and/or S&P (if those Rating Agencies are then rating any
Series of Acquiring Fund Preferred Shares) that the issuance of
any such additional class or series would not impair the rating
then assigned by such Rating Agencies to the Acquiring Fund
Preferred Shares;
o Amend, alter or repeal the provisions of the Articles, including the
Statements, whether by merger, consolidation or otherwise, so as to
affect any preference, right or power of any Series of Acquiring Fund
Preferred Shares; provided that the authorization, creation and
issuance of classes or series of stock ranking junior to the Acquiring
Fund Preferred Shares will not be deemed to affect those preferences,
rights or powers unless the issuance would cause the Acquiring Fund
not to satisfy the 1940 Act Asset Coverage or the Preferred Shares
Basic Maintenance Amount; or
o File a voluntary application for relief under federal bankruptcy law
or any similar application under state law for so long as the
Acquiring Fund is solvent and does not foresee becoming insolvent.
The holders of Acquiring Fund Preferred Shares will vote as a separate
class or classes on certain other matters as required under the Articles, the
1940 Act and Minnesota law. In addition, each of the Series A, B, C and D
Preferred Shares may vote as a separate Series under certain circumstances.
Unless otherwise required by law, the holders of Acquiring Fund Preferred Shares
do not have any relative rights or preferences or other special rights other
than those specifically set forth in the applicable Statement. The holders of
Acquiring Fund Preferred Shares have no preemptive rights or rights to
cumulative voting. In the event that the Acquiring Fund fails to pay any
dividends on the Acquiring Fund Preferred Shares, the exclusive remedy of the
holders of Acquiring Fund Preferred Shares shall be the right to vote for
directors as described above.
REASONS FOR THE ACQUISITIONS
All three Funds commenced operations following public offerings of their
Common Shares in 1992 and 1993. By current standards, the size of the Funds--
particularly Minnesota I and Minnesota III-- are relatively small compared to
other exchange-listed closed-end funds. The asset levels of the Acquired Funds
are both well below $100 million, the level of assets that is generally regarded
as the point at which most closed-end funds are considered to be successful. The
Board of Directors of each Fund has determined that the shareholders of the
Funds potentially could be advantaged by the increase in assets realized by
combining the Funds. A larger combined Fund can potentially realize cost savings
due to economies of scale, as certain fixed costs may be distributed over a
larger asset base.
Because Minnesota II is already the largest of the three Funds and has a
better overall long-term performance record, the Board of Directors of each Fund
has agreed that it should be the survivor of the combination. As of September
30, 2005, the performance of the Acquiring Fund at NAV over the trailing [3-, 5-
and 10-]year periods has been stronger than Minnesota I's performance at NAV,
and the performance of the Acquiring Fund at NAV over the trailing [1-, 3- and
10-]year periods has been stronger than Minnesota III's performance at NAV. The
total return figures and current distribution yield at NAV for the Funds, as of
September 30, 2005 are shown below.
- --------------------------- -------------- ------------- ---------------
Annualized Return Minnesota I Minnesota II Minnesota III
- --------------------------- -------------- ------------- ---------------
- --------------------------- -------------- ------------- ---------------
Cumulative Year-To-Date % % %
1 Year
3 Year
5 Year
10 Year
Current Distribution
Rate (at NAV)
- --------------------------- -------------- ------------- ---------------
Although the performance of Minnesota III is the strongest [on a
year-to-date and trailing 5-year basis], the performance disparity vis-a-vis the
Acquiring Fund over these particular periods has been relatively minor (_____%
v. _____% for the 5-year period); moreover, of these two, the Acquiring Fund has
the longer track record by eight months (with an inception date of February 26,
1993 versus October 29, 1993 for Minnesota III). The Acquiring Fund has stronger
performance than Minnesota I over all trailing periods except the trailing
1-year period. Of course, past performance is no guarantee of future results.
[As of September 30, 2005, the Acquiring Fund also had the highest current
distribution rate of the three Funds and has had, on average, the highest
distribution rate over the past five years, best fulfilling the Funds' stated
investment objective.] The average annualized 30-day distribution rate at NAV
for each of the three Funds during the period from September 30, 2000 to
September 30, 2005 is shown below.
- --------------------------------------------------------------------------------
Minnesota I %
Minnesota II %
Minnesota III %
- --------------------------------------------------------------------------------
The Acquiring Fund will also benefit from the Acquisitions. The Acquiring
Fund is obtaining additional assets without incurring the expenses associated
with offering new shares (which, as a closed-end fund, would require an
underwritten rights or warrants offering or similar underwritten offering of
exchange-traded securities). Although it is paying for a portion of the
Acquisitions, the Acquiring Fund is obtaining the additional portfolio
securities of the Acquired Funds without the commensurate brokerage costs,
dealer spreads or other trading expenses. Further, the Acquiring Fund is
afforded the opportunity to spread its costs over a larger asset base.
The Board of Directors of each Fund has therefore determined that each of
the Funds would benefit from the Acquisitions. The Boards have also determined
that the interests of the Funds' shareholders will not be diluted as a result of
the Acquisitions because the exchange of shares between the Acquiring Fund and
the Acquired Funds will be based on their relative NAVs (or, for Preferred
Shares, the same Liquidation Preference).
FEDERAL INCOME TAX CONSEQUENCES
It is expected that shareholders of the Acquired Funds will not recognize
any gain or loss for federal income tax purposes as a result of the exchange of
their shares for Acquiring Fund Shares. Shareholders should, however, consult
their tax adviser regarding the effect, if any, of the Acquisition in light of
their individual circumstances. Shareholders should also consult their tax
adviser about state and local tax consequences of the Acquisitions, if any,
because the information about tax consequences in this Proxy
Statement/Prospectus only relates to the federal income tax consequences. After
the Acquisitions, shareholders will continue to be responsible for tracking the
adjusted tax basis and holding period for their shares for federal income tax
purposes. This discussion of "Federal Income Tax Consequences" is not intended
or written to be used as, and should not be considered a substitute for, tax
advice.
Each Acquisition is intended to qualify as a tax-free reorganization for
federal income tax purposes under Section 368(a)(1) of the Code. Based on
certain assumptions made and representations received from the Acquired Funds
and the Acquiring Fund, the law firm of Stradley Ronon Stevens & Young, LLP, on
behalf of the Funds, will provide a legal opinion that, for federal income tax
purposes, shareholders of the Acquired Funds will not recognize any gain or loss
as a result of the exchange of their Acquired Fund Shares for Acquiring Fund
Shares, and the Acquiring Fund and its shareholders will not recognize any gain
or loss upon receipt of the Acquired Funds' assets.
In addition, following the Acquisitions, the capital loss carryovers
(together with any current year loss and net unrealized depreciation in the
value of the assets) of the Acquired Funds will be subject to an annual
limitation for federal income tax purposes. Capital losses can generally be
carried forward to each of the eight (8) taxable years succeeding the loss year
to offset future capital gains. This limitation may result in a portion of the
capital loss carryovers of the Acquired Funds, which might otherwise have been
utilized to offset future capital gains, to expire unutilized.
As of March 31, 2005, Minnesota II and Minnesota III had capital loss
carryovers that expire as follows:
- ------------------------ ---------------------------- --------------------------
YEAR MINNESOTA II MINNESOTA III
- ------------------------ ---------------------------- --------------------------
2006 -- $6,539
- ------------------------ ---------------------------- --------------------------
2007 -- --
- ------------------------ ---------------------------- --------------------------
2008 $376,004 $56,856
- ------------------------ ---------------------------- --------------------------
2009 $175,804 $153,308
- ------------------------ ---------------------------- --------------------------
2010 $8,416 --
- ------------------------ ---------------------------- --------------------------
2011 -- --
- ------------------------ ---------------------------- --------------------------
2012 -- --
- ------------------------ ---------------------------- --------------------------
Total: $560,224 $216,703
- ------------------------ ---------------------------- --------------------------
As of March 31, 2005, Minnesota III had net unrealized appreciation in the
value of its assets of $1,765,512. For each taxable year following the
Acquisitions, the Acquiring Fund generally will be able to use a maximum of
approximately $1.1 million of Minnesota III's capital loss carryovers based on
its NAV on the Closing Date multiplied by a rate published by the Internal
Revenue Service for change of control transactions (currently 4.24%). The
Acquiring Fund will have to pro rate this annual limitation for the remainder of
its taxable year in which the Acquisition closes.
COMPARISON OF ACQUIRING AND ACQUIRED FUND SHARES
The following is only a general discussion of certain characteristics of,
and material differences between, the shares of each Fund, and is not a complete
description of the Funds' organizational documents. Further information about
each Fund's shareholder rights is contained in each Fund's prospectus and
organizational documents and in relevant state law.
General
The rights, terms and preferences of shareholders of all three Funds are
substantially similar. All three Funds are organized as Minnesota corporations
and issue two classes of shares-- common and preferred. The rights, terms and
preferences of the Funds' shares are controlled by Minnesota law as well as by
each Fund's Articles of Incorporation, as amended ("Articles of Incorporation").
Certain other corporate governance provisions are contained in the bylaws of
each Fund, as amended from time to time (the "Bylaws"). The provisions of each
Fund's Articles of Incorporation and Bylaws are substantially similar. Subject
to the 1940 Act, Minnesota law, the Articles of Incorporation and the Bylaws,
each of the Funds is governed by a Board of Directors that is elected annually
and currently consists of the same individuals.
Capitalization
As of September 30, 2005, the capitalization of each of the Funds was as
follows:
- ------------------------ ---------------------------- --------------------------
(1) (2) (3)
Fund/Title of Class Amount Authorized Amount Outstanding
- ------------------------ ---------------------------- --------------------------
Minnesota I
- ------------------------ ---------------------------- --------------------------
Common 200,000,000 2,594,700
- ------------------------ ---------------------------- --------------------------
Preferred 1,000,000 400
Municipal Income Preferred
Shares: 400
- ------------------------ ---------------------------- --------------------------
Minnesota II
- ------------------------ ---------------------------- --------------------------
Common 200,000,000 7,252,200
- ------------------------ ---------------------------- --------------------------
Preferred 1,000,000 Series A: 600
Series A: 600 Series B: 600
Series B: 600 Total: 1,200
Series C: 400
Series D: 300
Total: 1,900
- ------------------------ ---------------------------- --------------------------
Minnesota III
- ------------------------ ---------------------------- --------------------------
Common 200,000,000 1,837,200
- ------------------------ ---------------------------- --------------------------
Preferred 1,000,000 300
Municipal Income Preferred
Shares: 300
- ------------------------ ---------------------------- --------------------------
Common Shares
Dividend Rights, Policies and Limitations The terms and conditions relating
to dividends and distributions for Minnesota I and III are substantially similar
to the terms and conditions described above for the Acquiring Fund under
"Information About the Acquisitions-- Material Features of the Acquisitions--
Description of Acquiring Fund Common Shares to Be Issued-- Distributions." The
restrictions on the payment of dividends to holders of the Acquired Fund Common
Shares are substantially similar to the restrictions on the payment of dividends
to holders of the Acquiring Fund Common Shares discussed above under "Principal
Risk Factors-- Potential Restrictions on Acquiring Fund's Payment of Dividends."
To the extent that a Fund engages in a managed or level dividend policy, if the
Fund's investments do not generate sufficient income, the Fund may be required
to liquidate a portion of its portfolio to pay for these distributions, and
therefore these payments may represent a reduction of the shareholders'
principal investment. These "returns of capital" are generally not taxable as
income under the Code.
Dividend Reinvestment Plan The dividend reinvestment plans for Minnesota I
and Minnesota III are substantially similar to the DRIP described above under
"Information About the Acquisitions-- Material Features of the Acquisitions--
Description of Acquiring Fund Common Shares to be Issued-- Dividend Reinvestment
Plan." All three Funds use the same DRIP Agent. Shareholders of Minnesota I are
automatically enrolled in that Fund's DRIP unless they notify the DRIP Agent
that they do not wish to participate. Shareholders of Minnesota III will receive
their dividends in cash unless they elect to participate in that Fund's DRIP by
notifying the DRIP Agent.
Voting Rights The common shares of each Fund have no right to cumulative
voting in the election of directors. The rights of holders of each Fund's Common
Shares, as set forth in each Fund's Articles, may not be modified other than by
a vote of not less than a majority of that Fund's outstanding Common Shares. For
more information about the voting rights of Common Shares, see "Provisions for
Delaying or Preventing Changes in Control" below.
Other Rights and Characteristics The Common Shares of all three Funds, when
issued in accordance with their respective terms, are fully paid,
non-assessable, and have no preference, preemptive, conversion, liquidation or
subscription rights.
Preferred Shares
General The Statements for the Series C and D Preferred Shares are
identical in all material respects to those of the corresponding Acquired Fund
Preferred Shares, and are substantially similar to those of the Series A and B
Preferred Shares, with respect to their preferences, voting powers,
restrictions, limitations as to dividends, qualifications, liquidation rights,
and terms and conditions of redemption. The Series A, B, C and D Preferred
Shares will all rank on parity with each other as to the payment of dividends
and the distribution of assets upon liquidation, and all carry one vote per
share on all matters on which such shares are entitled to vote. The Acquired
Fund Preferred Shares and the Series A and B Preferred Shares were, and the
Series C and D Preferred Shares will be, when issued in accordance with their
respective Statements and prospectuses, fully paid and non-assessable and have
no preemptive, conversion or exchange rights or rights to cumulative voting. See
generally the discussion above entitled "Information About the Acquisitions--
Material Features of the Acquisitions-- Description of the Acquiring Fund
Preferred Shares to be Issued."
Dividends The rights, terms and preferences as to dividends of the Acquired
Fund Preferred Shares and the Series A and B Preferred Shares are substantially
similar to those of the Series C and D Preferred Shares described above under
"Information About the Acquisition-- Material Features of the Acquisitions--
Description of the Acquiring Fund Preferred Shares to be Issued." The
restrictions on the payment of dividends to holders of the Acquired Fund
Preferred Shares and Series A and B Preferred Shares are substantially similar
to the restrictions on the payment of dividends to holders of the Acquiring Fund
Preferred Shares discussed above under "Principal Risk Factors-- Potential
Restrictions on Acquiring Fund's Payment of Dividends." Each of the Acquired
Fund Preferred Shares and the Series A and B Preferred Shares currently have
Dividend Periods of 28 days. The Acquisition is designed so that, after the
Initial Dividend Periods for the Series C and D Preferred Shares, the Acquiring
Fund's four Series of Preferred Shares will each have Dividend Periods of 28
days, and will each be remarketed in a different week.
Voting Rights The voting rights for each of the Acquired Fund Preferred
Shares and Series A and B Preferred Shares are substantially similar to those of
the Acquiring Fund Preferred Shares as described above under "Information About
the Acquisitions-- Material Features of the Acquisitions-- Description of the
Acquiring Fund Preferred Shares to be Issued-- Voting Rights." See also
"Provisions for Delaying or Preventing Changes in Control" below.
In addition to the voting rights described above, the Statement for the
Series A and B Preferred Shares provides that (unless a higher percentage vote
is required under the Articles) the affirmative vote of the holders of a
majority of the outstanding shares of the Series A and B Preferred Shares, each
voting as a separate class, is required with respect to any matter that
materially affects the Series in a manner different from that of other Series or
classes of the Acquiring Fund, including, without limitation, any proposal to do
the following:
o Increase or decrease the aggregate number of authorized Series A and B
Preferred Shares;
o Effect an exchange, reclassification or cancellation of all or part of
the Series A and B Preferred Shares;
o Effect an exchange, or create a right of exchange, of all or any part
of the Series A and B Preferred Shares;
o Change the rights or preferences of the Series A and B Preferred
Shares;
o Change the Series A and B Preferred Shares, whether with or without
par value, into the same or a different number of shares, either with
or without par value, of the same or another class or series;
o Create a new class or series of shares having rights and preferences
prior and superior to the Series A and B Preferred Shares, or increase
the rights and preferences or the number of authorized shares of a
series having rights and preferences prior or superior to the Series A
and B Preferred Shares; or
o Cancel or otherwise affect distributions on the Series A and B
Preferred Shares that have accrued but have not been declared.
The vote of holders of Series A and B Preferred Shares described above will
in each case be in addition to a separate vote of the requisite percentage of
shares of Acquiring Fund Shares necessary to authorize the action in question,
if any.
Changes to the Statements Certain calculations in the Statements for Series
C and D Preferred Shares, such as the Preferred Share Basic Maintenance Amount,
were revised from the corresponding statements of the Acquired Fund Preferred
Shares to take into account the fact that, if the Acquisitions are completed,
the Acquiring Fund will have four Series of outstanding Acquiring Fund Preferred
Shares. Holders of each Fund's Preferred Shares are currently entitled to
exclusively elect two directors to the Boards of their respective Funds. If the
Acquisitions are completed, holders of all four Series of Acquiring Fund
Preferred Shares, voting together as a class, will be entitled to exclusively
elect two directors to the Board of the Acquiring Fund. Similarly, holders of
each Fund's Preferred Shares currently have the ability to exclusively elect a
majority of their Fund's Board of Directors if that Fund fails to pay dividends
on its Preferred Shares for two years or more. If the Acquisition is completed,
holders of all four Series of Acquiring Fund Preferred Shares, voting together
as a class, will have the ability to exclusively elect a majority of the
Acquiring Fund's Board of Directors if the Acquiring Fund fails to pay dividends
on any of the Acquiring Fund's Preferred Shares for two years or more.
Securities Ratings The Series A and B Preferred Shares and each of the
Acquired Fund Preferred Shares are currently rated "AAA" by S&P and "Aaa" by
Moody's. Moreover, as a condition of the closing of the Acquisitions, the Funds
must have received confirmation from the Rating Agencies that the Series C and D
Preferred Shares will receive the same rating that the Rating Agencies had
provided to each of the Acquired Fund Preferred Shares, and the Acquiring Fund
must also receive written confirmation that the Acquisitions will not impair the
rating of the Series A and B Preferred Shares.
Receiving the highest rating available from each Rating Agency is material
to the Funds because it allows each Fund to pay lower dividends on its Preferred
Shares than would be the case if the Fund's Preferred Shares received a lower
rating. This, in turn, leaves more income available for distribution to holders
of Common Shares than would be the case if the Fund's Preferred Shares received
a lower rating.
The ratings provided by the Rating Agencies are largely based on each
Fund's adherence to the Rating Agency guidelines described in this Proxy
Statement/Prospectus and set forth in detail in the Statements attached as
Exhibits to this Proxy Statement/Prospectus. The guidelines for the Acquired
Fund Preferred Shares and for the Series A and B Preferred Shares are
substantially similar to those of the Series C and D Preferred Shares described
above under "Information About the Acquisitions-- Material Features of the
Acquisitions-- Description of the Acquiring Fund Preferred Shares to be Issued."
Each Fund complies, and intends to continue to comply, with these guidelines.
These guidelines establish criteria for the selection of each Fund's
investments, including the credit quality of each Fund's portfolio securities,
and also impose limitations on the kinds of instruments the Funds may use or in
which they may invest.
Provisions for Delaying or Preventing Changes in Control
Each Fund's Articles of Incorporation contain provisions designed to
prevent or delay changes in control of that Fund. Each Fund's Articles of
Incorporation provide that, unless an action has been previously approved by the
affirmative vote of two-thirds of a Fund's Board of Directors, an affirmative
vote of two-thirds of the outstanding Common and Preferred Shares, voting
together as a single class, is required to approve, adopt or authorize:
o A conversion of the Fund from a closed-end to an open-end fund;
o A merger or consolidation with any other corporation, or a
reorganization or recapitalization;
o A sale or transfer of all or substantially all of the assets of the
Fund (other than in the ordinary course of the Fund's investment
activities); or
o A liquidation or dissolution of the Fund.
If two-thirds of a Fund's Directors have approved such action, then the
action may be approved by the affirmative vote of a majority of the outstanding
Common and Preferred Shares entitled to vote, voting together as a single class.
Any such action that adversely affects the holders of Preferred Shares will also
require the affirmative vote of the holders of two-thirds of the Preferred
Shares, voting together as a separate class, unless the action has been approved
by two-thirds of the Fund's Board of Directors, in which case the Preferred
Shares may approve the action by a majority vote. The provision of the Articles
that sets forth these voting standards may only be amended or repealed by the
affirmative votes of two-thirds of the outstanding Common and Preferred Shares
entitled to vote, voting together as a single class. These voting standards are
in addition to the separate voting requirements for the Preferred Shares
described above.
Taxes
Each Fund intends to qualify for treatment as a "regulated investment
company" under Subchapter M of the Code. Each Fund intends to distribute
virtually all of its net investment income and net realized capital gains at
least once a year. Distributions by a Fund will consist primarily of
exempt-interest dividends from interest earned on Municipal Obligations. In
general, exempt-interest dividends are exempt from federal income tax. However,
a Fund may invest a portion of its assets in securities that pay income that is
not tax-exempt. Fund distributions from such income are taxable to shareholders
as ordinary dividends.
Exempt-interest dividends paid are taken into account when determining the
taxable portion of an investor's Social Security or railroad retirement
benefits. The Funds may invest a portion of their assets in private activity
bonds. The income from these bonds will be a preference item when determining an
investor's federal or Minnesota Alternative Minimum Tax (AMT). See the
discussion above on AMT under "Principal Risk Factors - Investment Risks -
Alternative Minimum Tax."
Exempt-interest dividends from interest earned on Municipal Obligations of
a state, or of its political subdivisions, generally will be exempt from that
state's personal income taxes. Most states, however, do not grant tax-free
treatment to interest on investments in Municipal Obligations of other states.
EXISTING AND PRO FORMA CAPITALIZATION
The following tables set forth, as of March 31, 2005, the separate
capitalizations of the Acquiring Fund and the Acquired Funds, and the estimated
capitalization of the Acquiring Fund as adjusted to give effect to the proposed
Acquisitions. The capitalization of the Acquiring Fund is likely to be different
when the Acquisitions are consummated.
Minnesota I + Minnesota II
- ---------------------------- -------------- ---------------------------- ----------------------------
Minnesota I Minnesota II Minnesota II after the
Acquisition (Estimated)*
- ---------------------------- -------------- ---------------------------- ----------------------------
- ---------------------------- -------------- ---------------------------- ----------------------------
Net Assets (millions) $37,737,594 $107,957,875 $145,545,469**
- ---------------------------- -------------- ---------------------------- ----------------------------
Common Shares Outstanding 2,594,700 7,252,200 9,783,969
- ---------------------------- -------------- ---------------------------- ----------------------------
Net Asset Value per Common $14.54 $14.89 $14.88**
Share
- ---------------------------- -------------- ---------------------------- ----------------------------
Preferred Shares Outstanding 400 Series A: 600 Series A: 600
Series B: 600 Series B: 600
Total: 1,200 Series C: 400
Total: 1,600
- ---------------------------- -------------- ---------------------------- ----------------------------
Liquidation Preference $50,000 $50,000 $50,000
- ---------------------------- -------------- ---------------------------- ----------------------------
Minnesota III + Minnesota II
- ---------------------------- -------------- ---------------------------- ----------------------------
Minnesota III Minnesota II Minnesota II after the
Acquisition (Estimated)*
- ---------------------------- -------------- ---------------------------- ----------------------------
Net Assets (millions) $25,719,745 $107,957,875 $133,527,620**
- ---------------------------- -------------- ---------------------------- ----------------------------
Common Shares Outstanding 1,837,200 7,252,200 8,976,101
- ---------------------------- -------------- ---------------------------- ----------------------------
Net Asset Value per Common $14.00 $14.89 $14.88**
Share
- ---------------------------- -------------- ---------------------------- ----------------------------
Preferred Shares Outstanding 300 Series A: 600 Series A: 600
Series B: 600 Series B: 600
Total: 1,200 Series D: 300
Total: 1,500
- ---------------------------- -------------- ---------------------------- ----------------------------
Liquidation Preference $50,000 $50,000 $50,000
- ---------------------------- -------------- ---------------------------- ----------------------------
__________________
* If the Acquisitions are approved for both Acquired Funds, the pro forma
capitalization of the Acquiring Fund would be as follows:
------------------------------ ----------------------------
Minnesota II after the
Acquisition (Estimated)
------------------------------ ----------------------------
Net Assets (millions) 171,190,214**
------------------------------ ----------------------------
Common Shares Outstanding 11,507,870
------------------------------ ----------------------------
Net Asset Value per Common 14.88**
Share
------------------------------ ----------------------------
Preferred Shares Outstanding Series A: 600
Series B: 600
Series C: 400
Series D: 300
Total: 1,900
------------------------------ ----------------------------
Liquidation Preference $50,000
------------------------------ ----------------------------
** Reflects estimated costs of the Acquisitions of $75,000 for each Fund.
INFORMATION ABOUT THE FUNDS
GENERAL DESCRIPTION
Organization; Investment Company Classification
Each of the Funds is organized as a Minnesota corporation. Minnesota I was
organized on February 20, 1992; Minnesota II was organized on December 29, 1992;
and Minnesota III was organized on August 4, 1993.
Each of the Acquired Funds is registered under the 1940 Act as a
non-diversified, closed-end management investment company; the Acquiring Fund is
registered as a diversified, closed-end management investment company.
"Non-diversified" means that an Acquired Fund is not limited in the amount it
can invest in a single issuer, although each Acquired Fund intends to operate
within the diversification requirements of the Code for regulated investment
companies. A "diversified" fund like the Acquiring Fund is limited by the 1940
Act in the amount that it may invest in a single issuer. A closed-end fund
(unlike an "open-end" or "mutual" fund) generally does not continuously sell and
redeem its shares-- in the case of the Funds, Common Shares are bought and sold
on the Exchange. A "management" investment company is "managed" by an investment
adviser-- DMC in the case of the Funds-- who buys and sells portfolio securities
on behalf of the investment company. The Funds would need to obtain shareholder
approval to become an open-end fund, but the Acquired Funds would not require
shareholder approval to become diversified.
Investment Objective and Policies
Investment Objective Each Fund seeks to provide current income exempt from
both regular federal income tax and Minnesota state personal income tax,
consistent with the preservation of capital. This investment objective is
classified as "non-fundamental," which means that each Fund's Board of Directors
may change a Fund's investment objective without shareholder approval, but will
notify Fund shareholders before any such change becomes effective
Investment Strategy Each Fund intends to emphasize investments in Minnesota
Municipal Obligations with long-term maturities in order to maintain an average
portfolio maturity of 20 to 30 years, although this may change based on market
conditions. Each Fund may also:
o Invest up to 20% of its total assets in unrated Minnesota Municipal
Obligations determined by DMC to be of comparable quality to
investment grade rated Minnesota Municipal Obligations;
o Continue to hold Municipal Obligations that have been downgraded by
Moody's or S&P below investment grade after purchase, although no more
than 5% of a Fund's total assets will consist of securities that have
been downgraded to a rating below Baa or BBB or, in the case of
unrated securities, that have been determined by DMC to be of a
quality lower than securities rated Baa or BBB by Moody's and S&P,
respectively;
o Invest up to 20% of the Fund's total assets in securities that
generate interest that is subject to federal and Minnesota AMT;
o Purchase Municipal Obligations on a "when-issued" basis and purchase
or sell Municipal Obligations on a "forward commitment" basis in order
to acquire the security or to hedge against anticipated changes in
interests rates and prices; and
o Invest without limit in state or Municipal Obligations issued by state
and local governments or authorities to finance the acquisition of
equipment and facilities such as fire, sanitation or police vehicles
or telecommunications equipment, buildings or other capital assets.
In addition, Minnesota III may invest to a greater extent than the other
Funds in Municipal Obligations that carry variable or floating rates of
interest, and may invest up to 20% of its total assets in variable rate
Municipal Obligations whose rates vary inversely with changes in market rates of
interest (so-called inverse floaters). Minnesota III may also invest to a
greater extent than the other Funds in custodial receipts or certificates that
evidence ownership of future interest payments, principal payments or both on
certain municipal securities. Because the Acquiring Fund does not invest to the
same extent in these instruments, it may have a lower yield and total return
than Minnesota III, but it may also tend to exhibit less volatility than
Minnesota III.
Other Investment Policies and Strategies
In addition to Municipal Obligations, the Funds may also invest using the
following instruments and strategies.
Inverse Floating Rate Securities Inverse floating rate securities ("inverse
floaters") are a type of derivative tax-exempt obligation with floating or
variable interest rates that move in the opposite direction of short-term
interest rates, usually at an accelerated speed. The market values of inverse
floaters are generally more volatile than other tax-exempt investments.
Advanced Refunded Bonds The Funds may invest in advanced refunded bonds,
escrow secured bonds or defeased bonds. Under current federal tax laws and
regulations, state and local government borrowers are permitted to refinance
outstanding bonds by issuing new bonds. The issuer refinances the outstanding
debt to either reduce interest costs or to remove or alter restrictive covenants
imposed by the bonds being refinanced. A refunding transaction where the
municipal securities are being refunded within 90 days or less from the issuance
of the refunding issue is known as a "current refunding."
"Advance refunded bonds" are bonds in which the refunded bond issue remains
outstanding for more than 90 days following the issuance of the refunding issue.
In an advance refunding, the issuer will use the proceeds of a new bond issue to
purchase high grade interest bearing debt securities, which are then deposited
in an irrevocable escrow account held by an escrow agent to secure all future
payments of principal and interest and bond premium of the advance refunded
bond. Bonds are "escrowed to maturity" when the proceeds of the refunding issue
are deposited in an escrow account for investment sufficient to pay all of the
principal and interest on the original interest payment and maturity dates.
Bonds are considered "pre-refunded" when the refunding issue's proceeds are
escrowed only until a permitted call date on the refunded issue, with the
refunded issue being redeemed at that time.
Bonds become "defeased" when their rights, interests and lien on the
pledged revenues or other security are substituted with an alternative source of
revenues (the escrow securities) sufficient to meet payments of principal and
interest to maturity or to the first call date. Escrowed secured bonds will
often receive the equivalent of a AAA rating from Moody's and/or S&P due to the
strong credit quality of the escrowed securities and the irrevocable nature of
the escrow deposit agreement.
Restricted Securities Restricted securities are privately placed securities
whose resale is restricted under federal securities law. Each Fund may invest in
restricted securities, including those that are eligible for resale only among
certain institutional buyers without registration (commonly known as Rule 144A
securities), without limitation if certain liquidity criteria are satisfied.
Restricted securities that are determined to be illiquid may not exceed each
Fund's 15% limit on illiquid securities, which is described below.
Illiquid Securities Illiquid securities are securities that do not have a
ready market and cannot be easily sold within seven days at a price that is
approximately equal to their value as assessed by the Fund. Illiquid securities
include repurchase agreements maturing in more than seven days. Each Fund may
not invest more than 15% of its net assets in illiquid securities. The Rating
Agency guidelines may operate to further limit each Fund's investments in
illiquid securities.
Temporary Defensive Investments Each Fund may invest in a temporary
defensive manner when DMC believes that the Fund will be affected by adverse
market conditions. When investing in this manner, a Fund may hold all or a
substantial part of its assets in short-term, high quality securities which may
be either tax-exempt or taxable. Tax-exempt temporary securities include various
obligations issued by state and local governmental issuers, such as tax-exempt
notes (bond anticipation notes, tax anticipation notes and revenue anticipation
notes or other such Municipal Obligations maturing in three years or less from
the date of issuance) and municipal commercial paper. Each Fund may invest only
in taxable temporary investments which are U.S. Government securities. To the
extent that a Fund invests in a temporary defensive manner, the Fund may not be
able to achieve its investment objective.
Portfolio Trading and Turnover Rate Portfolio trading may be undertaken to
accomplish the investment objective of a Fund in relation to actual and
anticipated movements in interest rates. In addition, a security may be sold and
another security of comparable quality purchased at approximately the same time
to take advantage of what DMC believes to be a temporary price disparity between
the two securities. Temporary price disparities between two comparable
securities may result from supply and demand imbalances where, for example, a
temporary oversupply of certain bonds may cause a temporarily low price for
those bonds, as compared with other bonds of like quality and characteristics.
Each Fund may also engage to a limited extent in short-term trading consistent
with its investment objective. Securities may be sold in anticipation of a
market decline (a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates) and later sold, but the Fund will
generally not engage in trading solely to recognize a gain.
Subject to the foregoing, each Fund will attempt to achieve its investment
objective by prudent selection of Minnesota Municipal Obligations with a view to
holding them for investment. Each Fund anticipates that its annual portfolio
turnover will not exceed 100%. However, the rate of turnover will not be a
limiting factor when a Fund deems it desirable to sell or purchase securities.
Therefore, depending on market conditions, the annual portfolio turnover rate of
a Fund may exceed 100% in particular years. Trading of the Fund's portfolio
securities will result in increased transaction costs to the Funds. Certain
federal tax requirements limit the portion of the Fund's annual gross income
that may be derived from the sale or disposition of securities held for less
than three months.
Fundamental Investment Restrictions
Each Fund considers the restrictions below to be "fundamental," which means
that they can only be changed by the vote of a majority of the outstanding
voting securities of that Fund.
Concentration Each Fund will not make investments that will result in the
concentration (as that term may be defined in the 1940 Act, any rule or order
thereunder, or SEC staff interpretation thereof) of its investments in the
securities of issuers primarily engaged in the same industry, provided that this
restriction does not limit the Fund from investing in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or in
tax-exempt securities or certificates of deposit.
Borrowing and Senior Securities Each Fund may not borrow money or issue
senior securities, except as the 1940 Act, any rule or order thereunder, or SEC
staff interpretation thereof, may permit.
Underwriting Each Fund may not underwrite the securities of other issuers,
except that a Fund may engage in transactions involving the acquisition,
disposition or resale of its portfolio securities, under circumstances where it
may be considered to be an underwriter under the Securities Act of 1933, as
amended.
Real Estate Each Fund may not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments and provided that
this restriction does not prevent a Fund from investing in issuers which invest,
deal or otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
Commodities Each Fund may not purchase or sell physical commodities, unless
acquired as a result of ownership of securities or other instruments and
provided that this restriction does not prevent a Fund from engaging in
transactions involving futures contracts and options thereon or investing in
securities that are secured by physical commodities.
Lending Each Fund may not make loans, provided that this restriction does
not prevent a Fund from purchasing debt obligations, entering into repurchase
agreements, loaning its assets to broker/dealers or institutional investors and
investing in loans, including assignments and participation interests.
How the Fundamental Investment Restrictions Are Interpreted
For the purpose of applying the limitations on concentration, a
non-governmental issuer, such as an industrial corporation or a privately owned
or operated hospital, would be deemed to be the issuer if the security is backed
only by the assets and revenues of the non-governmental issuer. In addition,
each type of utility and each health care sector shall be deemed to be a
separate industry. For example, the water, sewer and electric industries shall
be deemed to be separate industries and hospitals and nursing homes shall be
deemed to be separate industries.
Certain restrictions imposed by the Rating Agencies on borrowing money,
lending securities, buying and selling futures contracts, and writing put and
call options at any time the Preferred Shares are outstanding are not
fundamental policies and may be changed by a Fund from time to time without
shareholder approval, but only in the event that the Fund receives written
confirmation from S&P and/or Moody's, as appropriate, that such change would not
impair the ratings then assigned by S&P or Moody's, or both, to the Preferred
Shares.
Except with respect to a Fund's borrowing policy, the fundamental
investment restrictions and limitations will apply only at the time of purchase
of securities and will not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of an acquisition of
securities.
Hedging Strategies
Certain hedging strategies in which a Fund may engage may give rise to
income that is subject to regular federal income tax. In addition, compliance
with the guidelines established by the Rating Agencies in connection with a
Fund's receipt of a rating for its Preferred Shares will restrict the Fund's
ability to engage in these hedging strategies. Accordingly, no Fund engages in
these hedging strategies to a significant extent.
Interest Rate Transactions For hedging purposes, each Fund may enter into
interest rate swaps and the purchase and sale of interest rate caps and floors.
Each Fund expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio, to
manage the average weighted maturity of the Fund's portfolio or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Funds intend to use these transactions as a hedge and not
as a speculative investment. The Funds will not enter into any interest rate
transaction unless the unsecured senior debt or the claims-paying ability of the
other party thereto is rated at least A by at least one nationally recognized
rating organization at the time of entering into such a transaction.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. There is no limit on the amount of interest rate swap transactions
that may be entered into by a Fund.
The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling the interest rate floor. Each Fund may not sell interest
rate caps or floors based on securities that it does not own. The aggregate
purchase price of caps and floors held by a Fund may not exceed 5% of the Fund's
assets. However, each Fund may sell (i.e. write) caps and floors without
limitation, subject to certain segregated account requirements.
Futures Contracts A futures contract is an agreement to purchase or sell a
security at a specified price and on a specified date. To hedge the value of its
portfolio securities that might be affected by a change in interest rates and
for other risk management purposes, each Fund may enter into futures contracts
on debt securities, baskets of debt securities or indices of prices of debt
securities, other financial indices and U.S. Government debt securities.
Calls on Securities and Futures A call option ("calls") gives the purchaser
of the option the right to buy, and obligates the seller to sell, the underlying
security or futures contract at the exercise price at any time or at a specified
time during the option period. Each Fund may sell or purchase calls on Municipal
Obligations that are traded on the U.S. securities exchanges and in the
over-the-counter markets and related futures on such securities.
Puts on Securities and Futures A put option ("puts") gives the purchaser of
the option the right to sell, and obligates the seller to buy, the underlying
security or futures contract at the exercise price at any time or at a specified
time during the option period. Each Fund may purchase puts that relate to
Municipal Obligations or futures on Municipal Obligations. Each Fund may also
sell puts on Municipal Obligations or futures on Municipal Obligations if the
Fund's continuing obligations on such puts are secured by segregated assets
consisting of cash or liquid debt securities having an aggregate value not less
than the exercise price. Each Fund will not sell puts if, as a result, more than
50% of the Fund's assets would be required to cover its potential obligation
under its hedging and other investment transactions.
Rating Agency Guidelines on Hedging For as long as a Fund's Preferred
Shares are rated by Moody's, that Fund may engage in transactions in options on
securities, futures contracts on certain bond indices or U.S. treasury bonds,
and options on those futures contracts, only when consistent with the asset
maintenance requirements of the applicable Statement for the Preferred Shares,
unless the Fund receives written confirmation from Moody's that engaging in such
transactions would not impair the ratings assigned by Moody's to that Fund's
Preferred Shares. For as long as a Fund's Preferred Shares are rated by S&P, the
Fund will not buy or sell futures contracts or options on futures contracts or
write put options or call options on portfolio securities unless it receives
written confirmation from S&P that engaging in those transactions will not
impair the ratings assigned by S&P to that Fund's Preferred Shares, except that
a Fund may buy and sell futures contracts based on certain bond indices or U.S.
treasury bonds, may purchase put and call options on those futures contracts,
and may write covered call options and "secured" put options (i.e., put options
for which the Fund has segregated cash and/or liquid securities in an amount
equal to the put obligation, marked to market daily) on those futures contracts
or on portfolio securities, subject to the limitations of the asset maintenance
requirements in the Statement.
Share Price Data
The Exchange is the principal trading market for the Acquired Fund and
Acquiring Fund Common Shares. The following tables show the quarterly history of
public trading on the Exchange of each Fund's Common Shares for the last two
fiscal years of the Funds and for each full quarter since the beginning of the
current fiscal year.
Minnesota I
Percentage
Net Asset Value Market Price Premium/(Discount)
Quarter Ended
High Low High Low High Low
-------------- --------------- -------------- -------------- --------------- -------------
- --------------------------- -------------- --------------- -------------- -------------- --------------- -------------
September 30, 2005
June 30, 2005 $15.19 $14.58 $15.22 $14.18 13.43% (3.99%)
March 31, 2005 15.29 14.48 17.03 15.07 14.37% 3.65%
December 31, 2004 15.00 14.56 16.71 15.85 13.78% 6.02%
September 30, 2004 14.98 14.23 16.30 14.58 9.66% 1.32%
June 30, 2004 14.99 13.88 16.60 13.86 10.74% (1.90%)
March 31, 2004 15.46 14.84 16.87 15.64 12.37% 4.69%
December 31, 2003 15.18 14.72 15.65 14.79 4.82% (0.80%)
September 30, 2003 15.74 14.61 16.42 13.95 5.05% (5.49%)
June 30, 2003 16.16 15.32 16.70 15.72 4.49% 0.19%
March 31, 2003 15.68 15.19 16.60 15.55 6.75% 1.43%
Minnesota II
Percentage
Net Asset Value Market Price Premium/(Discount)
Quarter Ended
High Low High Low High Low
-------------- --------------- -------------- -------------- --------------- -------------
- --------------------------- -------------- --------------- -------------- -------------- --------------- -------------
September 30, 2005
June 30, 2005 $15.47 $14.93 $17.58 $15.77 14.08% 3.64%
March 31, 2005 15.55 14.83 17.45 16.09 16.64% 4.48%
December 31, 2004 15.31 14.93 16.75 15.74 10.93% 3.08%
September 30, 2004 15.24 14.59 16.70 15.08 10.74% 2.17%
June 30, 2004 15.26 14.25 16.72 13.97 9.57% (2.84%)
March 31, 2004 15.64 15.11 17.10 15.98 11.26% 4.92%
December 31, 2003 15.21 14.65 16.50 15.28 9.49% 1.86%
September 30, 2003 15.30 14.40 16.19 14.48 7.12% (0.34%)
June 30, 2003 15.68 14.93 16.44 15.18 6.34% 0.32%
March 31, 2003 15.23 14.74 15.50 14.95 4.39% 0.33%
Minnesota III
Percentage
Net Asset Value Market Price Premium/(Discount)
Quarter Ended
High Low High Low High Low
-------------- --------------- -------------- -------------- --------------- -------------
- --------------------------- -------------- --------------- -------------- -------------- --------------- -------------
September 30, 2005
June 30, 2005 $14.57 $14.04 $16.35 $14.84 14.42% 2.55%
March 31, 2005 14.62 13.95 16.80 15.25 18.69% 6.79%
December 31, 2004 14.39 14.02 15.85 15.05 11.82% 5.17%
September 30, 2004 14.38 13.74 15.50 13.84 8.99% 0.73%
June 30, 2004 14.45 13.41 16.16 13.09 12.82% (2.97%)
March 31, 2004 14.85 14.33 16.39 15.35 11.65% 6.24%
December 31, 2003 14.42 13.93 15.64 14.00 8.61% (2.17%)
September 30, 2003 14.59 13.67 15.15 13.13 5.98% (4.96%)
June 30, 2003 14.94 14.16 15.21 14.49 4.01% (0.47%)
March 31, 2003 14.46 13.94 14.95 13.86 4.27% (1.07%)
As of October ___, 2005, the NAV per Common Share, market price per Common
Share and premium/(discount) for each Fund was as follows:
Percentage
Fund Net Asset Value Market Price Premium/(Discount)
Minnesota I
Minnesota II
Minnesota III
Common Shares of each Fund trade on the Exchange at a market price that is
determined by current supply and demand conditions. The market price of a Fund's
Common Shares may or may not be the same as the Fund's NAV-- that is, the value
of the portfolio securities owned by the Fund less its liabilities. Sometimes
the market price of a Fund's Common Shares has exceeded its NAV, in which case
the Fund's Common Shares are said to be "trading at a premium." At other times,
the market price of a Fund's Common Shares have traded at less than its NAV, in
which case the Fund's Common Shares are said to be "trading at a discount." It
is very difficult to identify the factors that cause a closed-end fund to trade
at a premium or a discount. There is very little that a closed-end fund's board
of directors can do to reduce or eliminate a closed-end fund's discount over the
long term, other than liquidating the closed-end fund entirely, turning it into
an open-end fund or taking similar drastic measures that fundamentally alter the
character of the fund. Some short-term measures, such as stock repurchases and
tender offers, tend to dilute a closed-end fund's assets but do not typically
have a long-term effect on the discount. Other short-term measures, such as
managed dividend programs, frequently do not have a consistent long-term effect
on discounts.
While the Board of Directors of each Fund has determined that the
Acquisitions are in the best interests of each Fund's shareholders, there is no
expectation that the Acquisitions will have any long-term effect or influence on
whether the Acquiring Fund trades at a discount or a premium after the
Acquisitions. Whether a Fund has been trading at a premium or discount was not a
significant factor in each Board's approval of the applicable Acquisition and
recommendation for approval to Fund shareholders. The Acquiring Fund's Board of
Directors will continue to monitor the discount or premium at which the
Acquiring Fund trades after the Acquisitions, but it may or may not take any
action to address the discount or premium.
FINANCIAL HIGHLIGHTS
Selected data for each share of the Fund outstanding throughout each period were
as follows:
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND, INC.
Year Ended
3/31/04(6) 3/31/03 3/31/02(1) 3/31/01 3/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $15.460 $14.640 $14.790 $14.060 $15.380
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.999 1.119 1.191 1.155 1.180
Net realized and unrealized gain (loss)
on investments 0.130 0.758 (0.323) 0.732 (1.256)
Dividends on preferred stock from:
Net investment income (0.054) (0.094) (0.178) (0.317) (0.272)
Net realized gain on investments (0.047) (0.008) -- -- (0.014)
-------- -------- -------- -------- --------
Total dividends on preferred stock (0.101) (0.102) (0.178) (0.317) (0.286)
-------- -------- -------- -------- --------
Total from investment operations 1.028 1.775 0.690 1.570 (0.362)
-------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS TO
COMMON SHAREHOLDERS FROM:
Net investment income (0.938) (0.890) (0.840) (0.840) (0.907)
Net realized gain on investments (0.530) (0.065) -- -- (0.051)
-------- -------- -------- -------- --------
Total dividends and distributions (1.468) (0.955) (0.840) (0.840) (0.958)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $15.020 $15.460 $14.640 $14.790 $14.060
======== ======= ======= ======= =======
MARKET VALUE, END OF PERIOD $16.600 $16.000 $14.450 $14.300 $13.563
======== ======= ======= ======= =======
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value 13.86% 17.74% 7.00% 12.09% (12.39%)
Net asset value 6.62% 12.29% 4.81% 11.83% (2.56%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares, end
of period (000 omitted) $38,978 $40,122 $37,996 $33,386 $36,488
Ratio of expenses to average net assets
applicable to common shares(3) 1.20% 1.21% 1.13% 1.23% 1.36%
Ratio of net investment income to average net
assets applicable to common shares(3) 6.57% 7.35% 8.00% 8.22% 8.05%
Ratio of net investment income to average net
assets applicable to common shares net of
dividends to preferred shares(4) 5.90% 6.68% 6.84% 6.00% 6.17%
Portfolio turnover 50% 38% 15% 6% 12%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding
(000 omitted) $20,000 $20,000 $20,000 $20,000 $20,000
Net asset coverage per share of preferred
shares, end of period $147,445 $150,306 $144,989 $145,964 $141,221
Liquidation value per share of preferred
shares(5) $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the period ended March 31, 2002 was an increase in net
investment income per share of $0.006, a decrease in net realized and unrealized
gain (loss) per share of $0.006, and an increase in the ratio of net investment
income to average net assets of 0.04%. Per share data and ratios for periods
prior to April 1, 2001 have not been restated to reflect this change in
accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of each
period reported. Dividends and distributions, if any, are assumed for the
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in periods where there is an increase in the discount or a decrease in the
premium of the market value to the net asset value from the beginning to the end
of such periods. Conversely, total investment return based on net asset value
will be lower than total investment return based on market value in periods
where there is a decrease in the discount or an increase in the premium of the
market value to the net asset value from the beginning to the end of such
periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders divided by average net assets applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
(6) The average shares outstanding method has been applied for per share
information.
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC
Year Ended
3/31/04(6) 3/31/03 3/31/02(1) 3/31/01 3/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $15.060 $14.280 $14.450 $13.590 $14.950
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 1.093 1.143 1.163 1.168 1.176
Net realized and unrealized gain (loss)
on investments 0.207 0.689 (0.313) 0.850 (1.411)
Dividends on preferred stock from:
Net investment income (0.082) (0.112) (0.182) (0.340) (0.307)
-------- -------- -------- -------- --------
Total dividends on preferred stock (0.082) (0.112) (0.182) (0.340) (0.307)
-------- -------- -------- -------- --------
Total from investment operations 1.218 1.720 0.668 1.678 (0.542)
-------- -------- -------- -------- --------
LESS DIVIDENDS TO COMMON SHAREHOLDERS FROM:
Net investment income (0.998) (0.940) (0.838) (0.818) (0.818)
-------- -------- -------- -------- --------
Total dividends (0.998) (0.940) (0.838) (0.818) (0.818)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $15.280 $15.060 $14.280 $14.450 $13.590
======== ======== ======== ======== ========
Market value, end of period $16.800 $15.300 $14.050 $14.080 $12.438
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value 16.87% 15.84% 5.75% 20.37% (12.28%)
Net asset value 7.99% 12.19% 4.73% 13.06% (3.43%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares,
end of period (000 omitted) $110,828 $109,212 $103,573 $104,775 $98,574
Ratio of expenses to average net assets
applicable to common shares(3) 0.93% 1.03% 1.06% 1.01% 0.99%
Ratio of net investment income to average
net assets applicable to common shares(3) 7.23% 7.74% 8.03% 8.42% 8.44%
Ratio of net investment income to average
net assets applicable to common shares
net of dividends to preferred shares(4) 6.69% 6.99% 6.79% 5.96% 6.24%
Portfolio turnover 34% 22% 7% 3% 4%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding
(000 omitted) $60,000 $60,000 $60,000 $60,000 $60,000
Net asset coverage per share of preferred
shares, end of period $142,357 $141,010 $136,311 $137,312 $132,145
Liquidation value per share of preferred
shares(5) $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the period ended March 31, 2002 was an increase in net
investment income per share of $0.003, a decrease in net realized and unrealized
gain (loss) per share of $0.003, and an increase in the ratio of net investment
income to average net assets of 0.02%. Per share data and ratios for periods
prior to April 1, 2001 have not been restated to reflect this change in
accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of each
period reported. Dividends and distributions, if any, are assumed for the
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in periods where there is an increase in the discount or a decrease in the
premium of the market value to the net asset value from the beginning to the end
of such periods. Conversely, total investment return based on net asset value
will be lower than total investment return based on market value in periods
where there is a decrease in the discount or an increase in the premium of the
market value to the net asset value from the beginning to the end of such
periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders divided by average net assets applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
(6) The average shares outstanding method has been applied for per share
information.
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND III, INC.
Year Ended
3/31/04(6) 3/31/03 3/31/02(1) 3/31/01 3/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $14.290 $13.230 $13.420 $12.560 $13.970
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 1.034 1.084 1.064 1.065 1.075
Net realized and unrealized gain (loss)
on investments 0.119 0.918 (0.306) 0.889 (1.425)
Dividends on preferred stock from:
Net investment income (0.083) (0.112) (0.183) (0.336) (0.302)
-------- -------- -------- -------- --------
Total dividends on preferred stock (0.083) (0.112) (0.183) (0.336) (0.302)
-------- -------- -------- -------- --------
Total from investment operations 1.070 1.890 0.575 1.618 (0.652)
-------- -------- -------- -------- --------
LESS DIVIDENDS TO COMMON SHAREHOLDERS FROM:
Net investment income (0.880) (0.830) (0.765) (0.758) (0.758)
-------- -------- -------- -------- --------
Total dividends (0.880) (0.830) (0.765) (0.758) (0.758)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $14.480 $14.290 $13.230 $13.420 $12.560
======== ======== ======== ======== ========
MARKET VALUE, END OF PERIOD $16.160 $14.800 $13.000 $13.000 $11.750
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN BASED ON:(2)
Market value 15.76% 20.72% 5.93% 17.57% (11.70%)
Net asset value 7.43% 14.53% 4.43% 13.54% (4.57%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets applicable to common shares,
end of period (000 omitted) $26,601 $26,260 $24,306 $24,659 $23,075
Ratio of expenses to average net assets
applicable to common shares(3) 1.23% 1.32% 1.49% 1.42% 1.33%
Ratio of net investment income to average
net assets applicable to common shares(3) 7.20% 7.80% 7.88% 8.30% 8.33%
Ratio of net investment income to average
net assets applicable to common shares
net of dividends to preferred shares(4) 6.62% 6.99% 6.56% 5.68% 5.99%
Portfolio turnover 41% 23% 5% 5% 16%
LEVERAGE ANALYSIS:
Value of preferred shares outstanding
(000 omitted) $15,000 $15,000 $15,000 $15,000 $15,000
Net asset coverage per share of preferred
shares, end of period $138,670 $137,532 $131,007 $132,197 $126,916
Liquidation value per share of preferred
shares(5) $50,000 $50,000 $50,000 $50,000 $50,000
(1) As required, effective April 1, 2001, the Fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premiums and discounts on debt securities. The effect of
this change for the period ended March 31, 2002 was an increase in net
investment income per share of $0.007, a decrease in net realized and unrealized
gain (loss) per share of $0.007, and an increase in the ratio of net investment
income to average net assets of 0.04%. Per share data and ratios for periods
prior to April 1, 2001 have not been restated to reflect this change in
accounting.
(2) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of each
period reported. Dividends and distributions, if any, are assumed for the
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in periods where there is an increase in the discount or a decrease in the
premium of the market value to the net asset value from the beginning to the end
of such periods. Conversely, total investment return based on net asset value
will be lower than total investment return based on market value in periods
where there is a decrease in the discount or an increase in the premium of the
market value to the net asset value from the beginning to the end of such
periods.
(3) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(4) Ratio reflects total net investment income less dividends paid to preferred
shareholders divided by average net assets applicable to common shareholders.
(5) Excluding any accumulated but unpaid dividends.
(6) The average shares outstanding method has been applied for per share
information.
MANAGEMENT
Board of Directors
The management of the business and affairs of each Fund is the
responsibility of its Board of Directors. The Boards elect officers who are
responsible for the day-to-day operations of the Funds.
Investment Adviser
DMC manages the assets of the Funds and makes the investment decisions for
each Fund. DMC is a series of Delaware Management Business Trust, which is an
indirect, wholly owned subsidiary of Lincoln National Corporation, a publicly
held corporation, and is located at 2005 Market Street, Philadelphia,
Pennsylvania 19103. DMC and its predecessors have been managing the assets of
the funds in the Delaware Investments Family of Funds since 1938. As of
September 30, 2005, DMC and its affiliates within Delaware Investments were
managing in the aggregate approximately $1___ billion in assets in various
institutional or separately managed, investment company and insurance accounts.
Under each Fund's investment management agreement ("Investment Management
Agreement"), DMC regularly makes decisions as to what securities and other
instruments to purchase and sell on behalf of each Fund and effects the purchase
and sale of those investments in furtherance of that Fund's investment
objectives and policies. DMC also furnishes the Board of Directors of each Fund
with such information and reports regarding the Fund's investments as DMC deems
appropriate or as the Board may reasonably request.
In accordance with the terms of its respective Investment Management
Agreement, each Fund pays DMC an annual fee of 0.40%, which is calculated daily
based on the average daily net assets of each Fund, including assets
attributable to any outstanding Preferred Shares. The management fees paid by
the Funds are used by DMC to pay for the personnel, equipment, office space and
facilities that are needed to manage the assets of the Funds and to administer
their affairs. DMC, as part of its administrative services, pays operating
expenses on behalf of the Funds and is reimbursed on a periodic basis. Such
expenses include items such as printing of shareholder reports, fees for audit,
legal and tax services, registration fees, and directors' fees.
Portfolio Management
Each of the Funds is managed by a management team consisting of Joseph
Baxter, Robert Collins and Denise Franchetti.
Joseph Baxter is vice president and senior portfolio manager of municipal
bond investments for DMC. Prior to joining DMC in 1999, he held investment
positions with First Union. Most recently, he served as a municipal portfolio
manager for the Evergreen Funds. Mr. Baxter is a graduate of LaSalle University.
Robert Collins is vice president and senior portfolio manager of municipal
bond development for DMC. Prior to joining DMC in 2004, Mr. Collins was a senior
vice president and director of portfolio management in the Municipal Investment
Group within PNC Advisors. Mr. Collins earned bachelor's degree in economics
from Ursinus College. He is a Chartered Financial Analyst and a member of the
Financial Analysts of Philadelphia.
Denise Franchetti received bachelor's and MBA degrees from LaSalle
University. Prior to joining Delaware Investments in 1997, Ms. Franchetti was a
fixed-income trader for Provident Mutual Life Insurance Company. Before that,
she worked as an investment analyst for General Accident Insurance Company. Ms.
Franchetti, a CFA Charterholder, is a member of the CFA Institute and the
Financial Analysts of Philadelphia.
Administrators, Transfer Agent and Custodian
Fund Administration The Funds have engaged Delaware Service Company, Inc.
("DSC"), an affiliate of DMC, to provide accounting and administration services.
DSC's fees for providing these services are based on average net assets and paid
on a monthly basis.
Transfer Agent Mellon Investor Services, LLC serves as registrar, stock
transfer agent and dividend paying agent for the Funds. The main office of
Mellon Investor Services, LLC is Overpeck Centre, 85 Challenger Road, Ridgefield
Park, New Jersey 07660.
Remarketing Agent Citigroup Global Markets, Inc. ("Citigroup") is the
Remarketing Agent and receives from each Fund an annual fee of approximately
0.25% of the average amount of Preferred Shares outstanding (except during
Special Dividend Periods of 90 days or more, in which case the fee is to be
negotiated). A portion of this fee may be paid to broker-dealers for sales to
holders of Preferred Shares. Citigroup's main office is located at 390 Greenwich
Street, New York, New York 10013.
Custodian Mellon Bank, N.A. is the custodian of the securities and all
other assets of the Funds. The main office of Mellon Bank, N.A. is 135 Santilli
Highway, Everett, Massachusetts 02149.
Expenses
The Funds are responsible for conducting their own business and affairs and
bear the related expenses and salaries, including the costs incurred in:
o The maintenance of their corporate existence o Calling and holding of
shareholders' meetings
o The maintenance of their own books, records and
procedures o Miscellaneous office
expenses
o Dealing with their own shareholders o Brokerage commissions
o The payment of dividends o Custodian fees
o Transfer of stock, including issuance, redemption o Legal and accounting
and repurchase of shares fees
o Preparation of share certificates o Taxes
o Reports and notices to shareholders o Federal and state
registration fees
Directors, officers and employees of DMC who are directors, officers and/or
employees of the Funds shall not receive any compensation from the Funds for
acting in that dual capacity.
Expenses common to all funds within the Delaware Investments Family of
Funds are allocated among the funds on the basis of average net assets.
Management fees and other expenses are paid monthly. Certain expenses of the
Funds may be paid through commission arrangements with brokers. In addition, the
Funds may receive earnings credits from their custodian when positive cash
balances are maintained, which are used to offset custody fees.
Proxy Material, Reports and Other Information
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
1940 Act and the Exchange Act, each Fund files reports and other information
with the SEC. Proxy material, reports and other information filed by the Funds
can be inspected and copied at the public reference facilities maintained by the
SEC in Washington, D.C., and copies of such material can be obtained from the
SEC's Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549 at
prescribed rates.
In addition, reports, proxy statements and other information concerning the
Funds can be inspected at the Exchange.
VOTING INFORMATION
REVOCABILITY OF PROXY
Shareholders may revoke their proxy or change their voting instructions at
any time until the vote is taken at the Meeting. Shareholders may also attend
the Meeting and cast their vote in person. However, if shares are held of record
by a broker-dealer (or other nominee) and shareholders wish to vote in person at
the Meeting, they must obtain a "legal proxy" from their broker-dealer of record
(or other nominee) and present it to the Inspector of Elections at the Meeting.
PERSONS MAKING THE SOLICITATION
The Board of Directors of each Fund is soliciting its respective
shareholders for approval of the applicable Plan. The costs of the proposed
Acquisitions will be borne equally by the Acquired Funds, the Acquiring Fund and
DMC. Each party shall be assessed 1/4th of the costs of the Acquisitions.
The Funds expect that the solicitations will be primarily by mail, but
solicitations also may be made by advertisement, telephone, telegram, facsimile
transmission or other electronic media, or personal contacts. The Funds will
request broker-dealer firms, custodians, nominees and fiduciaries to forward
proxy materials to the beneficial owners of the Shares of record. The Funds may
reimburse broker-dealer firms, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection with such proxy solicitation. In
addition to solicitations by mail, officers and employees of each Fund and of
DMC, without extra pay, may conduct additional solicitations by telephone,
telecopy and personal interviews. The Funds have engaged Georgeson Shareholder
Communications, Inc. ("Georgeson") to solicit proxies from brokers, banks, other
institutional holders and individual shareholders at an anticipated cost of
approximately $21,000, including out of pocket expenses, which will be borne as
described above. Fees and expenses may be greater depending on the effort
necessary to obtain shareholder votes. The Funds have also agreed to indemnify
Georgeson against certain liabilities and expenses, including liabilities under
the federal securities laws.
As the Meeting date approaches, certain shareholders of each Acquired Fund
and the Acquiring Fund may receive a telephone call from a representative of
Georgeson if their votes have not yet been received. Proxies that are obtained
telephonically will be recorded in accordance with the procedures described
below. These procedures are designed to ensure that both the identity of the
shareholder casting the vote and the voting instructions of the shareholder are
accurately determined.
In all cases where a telephonic proxy is solicited, the Georgeson
representative is required to ask for each shareholder's full name and address,
or the zip code or employer identification number, and to confirm that the
shareholder has received the proxy materials in the mail. If the shareholder is
a corporation or other entity, the Georgeson representative is required to ask
for the person's title and confirmation that the person is authorized to direct
the voting of the shares. If the information solicited agrees with the
information provided to Georgeson, then the Georgeson representative has the
responsibility to explain the process, read the Proposals listed on the proxy
card and ask for the shareholder's instructions on each Proposal. Although the
Georgeson representative is permitted to answer questions about the process, he
or she is not permitted to recommend to the shareholder how to vote, other than
to read any recommendation set forth in this Proxy Statement/Prospectus.
Georgeson will record the shareholder's instructions on the card. Within 72
hours, the shareholder or its representative will be sent a letter or mailgram
to confirm their vote and asking the shareholder or its representative to call
Georgeson immediately if their instructions are not correctly reflected in the
confirmation.
DISSENTERS' RIGHT OF APPRAISAL
Notice of Dissent
Under Minnesota law, holders of Acquired Fund Common Shares do not have any
dissenters' rights of appraisal in connection with the Acquisition because the
Acquiring Fund Common Shares are traded on the Exchange. Holders of Acquired
Fund Preferred Shares, however, do have dissenters' rights of appraisal under
Minnesota law in connection with the Acquisition. These dissenters' rights, and
the procedures pertaining to them, are set forth in Minnesota Statutes, Sections
302A.471 and 302A.473, copies of which are attached to this Proxy
Statement/Prospectus as Exhibit B. The description of these rights and
procedures in this section are qualified in their entirety by reference to
Exhibit B. Holders of Acquired Fund Preferred Shares should note that they will
lose their dissenters' rights of appraisal if they do not follow the required
procedures carefully.
A holder of Acquired Fund Preferred Shares who is entitled to dissent under
Minnesota law and who wishes to exercise dissenters' rights must file with the
respective Acquired Fund before the vote on the Plan a written notice of intent
to demand the fair value of the Acquired Fund Preferred Shares owned by the
shareholder and must not vote the Acquired Fund Preferred Shares in favor of the
proposed action. For this purpose, the "fair value" of the shares means the
value of the Acquired Fund Preferred Shares immediately before the Closing Date.
A written notice of intent to demand the fair value of Acquired Fund Preferred
Shares should be submitted to the Secretary of the applicable Acquired Fund at
principal executive offices. This written notice is in addition to and separate
from any proxy or vote against the Plan. It should specify the shareholder's
name and mailing address, the number of Acquired Fund Preferred Shares owned and
that the shareholder intends to demand the fair value, plus interest, of the
shareholder's Acquired Fund Preferred Shares. Voting against, abstaining from
voting or failing to vote on the Plan does not constitute a demand for appraisal
within the meaning of Minnesota law.
Only holders of Acquired Fund Preferred Shares of record as of the record
date for the Meeting, and beneficial owners as of such date who hold Acquired
Fund Preferred Shares through such record shareholders, are entitled to exercise
dissenters' rights of appraisal. A shareholder cannot assert dissenters' rights
of appraisal as to less than all the Acquired Fund Preferred Shares that are
registered in that shareholder's name, except where some of the Acquired Fund
Preferred Shares are registered in that shareholder's name but are beneficially
owned by one or more other persons. If a record owner, such as a broker,
nominee, trustee or custodian, wishes to dissent with respect to Acquired Fund
Preferred Shares that are beneficially owned by another person, the record owner
must dissent with respect to all of the Acquired Fund Preferred Shares that are
beneficially owned by that person and must disclose the name and address of the
beneficial owner on whose behalf the dissent is made. A beneficial owner of
Acquired Fund Preferred Shares who is not the record owner of those shares may
assert dissenters' rights of appraisal as to the Acquired Fund Preferred Shares
held on such person's behalf, provided that the beneficial owner submits a
written consent of the record owner to the applicable Acquired Fund at or before
the time dissenters' rights are asserted.
Shareholders who wish to assert dissenters' rights of appraisal must not
vote for adoption of the Plan. A shareholder's failure to vote against the Plan
will not constitute a waiver of dissenters' rights. However, if a shareholder
returns a signed proxy but does not specify a vote against the Plan or a
direction to abstain, the proxy will be voted for approval of the Plan, which
will have the effect of waiving that shareholder's dissenters' rights.
Notice of Procedure; Deposit of Shares
If the Plan is approved by the shareholders of an Acquired Fund, the
Acquired Fund will send a notice (the "Notice of Procedure") to all holders of
Acquired Fund Preferred Shares who have provided timely written notice of their
intent to demand fair value. The Notice of Procedure will contain:
o The address to which a demand for payment and certificates of certificated
shares must be sent in order to obtain payment and the date by which they
must be received;
o Any restrictions on transfer of uncertificated shares that will apply after
the demand for payment is received;
o A form to be used to demand payment and to certify the date on which the
holder of Acquired Fund Preferred Shares, or the beneficial owner on whose
behalf the shareholder dissents, acquired the shares or an interest in
them; and
o A copy of the relevant provisions of Minnesota law and a brief description
of the procedures to be followed under those statutes.
In order to receive the fair value of the Acquired Fund Preferred Shares, a
dissenting shareholder must demand payment and deposit certificated shares or
comply with any restrictions on transfer of uncertificated shares within 30 days
after the Notice of Procedure was given, but the dissenter retains all other
rights of a shareholder until the applicable Acquisition takes effect. An
Acquired Fund may establish contingent liabilities for any Acquired Fund
Preferred Shares for which a demand has been, or is anticipated to be, received.
Payment; Return of Shares
After the Closing, the applicable Acquired Fund shall remit to each
dissenting holder of Acquired Fund Preferred Shares who has complied with these
requirements the amount the Acquired Fund estimates to be the fair value of the
shares, plus interest, accompanied by the following materials ("Payment
Materials"):
o The Acquired Fund's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the Closing Date,
together with the latest available interim financial statements;
o An estimate by the Acquired Fund of the fair value of the shares and a
brief description of the method used to reach the estimate (which estimated
fair value is anticipated to be the Liquidation Preference, including any
accumulated but unpaid dividends); and
o A copy of the relevant provisions of Minnesota law, and a brief description
of the procedure to be followed in demanding supplemental payment.
The Acquired Fund may withhold this payment from a person who was not a
holder of the applicable Acquired Fund Preferred Shares on the date the
Acquisition was first announced to the public-- September 9, 2005-- or who is
dissenting on behalf of a person who was not a beneficial owner on that date. In
that case, if the dissenter has complied with these requirements, the Acquired
Fund will forward to the dissenter the Payment Materials, a statement of the
reason for withholding the payment, and an offer to pay to the dissenter the
amount listed in the materials if the dissenter agrees to accept that amount in
full satisfaction. The dissenter may decline the offer and demand payment as set
forth below. Failure to do so entitles the dissenter only to the amount offered.
If the Acquired Fund fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the Acquired Fund may again give a Notice of Procedure
and require deposit or restrict transfer at a later time.
Where an Acquired Fund is required to pay the fair value of Acquired Fund
Preferred Shares plus interest, the interest will accrue commencing five days
after the Closing Date up to and including the date of payment. The interest
rate will be the rate at which interest accrues on verdicts and judgments under
Minnesota law. Under Minnesota law, this rate is reset annually at the beginning
of the calendar year, and it is based on the secondary market yield on one year
United States Treasury bills.
Supplemental Payment; Demand
If a dissenter believes that the amount paid is less than the fair value of
the Acquired Fund Preferred Shares plus interest, the dissenter may give written
notice ("Dissenter's Notice") to the Acquired Fund of the dissenter's own
estimate of the fair value of the Acquired Fund Preferred Shares, plus interest,
within 30 days after the Acquired Fund mails the payment. The Dissenter's Notice
must demand payment of the difference; otherwise, a dissenter is entitled only
to the amount remitted by the Acquired Fund.
Petition; Determination
If the Acquired Fund receives a demand based on the dissenter's own
estimate of the fair value of the Acquired Fund Preferred Shares, plus interest,
it shall, within 60 days after receiving the demand, either pay to the dissenter
the amount demanded by the dissenter, pay an amount agreed to by the dissenter
after discussion with the Acquired Fund, or file in court a petition requesting
that the court determine the fair value of the Acquired Fund Preferred Shares,
plus interest. The petition shall be filed in Ramsey County, the county in which
the registered office of each Acquired Fund is located. The petition shall name
as parties all dissenters who have demanded payment and who have not reached
agreement with the Acquired Fund. The Acquired Fund shall, after filing the
petition, serve all parties with a summons and copy of the petition under
Minnesota's Rules of Civil Procedure.
The court may appoint appraisers to receive evidence on and recommend the
amount of the fair value of the Acquired Fund Preferred Shares. The court shall
determine whether the shareholder or shareholders in question have fully
complied with the requirements of Minnesota law, and shall determine the fair
value of the Acquired Fund Preferred Shares, taking into account any and all
factors the court finds relevant, computed by any method or combination of
methods that the court, in its discretion, sees fit to use, whether or not used
by the Acquired Fund or by a dissenter. The fair value of the shares as
determined by the court is binding on all holders of Acquired Fund Preferred
Shares, wherever located. A dissenter is entitled to judgment in cash for the
amount by which the fair value of the shares as determined by the court, plus
interest, exceeds the amount paid, if any, but shall not be liable to the
Acquired Fund for the amount, if any, by which the amount, if any, paid to the
dissenter exceeds the fair value of the Acquired Fund Preferred Shares as
determined by the court, plus interest.
Costs; Fees; Expenses
The court shall determine the costs and expenses of the above proceeding,
including the reasonable expenses and compensation of any appraisers appointed
by the court, and shall assess those costs and expenses against the Acquired
Fund, except that the court may assess part or all of those costs and expenses
against a dissenter whose action in demanding payment is found to be arbitrary,
vexatious or not in good faith.
If the court finds that the Acquired Fund has failed to comply
substantially with Minnesota law, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions. The court may also award, in its discretion, fees and
expenses to an attorney for the dissenters out of the amount awarded to the
dissenters, if any.
VOTING REQUIREMENTS
Acquired Fund Shares
Shareholders of each Acquired Fund are requested to approve their
respective Plan. Approval of each Plan requires the affirmative vote of at least
a majority of the outstanding Acquired Fund Common Shares and Acquired Fund
Preferred Shares of the applicable Acquired Fund, voting together as a single
class. Approval of each Plan also requires the separate vote of a majority of
the outstanding Acquired Fund Preferred Shares of the applicable Acquired Fund,
voting as a separate class.
Acquiring Fund Shares
Because of the relative size of the Acquisitions by the Acquiring Fund of
the assets of the Acquired Funds, the rules of the Exchange require that
shareholders of the Acquiring Fund also approve each Plan. Each Plan must be
approved by the affirmative vote of a majority of the Acquiring Fund's
outstanding Common Shares and Preferred Shares voting together as a single
class.
Quorum; Adjournment; Tabulation
The presence in person or by proxy of holders of a majority of outstanding
shares shall constitute a quorum for each Fund. In the event that a quorum is
not present or if sufficient votes are not received consistent with the Board's
recommendation on the approval of a Plan, management may propose an adjournment
or adjournments of the Meeting for a Fund. Any adjournment would require a vote
in favor of the adjournment by the holders of a majority of the shares present
at the Meeting in person or by proxy. The persons named as proxies on the Proxy
Card(s) may vote (or withhold their vote) in their discretion on any proposed
adjournment.
Abstentions will be included for purposes of determining whether a quorum
is present for each Fund at the Meeting. They will be treated as votes present
at the Meeting, but will not be treated as votes cast. They therefore would have
the same effect as a vote "AGAINST" a Plan. The Funds anticipate that, in the
absence of express voting instructions from beneficial shareholders, the
Exchange will not permit member firms to vote in their discretion on the items
for which approval is requested in this Proxy Statement/Prospectus. As a result,
the Funds do not anticipate receiving any "broker non-votes."
PRINCIPAL HOLDERS OF VOTING SECURITIES
Record Date Information
The record date is October 10, 2005 (the "Record Date"). Each shareholder
may cast one vote for each full share and a partial vote for each partial share
of a Fund that they owned of record on the Record Date. As of that date, the
Funds had the following Common Shares and Preferred Shares outstanding:
- ------------------------------- ----------------------------
Fund/Title of Class Amount Outstanding
- ------------------------------- ----------------------------
Minnesota I
- ------------------------------- ----------------------------
Common 2,594,700
- ------------------------------- ----------------------------
Preferred 400
- ------------------------------- ----------------------------
Minnesota II
- ------------------------------- ----------------------------
Common 7,252,200
- ------------------------------- ----------------------------
Preferred Series A: 600
Series B: 600
Total: 1,200
- ------------------------------- ----------------------------
Minnesota III
- ------------------------------- ----------------------------
Common 1,837,200
- ------------------------------- ----------------------------
Preferred 300
- ------------------------------- ----------------------------
5% Record and Beneficial Owners
The following accounts held of record 5% or more of the outstanding shares
of the Funds as of the Record Date. Management does not have knowledge of
beneficial owners.
PERCENT OF PERCENT AFTER
FUND NAME AND ADDRESS NUMBER OF SHARES OUTSTANDING SHARES ACQUISITION
- ---------------------------------------------------------------------------------------------------------------
Delaware Investments Minnesota Cede &Co.
Municipal Income Fund, Inc. P.O. Box 20
Common Stock Bowling Green Station
New York, NY 10004
Delaware Investments Minnesota CitiGroup Global Markets Inc.
Municipal Income Fund, Inc. Pat Haller
Preferred Stock 333 West 34th Street
New York, NY 10001
Charles Schwab &Co., Inc.
Ronnie Fuiava
Attn: Proxy Department
San Francisco, CA 94105
Delaware Investments Minnesota Cede &Co.
Municipal Income Fund II, Inc. P.O. Box 20
Common Stock Bowling Green Station
New York, NY 10004
Delaware Investments Minnesota CitiGroup Global Markets Inc.
Municipal Income Fund II, Inc. Pat Haller
Preferred Stock 333 West 34th Street
Series A New York, NY 10001
USB Financial Services Inc.
Jane Flood
1200 Harbor Blvd.
Weehauken, NJ 07086
Charles Schwab &Co., Inc.
Ronnie Fuiava
Attn: Proxy Department
San Francisco, CA 94105
Delaware Investments Minnesota CitiGroup Global Markets Inc.
Municipal Income Fund II, Inc. Pat Haller
Preferred Stock 333 West 34th Street
Series B New York, NY 10001
Pershing LLC
Al Hernandez
Securities Corporation
1 Pershing Plaza
Jersey City, NJ 07399
Merrill Lynch, Pierce, Fenner &
Smith Safekeeping
Veronica O'Neill
4 Corporate Place
Piscataway, NJ 08854
Charles Schwab &Co., Inc.
Ronnie Fuiava
Attn: Proxy Department
San Francisco, CA 94105
Delaware Investments Minnesota Cede &Co.
Municipal Income Fund III, Inc. P.O. Box 20
Common Stock Bowling Green Station
New York, NY 10004
Delaware Investments Minnesota CitiGroup Global Markets Inc.
Municipal Income Fund III, Inc. Pat Haller
Preferred Stock 333 West 34th Street
New York, NY 10001
Charles Schwab &Co., Inc.
Ronnie Fuiara
Attn: Proxy Department
San Francisco, CA 94105
Ownership by Officers and Directors
Directors and officers of each Fund owned, as a group, less than one
percent of each class of each Fund's outstanding shares.
INTEREST OF CERTAIN PERSONS AND EXPERTS
Other than the interest of DMC in the investment advisory fee it receives
from the Funds and fees received by certain affiliates of DMC for services
provided to the Funds, the Funds are not aware of any material interest, direct
or indirect, by security holdings or otherwise, of any affiliated person of the
Funds in the proposed Acquisition. No experts were employed on a contingent
basis or have, or are to receive, in connection with the offering described in
this Proxy Statement/Prospectus, a substantial direct or indirect interest in
the Funds.
INFORMATION ON RE-OFFERINGS
To the knowledge of the Funds, none of the securities to be offered
pursuant to this Proxy Statement/Prospectus are expected to be reoffered to the
public by any person who is deemed to be an underwriter of those securities.
EXHIBIT A: FORM OF AGREEMENT AND PLAN OF ACQUISITION
AGREEMENT AND PLAN OF ACQUISITION
THIS AGREEMENT AND PLAN OF ACQUISITION ("Plan") is made as of this ___ day
of _________, 2005, by and among: (i) Delaware Investments Minnesota Municipal
Income Fund [III], Inc. ("Acquired Fund"), a corporation incorporated under the
laws of the State of Minnesota and a closed-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), with its principal place of business at One Commerce Square,
Philadelphia, PA 19103; (ii) Delaware Investments Minnesota Municipal Income
Fund II, Inc. ("Acquiring Fund"), a corporation incorporated under the laws of
the State of Minnesota and a closed-end management investment company registered
under the 1940 Act, with its principal place of business at One Commerce Square,
Philadelphia, PA 19103; and (iii) Delaware Management Company ("DMC"), a series
of Delaware Management Business Trust, a statutory trust formed under the laws
of the State of Delaware, with its principal place of business at One Commerce
Square, Philadelphia, PA 19103.
ACQUISITION
The acquisition ("Acquisition") will consist of (i) the acquisition by
Acquiring Fund of substantially all of the property, assets and goodwill of
Acquired Fund in exchange solely for (a) full and fractional shares of common
stock, par value $0.01 per share, of Acquiring Fund ("Acquiring Fund Common
Shares"), and (b) shares of Municipal Income Preferred Shares, Series [C], par
value $0.01 per share, of Acquiring Fund ("Acquiring Fund Preferred Shares," and
together with Acquiring Fund Common Shares, the "Acquiring Fund Shares"), (ii)
the pro rata distribution of such Acquiring Fund Shares to the shareholders of
the Acquired Fund according to their respective interests in complete
liquidation of Acquired Fund, and (iii) the dissolution of Acquired Fund as soon
as is practicable after the closing of the Acquisition (the "Closing"), all upon
and subject to the terms and conditions of this Plan hereinafter set forth.
AGREEMENT
In order to consummate this Plan and the Acquisition and in consideration
of the premises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. Sale and Transfer of Assets, Liquidation and Dissolution of Acquired Fund
(a) Subject to the terms and conditions of this Plan, and in reliance on
the representations and warranties of Acquiring Fund herein contained,
and in consideration of the delivery by Acquiring Fund of the number
of Acquiring Fund Shares hereinafter provided, Acquired Fund agrees
that it will convey, transfer and deliver to Acquiring Fund at the
Closing all of Acquired Fund's then existing assets, free and clear of
all liens, encumbrances and claims whatsoever (other than
shareholders' rights of redemption, if any), except for cash, bank
deposits or cash equivalent securities in an estimated amount
necessary to: (i) pay its costs and expenses of carrying out this Plan
(including, but not limited to, fees of counsel and accountants, and
expenses of its liquidation and dissolution contemplated hereunder),
which costs and expenses shall be established on Acquired Fund's books
as liability reserves; (ii) discharge its unpaid liabilities on its
books as of the date of the Closing (the "Closing Date"), including,
but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to, and through,
the Closing Date; and (iii) pay such contingent liabilities as the
Board of Directors of Acquired Fund (the "Acquired Fund Board") or its
officers may reasonably expect to exist against Acquired Fund, if any,
as of the Closing Date, for which contingent and other appropriate
liability reserves shall be established on Acquired Fund's books (such
assets, less the foregoing exceptions, hereinafter "Net Assets").
(b) Subject to the terms and conditions of this Plan, and in reliance on
the representations and warranties of Acquired Fund herein contained,
and in consideration of such conveyance, transfer and delivery,
Acquiring Fund agrees at the Closing to deliver to Acquired Fund: (i)
the number of Acquiring Fund Common Shares determined with respect to
Acquired Fund by (A) dividing the net asset value per share of the
common stock of Acquired Fund ("Acquired Fund Common Shares") by (B)
the net asset value per share of Acquiring Fund Common Shares, and (C)
multiplying the resulting quotient by the number of outstanding
Acquired Fund Common Shares; and (ii) [400] shares of Acquiring Fund
Preferred Shares, the aggregate liquidation preference of which shall
equal the aggregate liquidation preference of the preferred shares of
Acquired Fund ("Acquired Fund Preferred Shares" and, with the Acquired
Fund Common Shares, "Acquired Fund Shares"). All such values of the
Acquired Fund Common Shares and the Acquiring Fund Common Shares and
the aggregate liquidation preference of the Acquired Fund Preferred
Shares and the Acquiring Fund Preferred Shares shall be determined in
the manner and as of the time set forth in Section 2 hereof.
(c) Liquidating Distribution
(1) Immediately following the Closing, Acquired Fund shall liquidate
and distribute: (i) pro rata to shareholders of Acquired Fund
Common Shares of record as of the close of business on the
Closing Date, the Acquiring Fund Common Shares received by
Acquired Fund pursuant to this Section 1, in exchange for
Acquired Fund Common Shares held by such common shareholders; and
(ii) to shareholders of Acquired Fund Preferred Shares of record
as of the close of business on the Closing Date, one Acquiring
Fund Preferred Share, in exchange for each Acquired Fund
Preferred Share held by such preferred shareholders.
(2) Such liquidating distribution will be accomplished by opening
accounts on the books of Acquiring Fund in the name of each
holder of Acquired Fund Shares and transferring to each such
account: (i) in the case of a holder of Acquired Fund Common
Shares, such shareholder's pro rata share of the Acquiring Fund
Common Shares received by Acquired Fund; and (ii) in the case of
a holder of Acquired Fund Preferred Shares, a number of Acquiring
Fund Preferred Shares received by Acquired Fund equal to the
number of Acquired Fund Preferred Shares held by such preferred
shareholder.
(d) As promptly as is practicable after the Closing, each holder of any
outstanding certificate or certificates representing Acquired Fund
Shares shall be entitled to surrender the same to the transfer agent
for Acquiring Fund in exchange for the respective number of applicable
Acquiring Fund Shares into which the Acquired Fund Shares theretofore
represented by the certificate or certificates so surrendered shall
have been converted. Until so surrendered, each outstanding
certificate which, prior to the Closing, represented the Acquired Fund
Shares shall be deemed for all Acquiring Fund's purposes to evidence
ownership of the respective number of the applicable Acquiring Fund
Shares into which the Acquired Fund Shares (which prior to the Closing
were represented thereby) have been converted.
(e) Dividends on Acquired Fund Preferred Shares shall accumulate to and
including the Closing Date and then cease to accumulate. At or prior
to the Closing, Acquired Fund will declare all accumulated but unpaid
dividends on the Acquired Fund Preferred Shares up to and including
the Closing Date, such dividends to be paid to the holders thereof on
the "Dividend Payment Date" in respect of the "Initial Dividend
Period" of Acquiring Fund Preferred Shares (as those terms are defined
in the certificate of designation of the Acquiring Fund Preferred
Shares ("Certificate of Designation")). The "Applicable Dividend Rate"
(as that term is defined in the Certificate of Designation) in respect
of the Initial Dividend Period for the Acquiring Fund Preferred Shares
shall accumulate from and including the day after the Closing Date at
the same rate borne on the Closing Date by the Acquired Fund Preferred
Shares.
(f) At or prior to the Closing, Acquired Fund will declare a dividend
and/or other distribution to be paid to the holders of Acquired Fund
Common Shares so that, upon such payment, it will have distributed all
of its investment company taxable income (computed without regard to
any deduction for dividends paid), net tax-exempt income and realized
net capital gains, if any, earned or anticipated to be earned through
and including the Closing Date.
(g) Promptly following the Closing, the liquidating distribution of the
respective Acquiring Fund Shares, payment of any dividends or
distributions and resolution of any other contingent liabilities,
Acquired Fund shall be dissolved.
2. Valuation
(a) The value of Acquired Fund's Net Assets to be acquired by Acquiring
Fund hereunder and the net asset value per Acquired Fund Common Share
shall be determined to the third decimal place as of 4:00 p.m. Eastern
Time on the Closing Date in a manner consistent with the valuation
procedures described in Acquired Fund's registration statement on Form
N-2 filed with the U.S. Securities and Exchange Commission (the
"SEC"), as such disclosure has been amended to date by any: (i)
amendments to Acquired Fund's registration statement on Form N-2; (ii)
press releases issued on behalf of Acquired Fund; and (iii) annual or
semi-annual reports of Acquired Fund sent to shareholders pursuant to
Section 30 of the 1940 Act (together, the "Acquired Fund Disclosure
Documents"). The value of Acquired Fund's Net Assets shall be
calculated net of the liquidation preference (including accumulated
and unpaid dividends) of all outstanding Acquired Fund Preferred
Shares.
(b) The value of Acquiring Fund's net asset value per Acquiring Fund
Common Share shall be computed to the third decimal place as of 4:00
p.m. Eastern Time on the Closing Date in a manner consistent with the
valuation procedures described in Acquiring Fund's registration
statement on Form N-2 filed with the SEC, as such disclosures have
been amended to date by any: (i) amendments to Acquiring Fund's
registration statement on Form N-2; (ii) press releases issued on
behalf of Acquiring Fund; and (iii) annual or semi-annual reports of
Acquiring Fund sent to shareholders pursuant to Section 30 of the 1940
Act (together, the "Acquiring Fund Disclosure Documents"). The value
of the Acquiring Fund's net asset value per Acquiring Fund Common
Share shall be calculated net of the liquidation preference (including
accumulated and unpaid dividends) of all outstanding preferred shares
of Acquiring Fund.
(c) The liquidation preference of the Acquired Fund Preferred Shares and
the Acquiring Fund Preferred Shares is $50,000 per share.
3. Closing Date
The Closing Date shall be March 15, 2006, or such later date as the parties
may mutually agree, provided that the Closing Date shall not be a date on which
a remarketing of the Acquired Fund Preferred Shares would ordinarily occur. The
Closing shall take place at the principal office of Acquiring Fund at 5:00 p.m.
Eastern Time on the Closing Date. Acquired Fund shall have provided for delivery
as of the Closing those Net Assets of Acquired Fund to be transferred to the
account of Acquiring Fund's custodian, Mellon Bank, N.A., One Mellon Center,
Pittsburgh, Pennsylvania 15258. Acquired Fund shall also deliver at the Closing
a list of names and addresses of the shareholders of record of its Acquired Fund
Shares, as well as the number of full and fractional shares of Acquired Fund
Common Shares and the number of Acquired Fund Preferred Shares owned by each
such shareholder, indicating thereon which such shares are represented by
outstanding certificates and which by book-entry accounts, all as of 4:00 p.m.
Eastern Time on the Closing Date, certified by Acquired Fund's transfer agent or
by its President or a Vice President to the best of its or his or her knowledge
and belief. Acquiring Fund shall issue and deliver a certificate or certificates
evidencing the respective Acquiring Fund Common Shares and Acquiring Fund
Preferred Shares to be delivered to the account of Acquired Fund at said
transfer agent registered in such manner as the officers of Acquired Fund may
request, or provide evidence satisfactory to Acquired Fund in such manner as the
officers of Acquired Fund may request that such Acquiring Fund Shares have been
registered in an account on the books of Acquiring Fund.
4. Representations and Warranties by Acquiring Fund
Acquiring Fund represents and warrants to Acquired Fund that:
(a) Acquiring Fund is a corporation incorporated under the laws of the
State of Minnesota on December 29, 1992, and is validly existing and
in good standing under the laws of that State. Acquiring Fund is duly
registered under the 1940 Act as a closed-end, management investment
company and all of the Acquiring Fund Shares sold were sold pursuant
to an effective registration statement filed under the Securities Act
of 1933, as amended (the "1933 Act"), except for those shares sold
pursuant to the private offering exemption for the purpose of raising
the required initial capital.
(b) The authorized capital of Acquiring Fund consists of 201,000,000
shares consisting of 200,000,000 shares of common stock, par value
$0.01 per share, and 1,000,000 shares of preferred stock, par value
$0.01. As of the date hereof, Acquiring Fund had issued and
outstanding 7,252,200 Acquiring Fund Common Shares listed on the
American Stock Exchange LLC ("AmEx"), 600 Municipal Income Fund
Preferred Shares, Series A issued and outstanding, 600 Municipal
Income Fund Preferred Shares, Series B issued and outstanding, 400
Municipal Income Fund Preferred Shares, Series C authorized and
unissued, and 300 Municipal Income Fund Preferred Shares, Series D
authorized and unissued. All issued and outstanding Acquiring Fund
Common Shares and Municipal Income Preferred Shares are, and all
Acquiring Fund Common Shares and Acquiring Fund Preferred Shares to be
issued in exchange for Net Assets of Acquired Fund pursuant to this
Plan will be when so issued, fully paid and non-assessable.
(c) The audited financial statements appearing in Acquiring Fund's Annual
Report to Shareholders for the fiscal year ended March 31, 2005,
audited by Ernst & Young, LLP, a copy of which has been delivered to
Acquired Fund, fairly present the financial position of Acquiring Fund
as of the date indicated and the results of its operations for the
periods indicated are in conformity with generally accepted accounting
principles applied on a consistent basis.
(d) The books and records of Acquiring Fund accurately summarize the
accounting data represented and contain no material omissions with
respect to the business and operations of Acquiring Fund.
(e) Acquiring Fund has the necessary corporate power and corporate
authority to conduct its business as such business is now being
conducted.
(f) Acquiring Fund is not a party to or obligated under any provision of
its Articles of Incorporation or its By-laws (together, as each has
been amended to date, the "Acquiring Fund Corporate Documents"), or
any contract or any other commitment or obligation, and is not subject
to any order or decree, that would be violated by its execution of, or
performance under, this Plan.
(g) Acquiring Fund has elected to be treated as a regulated investment
company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and it has qualified as a RIC for each taxable year since its
inception and will qualify as a RIC as of the Closing Date, and
consummation of the transactions contemplated by this Plan will not
cause it to fail to be qualified as a RIC as of the Closing Date or at
the end of its fiscal year.
(h) Acquiring Fund is not under jurisdiction of a Court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(i) At the time of effectiveness of the registration statement filed by
the Acquiring Fund with the SEC on Form N-14 under the 1933 Act
relating to Acquiring Fund Shares issuable hereunder (the "Acquiring
Fund N-14 Registration Statement"), the Acquiring Fund N-14
Registration Statement will: (i) comply in all material respects with
the applicable provisions of the 1933 Act and the rules and
regulations promulgated thereunder; and (ii) not contain any untrue
statement of material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty
shall not apply to any disclosure in the Acquiring Fund N-14
Registration Statement provided by Acquired Fund or relating to
Acquired Fund.
(j) At the time the Acquiring Fund N-14 Registration Statement becomes
effective, at the time of the Acquiring Fund's and Acquired Fund's
shareholders' meeting to consider this Plan and the Acquisition (the
"Meeting"), and at the Closing Date, the proxy statement/prospectus
("Proxy Statement/Prospectus") and statement of additional information
("SAI") included in the Acquiring Fund N-14 Registration Statement
will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not
apply to any disclosure in the Acquiring Fund N-14 Registration
Statement provided by Acquired Fund or relating to Acquired Fund.
5. Representations and Warranties by Acquired Fund
Acquired Fund represents and warrants to Acquiring Fund that:
(a) Acquired Fund is a corporation incorporated under the laws of the
State of Minnesota on [February 20,1992], and is validly existing and
in good standing under the laws of that State. Acquired Fund is duly
registered under the 1940 Act as a closed-end management investment
company and all of Acquired Fund's Acquired Fund Shares sold were sold
in compliance in all material respects with applicable registration
requirements of the 1933 Act.
(b) The authorized capital of Acquired Fund consists of 201,000,000 shares
consisting of 200,000,000 shares of common stock, par value $0.01 per
share, and 1,000,000 shares of preferred stock, par value $0.01. As of
the date hereof, the Acquiring Fund had issued and outstanding
[2,594,700] Acquired Fund Common Shares listed on AmEx and [400]
Municipal Income Fund Preferred Shares issued and outstanding. All
issued and outstanding Acquired Fund Shares are fully paid and
non-assessable.
(c) The audited financial statements appearing in Acquired Fund's Annual
Report to Shareholders for the fiscal year ended March 31, 2005,
audited by Ernst & Young, LLP, a copy of which has been delivered to
Acquiring Fund, fairly present the financial position of the Acquired
Fund as of the date indicated and the results of its operations for
the periods indicated are in conformity with generally accepted
accounting principles applied on a consistent basis.
(d) The books and records of Acquired Fund accurately summarize the
accounting data represented and contain no material omissions with
respect to the business and operations of Acquired Fund.
(e) Acquired Fund has the necessary corporate power and corporate
authority to conduct its business as such business is now being
conducted.
(f) Acquired Fund is not a party to or obligated under any provision of
its Articles of Incorporation or its Bylaws (together, as amended or
supplemented from time to time, the "the Acquired Fund Corporate
Documents"), or any contract or any other commitment or obligation,
and is not subject to any order or decree, that would be violated by
its execution of, or performance under, this Plan.
(g) Acquired Fund has elected to be treated as a RIC for federal income
tax purposes under Part I of Subchapter M of the Code, and it has
qualified as a RIC for each taxable year since its inception and will
qualify as a RIC as of the Closing Date, and consummation of the
transactions contemplated by this Plan will not cause it to fail to be
qualified as a RIC as of the Closing Date or at the end of its fiscal
year.
(h) Acquired Fund is not under jurisdiction of a Court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(i) At the time of effectiveness of the Acquiring Fund N-14 Registration
Statement, the Acquiring Fund N-14 Registration Statement will not
contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading as to any disclosure in the
Acquiring Fund N-14 Registration Statement provided by Acquired Fund
or relating to Acquired Fund.
(j) At the time the Acquiring Fund N-14 Registration Statement becomes
effective, at the time of the Meeting, and at the Closing Date, the
Proxy Statement/Prospectus and SAI will not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading as to any
disclosure in the Acquiring Fund N-14 Registration Statement provided
by Acquired Fund or relating to Acquired Fund.
6. Representations and Warranties by Acquired Fund and Acquiring Fund
Acquired Fund and Acquiring Fund each represents and warrants to the other
that:
(a) The statement of assets and liabilities to be furnished by it as of
4:00 p.m. Eastern Time on the Closing Date, for the purpose of
determining the number of Acquiring Fund Common Shares to be issued
pursuant to Section 1 of this Plan, will accurately reflect Net Assets
in the case of Acquired Fund and the net asset value in the case of
Acquiring Fund, and the outstanding Acquired Fund Common Shares and
Acquiring Fund Common Shares, respectively, as of such date, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(b) At the Closing, it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and
liabilities referred to in (a) above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of
title or encumbrances as do not materially detract from the value or
use of the assets subject thereto, or materially affect title thereto
(such as pledges or segregation in connection with portfolio
transactions in the ordinary course of business).
(c) Except as has been previously disclosed in the Acquired Fund
Disclosure Documents or in the Acquiring Fund Disclosure Documents,
there is no suit, judicial action, or legal or administrative
proceeding pending or threatened against Acquired Fund or Acquiring
Fund, respectively.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery and performance of this Plan have been duly
authorized by all necessary action of the Acquired Fund Board or the
Board of Directors of Acquiring Fund (the "Acquiring Fund Board"),
respectively, and this Plan constitutes a valid and binding obligation
of such party enforceable in accordance with its terms.
7. Covenants of Acquired Fund and Acquiring Fund
(a) Acquired Fund and Acquiring Fund each covenants to operate its
respective business as presently conducted between the date hereof and
the Closing.
(b) Acquired Fund undertakes that it will not acquire Acquiring Fund
Shares for the purpose of making distributions thereof to anyone other
than the shareholders of Acquired Fund.
(c) Acquired Fund undertakes that, if this Plan is consummated, it will
dissolve its corporate existence, file an application pursuant to
Section 8(f) of the 1940 Act for an order declaring that it has ceased
to be an investment company and take the necessary actions, including
making the necessary filings, to withdraw its shares from listing on
those stock exchanges on which the Acquired Fund Shares are listed as
of the Closing Date.
(d) Acquired Fund and Acquiring Fund each agrees that, by the Closing, all
of its federal and other tax returns and reports required by law to be
filed on or before such date shall have been filed, and all federal
and other taxes shown as due on said returns shall have either been
paid or had adequate liability reserves created for the payment of
such taxes.
(e) At the Closing, Acquired Fund shall provide Acquiring Fund the
certified copy of the shareholder ledger accounts described in Section
3 of this Plan.
(f) Acquiring Fund shall file with the SEC the Acquiring Fund N-14
Registration Statement, and shall use its best efforts to provide that
the Acquiring Fund N-14 Registration Statement becomes effective as
promptly as is practicable.
(g) Acquired Fund agrees to mail to each of its respective shareholders of
record entitled to vote at the Meeting, in sufficient time to comply
with requirements as to notice thereof, a combined Proxy
Statement/Prospectus that complies in all material respects with the
applicable provisions of Section 14(a) of the Securities Exchange Act
of 1934, as amended (the "1934 Act") and Section 20(a) of the 1940
Act, and the rules and regulations thereunder.
(h) Acquiring Fund agrees to mail to each of its respective shareholders
of record entitled to vote at the Meeting, in sufficient time to
comply with requirements as to notice thereof, a combined Proxy
Statement/Prospectus that complies in all material respects with the
applicable provisions of Section 14(a) of the 1934 Act and Section
20(a) of the 1940 Act, and the rules and regulations thereunder.
8. Conditions Precedent to be Fulfilled by Acquired Fund and Acquiring Fund
The consummation of this Plan shall be subject to the conditions precedent
that:
(a) (i) All the representations and warranties of each party contained
herein shall be true and correct as of the Closing with the same
effect as though made as of and at such date; (ii) each party shall
have performed all obligations required by this Plan to be performed
by it prior to the Closing; and (iii) Acquired Fund and Acquiring Fund
shall have delivered to the other a certificate signed by its
President, a Vice President or an equivalent officer to the foregoing
effect.
(b) Acquired Fund and Acquiring Fund shall have delivered to the other a
copy of the resolutions approving the Plan adopted and approved by the
appropriate action of the Acquired Fund Board or Acquiring Fund Board,
as appropriate, certified by its President, a Vice President or an
equivalent officer of Acquired Fund or Acquiring Fund, respectively.
(c) (i) The SEC shall not have issued an unfavorable management report
under Section 25(b) of the 1940 Act or instituted or threatened to
institute any proceeding seeking to enjoin consummation of the Plan
under Section 25(c) of the 1940 Act; and (ii) no other legal,
administrative or other proceeding shall have been instituted or
threatened that would materially affect the financial condition of
either party or would prohibit the transactions contemplated hereby.
(d) This Plan and the Acquisition contemplated hereby shall have been
adopted and approved by the appropriate action of the shareholders of
Acquired Fund, and the Acquisition shall have been approved by the
appropriate action of the shareholders of Acquiring Fund, at an annual
or special meeting of the respective shareholders thereof or any
adjournment thereof.
(e) A distribution or distributions shall have been declared for Acquired
Fund prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its
shareholders: (i) all of its ordinary income and all of its capital
gain net income, if any, for the period from the close of its last
fiscal year to 4:00 p.m. Eastern Time on the Closing Date; and (ii)
any undistributed ordinary income and capital gain net income from any
period to the extent not otherwise declared for distribution. Capital
gain net income has the meaning given such term by Section 1222(a) of
the Code.
(f) There shall be delivered to Acquired Fund and Acquiring Fund an
opinion from Stradley Ronon Stevens & Young, LLP, counsel to Acquired
Fund and Acquiring Fund, to the effect that, provided the Acquisition
contemplated hereby is carried out in accordance with this Plan and
the laws of the State of Minnesota, and based upon certificates of the
officers of Acquired Fund and Acquiring Fund with regard to matters of
fact and upon special counsel to Acquired Fund and Acquiring Fund with
regard to matters of Minnesota law:
(1) The acquisition by Acquiring Fund of substantially all the assets
of the Acquired Fund as provided for herein in exchange for the
respective Acquiring Fund Shares followed by the distribution by
Acquired Fund to its shareholders of such Acquiring Fund Shares
in complete liquidation of Acquired Fund will qualify as a
reorganization within the meaning of Section 368(a)(1) of the
Code, and Acquired Fund and Acquiring Fund will each be a "party
to the reorganization" within the meaning of Section 368(b) of
the Code;
(2) No gain or loss will be recognized by Acquired Fund upon the
transfer of substantially all of its assets to Acquiring Fund in
exchange solely for voting shares of Acquiring Fund (Sections
361(a) and 357(a) of the Code);
(3) No gain or loss will be recognized by Acquiring Fund upon the
receipt of substantially all of the assets of Acquired Fund in
exchange solely for voting shares of Acquiring Fund (Section
1032(a) of the Code);
(4) No gain or loss will be recognized by Acquired Fund upon the
distribution of Acquiring Fund Shares to its shareholders in
liquidation of Acquired Fund (in pursuance of this Plan) (Section
361(c)(1) of the Code);
(5) The basis of the assets of Acquired Fund received by Acquiring
Fund will be the same as the basis of such assets to Acquired
Fund immediately prior to Acquisition (Section 362(b) of the
Code);
(6) The holding period of the assets of Acquired Fund received by
Acquiring Fund will include the period during which such assets
were held by Acquired Fund (Section 1223(2) of the Code);
(7) No gain or loss will be recognized to the shareholders of
Acquired Fund upon the exchange of their shares in Acquired Fund
for voting shares of Acquiring Fund, including fractional shares
to which they may be entitled (Section 354(a) of the Code);
(8) The basis of Acquiring Fund Shares received by the shareholders
of Acquired Fund shall be the same as the basis of the Acquired
Fund Shares exchanged therefor (Section 358(a)(1) of the Code);
(9) The holding period of Acquiring Fund Shares received by the
shareholders of Acquired Fund (including fractional shares to
which they may be entitled) will include the holding period of
the Acquired Fund Shares surrendered in exchange therefor,
provided that the Acquired Fund Shares were held as a capital
asset on the effective date of the exchange (Section 1223(1) of
the Code); and
(10) Acquiring Fund will succeed to and take into account as of the
date of the transfer (as defined in Section 1.381(b)-1(b) of the
regulations issued by the United States Treasury ("Treasury
Regulations")) the items of Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations
specified in Sections 381, 382, 383 and 384 of the Code and the
Treasury Regulations.
(g) There shall be delivered to Acquiring Fund an opinion in form and
substance satisfactory to it from Stradley Ronon Stevens & Young, LLP,
counsel to Acquired Fund, to the effect that, subject in all respects
to the effects of bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws now or hereafter affecting
generally the enforcement of creditors' rights:
(1) The Acquired Fund is a corporation incorporated under the laws of
the State of Minnesota, and is a validly existing corporation and
in good standing under the laws of that state;
(2) The authorized capital of Acquired Fund consists of 201,000,000
shares consisting of 200,000,000 shares of Acquired Fund Common
Shares, par value $0.01 per share, and 1,000,000 shares of
preferred stock, par value $0.01, of which [400] shares have been
designated as Municipal Income Preferred Shares. Assuming that
the initial Acquired Fund Shares were issued in accordance with
the 1933 Act and the Acquired Fund Corporate Documents, and that
all other outstanding Acquired Fund Shares were sold, issued and
paid for in compliance in all material respects with applicable
registration requirements of the 1933 Act, each such outstanding
Acquired Fund Share is fully paid and non-assessable and, with
respect to Acquired Fund Common Shares, freely transferable, all
in accordance with the terms of the Acquired Fund Corporate
Documents;
(3) Acquired Fund is a closed-end investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in the Acquired Fund Disclosure Documents,
such counsel does not know of any material suit, action or legal
or administrative proceeding pending or threatened against the
Acquired Fund, the unfavorable outcome of which would materially
and adversely affect Acquired Fund;
(5) All corporate actions required to be taken by Acquired Fund to
authorize this Plan and to effect the Acquisition contemplated
hereby have been duly authorized by all necessary action on the
part of the Acquired Fund; and
(6) The execution, delivery or performance of this Plan by Acquired
Fund will not violate any provision of the Acquired Fund
Corporate Documents, or the provisions of any agreement or other
instrument known to such counsel to which Acquired Fund is a
party or by which Acquired Fund is otherwise bound, and this Plan
is the legal, valid and binding obligation of Acquired Fund and
is enforceable against Acquired Fund in accordance with its
terms.
In giving the opinions set forth above, counsel may state that it is
relying on certificates of the officers of Acquired Fund with regard
to matters of fact, certain certifications and written statements of
governmental officials with respect to the good standing of Acquired
Fund, and the opinion of special counsel to Acquired Fund on questions
of Minnesota law.
(h) There shall be delivered to Acquired Fund an opinion in form and
substance satisfactory to it from Stradley Ronon Stevens & Young, LLP,
counsel to Acquiring Fund, to the effect that, subject in all respects
to the effects of bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws now or hereafter affecting
generally the enforcement of creditors' rights:
(1) Acquiring Fund is a corporation incorporated under the laws of
the State of Minnesota, and is a validly existing corporation and
in good standing under the laws of that State;
(2) The authorized capital of Acquiring Fund consists of 201,000,000
shares consisting of 200,000,000 shares of Acquiring Fund Common
Shares, par value $0.01 per share, and 1,000,000 shares of
preferred stock, par value $0.01. The preferred stock is divided
into four series: Municipal Income Fund Preferred Shares, Series
A, of which there are currently 600 shares issued and
outstanding; Municipal Income Fund Preferred Shares, Series B, of
which there are currently 600 shares issued and outstanding;
Municipal Income Preferred Shares, Series C, of which there are
400 shares authorized and unissued; and Municipal Income Fund
Preferred Shares, Series D, of which there are 300 shares
authorized and unissued. Assuming that the initial shares of each
class and series of Acquiring Fund were issued in accordance in
all material respects with the 1933 Act and the Acquiring Fund
Corporate Documents, and that all other outstanding shares of
Acquiring Fund were sold, issued and paid for in accordance in
all material respects with the terms of Acquiring Fund's
prospectus in effect at the time of such sales, each such
outstanding share is fully paid and non-assessable and, with
respect to Acquiring Fund Common Shares, freely transferable, all
in accordance with the terms of the Acquiring Fund Corporate
Documents;
(3) Acquiring Fund is a closed-end investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in the Acquiring Fund Disclosure Documents,
such counsel does not know of any material suit, action or legal
or administrative proceeding pending or threatened against
Acquiring Fund, the unfavorable outcome of which would materially
and adversely affect Acquiring Fund;
(5) Acquiring Fund Shares to be issued pursuant to the terms of this
Plan have been duly authorized and, when issued and delivered as
provided in this Plan, will have been validly issued and fully
paid and will be non-assessable by Acquiring Fund;
(6) All corporate actions required to be taken by Acquiring Fund to
authorize this Plan and to effect the Acquisition contemplated
hereby have been duly authorized by all necessary action on the
part of Acquiring Fund;
(7) The execution, delivery or performance of this Plan by Acquiring
Fund will not violate any provision of the Acquiring Fund
Corporate Documents, or the provisions of any agreement or other
instrument known to such counsel to which Acquiring Fund is a
party or by which Acquiring Fund is otherwise bound, and this
Plan is the legal, valid and binding obligation of Acquiring Fund
and is enforceable against Acquiring Fund in accordance with its
terms; and
(8) The Acquiring Fund N-14 Registration Statement has been declared
or, by operation of rule, has become effective under the 1933
Act, and, to the best knowledge of such counsel, no stop order
suspending the effectiveness of such Registration Statement has
been issued, and no proceedings for such purpose have been
instituted or are pending before or threatened by the SEC under
the 1933 Act, and nothing has come to counsel's attention that
causes it to believe that, at the time the Acquiring Fund N-14
Registration Statement became effective, or at the Closing, such
Registration Statement (except for the financial statements and
other financial and statistical data included therein, as to
which counsel need not express an opinion), contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Acquiring
Fund N-14 Registration Statement, or of any contract or document
of a character required to be described in the Acquiring Fund
N-14 Registration Statement, that is not described as required.
In giving the opinions set forth above, counsel may state that it is
relying on certificates of the officers of Acquiring Fund with regard
to matters of fact, and certain certifications and written statements
of governmental officials with respect to the good standing of
Acquiring Fund, and the opinion of special counsel to the Acquiring
Fund on questions of Minnesota law.
(i) Acquired Fund shall have received a certificate from the President or
a Vice President of Acquiring Fund to the effect that, except for
disclosure provided by or relating to Acquired Fund, to the best
knowledge and belief of such officer, the statements contained in the
Acquiring Fund N-14 Registration Statement, at the time the Acquiring
Fund N-14 Registration Statement became effective, at the date of the
signing of this Plan, and at the Closing, did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading.
(j) The Acquiring Fund N-14 Registration Statement to be delivered to the
shareholders of Acquiring Fund and Acquired Fund in accordance with
this Plan shall have become effective, and no stop order suspending
the effectiveness of the Acquiring Fund N-14 Registration Statement,
or any amendment or supplement thereto, shall have been issued prior
to the Closing Date or shall be in effect at Closing, and no
proceedings for the issuance of such an order shall be pending or
threatened on that date.
(k) Acquiring Fund Shares to be delivered hereunder shall be eligible for
sale with each state commission or agency with which such eligibility
is required in order to permit Acquiring Fund Shares lawfully to be
delivered to each holder of the Acquired Fund Shares.
(l) At the Closing, there shall be transferred to Acquiring Fund the
respective aggregate Net Assets of Acquired Fund comprising at least
90% in fair market value of the total net assets and 70% of the fair
market value of the total gross assets recorded on the books of
Acquired Fund on the Closing Date.
(m) There be delivered to Acquiring Fund information concerning the tax
basis of Acquired Fund in all securities transferred to Acquiring Fund
together with shareholder information including the names, addresses
and taxpayer identification numbers of the respective shareholders of
Acquired Fund as of the Closing Date, the number of shares held by
each shareholder, the dividend reinvestment elections applicable to
each shareholder, and the backup withholding and nonresident alien
withholding certifications, notices or records on file with Acquired
Fund with respect to each shareholder.
(n) All consents of other parties, and all other consents, orders and
permits of federal, state and local regulatory authorities (including
those of the SEC and of state Blue Sky securities authorities,
including any necessary "no-action" positions or exemptive orders from
such federal and state authorities), required to permit consummation
of the Acquisition contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would
not involve a risk of a material adverse effect on the assets or
properties of Acquired Fund or Acquiring Fund.
(o) Am Ex shall have approved the listing of the additional Acquiring Fund
Common Shares to be issued to common shareholders of Acquired Fund in
connection with the Acquisition.
(p) The preferences, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of
the Acquiring Fund Preferred Shares as set forth in the Certificate of
Designation shall be identical in all material respects to those of
the Acquired Fund Preferred Shares.
(q) Acquiring Fund shall have obtained written confirmation from both
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's, a
division of The McGraw Hill Companies, Inc. ("S&P"), that (i)
consummation of the transactions contemplated by this Plan will not
impair the ratings assigned by such rating agencies to the existing
Municipal Income Preferred Shares, Series A and Series B, of Acquiring
Fund, and (ii) the Acquiring Fund Preferred Shares to be issued
pursuant to Section 1 of this Agreement will be rated "aaa" by Moody's
and "AAA" by S&P.
9. Fees and Expenses
(a) Acquired Fund and Acquiring Fund each represents and warrants to the
other that there are no broker or finders' fees payable by it in
connection with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of this
Plan shall be borne 25% by Acquiring Fund, 25% by Acquired Fund, 25%
by Voyageur Minnesota Municipal Income Fund [III], Inc. and 25% by
DMC.
10. Termination; Postponement; Waiver; Order
(a) Anything contained in this Plan to the contrary notwithstanding, this
Plan may be terminated and the Acquisition abandoned at any time
(whether before or after approval thereof by the shareholders of
Acquiring Fund or Acquired Fund) prior to the Closing, or the Closing
may be postponed as follows:
(1) by mutual consent of Acquired Fund and Acquiring Fund;
(2) by Acquiring Fund if any condition of its obligations set forth
in Section 8 has not been fulfilled or waived; or
(3) by Acquired Fund if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived.
An election by Acquired Fund or Acquiring Fund to terminate this Plan
and to abandon the Acquisition shall be exercised by the Acquired Fund
Board or the Acquiring Fund Board, respectively.
(b) If the transactions contemplated by this Plan have not been
consummated by December 31, 2006, this Plan shall automatically
terminate on that date, unless a later date is agreed to by both the
Acquired Fund Board and the Acquiring Fund Board.
(c) In the event of termination of this Plan pursuant to the provisions
hereof, this Plan shall become void and have no further effect, and
neither Acquired Fund nor Acquiring Fund, nor their directors,
officers or agents or the shareholders of Acquired Fund or Acquiring
Fund shall have any liability in respect of this Plan.
(d) At any time prior to the Closing, any of the terms or conditions of
this Plan may be waived by the party who is entitled to the benefit
thereof by action taken by the Acquiring Fund Board or the Acquired
Fund Board, as the case may be, if, in the judgment of such Board,
such action or waiver will not have a material adverse effect on the
benefits intended under this Plan to its shareholders, on behalf of
whom such action is taken.
(e) The respective representations and warranties contained in Sections 4
through 6 hereof shall expire with and be terminated by the
Acquisition, and neither Acquired Fund nor Acquiring Fund, nor any of
their officers, directors, agents or shareholders shall have any
liability with respect to such representations or warranties after the
Closing. This provision shall not protect any officer, director, agent
or shareholder of Acquired Fund or Acquiring Fund against any
liability to the entity for which that officer, director, agent or
shareholder so acts or to its shareholders to which that officer,
director, agent or shareholder would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties in the conduct of such office.
(f) If any order or orders of the SEC with respect to this Plan shall be
issued prior to the Closing and shall impose any terms or conditions
that are determined by action of the Acquired Fund Board and the
Acquiring Fund Board to be acceptable, such terms and conditions shall
be binding as if a part of this Plan without further vote or approval
of the shareholders of Acquiring Fund or Acquired Fund, unless such
terms and conditions shall result in a change in the method of
computing the number of Acquiring Fund Shares to be issued to Acquired
Fund, in which event, unless such terms and conditions shall have been
included in the proxy solicitation material furnished to the
shareholders of Acquiring Fund and Acquired Fund prior to the Meeting,
this Plan shall not be consummated and shall terminate unless
Acquiring Fund and Acquired Fund shall each promptly call a special
meeting of its shareholders at which such conditions so imposed shall
be submitted for approval.
11. Entire Agreement and Amendments
This Plan embodies the entire agreement between the parties and there are
no agreements, understandings, restrictions or warranties relating to the
transactions contemplated by this Plan other than those set forth herein or
herein provided for. This Plan may be amended only by mutual consent of the
parties in writing. Neither this Plan nor any interest herein may be assigned
without the prior written consent of the other parties.
12. Counterparts
This Plan may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts together shall
constitute but one instrument.
13. Notices
Any notice, report or demand required or permitted by any provision of this
Plan shall be in writing and shall be deemed to have been given to each party to
this Plan if delivered or mailed, first class postage prepaid, to the following
addresses:
- ----------------------------------- ---------------------------------
If to Acquired Fund If to Acquiring Fund:
Delaware Investments Minnesota Delaware Investments Minnesota
Municipal Income Fund [III], Inc. Municipal Income Fund II, Inc.
One Commerce Square One Commerce Square
Philadelphia, PA 19103 Philadelphia, PA 19103
Attn: Secretary Attn: Secretary
- ----------------------------------- ---------------------------------
If to DMC:
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
Attn: Secretary
- ----------------------------------- ---------------------------------
14. Governing Law
This Plan shall be governed by and carried out in accordance with the laws
of the State of Minnesota.
[The remainder of this page was intentionally left blank.]
IN WITNESS WHEREOF, Acquired Fund, Acquiring Fund and DMC have each caused
this Plan to be executed on its behalf by its duly authorized officers, all as
of the date and year first-above written.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL
INCOME FUND [III], INC.
Attest: _______________________ By: __________________________
Name: Name:
Title: Title:
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL
INCOME FUND II, INC.
Attest: ________________________ By: _____________________________
Name: Name:
Title: Title:
DELAWARE MANAGEMENT COMPANY, a series of
Delaware Management Business Trust
Attest: ________________________ By: ________________________________
Name: Name:
Title: Title:
EXHIBIT B: MINNESOTA STATUTES
302A.471 Rights of dissenting shareholders.
Subdivision 1. Actions creating rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) unless otherwise provided in the articles, an amendment of the articles
that materially and adversely affects the rights or preferences of the shares of
the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the redemption
or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares or
securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or
to cumulate votes, except as the right may be excluded or limited through the
authorization or issuance of securities of an existing or new class or series
with similar or different voting rights; except that an amendment to the
articles of an issuing public corporation that provides that section 302A.671
does not apply to a control share acquisition does not give rise to the right to
obtain payment under this section; or
(5) eliminates the right to obtain payment under this subdivision;
(b) a sale, lease, transfer, or other disposition of property and assets of
the corporation that requires shareholder approval under section 302A.661,
subdivision 2, but not including a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or substantially
all of the net proceeds of disposition be distributed to the shareholders in
accordance with their respective interests within one year after the date of
disposition;
(c) a plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a constituent organization, except as provided in
subdivision 3, and except for a plan of merger adopted under section 302A.626;
(d) a plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, except as provided in subdivision 3;
(e) a plan of conversion adopted by the corporation; or
(f) any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares that
are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
Subd. 3. Rights not to apply. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of (1) the surviving
corporation in a merger with respect to shares of the shareholder that are not
entitled to be voted on the merger and are not canceled or exchanged in the
merger or (2) the corporation whose shares will be acquired by the acquiring
corporation in a plan of exchange with respect to shares of the shareholder that
are not entitled to be voted on the plan of exchange and are not exchanged in
the plan of exchange.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote on
an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
(c) Notwithstanding subdivision 1, the right to obtain payment under this
section, other than in connection with a plan of merger adopted under section
302A.621, is limited in accordance with the following provisions:
(1) The right to obtain payment under this section is not available for the
holders of shares of any class or series of shares that is listed on the New
York Stock Exchange or the American Stock Exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.
(2) The applicability of clause (1) is determined as of:
(i) the record date fixed to determine the shareholders entitled to receive
notice of, and to vote at, the meeting of shareholders to act upon the corporate
action described in subdivision 1; or
(ii) the day before the effective date of corporate action described in
subdivision 1 if there is no meeting of shareholders.
(3) Clause (1) is not applicable, and the right to obtain payment under
this section is available pursuant to subdivision 1, for the holders of any
class or series of shares who are required by the terms of the corporate action
described in subdivision 1 to accept for such shares anything other than shares,
or cash in lieu of fractional shares, of any class or any series of shares of
the corporation, or any other proprietary interest of any other entity, that
satisfies the standards set forth in clause (1) at the time the corporate action
becomes effective.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473 Procedures for asserting dissenters' rights.
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by the
shareholders and the corporation holds a shareholder meeting, a shareholder who
is entitled to dissent under section 302A.471 and who wishes to exercise
dissenters' rights must file with the corporation before the vote on the
proposed action a written notice of intent to demand the fair value of the
shares owned by the shareholder and must not vote the shares in favor of the
proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to (i) all shareholders who have complied with
subdivision 3, (ii) all shareholders who did not sign or consent to a written
action that gave effect to the action creating the right to obtain payment under
section 302A.471, and (iii) all shareholders entitled to dissent if no
shareholder vote was required, a notice that contains:
(1) the address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) a form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the shares
or an interest in them and to demand payment; and
(4) a copy of section 302A.471 and this section and a brief description of
the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description of
the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
Rules of Civil Procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the Rules of Civil Procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expenses
and compensation of any appraisers appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose action
in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or
not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
EXHIBIT C : STATEMENT OF RIGHTS AND PREFERENCES OF SERIES C PREFERRED SHARES
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
Statement Establishing and Fixing the Rights and Preferences
Of Municipal Income Preferred Shares, Series C
Delaware Investments Minnesota Municipal Income Fund II, Inc., a Minnesota
corporation (the "Corporation"), certifies to the Secretary of State of
Minnesota that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article 5 of its Articles of Incorporation (which, as
hereafter restated or amended from time to time are, together with this
Statement, herein called the "Articles"), the Board of Directors has, by
resolution adopted at a meeting held on August 17, 2005, authorized the issuance
of one series of 400 shares of its authorized preferred stock, par value $.01
per share, liquidation preference $50,000 per share, designated "Municipal
Income Preferred Shares, Series C" (such series of Municipal Income Preferred
Shares, Series C is referred to in this Statement as "Series C Preferred
Shares").
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption of the Series
C Preferred Shares of each such series are as follows:
DESIGNATION
A series of 400 shares of preferred stock, par value $.01 per share,
liquidation preference $50,000 per share, is hereby designated "Municipal Income
Preferred Shares, Series C" (each, a "Series C Preferred Share" and,
collectively, the "Series C Preferred Shares"). Each Series C Preferred Share
shall: (i) be issued upon on the closing of the reorganization (the
"Reorganization") of Delaware Investments Minnesota Municipal Income Fund, Inc.
("VMN") into the Corporation pursuant to the Agreement and Plan of Acquisition
dated _________, 2005 (the "Agreement") by and among the Corporation, VMN and
Delaware Management Company, a series of Delaware Management Business Trust;
(ii) have a dividend rate for its Initial Dividend Period equal to such dividend
rate applicable to the Municipal Income Preferred Shares of VMN, as determined
on the closing date of the Reorganization; (iii) have an Initial Dividend Period
ending _________, 2006; and (iv) have such other preferences, limitations and
relative voting rights, in addition to those required by applicable law or set
forth in the Articles applicable to preferred stock of the Corporation, as are
set forth in Part I and Part II of this Statement. The Series C Preferred Shares
shall constitute a separate series of preferred stock of the Corporation, and
each Series C Preferred Share shall be identical except as provided in Section 4
of Part I of this Statement.
No holder of Series C Preferred Shares shall, as such holder, have any
right to acquire, purchase or subscribe for any Series C Preferred Shares,
shares of Common Stock, $.01 par value, of the Corporation or other securities
of the Corporation which it may hereafter issue or sell (whether out of the
number of shares authorized by the Articles, out of any shares acquired by the
Corporation after the issuance thereof, or otherwise).
PART I
1. Definitions
"AA Composite Commercial Paper Rate," on any date of determination, means
(a) the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated AA by S&P or Aa by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day immediately preceding
such date, or (b) in the event that the Federal Reserve Bank of New York does
not make available such a rate, then the arithmetic average of the Interest
Equivalent of the rate on commercial paper placed on behalf of such issuers, as
quoted on a discount basis or otherwise by the Commercial Paper Dealers to the
Remarketing Agent for the close of business on the Business Day immediately
preceding such date. If one of the Commercial Paper Dealers does not quote a
rate required to determine the AA Composite Commercial Paper Rate, the AA
Composite Commercial Paper Rate will be determined on the basis of the quotation
or quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Corporation to provide such rate or
rates not being supplied by the Commercial Paper Dealer. If the number of
Dividend Period Days shall be (a) fewer than 49 days, such rate shall be the
Interest Equivalent of the 30-day rate on such commercial paper; (b) 49 or more
days but fewer than 70 days, such rate shall be the Interest Equivalent of the
60-day rate on such commercial paper; (c) 70 or more days but fewer than 85
days, such rate shall be the arithmetic average of the Interest Equivalent of
the 60-day and 90-day rates on such commercial paper; and (d) 85 or more days
but fewer than 91 days, such rate shall be the Interest Equivalent of the 90-day
rate on such commercial paper.
"Additional Dividend" means payment to a Holder of Series C Preferred
Shares of an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such Holder with respect to the taxable
year in question, would cause such Holder's dividends in dollars (after federal
and Minnesota personal income tax consequences, as defined below) from the
aggregate of both the Retroactive Taxable Allocations and the Additional
Dividend to be equal to the dollar amount of the dividends which would have been
received by such Holder if the amount of the aggregate Retroactive Taxable
Allocations would have been excludable from the gross income of such Holder.
Such Additional Dividend shall be calculated (a) without consideration being
given to the time value of money, (b) assuming that no Holder of Series C
Preferred Shares is subject to the federal or Minnesota alternative minimum tax
with respect to dividends received from the Corporation, and (c) assuming that
each Retroactive Taxable Allocation would be taxable in the hands of each Holder
of Series C Preferred Shares at (i) in the case of that portion of an allocation
attributable to capital gains, the maximum marginal combined regular federal and
Minnesota income tax rate (taking into account the federal income tax
deductibility of state taxes paid or incurred) on net capital gains applicable
to individuals or corporations in effect during the taxable year in question,
whichever is greater, or (ii) in the case of that portion of an allocation
attributable to ordinary income, the maximum marginal combined regular federal
and Minnesota income tax rate (taking into account the federal income tax
deductibility of state taxes paid or incurred) on ordinary income applicable to
individuals or corporations in effect during the taxable year in question,
whichever is greater.
"Administrator" means [Mitchell Hutchins Asset Management Inc., a Delaware
corporation,] [confirm name] and any additional or successor companies or
entities which have entered into an agreement with the Corporation to provide
administrative services to the Corporation.
"Adviser" means Delaware Management Company ("DMC"), a series of Delaware
Management Business Trust, a statutory trust formed under the laws of the State
of Delaware, with its principal place of business at One Commerce Square,
Philadelphia, PA 19103.
"Agent Member" means a designated member of the Securities Depository that
will maintain records for a beneficial owner of one or more Series C Preferred
Shares that has identified such Agent Member in its Master Purchasers Letter and
that will be authorized and instructed to disclose information to the
Remarketing Agent and/or the Paying Agent with respect to such beneficial owner.
"Agreement" means the Agreement and Plan of Acquisition dated __________,
2005 by and among VMN, the Corporation and the Adviser.
"Anticipation Notes" means the following obligations: tax anticipation
notes, revenue anticipation notes, and tax and revenue anticipation notes.
"Applicable Dividend Rate" means, with respect to the Initial Dividend
Period, the initial dividend rate per annum described in the "Designation" of
this Statement and, with respect to any subsequent Dividend Period, the dividend
rate per annum that (a) except for a Dividend Period commencing during a
Non-Payment Period, will be equal to the lower of the rate per annum that the
Remarketing Agent advises results on the Remarketing Date preceding the first
day of such Dividend Period from implementation of the remarketing procedures
described herein in Part II and the Maximum Dividend Rate, or (b) for each
Dividend Period commencing during a Non-Payment Period, will be equal to the
Non-Payment Period Rate.
"Applicable Percentage" means, with respect to any Dividend Period of 90
days or less, the percentage of the Reference Rate on each Remarketing Date,
which will be determined with reference to the lower of the credit rating
assigned on such date to the Series C Preferred Shares by Moody's and S&P (or,
if Moody's or S&P, or both, shall not make such rating available, the equivalent
of either or both of such ratings by a Substitute Rating Agency or two
Substitute Rating Agencies or, in the event that only one such rating shall be
available, such rating), as follows:
Credit Ratings Applicable Percentage of Reference Rate
Moody's S&P
aa3 or higher AA- or higher 110%
a3 to a1 A- to A+ 125%
baa3 to baa1 BBB- to BBB+ 150%
ba3 to ba1 BB- to BB+ 200%
below ba3 below BB- 250%
; provided, however, that in the event the Corporation has notified the Paying
Agent and the Remarketing Agent of its intent to allocate income taxable for
federal income tax purposes to the Series C Preferred Shares prior to the
Remarketing establishing the Applicable Dividend Rate for such shares, the
applicable percentage in the foregoing table shall be divided by the quantity 1
minus (a) in the case of capital gains dividends, the maximum marginal combined
regular federal and Minnesota income tax rate (taking into account the federal
income tax deductibility of state taxes paid or incurred) on capital gains
applicable to individuals or corporations, whichever is greater, or (b) in the
case of ordinary income dividends, the maximum marginal combined regular federal
and Minnesota income tax rate (taking into account the federal income tax
deductibility of state taxes paid or incurred) on ordinary income applicable to
individuals or corporations, whichever is greater. If the ratings for the Series
C Preferred Shares are split between two of the foregoing credit rating
categories, the lower rating will determine the prevailing rating.
"Articles" means the Articles of Incorporation, as amended, of the
Corporation, including this Statement.
"Beneficial Owner" means a person who has signed, or on whose behalf an
Agent Member has signed, a Master Purchaser's letter and is listed as the
beneficial owner of one or more Series C Preferred Shares on the records of the
Paying Agent or, with respect to any Series C Preferred Shares not registered in
the name of the Securities Depository on the share transfer books of the
Corporation, the person in whose name such share is so registered.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in the City of New York are authorized or obligated by law to close.
"Closing Transaction" means the termination of a futures contract or option
position by taking an equal position opposite thereto in the same delivery month
as such initial position being terminated.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Citigroup Global Markets, Inc. and such
other dealers as the Corporation may from time to time appoint or, in lieu of
any thereof, their respective affiliates or successors.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common shares, par value $.01 per share, of the
Corporation.
"Date of Original Issue" means, with respect to any Series C Preferred
Share, the date on which the Corporation originally issued such share.
"Deposit Securities" has the meaning set forth in Part I, Section 7(c) of
this Statement.
"Directors" shall mean members of the Board of Directors.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"Discounted Value" of any asset of the Corporation means the market value
thereof, as determined by the Corporation in accordance with the Pricing
Service, discounted by the applicable Moody's Discount Factor or S&P Discount
Factor, as the case may be, in connection with the Corporation's receipt of
ratings on the Series C Preferred Shares from Moody's and S&P, provided that
with respect to a Moody's Eligible Asset, Discounted Value shall not exceed the
par value of such asset at any time.
"Dividend Coverage Amount" has the meaning set forth in Part I, Section
7(c) of this Statement.
"Dividend Coverage Assets" has the meaning set forth in Part I, Section
7(c) of this Statement.
"Dividend Payment Date" has the meaning described in Part I, Section 3(e)
of this Statement.
"Dividend Period" means a Seven-day Dividend Period, a 28-day Dividend
Period or a Special Dividend Period.
"DTC" means The Depository Trust Company, which will register the Series C
Preferred Shares in the name of its nominee, Cede & Co.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Holder" of Series C Preferred Shares means, unless the context otherwise
requires, a person who has signed, or on whose behalf an Agent Member has
signed, a Master Purchaser's Letter and is listed in the records of the Paying
Agent as the beneficial owner of one or more Series C Preferred Shares.
"Initial Dividend Period" means the period commencing on and including the
Date of Original Issue thereof and ending on _________, 2006.
"Initial Margin" means the amount of cash or securities deposited with a
futures commission merchant as a good faith deposit at the time of the
initiation of a purchase or sale position with respect to a futures contract or
a sale position with respect to an option position thereon.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"IRS" means the Internal Revenue Service.
"Mandatory Redemption Price" means $50,000 per Series C Preferred Share
plus an amount equal to accumulated but unpaid dividends thereon to the date of
redemption (whether or not earned or declared).
"Marginal Tax Rate" means the maximum marginal regular federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation means the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service values portfolio
securities at the mean between the quoted bid and asked price or the yield
equivalent when quotations are readily available. Securities for which
quotations are not readily available are valued at fair value as determined by
the Pricing Service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
The Pricing Service may employ electronic data processing techniques and/or a
matrix system to determine valuations. In the event the Pricing Service fails to
provide a valuation for a portfolio security or, in the judgment of the Adviser,
provides a valuation which is incorrect, Market Value of such security shall
mean the lower of two independent bid price quotations received from members of
the National Association of Securities Dealers, Inc. who make a market in such
security, one of which shall be in writing.
"Master Purchaser's Letter" means a letter addressed to the Corporation,
the Remarketing Agent, an Agent Member and other persons in which a potential
Holder, or such Holder's Agent Member on such Holder's behalf, agrees, among
other things, to follow the procedures set forth in the Prospectus dated
_____________ relating to the offering of the Series C Preferred Shares, as such
Prospectus may be amended or supplemented from time to time, and the Remarketing
Procedures as set forth in Part II of this Statement.
"Maximum Dividend Rate" means a maximum dividend rate for Series C
Preferred Shares determined with reference to the credit rating assigned to such
shares and the duration of the applicable Dividend Period. The Maximum Dividend
Rate for any Dividend Period (other than a Special Dividend Period of more than
90 days) at any date on which an Applicable Dividend Rate is determined will be
the Applicable Percentage of the Reference Rate. The Maximum Dividend Rate for
any Special Dividend Period of more than 90 days will be a fixed rate or
variable rate determined from time to time by formula or other means as
designated by the Board of Directors in respect to such period.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Corporation were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Corporation, as of the end of the calendar month immediately preceding such
Valuation Date, and assuming such Additional Dividends are fully taxable.
"Minimum Liquidity Level" has the meaning set forth in Part I, Section 7(c)
of this Statement.
"Minnesota Municipal Obligations" means "Minnesota Municipal Obligations"
as defined in the Corporation's Registration Statement on Form N-2 (File Nos.
33-60636 and 811-7420) on file with the Commission, as such Registration
Statement may be amended from time to time.
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation,
and its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined by reference to
the rating on such asset and the shortest period set forth opposite such rating
that is the same length as or is longer than the Moody's Exposure Period, in
accordance with the table set forth below:
Moody's Discount Factors
Rating Category
Exposure Period Aaa (1) Aa (1) A (1) Baa (1) Other (2) VMIG-1 (1) (3)(4) SP-1+ (3) (4)
7 weeks or less.......................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than 7 weeks. 154% 164% 173% 205% 235% 137% 149%
9 weeks or less but greater than 8 weeks. 158% 169% 179% 209% 242% 138% 150%
___________________
(1) Moody's rating
(2) Municipal Obligations not rated by Moody's but rated BBB or BBB+ by S&P.
(3) Municipal Obligations rated MIG-1 or VMIG-1 or, if not rated by Moody's,
rated SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating.
(4) For the purposes of the definition of Moody's Eligible Assets, these
securities will have an assumed rating of A by Moody's.
Notwithstanding the foregoing, (a) no Moody's Discount Factor will be
applied to short-term Municipal Obligations so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's which mature or
have a demand feature at par exercisable within the Moody's Exposure Period and
the Moody's Discount Factor for such Municipal Obligations will be 125% so long
as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable within the Moody's Exposure
Period; and (b) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within the Moody's Exposure Period,
and if the trades which generated such receivables are (A) settled through
clearing house firms with respect to which the Corporation has received prior
written authorization from Moody's or (B) with counterparties having a Moody's
long-term debt rating of at least Baa3; and (ii) the Moody's Discounted Value of
Municipal Obligations sold as of or prior to such Valuation Date which generated
receivables, if such receivables are due within the Moody's Exposure Period but
do not comply with either of conditions (A) or (B).
"Moody's Eligible Assets" means cash or a Municipal Obligation that (a)
pays interest in cash, (b) is publicly rated Baa or better by Moody's or, if not
rated by Moody's but rated by S&P, is rated at least BBB by S&P (provided that,
for purposes of determining the Moody's Discount Factor applicable to any such
S&P-rated Municipal Obligation, such Municipal Obligation (excluding any
short-term Municipal Obligation) will be deemed to have a Moody's rating which
is one full rating category lower than its S&P rating), (c) does not have its
rating suspended, (d) is part of an issue of Minnesota Municipal Obligations of
at least $5,000,000 if rated Aaa, Aa or A by Moody's (or, if not rated by
Moody's, rated AAA or AA by S&P), or $10,000,000 if rated Baa by Moody's (or, if
not rated by Moody's rated A or BBB by S&P), (e) is not a private placement, and
(f) is not convertible. In addition, Receivables for Municipal Obligations Sold
(as defined under "Moody's Discount Factor") shall constitute Moody's Eligible
Assets. Municipal Obligations in the Corporation's portfolio must be within the
following diversification requirements in order to be included within Moody's
Eligible Assets:
Minimum Maximum Maximum Maximum
Issue Size Underlying Issue Type County
($ Millions) Obligor (%)((2)) Concentration (%)((2))((3)) Concentration (%)((2))((4))
Rating
Aaa...................... 5 100 100 100
Aa....................... 5 20 60 60
A........................ 5 10 40 40
Baa...................... 10 6 20 20
Other (1) 10 4 12 12
__________________
(1) Municipal securities not rated by Moody's but rated BBB or BBB+ by S&P.
(2) The referenced percentages represent cumulative totals for the related
rating category and each lower rating category.
(3) For purposes of the issue type concentration requirement, Municipal
Obligations will be classified within one of the following categories:
health care issues, housing issues, educational facilities (public and
private schools) issues, student loan issues, resource recovery issues,
transportation issues, industrial revenue and pollution control bond
issues, utility issues (including water, sewer and electric), general
obligation issues, lease obligations and certificates of participation,
escrowed bonds and other issues ("Other Issues") including special
obligations to crossover, excise and sales tax revenue, recreation revenue,
special assessments, and telephone revenue bonds only. The following issue
types will be further limited as follows for all rating categories listed:
student loan issues-10%; resource recovery issues-10%; Other Issues-10%.
(4) Applicable to general obligation Municipal Obligations only.
For purposes of the maximum underlying obligor requirement described above,
any Municipal Obligation backed by the guaranty, letter of credit or insurance
issued by a third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating of
such Municipal Obligation. In the event any of the Moody's Eligible Assets in
the Corporation's portfolio consist of Municipal Obligations other than
Minnesota Municipal Obligations, then such Municipal Obligations shall be
subject to the following requirements regarding the maximum percentage of
Moody's Eligible Assets that may be invested in Municipal Obligations of issuers
located in a particular state of United States territory: such Municipal
Obligations rated BBB or BBB+ by S&P may comprise no more than 12% of total
Moody's Eligible Assets; such BBB or BBB+ rated Municipal Obligations, if any,
together with any such Municipal Obligations rated Baa by Moody's or A by S&P,
may comprise no more than 20% of total Moody's Eligible Assets; such BBB, BBB+,
Baa and A-rated Municipal Obligations, if any, together with any such Municipal
Obligations rated A by Moody's or AA by S&P, may comprise no more than 40% of
total Moody's Eligible Assets; and such BBB, BBB+, Baa, A and AA-rated Municipal
Obligations, if any, together with any such Municipal Obligations rated Aa by
Moody's or AAA by S&P, may comprise no more than 60% of total Moody's Eligible
Assets; provided, however, that, notwithstanding the foregoing, no more than an
aggregate of 10% of the Moody's Eligible Assets may consist of Municipal
Obligations of issuers located in United States Territories, other than Puerto
Rico. For purposes of applying the foregoing requirements, Municipal Obligations
rated MIG-1 or VMIG-1 or, if not rated by Moody's, rated SP-1+ by S&P, which do
not mature or have a demand feature at par exercisable in 30 days and which do
not have a long-term rating, will be considered to have a long-term rating of A.
For purposes of calculation of Minimum Issue Size, Underlying Obligor,
Maximum Issue Type and Maximum County Concentration, Moody's Eligible Assets
shall be calculated without including cash and Municipal Obligations rated MIG-1
or VMIG-1 or, if not rated by Moody's, rated SP-1+ by S&P, which either mature
or have a demand feature at par exercisable with the Moody's Exposure Period.
Where the Corporation sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Moody's Eligible
Asset and the amount the Corporation is required to pay upon repurchase of such
asset will count as a liability for the purposes of the Preferred Share Basic
Maintenance Amount. Where the Corporation purchases an asset and agrees to sell
it to a third party in the future, cash receivable by the Corporation thereby
will constitute a Moody's Eligible Asset if the long-term debt of such other
party is rated at least A2 by Moody's and such agreement has a term of 30 days
or less; otherwise the Discounted Value of such asset will constitute a Moody's
Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if (a) it is subject to any material lien, mortgage, pledge,
security interest or security agreement of any kind (collectively, "Liens"),
except for (i) Liens which are being contested in good faith by appropriate
proceedings and which Moody's has indicated to the Corporation will not affect
the status of such assets as a Moody's Eligible Asset, (ii) Liens for taxes that
are not then due and payable or that can be paid thereafter without penalty,
(iii) Liens to secure payment for services rendered or cash advanced to the
Corporation by the Adviser, the Paying Agent, the Administrator or the
Remarketing Agent and (iv) Liens by virtue of any repurchase agreement; or (b)
it is irrevocably deposited by the Corporation for the payment of any amounts
set forth in (a)(i) through (a)(vii) under "Preferred Share Basic Maintenance
Amount."
"Moody's Exposure Period" on a given Valuation Date means the period
commencing on such date and ending 47 days thereafter, as such exposure period
may be modified by the Board of the Corporation; provided, however, that the
Corporation shall have received confirmation in writing from Moody's that any
such modification shall not adversely affect the then-current Moody's rating of
the Series C Preferred Shares.
"Moody's Hedging Transactions" means options on securities, futures
contracts based on the Municipal Index or Treasury Bonds and options on such
futures contracts.
"Moody's Volatility Factor" means 275% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
% Change in Marginal Tax Moody's Volatility
Rate Factor
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Corporation in
writing is applicable.
"Municipal Index" means The Bond Buyer Municipal Bond Index.
"Municipal Obligations" means "Municipal Obligations" as defined in the
Corporation's Registration Statement on Form N-2 (File Nos. 33-60636 and
811-7420) on file with the Commission, as such Registration Statement may be
amended from time to time.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act Asset Coverage" means asset coverage (determined in accordance
with Section 18 of the 1940 Act) of at least 200% with respect to senior
securities which are stock, including the Series C Preferred Shares (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of paying dividends on its common
stock).
"1940 Act Cure Date" means the last Business Day of the calendar month
following the failure by the Corporation to maintain the 1940 Act Asset Coverage
as of the last Business Day of any calendar month in which any Series C
Preferred Shares are Outstanding.
"Non-Call Period" has the meaning described in "Specific Redemption
Provisions," below.
"Non-Payment Period" has the meaning set forth in Part I, Section 3(g) of
this Statement.
"Non-Payment Period Rate" has the meaning set forth in Part I, Section 3(g)
of this Statement
"Notice of Redemption" has the meaning set forth in Part I, Section 4(d) of
this Statement.
"Optional Redemption Price" means (a) $50,000 per Series C Preferred Share
in the case of a Seven-day Dividend Period, a 28-day Dividend Period or a
Special Dividend Period of less than 365 days, or (b) with respect to a Special
Dividend Period of 365 days or more, the redemption price set forth in the
Specific Redemption Provisions in connection therewith; in each case plus an
amount equal to accumulated but unpaid dividends thereon to the date of
redemption (whether or not earned or declared).
"Outstanding" means, as of any date, Series C Preferred Shares theretofore
issued by the Corporation except, without duplication, (a) any of the Series C
Preferred Shares theretofore canceled or redeemed by the Corporation, or with
respect to which the Corporation has given notice of redemption and irrevocably
deposited with the Paying Agent sufficient funds to redeem such Series C
Preferred Shares, (b) any Series C Preferred Shares as to which the Corporation
or any affiliate thereof is a Holder, and (c) any Series C Preferred Shares
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Corporation.
"Paying Agent" means Bankers Trust Company, or any successor company or
entity, which has entered into a Paying Agent Agreement with the Corporation to
act, among other things, as the transfer agent, registrar, dividend and
redemption price disbursing agent, settlement agent and agent for certain
notifications for the Corporation in connection with the Series C Preferred
Shares in accordance with such agreement.
"Paying Agent Agreement" means an agreement to be entered into between the
Corporation and the Paying Agent.
"Preferred Share Basic Maintenance Amount" as of any Valuation Date with
respect to all of the outstanding preferred stock of the Corporation, including
the Series C Preferred Shares, means the dollar amount equal to (a) the sum of
(i) the product of the number of shares of preferred stock of the Corporation
outstanding on such date multiplied by the liquidation preference of such
preferred stock, (ii) the aggregate amount of dividends (whether or not earned
or declared) that will have accumulated to (but not including) the next Dividend
Payment Date that follows such Valuation Date or a date 47 days after such
Valuation Date, whichever is sooner, at the Applicable Dividend Rate, (iii) the
amount equal to the Projected Dividend Amount (based upon the number of shares
of preferred stock of the Corporation outstanding on such date), (iv) the amount
of anticipated Corporation expenses for the 90 days subsequent to such Valuation
Date, (v) the premium, if any, resulting from the designation of a Premium Call
Period, (vi) the amount of the Corporation's Maximum Potential Additional
Dividend Liability as of such Valuation Date, and (vii) any current liabilities
as of such Valuation Date, including but not limited to liabilities relating to
the payment of the redemption price for any shares of preferred stock of the
Corporation for which the Corporation has given notice of redemption, to the
extent not reflected in any of (a)(i) through (a)(vi) (including, without
limitation, any amounts described below as required to be treated as liabilities
in connection with the Corporation's transactions in futures and options and
including payables for Municipal Obligations purchased as of such Valuation
Date); less (b) either (1) the face value of any Corporation assets irrevocably
deposited by the Corporation for the payment of any of (a)(i) through (a)(vii)
if, with respect to any such liability, such assets mature by the payment date
for such liability or by a date 47 days after such Valuation Date, whichever is
sooner, and are either securities issued or guaranteed by the United States
Government or have a rating assigned by Moody's of P-1, VMIG1 or MIG-1 (or, with
respect to S&P, SP-1+ or A-1+) or (2) the Discounted Value of such assets. The
Preferred Share Basic Maintenance Amount shall be calculated based on all
outstanding preferred stock of the Corporation and, therefore, for purposes of
this calculation, defined terms will be deemed to apply to all outstanding
preferred stock of the Corporation as the context requires.
For purposes of the Preferred Share Basic Maintenance Amount in connection
with S&P's rating of the Series C Preferred Shares, with respect to any
transactions by the Corporation in futures contracts, the Corporation shall
include as liabilities (a) 30% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on the Municipal Index which
are owned by the Corporation plus (b) 25% of the aggregate settlement value, as
marked to market, of any outstanding futures contracts based on Treasury Bonds
which contracts are owned by the Corporation.
For purposes of the Preferred Share Basic Maintenance Amount in connection
with Moody's rating of the Series C Preferred Shares, with respect to any
transactions by the Corporation in futures contracts, options on futures
contracts and securities options, the Corporation shall include as liabilities
(a) 10% of the exercise price of a call option written by the Corporation and
(b) the exercise price of any written put option.
"Preferred Share Basic Maintenance Cure Date" means the third Business Day
after a failure by the Corporation to have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Share Basic Maintenance Amount
on any Valuation Date.
"Series C Preferred Share Provisions" means the rights and preferences of
the Series C Preferred Shares established by this Statement establishing the
Series C Preferred Shares.
"Premium Call Period" has the meaning described in "Specific Redemption
Provisions," below.
"Pricing Service" means S&P Pricing Services or such other pricing service
as may be designated from time to time by the Board of Directors, provided that,
for so long as Series C Preferred Shares are rated by Moody's and S&P, no
pricing service shall be so designated without the prior consent of Moody's and
S&P.
"Projected Dividend Amount" means, with respect to the Series C Preferred
Shares, on any Valuation Date the aggregate amount of dividends that would
accumulate on all outstanding preferred stock of the Corporation, including the
Series C Preferred Shares, during the period beginning on the next Dividend
Payment Date that follows such Valuation Date and ending on a date 47 days after
such Valuation Date at a dividend rate equal to the Maximum Dividend Rate for a
Dividend Period in effect on such date (or at the Non-Payment Period Rate if
such calculation is made during a Non-Payment Period) multiplied by the larger
of the Moody's Volatility Factor or the S&P Volatility Factor determined from
time to time by Moody's and S&P, respectively. The Projected Dividend Amount
shall be calculated based on all outstanding preferred stock of the Corporation
and, therefore, for purposes of this calculation, defined terms will be deemed
to apply to all outstanding preferred stock of the Corporation as the context
requires.
A "record holder" of Series C Preferred Shares shall mean the Securities
Depository or its nominee or such other person or persons listed in the stock
transfer books of the Corporation as the registered holder of one or more Series
C Preferred Shares.
"Reference Rate" means (a) with respect to any Dividend Period having fewer
than 35 days, the higher of the applicable AA Composite Commercial Paper Rate
and the Taxable Equivalent of the Short-Term Municipal Bond Rate, and (b) with
respect to any Special Dividend Period having 35 or more but fewer than 91 days,
the applicable AA Composite Commercial Paper Rate.
"Remarketing" means each periodic operation of the process for remarketing
Series C Preferred Shares, as described in Part II of this Statement.
"Remarketing Agent" means Citigroup Global Markets, Inc. and any additional
or successor companies or entities which have entered into an agreement with the
Corporation to follow the remarketing procedures for the purposes of determining
the Applicable Dividend Rate.
"Remarketing Agreement" means the agreement entered into between the
Corporation and the Remarketing Agent which provides, among other things, that
the Remarketing Agent will follow certain procedures for remarketing Series C
Preferred Shares on behalf of the Holders as provided in the Series C Preferred
Share Provisions for the purpose of determining the Applicable Dividend Rate
that will enable the Remarketing Agent to remarket Series C Preferred Shares
tendered to it at $50,000 per share for the next applicable Dividend Period.
"Remarketing Date," means the last Business Day of a Dividend Period.
"Reorganization" means the reorganization of VMN into the Corporation
pursuant to the Agreement.
"Retroactive Taxable Allocation" has the meaning set forth in Part I,
Section 3(i) of this Statement.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and its successors.
"S&P Discount Factor" means, for purposes of calculating the Discounted
Value of any S&P Eligible Asset, the percentage determined by reference to the
rating on such asset and the shortest S&P Exposure Period set forth opposite
such rating that is the same length as or is longer than the S&P Exposure Period
on the date of such determination, in accordance with the table set forth below:
S&P Discount Factors
Rating Category
----------------------------------------------------
------------ ------------ ------------- ------------
Exposure Period AAA AA A BBB
40 Business Days........ 205% 210% 225% 265%
22 Business Days........ 185 190 205 245
10 Business Days........ 170 175 190 230
7 Business Days......... 165 170 185 225
3 Business Days......... 145 150 165 205
Notwithstanding the foregoing, (a) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, provided such Municipal Obligations must be
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in 30
days or less, or 125% if such Municipal Obligations are not rated by S&P but are
rated VMIG-1, P-1 or MIG-1 by Moody's and mature or have a demand feature
exercisable in 30 days or less; provided, however, that any such Moody's-rated
short-term Municipal Obligations which have demand features exercisable within
30 days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution and such bank or
institution must have a short-term rating of at least A-1+ from S&P ; and
further provided that such Moody's-rated short-term Municipal Obligations may
comprise no more than 50% of short-term Municipal Obligations that qualify as
S&P Eligible Assets, and (b) no S&P Discount Factor will be applied to cash or
to Receivables for Municipal Obligations Sold. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated MIG-1 or VMIG-1 by
Moody's, which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating, shall be considered to be
short-term Municipal Obligations. "Receivables for Municipal Obligations Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for Municipal Obligations sold as of or prior to
such Valuation Date if such receivables are due within five business days of
such Valuation Date.
"S&P Eligible Assets" means cash (excluding any cash irrevocably deposited
by the Corporation for the payment of any liabilities within the meaning of
Preferred Share Basic Maintenance Amount), Receivables for Municipal Obligations
Sold (as defined above under "S&P Discount Factor") or a Municipal Obligation
that is: (a) issued by any of the 50 states, U.S. territories, and their
subdivisions, counties, cities, towns, villages, school districts, and agencies,
such as authorities and special districts created by the states and certain
federally sponsored agencies such as local housing authorities (payments made on
Municipal Obligations are exempt from federal income tax and are generally
exempt from state and local taxes in the state of issuance); (b) interest
bearing and pays interest at least semi-annually; (c) payable in U.S. dollars;
(d) publicly rated BBB or higher by S&P or, if not rated by S&P but rated by
Moody's, rated at least A by Moody's; provided that such Moody's-rated Municipal
Obligations will be included in S&P Eligible Assets only to the extent the fair
market value of such Municipal Obligations does not exceed 50% of the aggregate
fair market value of the S&P Eligible Assets (for purposes of determining the
S&P Discount Factors applicable to such Moody's-rated Municipal Obligations, any
such Municipal Obligations will be deemed to have an S&P rating which is one
full rating category lower than its Moody's rating); (e) not a private
placement; (f) part of an issue with an original issue size of at least $10
million or, if of an issue with an original issue size below $10 million but in
no event lower than $5 million, be issued by an issuer with a total of at least
$50 million of issues outstanding; and (g) owned by the Corporation.
Notwithstanding the foregoing:
(a) Municipal Obligations of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the fair market value of such Municipal Obligations does not exceed 10% of
the aggregate fair market value of the S&P Eligible Assets, provided that
2% is added to the applicable S&P Discount Factor for every 1% by which the
fair market value of such Municipal Obligations exceeds 5% of the aggregate
fair market value of the S&P Eligible Assets.
(b) Municipal Obligations guaranteed or insured by any one bond
insurer will be considered S&P Eligible Assets only to the extent the fair
market value of such Municipal Obligations does not exceed 25% of the
aggregate fair market value of the S&P Eligible Assets.
(c) Municipal Obligations of any one issue type category will be
considered S&P Eligible Assets only to the extent the fair market value of
such Municipal Obligations does not exceed 20% of the aggregate fair market
value of S&P Eligible Assets. For purposes of this requirement, Municipal
Obligations will be classified into one of the following categories: health
care issues, housing issues, educational facilities issues, student loan
issues, transportation issues, industrial development bond issues, public
power utilities issues, water and sewer utilities issues, special utilities
issues, general obligation issues, lease obligations, escrowed bonds and
other issues not falling within one of the aforementioned categories.
Furthermore, special utilities issues that are not rated by S&P will not be
considered S&P Eligible Assets.
(d) Non-Minnesota Municipal Obligations will be considered S&P
Eligible Assets only to the extent the fair market value of such Municipal
Obligations does not exceed 20% of the aggregate fair market value of S&P
Eligible Assets.
"S&P Exposure Period" on a given Valuation Date means the period commencing
on such date and ending three Business Days thereafter, as such exposure period
may be modified by the Board of Directors of the Corporation; provided, however,
that any such modification shall not adversely affect the then-current S&P
rating of the Series C Preferred Shares.
"S&P Hedging Transaction" means a purchase or sale position with respect to
futures contracts based on the Municipal Index or Treasury Bonds, a purchase of
a put or call option on such contracts, or the sale of a covered call option or
a secured put option on such contracts or on Municipal Obligations.
"S&P Volatility Factor" means a multiplicative factor equal to 304% or such
other potential dividend rate increase factor as S&P advises the Corporation in
writing is applicable.
"Securities Depository" means DTC or any successor company or other entity
selected by the Corporation as securities depository for the Series C Preferred
Shares that agrees to follow the procedures required to be followed by such
securities depository in connection with the Series C Preferred Shares.
"Settlement Date" means the first Business Day after a Remarketing Date.
"Seven-day Dividend Period" means (a) any Dividend Period commencing after
a failed Remarketing, or (b) any Dividend Period commencing after the first day
of, and during, a Non-Payment Period and, in all such cases, generally
containing seven days.
"Special Dividend Period" means a Dividend Period established by the Board
of Directors for the Series C Preferred Shares as described in Part 1, Section
3(d) of this Statement.
"Specific Redemption Provisions" means, with respect to any Special
Dividend Period of 365 or more days, either, or any combination of, (a) a period
(a "Non-Call Period") determined by the Board of Directors, after consultation
with the Remarketing Agent, during which the shares subject to such Special
Dividend Period are not subject to redemption at the option of the Corporation,
and (b) a period (a "Premium Call Period") consisting of a number of whole years
and determined by the Board of Directors, after consultation with the
Remarketing Agent, during each year of which the shares subject to such Special
Dividend Period shall be redeemable at the Corporation's option at a price per
share equal to $50,000 plus accumulated but unpaid dividends plus a premium
expressed as a percentage of $50,000 as determined by the Board of Directors,
after consultation with the Remarketing Agent.
"Statement" means this Statement Establishing and Fixing the Rights and
Preferences of Municipal Income Preferred Shares, Series C on file with the
Secretary of State of Minnesota.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations selected by the Corporation to act
as the substitute rating agency or substitute rating agencies, as the case may
be, to determine the credit ratings of the Series C Preferred Shares.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (a) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index or any successor
index (the "Kenny Index"), made available for the Business Day immediately
preceding such date but in any event not later than 8:30 a.m., New York City
time, on such date by the Pricing Service or any successor thereto, based upon
30-day yield evaluations at par of bonds the interest on which is excludable for
regular federal income tax purposes under the Code of "high grade" component
issuers selected by the Pricing Service or any such successor from time to time
in its discretion, which component issuers shall include, without limitation,
issuers of general obligation bonds but shall exclude any bonds the interest on
which constitutes an item of tax preference under Section 57(a)(5) of the Code
or successor provisions, for purposes of the "alternative minimum tax," divided
by (b) 1.00 minus the Marginal Tax Rate (expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 a.m., New York
City time, on such date by the Pricing Service or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (i)
the per annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day, divided by
(ii) 1.00 minus the Marginal Tax Rate (expressed as a decimal).
"Tender and Dividend Reset" means the process pursuant to which Series C
Preferred Shares may be tendered in a Remarketing or held and become subject to
the new Applicable Dividend Rate determined by the Remarketing Agent in such
Remarketing.
"Treasury Bonds" means United States Treasury Bonds backed by the full
faith and credit of the United States government with remaining maturities of
ten years or more.
"28-day Dividend Period" means the Dividend Period generally applicable to
Series C Preferred Shares and generally contains 28 days.
"Valuation Date" means every Business Day, beginning with the Date of
Original Issue.
"Variation Margin" means, in connection with outstanding purchase or sale
positions in futures contracts and outstanding sales positions with respect to
options thereon by the Corporation, the amount of cash or securities paid to and
received from a futures commission merchant (subsequent to the Initial Margin
payment) from time to time as the value of such position fluctuates.
"VMN" means Delaware Investments Minnesota Municipal Income Fund, Inc.
2. Number of Shares; Ranking
(a) There are 400 authorized shares constituting the Series C Preferred
Shares. No fractional Series C Preferred Shares shall be issued.
(b) Any Series C Preferred Shares which at any time hereafter have been
redeemed, exchanged, or otherwise acquired by the Corporation shall return to
the status of authorized and unissued preferred shares of the Corporation
without designation as to series. Upon the redemption, exchange, or other
acquisition by the Corporation of all outstanding Series C Preferred Shares, all
provisions of this Statement shall cease to be of further effect and shall cease
to be a part of the Articles. Upon the occurrence of such events, the Board of
Directors shall have the power, pursuant to Minnesota Statutes Section 302A.135,
Subdivision 5 or any successor provision and without shareholder action, to
cause restated articles of incorporation of the Corporation to be prepared and
filed with the Secretary of State of the State of Minnesota which reflect the
removal of this Statement and of all other provisions of the Articles, if any,
relating to the Series C Preferred Shares.
(c) The Series C Preferred Shares shall rank on a parity with the
Corporation's Series A, Series B and Series D Preferred Shares and the shares of
any other series of preferred stock of the Corporation as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Corporation.
3. Dividends
(a) Holders of Series C Preferred Shares will be entitled to receive, when,
as and if declared by the Corporation, out of funds legally available therefor,
cumulative cash dividends, at the rate per annum referred to in this Statement
under "Designation" for the Initial Dividend Period and, in the case of any
other Dividend Period, at the Applicable Dividend Rate for the applicable
Dividend Period and no more (except as otherwise provided below in Section 3(i)
of this Statement), payable on the respective dates set forth below and, except
as described below, set by the Remarketing Agent in accordance with the
remarketing procedures described in Part II of this Statement.
(b) Initial Dividend Payment Date and Dividend Period. The Initial Dividend
Period for Series C Preferred Shares will commence on their Date of Original
Issue and end on _________, 2006. Dividends for the Initial Dividend Period will
be paid, when, as and if declared, out of funds legally available therefor, on
_________, 2006 to the Securities Depository (or such other record holder) as of
the Business Day preceding the date of such payment. Dividends for each Dividend
Period thereafter will be payable, when, as and if declared, on each Dividend
Payment Date, subject to certain exceptions.
(c) Subsequent Dividend Periods.
(i) After the Initial Dividend Period for each Series C Preferred
Share, a Dividend Period therefor will commence on each Dividend Payment
Date with respect to such share (which, except during a Non-Payment Period,
will be a Settlement Date). Each subsequent Dividend Period for any Series
C Preferred Shares, with the exception of Seven-day Dividend Periods, will
comprise, beginning with and including the date on which it commences, 28
consecutive days or, in the event the Board of Directors has designated
such Dividend Period as a Special Dividend Period, such number of
consecutive days or whole years as shall be designated by the Board of
Directors. Notwithstanding the foregoing, any adjustment of the remarketing
schedule by the Remarketing Agent which includes an adjustment of a
Settlement Date will lengthen or shorten Dividend Periods by causing them
always to end on and include the day before the Settlement Date as so
adjusted.
(ii) Except during a Non-Payment Period, by 12:00 noon, New York City
time, on the Remarketing Date in each applicable Remarketing, the Holder of
a Series C Preferred Share may elect to tender such share or to hold such
share for the next applicable Dividend Period. If the holder of such share
fails to tender such share on such Remarketing Date, such Holder will
continue to hold such share at the Applicable Dividend Rate determined in
such Remarketing for the next Dividend Period; provided that, if there is
no Remarketing Agent, the Remarketing Agent is not required to conduct a
Remarketing or the Remarketing Agent is unable to remarket in the
Remarketing following such Remarketing Date all shares tendered to it at a
price of $50,000 per share, then the next Dividend Period for such share
and for all other shares will be a Seven-day Dividend Period and the
Applicable Dividend Rate therefor will be the Maximum Dividend Rate for a
Seven-day Dividend Period. If a Series C Preferred Share is tendered (or
deemed tendered) but not sold in a Remarketing, the Holder of such share
will hold such share for a Seven-day Dividend Period at the Maximum
Dividend Rate therefor.
(d) Special Dividend Periods. The Board of Directors may at any time
designate a subsequent Dividend Period with respect to all Series C Preferred
Shares on the Remarketing Date next preceding the commencement of such Dividend
Period as a Special Dividend Period with such number of days or whole years
(subject to adjustment as described above) as the Board of Directors shall
specify; provided that (i) written notice of any such designation, of the
Maximum Dividend Rate, if applicable, and Specific Redemption Provisions, if
applicable, in respect thereof and of the consequences of failure to tender, or
to elect to hold, shares must be given at least seven days prior to such
Remarketing Date to the Remarketing Agent, the Paying Agent, the Securities
Depository and the Holders of Series C Preferred Shares which are to be subject
to such Special Dividend Period; (ii) no Special Dividend Period may commence
during a Non-Payment Period; and (iii) in respect of any Special Dividend Period
of more than 90 days, the Board of Directors shall also determine a Maximum
Dividend Rate, as described in Part II, Section 3, of this Statement, which rate
or rates, as determined from time to time by formula or other means, may be
fixed or variable, and (iv) in respect of any Special Dividend Period of 365
days or more days, the Board of Directors, after consultation with the
Remarketing Agent, may establish Specific Redemption Provisions and shall
determine Dividend Payment Dates which shall be separated by periods of equal
length as provided in the following paragraph; provided further that prior to
such designation, the Corporation shall provide a Certificate of Preferred Share
Basic Maintenance Amount showing, as of the third Business Day next preceding
such proposed Special Dividend Period, (x) Moody's Eligible Assets, assuming for
the purposes of calculating Moody's Eligible Assets, in connection with a
Certificate of Preferred Share Basic Maintenance Amount required to be prepared
pursuant to this proviso, a Moody's Exposure Period of "eight weeks or less but
greater than seven weeks" (if Moody's is then rating the Series C Preferred
Shares) and (y) S&P Eligible Assets (if S&P is then rating the Series C
Preferred Shares), each with a Discounted Value at least equal to the Preferred
Share Basic Maintenance Amount as of such Business Day (assuming for purposes of
the foregoing calculation that the Maximum Dividend Rate is the Maximum Dividend
Rate on such Business Day as if such Business Day were the last Business Day
prior to the proposed Special Dividend Period). The existence of any rescission
of any Special Dividend Period will not affect the current Dividend Period or
prevent the Board of Directors from establishing other Special Dividend Periods
of similar duration or in any way restrict the Maximum Dividend Rate or Specific
Redemption Provisions which may be designated in connection with any other
Special Dividend Period. The Board of Directors will not designate a Dividend
Period as a Special Dividend Period unless it receives written confirmation from
each of S&P and Moody's that the establishment of such Special Dividend Period
would not impair the rating then assigned by S&P or Moody's to the Series C
Preferred Shares. In addition, the Board of Directors will not change the
frequency of the Valuation Dates unless it receives confirmation in writing from
each of S&P and Moody's that such change would not so impair the then current
rating of the Series C Preferred Shares.
(e) Dividend Payment Dates. Dividends on each Series C Preferred Share will
accumulate from its Date of Original Issue and will be payable, when, as and if
declared by the Board of Directors, out of funds legally available therefor, on
the applicable Dividend Payment Dates to the Securities Depository (or such
other record holder) as of the Business Day preceding the applicable Dividend
Payment Date. The Dividend Payment Dates will be: (i) with respect to a Special
Dividend Period of more than 28 days, the first Business Day of each calendar
month after the designation of such Special Dividend Period; and (ii) with
respect to any other Dividend Period, the day after the last day thereof;
provided that, if any such day is not a Business Day, the Dividend Payment Date
will be the first Business Day after such day.
(f) Dividend Payments.
(i) So long as there is a Securities Depository with respect to the
Series C Preferred Shares, each dividend on such shares will be paid to the
Securities Depository or its nominee as the record holder of all shares.
The Securities Depository will credit the accounts of the Agent Members of
the Beneficial Owners of Series C Preferred Shares in accordance with the
Securities Depository's normal procedures. Each Agent Member will be
responsible for holding or disbursing such payments to the Holders of the
Series C Preferred Shares for which it is acting in accordance with the
instructions of such Holders. Dividends on any Series C Preferred Share in
arrears with respect to any past Dividend Payment Date may be declared and
paid at any time, without reference to any regular Dividend Payment Date,
to the Holder thereof as of a date not exceeding five Business Days
preceding the date of payment thereof as may be fixed by the Board of
Directors. Any dividend payment made on Series C Preferred Shares will be
first credited against the dividends accumulated but unpaid (whether or not
earned or declared) with respect to the earliest Dividend Payment Date on
which dividends were not paid. Holders of Series C Preferred Shares will
not be entitled to any dividends, whether payable in cash, property or
stock, in excess of full cumulative dividends thereon. Except for the late
charge described in paragraph (g) of this Section 3, Holders of Series C
Preferred Shares will not be entitled to any interest or other additional
amount on any dividend payment on any Series C Preferred Share which may be
in arrears.
(ii) The amount of declared dividends for each Series C Preferred
Share payable on each Dividend Payment Date in respect of a Seven-day
Dividend Period, a 28-day Dividend Period or a Special Dividend Period of
fewer than 365 days will be computed by the Corporation by multiplying the
Applicable Dividend Rate in effect with respect to dividends payable on
such share on such Dividend Payment Date by a fraction the numerator of
which will be the number of days such share was Outstanding from and
including its Date of Original Issue or the preceding Dividend Payment Date
for such share, as the case may be, to and including the last day of such
Dividend Period, and the denominator of which will be 365, and then
multiplying the rate so obtained by $50,000, and the amount of declared
dividends for each Series C Preferred Share in respect of a Special
Dividend Period for such series of 365 or more days will be computed on the
basis of a 360-day year of twelve 30-day months.
(g) Non-Payment Period; Late Charge. A Non-Payment Period will commence if
the Corporation fails to (i) declare, prior to 12:00 noon, New York City time,
on any Dividend Payment Date for Series C Preferred Shares, for payment on or
within three Business Days after such Dividend Payment Date to the persons who
held such shares as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date, the full amount of any dividend on such
Series C Preferred Shares payable on such Dividend Payment Date, or (ii)
deposit, irrevocably and in trust, in same-day funds, with the Paying Agent by
12:00 noon, New York City time, (A) on or within three Business Days after any
Dividend Payment Date for Series C Preferred Shares the full amount of any
dividend on such shares (whether or not earned or declared) payable on such
Dividend Payment Date, or (B) on or within three Business Days after any
redemption date for Series C Preferred Shares called for redemption, the
Mandatory Redemption Price or the Optional Redemption Price per share. Such
Non-Payment Period will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be, and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid dividends and unpaid redemption prices shall have been so
deposited or shall have otherwise been made available to the applicable holders
in same-day funds; provided that a Non-Payment Period will not end during the
first seven days thereof unless the Corporation shall have given at least three
days' written notice to the Paying Agent, the Remarketing Agent and the
Securities Depository and thereafter will not end unless the Corporation shall
have given at least fourteen days' written notice to the Paying Agent, the
Remarketing Agent, the Securities Depository and all Holders of Series C
Preferred Shares. The Applicable Dividend Rate for each Dividend Period
commencing during a Non-Payment Period will be equal to the Non-Payment Period
Rate; any share for which a Special Dividend Period would otherwise have
commenced on the first day of a Non-Payment Period will have, instead, a
Seven-day Dividend Period; and each Dividend Period for Series C Preferred
Shares commencing after the first day of, and during, a Non-Payment Period shall
be a Seven-day Dividend Period. Any dividend on Series C Preferred Shares due on
any Dividend Payment Date for such shares (if, prior to 12:00 noon, New York
City time, on such Dividend Payment Date, the Corporation has declared such
dividend payable on or within three Business Days after such Dividend Payment
Date to the persons who held such shares as of 12:00 noon, New York City time,
on the Business Day preceding such Dividend Payment Date) or redemption price
with respect to such shares not paid to such persons when due (if such
non-payment is not solely due to the willful failure of the Corporation) but
paid to such persons in the same form of funds by 12:00 noon, New York City
time, on any of the first three Business Days after such Dividend Payment Date
or due date, as the case may be, will incur a late charge to be paid therewith
to such persons and calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on the actual number
of days comprising such period divided by 365. For the purposes of the
foregoing, payment to a person in same-day funds on any Business Day at any time
will be considered equivalent to payment to that person in New York Clearing
House (next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day. The
Non-Payment Period Rate will be (i) 250% (300% at any time the Corporation has
notified the Remarketing Agent of its intent to allocate income that is taxable
for federal income tax purposes to the Series C Preferred Shares prior to any
Remarketing with respect to such shares) of the Reference Rate with respect to
any Dividend Period of 90 days or less or (ii) such percentage as designated by
the Board of Directors with respect to any Special Dividend Period of more than
90 days, provided that in no event will such percentage be lower than the
percentage that would apply to a Dividend Period of 90 days or less.
(h) Restrictions on Dividends and Other Payments.
(i) Under the 1940 Act, the Corporation may not declare dividends
(except a dividend payable in shares of Common Stock) or make other
distributions on shares of Common Stock or purchase any such shares if, at
the time of the declaration, distribution or purchase, as applicable (and
after giving effect thereto), asset coverage (as defined in the 1940 Act)
with respect to the outstanding preferred stock of the Corporation would be
less than 200% (or such other percentage as may in the future be required
by law).
(ii) In addition, for so long as any Series C Preferred Shares are
Outstanding, (A) the Corporation will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, Common Stock or other capital stock, if any, ranking
junior to Series C Preferred Shares as to dividends and upon liquidation)
in respect of Common Stock or any other capital stock of the Corporation
ranking junior to or on a parity with Series C Preferred Shares as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of Common Stock or any other
such junior capital stock (except by conversion into or exchange for shares
of the Corporation ranking junior to Series C Preferred Shares as to
dividends and upon liquidation) or any such parity capital stock (except by
conversion into or exchange for shares of the Corporation ranking junior to
or on a parity with Series C Preferred Shares as to dividends and upon
liquidation), unless (1) full cumulative dividends on Series C Preferred
Shares through the most recently ended Dividend Period (or, if such
transaction is on a Dividend Payment Date, through the Dividend Period
ending on the day prior to such Dividend Payment Date) shall have been paid
or shall have been declared and sufficient funds for the payment thereof
deposited with the Paying Agent, and (2) the Corporation has redeemed the
full number of Series C Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in the Articles, and (B) the
Corporation will not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares
of, or options, warrants or rights to subscribe for or purchase, Common
Stock or other capital stock, if any, ranking junior to Series C Preferred
Shares as to dividends and upon liquidation) in respect of Common Stock or
any other capital stock of the Corporation ranking junior to or on a parity
with Series C Preferred Shares as to dividends or upon liquidation, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
shares of Common Stock or any other such junior capital stock (except by
conversion into or exchange for stock of the Corporation ranking junior to
Series C Preferred Shares as to dividends or upon liquidation) or any such
parity capital stock (except by conversion into or exchange for shares of
the Corporation ranking junior to or on a parity with Series C Preferred
Shares as to dividends and upon liquidation), unless immediately after such
transaction the aggregate Discounted Value of the Corporation's Eligible
Assets would at least equal the Preferred Share Basic Maintenance Amount.
(i) Additional Dividends. If the Corporation allocates any net capital
gains or other income taxable for federal income tax purposes to Series C
Preferred Shares without having given advance notice of such allocation to the
Paying Agent and the Remarketing Agent as provided in Section 2 of Part II by
reason of the fact that such allocation is made as a result of (i) the
realization of net capital gains or other income taxable for federal income tax
purposes, (ii) the redemption of all or a portion of the Outstanding Series C
Preferred Shares or (iii) the liquidation of the Corporation (such allocation
being referred to herein as a "Retroactive Taxable Allocation"), the Corporation
shall, within 270 days after the end of the Corporation's taxable year in which
a Retroactive Taxable Allocation is made, provide notice thereof to the
Remarketing Agent, the Paying Agent and to each Holder of such shares during
such taxable year at such Holder's address as the same appears or last appeared
on the stock books of the Corporation. Such Holders of such shares shall be
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, dividends in an amount equal to the aggregate
Additional Dividends with respect to all Retroactive Taxable Allocations made to
such shares during the taxable year in question, such dividends to be payable by
the Corporation to the Paying Agent, for distribution to such Holders, within 30
days after the notice described above is given to the Remarketing Agent and the
Paying Agent.
4. Redemption
(a) Optional Redemption.
(i) Upon giving a Notice of Redemption, as provided below, the
Corporation at its option may redeem Series C Preferred Shares, in whole or
in part, on any scheduled Dividend Payment Date, out of funds legally
available therefor, at a redemption price equal to the Optional Redemption
Price; provided that no Series C Preferred Share will be subject to
optional redemption during any Non-Call Period. Additionally, without the
consent of the Remarketing Agent, the Series C Preferred Shares may not be
redeemed in part if after such partial redemption fewer than 300 Series C
Preferred Shares remain Outstanding.
(ii) So long as either Moody's or S&P is rating the Series C Preferred
Shares, no Series C Preferred Shares shall be redeemed pursuant to this
Section 4(a) unless (A) on the date on which the Corporation intends to
give notice of such redemption pursuant to paragraph (d) of this Section 4,
the Corporation has available Deposit Securities with maturity or tender
dates not later than the day preceding the applicable redemption date and
having a value not less than the amount (including any applicable premium)
due to Holders of Series C Preferred Shares by reason of the redemption of
such shares on such redemption date, and (B) on the date on which the
Corporation intends to give notice of such redemption and on the redemption
date, Moody's Eligible Assets (if Moody's is then rating the Series C
Preferred Shares) and S&P Eligible Assets (if S&P is then rating the Series
C Preferred Shares) each at least equal the Preferred Share Basic
Maintenance Amount, and would at least equal the Preferred Share Basic
Maintenance Amount immediately subsequent to such redemption if such
redemption were to occur on such date.
(b) Mandatory Redemption.
(i) The Corporation will redeem, at a redemption price equal to the
Mandatory Redemption Price, certain of the Outstanding Series C Preferred
Shares, if the Corporation fails to maintain as of each Valuation Date
Eligible Assets having in the aggregate a Discounted Value at least equal
to the Preferred Share Basic Maintenance Amount or as of the last Business
Day of any calendar month fails to maintain the 1940 Act Asset Coverage and
such failure is not cured on or before the Preferred Share Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein respectively
referred to as a "Cure Date"), as the case may be. The number of Series C
Preferred Shares to be redeemed will be equal to the lesser of (A) the
minimum number of Series C Preferred Shares the redemption of which, if
deemed to have occurred immediately prior to the opening of business on the
Cure Date, would together with any other outstanding preferred stock of the
Corporation to be redeemed, result in the satisfaction of the Preferred
Share Basic Maintenance Amount or the 1940 Act Asset Coverage, as the case
may be, on such Cure Date (provided that, if there is no such minimum
number of shares the redemption of which would have such result, all Series
C Preferred Shares then Outstanding will be redeemed; and provided further
that, if less than 300 Series C Preferred Shares would remain Outstanding
following any partial redemption hereunder, the Remarketing Agent may
direct the Corporation to redeem all of the Series C Preferred Shares then
Outstanding), and (B) the maximum number of Series C Preferred Shares that,
together with any other outstanding preferred stock of the Corporation to
be redeemed, can be redeemed out of funds expected to be legally available
therefor. To the extent practicable, the Series C Preferred Shares shall
participate in any such redemption on a pro rata basis with all other
outstanding preferred stock of the Corporation.
(ii) The Corporation will effect such a mandatory redemption not
earlier than 20 days and not later than 40 days after such Cure Date,
except that if the Corporation does not have funds legally available for
the redemption of all of the required number of Series C Preferred Shares
which are subject to mandatory redemption or the Corporation otherwise is
unable to effect such redemption on or prior to 40 days after such Cure
Date, the Corporation will redeem those Series C Preferred Shares which it
was unable to redeem on the earliest practicable date on which it is able
to effect such redemption.
(c) Allocation. If fewer than all the outstanding Series C Preferred Shares
are to be redeemed, the number of Series C Preferred Shares to be so redeemed
will be a whole number of shares and will be determined by the Board of
Directors (subject to the provisions described above under subparagraph (b)) and
the Corporation will give a Notice of Redemption. Unless certificates
representing shares are held by persons other than the Securities Depository or
its nominee, the Securities Depository, upon receipt of such Notice of
Redemption, shall use its best efforts to determine, by 10:00 a.m., New York
City time, on the second Business Day immediately succeeding the date on which
it receives such Notice of Redemption, by lot the number of Series C Preferred
Shares to be redeemed from the account of each Agent Member (which may include
an Agent Member, including the Remarketing Agent, holding shares for its own
account) and shall immediately notify the Paying Agent of such determination.
The Paying Agent, upon receipt of such notice, will in turn determine by lot the
number of shares to be redeemed from the accounts of the Holders of the shares
whose Agent Members have been selected by the Securities Depository. In doing
so, the Paying Agent may determine that shares will be redeemed from the
accounts of some Holders, which may include the Remarketing Agent, without
shares being redeemed from the accounts of other Holders. Notwithstanding the
foregoing, if any certificates for Series C Preferred Shares are not held by the
Securities Depository or its nominee, the shares to be redeemed will be selected
by the Corporation by lot.
(d) Notice of Redemption.
(i) The Corporation will give 30 days' Notice of Redemption. Such
notice shall be given by telephone or facsimile, to the Securities
Depository (and any other record holder), the Paying Agent and the
Remarketing Agent, and promptly confirmed in writing. In the event the
Corporation obtains appropriate exemptive or no-action relief from the
Commission, the number of days' notice required for a mandatory redemption
may be reduced by the Board of Directors of the Corporation to as few as
two Business Days if Moody's and S&P each has agreed in writing that the
revised notice provision would not adversely affect its then current rating
of the Series C Preferred Shares. The Paying Agent will use its reasonable
efforts to provide telephonic notice to each Holder of Series C Preferred
Shares called for redemption not later than the close of business on the
Business Day on which the Paying Agent determines the shares to be redeemed
(as described above) (or, during a Non-Payment Period with respect to such
shares, not later than the close of business on the Business Day
immediately following the day on which the Paying Agent receives Notice of
Redemption from the Corporation). Such telephonic notice will be confirmed
promptly in writing not later than the close of business on the third
Business Day preceding the redemption date by notice sent by the Paying
Agent to each Holder of record of Series C Preferred Shares called for
redemption, the Remarketing Agent and the Securities Depository.
(ii) Every Notice of Redemption and other redemption notice with
respect to Series C Preferred Shares will state (A) the redemption date,
(B) the number of Series C Preferred Shares to be redeemed, (C) the
redemption price, (D) that dividends on the Series C Preferred Shares to be
redeemed will cease to accumulate as of such redemption date, and (E) the
provision of the Articles pursuant to which such shares are being redeemed.
No defect in the Notice of Redemption or other redemption notice or in the
transmittal or the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law.
(iii) Series C Preferred Shares, the Holders of which shall have been
given Notice of Redemption, will not be transferable outside of a
Remarketing.
(e) Other Redemption Procedures.
(i) To the extent that any redemption for which Notice of Redemption
has been given is not made by reason of the absence of legally available
funds therefor, such redemption will be made as soon as practicable to the
extent such funds become available. Failure to redeem Series C Preferred
Shares will be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Corporation shall have
failed, for any reason whatsoever, to deposit with the Paying Agent funds
with respect to any shares for which such Notice of Redemption has been
given. Notwithstanding the fact that the Corporation may not have redeemed
Series C Preferred Shares for which a Notice of Redemption has been given,
dividends may be declared and paid on such shares and will include those
shares for which Notice of Redemption has been given.
(ii) Upon the deposit of funds sufficient to redeem Series C Preferred
Shares with the Paying Agent and the giving of Notice of Redemption, all
rights of the Holders of the shares so called for redemption will cease and
terminate, except the right of the Holders thereof to receive the Optional
Redemption Price or the Mandatory Redemption Price, as the case may be, but
without any interest or other additional amount (except for the late charge
described under Part I, Section 3(g) hereof), and such shares will no
longer be deemed Outstanding for any purpose. The Corporation will be
entitled to receive from the Paying Agent, promptly after the date fixed
for redemption, any cash deposited with the Paying Agent in excess of (A)
the aggregate redemption price of the Series C Preferred Shares called for
redemption on such date and (B) all other amounts to which Holders of
Series C Preferred Shares called for redemption may be entitled. Any funds
so deposited that are unclaimed at the end of 90 days from such redemption
date will, to the extent permitted by law, be repaid to the Corporation,
after which time the holders of Series C Preferred Shares so called for
redemption will look only to the Corporation for payment of the redemption
price and all other amounts to which they may be entitled. The Corporation
will be entitled to receive, from time to time after the date fixed for
redemption, any interest on the funds so deposited.
(iii) Nothing contained in the Articles limits any legal right of the
Corporation or any affiliate to purchase or otherwise acquire Series C
Preferred Shares outside of a Remarketing at any price, whether higher or
lower than the Optional Redemption Price or Mandatory Redemption Price, so
long as, at the time of any such purchase, there is no arrearage in the
payment of dividends on any outstanding preferred stock of the Corporation
and the Corporation is in compliance with the 1940 Act Asset Coverage and
has assets with a Discounted Value at least equal, in the aggregate, to the
Preferred Share Basic Maintenance Amount after giving effect to such
purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Corporation shall have no
voting rights. If fewer than all the Outstanding Series C Preferred Shares
are redeemed or otherwise acquired by the Corporation, the Corporation
shall give notice of such transaction in accordance with the procedures
agreed upon by the Board of Directors. Subject to Section 18 of the 1940
Act and the Series C Preferred Share Provisions, any Series C Preferred
Shares redeemed or otherwise acquired by the Corporation may be reissued by
the Corporation; provided, however, that after giving effect to such
reissuance the Corporation shall have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Share Basic Maintenance
Amount.
(iv) The Corporation has the right to arrange for others to purchase
from the Holders thereof Series C Preferred Shares which are to be redeemed
as described in paragraph 4(a) above.
(v) The Remarketing Agent may, in its sole discretion, modify the
procedures concerning notification of redemption described above so long as
any such modification does not adversely affect the Holders of the Series C
Preferred Shares.
(vi) In effecting any redemption pursuant to this Section 4, the
Corporation shall use its best efforts to comply with all applicable
procedural conditions precedent to effecting such redemption under the 1940
Act and Minnesota law, but shall effect no redemption except in accordance
with the 1940 Act and Minnesota law.
5. Liquidation
(a) Upon a liquidation, dissolution or winding up of the affairs of the
Corporation, whether voluntary or involuntary, the Holders of Series C Preferred
Shares then Outstanding will be entitled, whether from capital or surplus,
before any assets of the Corporation will be distributed among or paid over to
the holders of the Common Stock or any other class of capital stock of the
Corporation junior to the Series C Preferred Shares as to liquidation payments,
to be paid an amount equal to the liquidation preference with respect to such
shares. The liquidation preference for Series C Preferred Shares is $50,000 per
share plus an amount equal to all accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date of final distribution in
same-day funds, together with any payments required to be made pursuant to Part
I, Section 3(i) of this Statement in connection with liquidation of the
Corporation. After any such payment, the Holders of Series C Preferred Shares
will not be entitled to any further participation in any distribution of assets
of the Corporation. If, upon any such liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation shall be insufficient to make
such full payments to the Holders of Series C Preferred Shares and to the
holders of any shares of preferred stock of the Corporation with preference
rights ranking as to liquidation, dissolution or winding up, on a parity with
the Series C Preferred Shares, then such assets will be distributed pro rata
among the holders of Series C Preferred Shares and any other such preferred
stock.
(b) Neither the consolidation nor the merger of the Corporation with or
into any other entity or entities nor a reorganization of the Corporation alone
nor the sale, lease or transfer by the Corporation of all or substantially all
of its assets shall be deemed to be a dissolution or liquidation of the
Corporation.
6. Voting Rights
(a) Except as otherwise indicated in the Articles and except as otherwise
required by applicable law, Holders of Series C Preferred Shares will have equal
voting rights with holders of shares of Common Stock and any other preferred
stock (one vote per share) and will vote together with holders of shares of
Common Stock and any other preferred stock as a single class.
(b) In connection with the election of the Corporation's Directors, holders
of shares of preferred stock, including Holders of Series C Preferred Shares,
voting as a separate class, shall be entitled to elect two of the Corporation's
Directors, and the remaining Directors will be elected by holders of shares of
Common Stock and shares of preferred stock, including Holders of Series C
Preferred Shares, voting together as a single class. In addition, if at any time
dividends on outstanding shares of preferred stock, including Series C Preferred
Shares, shall be unpaid in an amount equal to two full years' dividends thereon,
then the number of Directors constituting the Board of Directors shall
automatically be increased by the smallest number that, when added to the two
Directors elected exclusively by the holders of shares of preferred stock,
including Holders of Series C Preferred Shares, as described above, would
constitute a majority of the Board of Directors as so increased by such smallest
number; and at a special meeting of shareholders, which will be called and held
as soon as practicable, and at all subsequent meetings at which Directors are to
be elected, the holders of shares of preferred stock, including Holders of
Series C Preferred Shares, voting as a separate class, will be entitled to elect
the smallest number of additional Directors that, together with the two
Directors which such holders will be in any event entitled to elect, constitutes
a majority of the total number of Directors of the Corporation as so increased.
The terms of office of the persons who are Directors at the time of that
election will continue. If the Corporation thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding shares
of preferred stock, including Series C Preferred Shares, for all past dividend
periods, the voting rights stated in the preceding sentence shall cease, and the
terms of office of all of the additional Directors elected by the holders of
shares of preferred stock, including Holders of Series C Preferred Shares (but
not of the Directors with respect to whose election the holders of Common Stock
were entitled to vote or the two Directors the holders of shares of preferred
stock, including Holders of Series C Preferred Shares, have the right to elect
in any event) will terminate automatically. If at any time the holders of any
series of preferred stock other than the Series C Preferred Shares are entitled
under the 1940 Act to elect a majority of the Board of Directors, then Holders
of Series C Preferred Shares will have equal voting rights with holders of
shares of such other series (one vote per share) with respect to the election of
the Corporation's Directors.
(c) (i) So long as any Series C Preferred Shares are outstanding, the
Corporation shall not, without the affirmative vote or consent of the Holders of
a majority of the Outstanding Series C Preferred Shares in person or by proxy,
either in writing or at a meeting (voting separately as one class): (A)
authorize, create or issue any class or series of stock ranking prior to or on a
parity with the Series C Preferred Shares with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Corporation, or increase the authorized amount of
Series C Preferred Shares (except that, notwithstanding the foregoing, but
subject to the provisions of Section 9(a)(iv) of this Part I, the Board of
Directors, without the vote or consent of the Holders of Series C Preferred
Shares, may from time to time authorize and create, and the Corporation may from
time to time issue, classes or series of preferred stock ranking on a parity
with the Series C Preferred Shares with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation, subject to continuing compliance by the Corporation
with the 1940 Act Asset Coverage and Preferred Share Basic Maintenance Amount
requirements, provided that the Corporation obtains written confirmation from
Moody's (if Moody's is then rating the Series C Preferred Shares) and S&P (if
S&P is then rating the Series C Preferred Shares) that the issuance of any such
additional class or series would not impair the rating then assigned by such
rating agency or agencies, as the case may be, to the Series C Preferred
Shares); (B) amend, alter or repeal the provisions of the Articles, including
this Statement, whether by merger, consolidation or otherwise, so as to affect
any preference, right or power of such Series C Preferred Shares or the Holders
thereof; provided that the authorization, creation and issuance of classes or
series of stock ranking junior to the Series C Preferred Shares with respect to
the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Corporation, will not be deemed
to affect such preferences, rights or powers unless such issuance would, at the
time thereof, cause the Corporation not to satisfy the 1940 Act Asset Coverage
or the Preferred Shares Basic Maintenance Amount; or (C) file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as the Corporation is solvent and does not foresee
becoming insolvent.
(ii) To the extent permitted by Minnesota law, the Board of Directors,
without the vote or consent of the Holders of Series C Preferred Shares,
may from time to time amend, alter or repeal any or all of the rating
agency guidelines described herein, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of
Series C Preferred Shares or the Holders thereof, provided the Board of
Directors receives written confirmation from Moody's and S&P that any such
amendment, alteration or repeal would not impair the ratings then assigned
by Moody's or S&P, as the case may be, to the Series C Preferred Shares.
(d) Unless otherwise required by law, the Holders of Series C Preferred
Shares shall not have any relative rights or preferences or other special rights
other than those specifically set forth herein. The Holders of Series C
Preferred Shares shall have no preemptive rights or rights to cumulative voting.
In the event that the Corporation fails to pay any dividends on the Series C
Preferred Shares, the exclusive remedy of the Holders shall be the right to vote
for Directors pursuant to the provisions of this Section 6.
(e) Unless a higher percentage is specifically provided for in the
Articles, the affirmative vote of the Holders of a majority of the outstanding
Series C Preferred Shares, voting as a separate class, shall be required to
approve any plan of reorganization (as such term is defined in the 1940 Act)
adversely affecting such shares or any action requiring a vote of security
holders of the Corporation under Section 13(a) of the 1940 Act. In the event a
vote of Holders of Series C Preferred Shares is required pursuant to the
provisions of Section 13(a) of the 1940 Act, the Corporation (i) shall, not
later than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's and S&P that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken, and (ii) not later
than three Business Days after the date of such vote, notify Moody's and S&P of
the results of such vote.
(f) The foregoing voting provisions will not apply with respect to Series C
Preferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
7. Asset Maintenance
(a) 1940 Act Asset Coverage. The Corporation will maintain, with respect to
Series C Preferred Shares, as of the last Business Day of each month in which
any Series C Preferred Shares are Outstanding, 1940 Act Asset Coverage.
(b) Preferred Share Basic Maintenance Amount. So long as Series C Preferred
Shares are Outstanding, the Corporation will maintain as of each Valuation Date
Eligible Assets having in the aggregate a Discounted Value at least equal to the
Preferred Share Basic Maintenance Amount.
(c) Minimum Liquidity Level. The Corporation will have, as of each
Valuation Date, Deposit Securities with maturities or tender dates not later
than the day preceding the first respective Dividend Payment Date (collectively,
"Dividend Coverage Assets") that follows such Valuation Date and having a value
of not less than the Dividend Coverage Amount (the "Minimum Liquidity Level").
If, as of each Valuation Date, the Corporation does not have the required
Dividend Coverage Assets, the Corporation shall, as soon as practicable, adjust
its portfolio in order to meet the Minimum Liquidity Level, but only if S&P is
then rating the Series C Preferred Shares. The "Dividend Coverage Amount," as of
any Valuation Date, means (i) the aggregate amount of dividends that will
accumulate on each Series C Preferred Share to (but not including) the first
Dividend Payment Date for such share that follows such Valuation Date plus any
liabilities of the Corporation that are required to be paid on or prior to the
next Dividend Payment Date for such share, less (ii) the combined value of
Deposit Securities irrevocably deposited for the payment of dividends on Series
C Preferred Shares. "Deposit Securities" means cash, Receivables for Municipal
Obligations Sold (as defined above in Part I, Section 1 under "S&P Discount
Factor") which become due before the Dividend Payment Date, interest with
respect to Municipal Obligations which is payable to the Corporation prior to or
on such Dividend Payment Date, and Municipal Obligations rated at least A-1+ or
SP-1+ by S&P, except that, for purposes of the requirements regarding Optional
Redemption and the definition of "Outstanding," as set forth in Section 1 of
this Part I, such Municipal Obligations shall be considered "Deposit Securities"
only if they are also rated P-1, MIG-1 or VMIG-1 by Moody's. The definitions of
"Deposit Securities," "Dividend Coverage Assets" and "Dividend Coverage Amount"
may be changed from time to time by the Corporation without shareholder
approval, but only in the event the Corporation receives written confirmation
from S&P that any such change would not impair the ratings then assigned by S&P
to the Series C Preferred Shares.
8. Compliance Procedures for Asset Maintenance
(a) As of each Valuation Date, the Corporation shall determine in
accordance with the procedures specified herein (i) the Market Value of each
Eligible Asset owned by the Corporation on that date, (ii) the Discounted Value
of each such Eligible Asset using discount factors the ranges of which are set
forth herein, (iii) whether the Corporation has Moody's Eligible Assets and S&P
Eligible Assets with a Discounted Value at least equal, in the aggregate, to the
Preferred Share Basic Maintenance Amount as of that date with respect to Series
C Preferred Shares, (iv) the Dividend Coverage Assets owned by the Corporation
on that date with respect to Series C Preferred Shares, (v) the Dividend
Coverage Amount on that date, (vi) whether the Minimum Liquidity Level is met as
of that date with respect to Series C Preferred Shares, (vii) the value of the
total assets of the Corporation, less all liabilities, (viii) statutory asset
coverage on that date, and (ix) whether the 1940 Act Asset Coverage is met as of
that date. In managing the Corporation's portfolio, the Adviser will not alter
the composition of the Corporation's portfolio if, in the reasonable belief of
the Adviser, the effect of any such alteration would be to cause the Corporation
to have Eligible Assets with an aggregate Discounted Value, as of the
immediately preceding Valuation Date, less than the Preferred Share Basic
Maintenance Amount as of such Valuation Date; provided, however, that in the
event that, as of the immediately preceding Valuation Date, the aggregate
Discounted Value of the Corporation's Eligible Assets exceeded the Preferred
Share Basic Maintenance Amount by five percent or less, the Adviser will not
alter the composition of the Corporation's portfolio in a manner reasonably
expected to reduce the aggregate Discounted Value of the Corporation's Eligible
Assets unless the Corporation shall have confirmed that, after giving effect to
such alteration, the aggregate Discounted Value of the Corporation's Eligible
Assets would exceed the Preferred Share Basic Maintenance Amount.
(b) If the Corporation does not maintain as of any Valuation Date Moody's
Eligible Assets and S&P Eligible Assets with an aggregate Discounted Value at
least equal to the Preferred Share Basic Maintenance Amount or the Corporation
fails to meet, as of the last Business Day of the month, the 1940 Act Asset
Coverage, then the Corporation shall, by the Preferred Share Basic Maintenance
Cure Date or 1940 Act Cure Date, as the case may be, (i) change the composition
of the portfolio of Municipal Obligations or (ii) purchase shares of outstanding
preferred stock of the Corporation, including Series C Preferred Shares, outside
of a Remarketing, or both, so that the Preferred Share Basic Maintenance Amount
and 1940 Act Asset Coverage would be met on a pro forma basis as of such Cure
Date. Any such purchase of shares of outstanding preferred stock of the
Corporation, including Series C Preferred Shares, outside of a Remarketing must
be made in compliance with the applicable requirements of the 1940 Act and the
rules and regulations thereunder.
(c) For purposes of determining whether any such asset maintenance test is
met, no shares of preferred stock of the Corporation, including Series C
Preferred Shares, shall be deemed to be outstanding for purposes of any
computation if, prior to or concurrently with the determination of such asset
maintenance test, (i) the requisite funds for the redemption of any such share
shall have been deposited in trust with the Remarketing Agent for that purpose
and the requisite notice of redemption shall have been given or (ii) any such
share shall have been redeemed, purchased or otherwise acquired by the
Corporation.
(d) Such determinations, as of any date as to which they are made, shall be
set forth in Certificates of Preferred Share Basic Maintenance Amount (which
will include a determination of items (i) through (iii) in Section 8(a) above),
Minimum Liquidity Level (which will include a determination of items (iv)
through (vi) in Section 8(a) above) and 1940 Act Asset Coverage (which will
include a determination of items (vii) through (ix) in Section 8(a) above), as
the case may be. On or before the third Business Day after a Valuation Date on
which the Corporation fails to meet any asset maintenance test, the Corporation
is required to deliver to the Remarketing Agent, S&P and Moody's the relevant
Certificates of Preferred Share Basic Maintenance Amount, Minimum Liquidity
Level and 1940 Act Asset Coverage, as the case may be.
(e) The Corporation will also deliver Certificates of Preferred Share Basic
Maintenance Amount, Minimum Liquidity Level and 1940 Act Asset Coverage (i) to
the Remarketing Agent, S&P and Moody's as of the Date of Original Issue, any
Cure Date and the last Business Day of each fiscal quarter of the Corporation,
in each case on or before the third Business Day after such day; (ii) to Moody's
or S&P on or before the third Business Day after any day on which the Discounted
Value of Moody's Eligible Assets or S&P Eligible Assets, respectively, is equal
to or less than the Preferred Share Basic Maintenance Amount or does not exceed
the Preferred Share Basic Maintenance Amount by more than 5%; (iii) to Moody's
on or before the third Business Day after the Corporation redeems any shares of
Common Stock; and (iv) for the first year after issuance of the Series C
Preferred Shares, to S&P and the Remarketing Agent as of the fifteenth day of
each month (or, if such day is not a Business Day, the next succeeding Business
Day) and the last Business Day of each month, in each case on or before the
third Business Day after such day.
(f) Within ten Business Days after delivery of such report relating to the
last Business Day of each fiscal year end of the Corporation, and within ten
Business Days after delivery of such report relating to the Date of Original
Issue and any Cure Date, the Corporation will deliver to the Remarketing Agent,
S&P and Moody's a letter prepared by the Corporation's independent accountants
regarding the accuracy of the calculations made by the Corporation in its most
recent Certificates of Preferred Share Basic Maintenance Amount, Minimum
Liquidity Level and the 1940 Act Asset Coverage and in Certificates of Preferred
Share Basic Maintenance Amount, Minimum Liquidity Level and 1940 Act Asset
Coverage on a Valuation Date during such fiscal year selected at random by such
accountants. If any such letter prepared by the Corporation's independent
accountants shows that an error was made in any of the most recent Certificates
of Preferred Share Basic Maintenance Amount, Minimum Liquidity Level and 1940
Act Asset Coverage, the calculation or determination made by the Corporation's
independent accountants will be conclusive and binding on the Corporation and
notice of such discrepancy shall be given in writing to each of Moody's and S&P.
(g) The letter referred to in subsection (f) will confirm (i) the
mathematical accuracy of the calculations reflected in the related Certificates
of Preferred Share Basic Maintenance Amount, Minimum Liquidity Level and 1940
Act Asset Coverage, (ii) that the method used by the Corporation in determining
whether or not the Preferred Share Basic Maintenance Amount, Minimum Liquidity
Level and 1940 Act Asset Coverage are met is in accordance with the applicable
requirements of the Corporation's Series C Preferred Share Provisions, (iii)
that the written price quotations used by the Corporation in such determination
conform to the written quotations obtained by the Corporation in accordance with
the applicable requirements of the Corporation's Series C Preferred Share
Provisions, and (iv) that the assets listed as Eligible Assets and Dividend
Coverage Assets in the Preferred Share Basic Maintenance Amount and Minimum
Liquidity Level tests conform to the description of Eligible Assets and Dividend
Coverage Assets, as the case may be, set forth in the Corporation's Series C
Preferred Share Provisions.
(h) The Corporation shall give prompt written notice to S&P and to Moody's
of (i) any material change to the Articles of the Corporation, including the
Series C Preferred Share Provisions, or the by-laws of the Corporation, (ii) any
failure by the Corporation to declare or pay any dividend on the Series C
Preferred Shares, (iii) any issuance of a notice of optional or mandatory
redemption of the Series C Preferred Shares, (iv) the assumption of control of
the Board of Directors of the Corporation by holders of preferred stock pursuant
to Section 6(b) of Part I of the Series C Preferred Share Provisions, (v) the
unavailability of pricing information with respect to the Municipal Obligations
in the Corporation's portfolio, whether pursuant to a pricing service or through
dealer bids, (vi) any change in any pricing service utilized by the Corporation,
(vii) any Dividend Period in which the Applicable Dividend Rate is greater than
or equal to 95% of the "AA" Composite Commercial Paper Rate, (viii) the
designation by the Board of Directors of any Special Dividend Period, (ix) any
person's acquisition, to the knowledge of the Corporation, of beneficial
ownership of 5% or more of any class of the Corporation's voting securities
(including the Series C Preferred Shares), (x) any change in the index used in
determining the Reference Rate, (xi) any tax changes that affect the calculation
of the Gross up Payment, and (xii) any change in the Corporation's Adviser.
9. Certain Other Restrictions
(a) For so long as any Series C Preferred Shares are Outstanding and
Moody's and S&P are rating such shares, the Corporation will not, unless it has
received written confirmation from Moody's and S&P, as appropriate, that any
such action would not impair the ratings then assigned by Moody's and S&P to
Series C Preferred Shares, engage in any one or more of the following
transactions:
(i) borrow money, except that the Corporation may, without obtaining
the written confirmation described above, borrow money for the purpose of
clearing securities transactions if the Preferred Share Basic Maintenance
Amount would continue to be satisfied after giving effect to such
borrowing, provided that so long as any Series C Preferred Shares are rated
by Moody's, such borrowing will not exceed 5% of the value of the total
assets of the Corporation, will be required to be repaid within 60 days and
will not be extendable or renewable;
(ii) engage in any short sales of securities;
(iii) lend securities; or
(iv) issue any class of stock ranking prior to or on a parity with the
Series C Preferred Shares with respect to paying dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Corporation.
(b) For so long as Series C Preferred Shares are rated by Moody's and such
shares remain Outstanding, the Corporation will not, except as necessary to
effect Closing Transactions, engage in transactions in options on securities,
futures contracts or options on futures contracts, except that, in connection
with Moody's Hedging Transactions, (i) the Corporation may buy call or put
option contracts, (ii) the Corporation may write covered call options, and (iii)
the Corporation may write put options, in each case on securities. For purposes
of valuation of Moody's Eligible Assets, (i) if the Corporation writes a call
option, the underlying asset will be valued as follows: (A) if the option is
exchange-traded and may be offset readily or if the option expires before the
earliest possible redemption date of the Series C Preferred Shares, at the lower
of the Discounted Value of the underlying security and exercise price of the
option or (B) otherwise, it has no value; (ii) if the Corporation writes a put
option, the underlying asset will be valued as follows: the lesser of (A)
exercise price and (B) the Discounted Value of the underlying security; and
(iii) call or put option contracts which the Corporation buys have no value. For
so long as Series C Preferred Shares are rated by Moody's, (i) the Corporation
will not engage in options transactions for leveraging or speculative purposes;
(ii) the Corporation will not write any anticipatory call options pursuant to
which the Corporation hedges the anticipated purchase of an asset prior to
completion of such purchase; (iii) the Corporation will not enter into an option
unless, after giving effect thereto, the Corporation would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the Preferred Share Basic Maintenance Amount; (iv) the Corporation will not
enter into an option unless after giving effect to such transaction the
Corporation would continue to be in compliance with Section 7(b) of this Part I;
(v) for purposes of the Series C Preferred Share Basic Maintenance Amount, (A)
assets in margin accounts are not Moody's Eligible Assets, (B) 10% of the
settlement price of assets sold under a futures contract, the settlement price
of assets purchased under a futures contract and the settlement price of an
underlying futures contract if the Corporation writes put options on futures
contracts will constitute liabilities of the Corporation, and (C) if the
Corporation writes call options on futures contracts and does not own the
underlying futures contract, 105% of the fair market value of the underlying
futures contract will constitute a liability of the Corporation; (vi) the
Corporation shall write only exchange-traded options on exchanges approved by
Moody's; (vii) where delivery may be made to the Corporation with any of a class
of securities, the Corporation shall assume for purposes of the Preferred Share
Basic Maintenance Amount that it takes delivery of that security which yields it
the least value; (viii) the Corporation will not engage in forward contracts;
(ix) the Corporation will enter into future contracts as sellers only if it owns
the underlying securities; and (x) there shall be a quarterly audit made of the
Corporation's futures and options transactions by the Corporation's independent
accountants to confirm that the Corporation is in compliance with these
standards. Notwithstanding the foregoing restrictions on options and futures,
the Corporation may engage in such transactions if the Corporation receives
written confirmation from Moody's that the action the Corporation proposes to
take would not impair the rating then assigned to the Series C Preferred Shares.
(c) For so long as Series C Preferred Shares are rated by S&P and such
shares remain Outstanding, the Corporation will not merge or consolidate with
any other corporation or change pricing services. In addition, the Corporation
will not purchase or sell futures contracts or options thereon or write
unsecured put or uncovered call options on portfolio securities, except that (i)
the Corporation may engage in any S&P Hedging Transactions based on the
Municipal Index, provided that (A) the Corporation shall not engage in any S&P
Hedging Transactions based on the Municipal Index (other than Closing
Transactions) which would cause the Corporation at the time of such transaction
to own or have sold the least of (1) more than 1,000 outstanding futures
contracts based on the Municipal Index, (2) outstanding futures contracts based
on the Municipal Index and on Treasury Bonds exceeding in number 25% of the
quotient of the fair market value of the Corporation's total assets divided by
100,000, or (3) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the month prior to the time of effecting such
transaction as reported by The Wall Street Journal; and (ii) the Corporation may
engage in S&P Hedging Transactions based on Treasury Bonds, provided that (A)
the Corporation shall not engage in any S&P Hedging Transactions based on
Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold the lesser of
(1) outstanding futures contracts based on Treasury Bonds and on the Municipal
Index exceeding in number 25% of the quotient of the fair market value of the
Corporation's total assets divided by 100,000 or (2) outstanding futures
contracts based on Treasury Bonds exceeding in number 10% of the average number
of daily traded futures contracts based on Treasury Bonds in the month prior to
the time of effecting such transaction as reported by The Wall Street Journal.
For so long as Series C Preferred Shares are rated by S&P, the Corporation will
engage in Closing Transactions to close out any outstanding futures contract
which the Corporation owns or has sold or any outstanding option thereon owned
by the Corporation in the event (i) the Corporation does not have S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Share Basic Maintenance Amount on two consecutive Valuation Dates and (ii) the
Corporation is required to pay Variation Margin on the second such Valuation
Date. For so long as Series C Preferred Shares are rated by S&P, the Corporation
will engage in a Closing Transaction to close out any outstanding futures
contract or option thereon in the month prior to the delivery month under the
terms of such futures contract or option thereon unless the Corporation holds
securities deliverable under such terms. For purposes of determining S&P
Eligible Assets to determine compliance with the Preferred Share Basic
Maintenance Amount, no amounts on deposit with the Corporations, custodian or
broker representing Initial Margin or Variation Margin shall constitute S&P
Eligible Assets. For so long as Series C Preferred Shares are rated by S&P, when
the Corporation writes a futures contract or option thereon, it will maintain an
amount of cash, cash equivalents or short-term, fixed-income securities in a
segregated account with the Corporation's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in the
account of the Corporation's broker equals the fair market value of the futures
contract, except that in the event the Corporation writes a futures contract or
option thereon which requires delivery of an underlying security, the
Corporation shall hold such underlying security. Notwithstanding the foregoing
restrictions, the Corporation may engage in such transactions if the Corporation
receives written confirmation from S&P that the action the Corporation proposes
to take would not impair the rating then assigned to the Series C Preferred
Shares.
PART II
1. Remarketing Schedule
Each Remarketing shall take place over a two-day period consisting of the
Remarketing Date and the Settlement Date. Such dates or the method of
establishing such dates shall be determined by the Board of Directors from time
to time.
2. Advance Notice of Allocation of Taxable Income
Whenever the Corporation intends to include any net capital gains or other
income taxable for federal income tax purposes to any dividend on Series C
Preferred Shares, the Corporation intends to notify the Remarketing Agent and
the Paying Agent of the amount to be so included seven days prior to the
Remarketing on which the Applicable Dividend Rate for such dividend is to be
established. Whenever the Remarketing Agent receives such notice from the
Corporation, it will in turn notify the Holders of Series C Preferred Shares and
prospective purchasers believed by it to be interested in purchasing Series C
Preferred Shares in such Remarketing.
3. Procedure for Tendering
(a) Each Series C Preferred Share is subject to Tender and Dividend Reset
at the end of each Dividend Period in the Remarketing which commences on the
Remarketing Date immediately prior to the end of the current Dividend Period. By
9:00 a.m., New York City time, on each such Remarketing Date, the Remarketing
Agent shall, after canvassing the market and considering prevailing market
conditions at the time for Series C Preferred Shares and similar securities,
provide Beneficial Owners of Series C Preferred Shares non-binding indications
of the Applicable Dividend Rate for such shares for the next succeeding 28-day
Dividend Period; provided that, if the Board of Directors has designated the
next Dividend Period as a Special Dividend Period, the Remarketing Agent will
provide to Beneficial Owners a non-binding indication only of the Applicable
Dividend Rate for such Special Dividend Period. The actual Applicable Dividend
Rate for such Dividend Period may be greater than or less than the rate per
annum indicated in such non-binding indications (but not greater than the
applicable Maximum Dividend Rate) and will not be determined until after a
Holder is required to elect to hold or sell its Series C Preferred Shares. By
12:00 noon, New York City time, on such Remarketing Date, each Holder of Series
C Preferred Shares must notify the Remarketing Agent of its desire, on a
share-by-share basis, either to tender such Series C Preferred Shares at a price
of $50,000 per share or to continue to hold such share for the next Dividend
Period. Any notice given to the Remarketing Agent to tender or hold shares for a
particular Dividend Period shall be irrevocable and may not be waived by the
Remarketing Agent, except that the Remarketing Agent may, in its sole discretion
(i) at the request of a Holder that has tendered one or more shares to the
Remarketing Agent, waive such Holder's tender, and thereby enable such Holder to
continue to hold the share or shares for a 28-day Dividend Period or a
designated Special Dividend Period, if applicable, as agreed to by such Holder
and the Remarketing Agent at such time, so long as such tendering Holder has
indicated to the Remarketing Agent that it would accept the new Applicable
Dividend Rate for such Dividend Period, such waiver to be contingent upon the
Remarketing Agent's ability to remarket all shares tendered in such Remarketing,
and (ii) at the request of a Holder that has elected to hold one or more of its
Series C Preferred Shares, waive such Holder's election with respect thereto.
Notwithstanding the foregoing, any holder or prospective purchaser may
informally indicate to the Remarketing Agent its Applicable Dividend Rate
preferences. The Applicable Dividend Rate with respect to a Dividend Period may
be greater or less than such informal rate preferences.
(b) The right of each Holder to tender Series C Preferred Shares in a
Remarketing shall be limited to the extent that (i) the Remarketing Agent
conducts a Remarketing pursuant to the terms of the Remarketing Agreement, (ii)
shares tendered have not been called for redemption, and (iii) the Remarketing
Agent is able to find a purchaser or purchasers for tendered Series C Preferred
Shares at an Applicable Dividend Rate for a 28-day Dividend Period or a
designated Special Dividend Period, if any, not in excess of any applicable
Maximum Dividend Rate.
4. Determination of Applicable Dividend Rates
(a) By 3:00 p.m., New York City time, on each Remarketing Date, the
Remarketing Agent shall determine the Applicable Dividend Rate to the nearest
one-thousandth (0.001) of one percent per annum for the next Dividend Period.
The Applicable Dividend Rate for each such Dividend Period, except as otherwise
required herein, shall be the dividend rate per annum which the Remarketing
Agent determines, in its sole judgment, to be the lowest rate that will enable
it to remarket on behalf of the Holders thereof of the Series C Preferred Shares
in such Remarketing and tendered to it on such Remarketing Date at a price of
$50,000 per share.
(b) If no Applicable Dividend Rate shall have been established on a
Remarketing Date in a Remarketing for the next Dividend Period, for any reason
(other than because there is no Remarketing Agent or the Remarketing Agent is
not required to conduct a Remarketing pursuant to the terms of the Remarketing
Agreement), then the Remarketing Agent, in its sole discretion, shall, if
necessary and except during a Non-Payment Period, after taking into account
market conditions as reflected in the prevailing yields on fixed and variable
rate taxable and tax-exempt debt securities and the prevailing dividend yields
of fixed and variable rate preferred stock, determine the Applicable Dividend
Rate which that would be the rate per annum that would be the initial dividend
rate fixed in an offering on such Remarketing Date, assuming in each case a
comparable dividend period, issuer and security. If there is no Remarketing
because there is no Remarketing Agent or the Remarketing Agent is not required
to conduct a Remarketing pursuant to the Remarketing Agreement, then, except
during a Non-Payment Period, the Applicable Dividend Rate for the subsequent
Dividend Period and for each subsequent Dividend Period for which no Remarketing
takes place because of the foregoing shall be the applicable Maximum Dividend
Rate and the next succeeding Dividend Period shall be a Seven-day Dividend
Period.
(c) In determining such Applicable Dividend Rate, the Remarketing Agent
shall, after taking into account market conditions as reflected in the
prevailing yields on fixed and variable rate taxable and tax-exempt debt
securities and the prevailing dividend yields of fixed and variable rate
preferred stocks determined for the purpose of providing non-binding indications
of the Applicable Dividend Rate to Holders and potential purchasers of Series C
Preferred Shares, (i) consider the number of Series C Preferred Shares tendered
and the number of Series C Preferred Shares potential purchasers are willing to
purchase, and (ii) contact by telephone or otherwise current and potential
Holders of Series C Preferred Shares to ascertain the dividend rates at which
they would be willing to hold Series C Preferred Shares.
(d) The Applicable Dividend Rate shall be determined as aforesaid by the
Remarketing Agent in its sole discretion (except as otherwise provided in this
Statement with respect to an Applicable Dividend Rate that shall be the
Non-Payment Period Rate or the Maximum Dividend Rate) and shall be conclusive
and binding on Holders.
(e) Except during a Non-Payment Period, the Applicable Dividend Rate for
any Dividend Period shall not be more than the applicable Maximum Dividend Rate.
5. Allocation of Shares: Failure to Remarket at $50,000 Per Share
(a) If the Remarketing Agent is unable to remarket by 1:00 p.m., New York
City time, on a Settlement Date all Series C Preferred Shares tendered to it in
the related Remarketing at a price of $50,000 per share, (i) each Holder that
tendered or was deemed to have tendered Series C Preferred Shares for sale shall
sell a number of Series C Preferred Shares on a pro rata basis, to the extent
practicable, or by lot, as determined by the Remarketing Agent in its sole
discretion, based upon the number of orders to purchase Series C Preferred
Shares in such Remarketing, and (ii) the Dividend Period will be a Seven-day
Dividend Period and the Applicable Dividend Rate for such Dividend Period shall
be the Maximum Dividend Rate for a Seven-day Dividend Period.
(b) If the allocation procedures described above would result in the sale
of a fraction of a Series C Preferred Share, the Remarketing Agent shall, in its
sole discretion, round up or down the number of Series C Preferred Shares sold
by each Holder on the applicable Settlement Date so that each share sold by a
Holder shall be a whole Series C Preferred Share, and the total number of shares
sold equals the total number of shares purchased on such Settlement Date.
6. Notification of Results; Settlement
(a) Subject to a failure to remarket as described in Part II, Section 5 of
this Statement, by telephone at approximately 3:30 p.m., New York City time, on
each Remarketing Date, the Remarketing Agent shall advise each Holder of
tendered shares and each purchaser thereof (or the Agent Member thereof who in
turn will advise such Holder or purchaser) (i) of the number of shares such
Holder or purchaser is to sell or purchase and (ii) to give instructions to its
Agent Member to deliver such shares against payment therefor or to pay the
purchase price against delivery as appropriate. The Remarketing Agent will also
advise each Holder or purchaser that is to continue to hold, or to purchase,
shares with a Dividend Period beginning on such Settlement Date of the
Applicable Dividend Rate for such shares.
(b) In accordance with the Securities Depository's normal procedures, on
the Settlement Date, the transactions described above with respect to each
Series C Preferred Share shall be executed through the Securities Depository, if
the Securities Depository or its nominee holds or is to hold the certificate
relating to the shares to be purchased, and the accounts of the respective Agent
Members of the Securities Depository shall be debited and credited and shares
delivered by book entry as necessary to effect the purchases and sales of Series
C Preferred Shares in the related Remarketing. Purchasers of Series C Preferred
Shares shall make payment to the Paying Agent in same-day funds against delivery
to other purchasers or their nominees of one or more certificates representing
Series C Preferred Shares, or, if the Securities Depository or its nominee holds
or is to hold the certificate relating to the shares to be purchased, through
their Agent Members in same-day funds to the Securities Depository against
delivery by book entry of Series C Preferred Shares through their Agent Members.
The Securities Depository shall make payment in accordance with its normal
procedures. If the certificate for Series C Preferred Shares is not held by the
Securities Depository or its nominee, payment with respect to such shares will
be made in same-day funds to the Paying Agent against delivery of certificates
for such shares. As long as the Securities Depository or its nominee holds the
certificates representing the Series C Preferred Shares, no share certificates
will need to be delivered by any selling Holder to reflect any transfer of
Series C Preferred Shares effected in a Remarketing.
(c) If any Holder selling Series C Preferred Shares in a Remarketing fails
to deliver such shares, the Agent Member of such selling Holder and of any other
person that was to have purchased Series C Preferred Shares in such Remarketing
may deliver to any such other person a number of whole Series C Preferred Shares
that is less than the number of shares that otherwise was to be purchased by
such person. In such event, the number of Series C Preferred Shares to be so
delivered shall be determined by such Agent Member. Delivery of such lesser
number of Series C Preferred Shares shall constitute good delivery.
(d) The Remarketing Agent, the Paying Agent and the Securities Depository
each will use its reasonable commercial efforts to meet the timing requirements
set forth in paragraphs (a) and (b) above; provided that, in the event that
there is a delay in the occurrence of any delivery or other event connected with
a Remarketing, the Remarketing Agent, the Paying Agent and the Securities
Depository each will use its reasonable commercial efforts to accommodate such
delay in furtherance of the Remarketing.
(e) Notwithstanding any of the foregoing provisions of this Section 6, the
Remarketing Agent may, in its sole discretion, modify the settlement procedures
set forth above with respect to any Remarketing, provided any such modification
does not adversely affect the Holders of Series C Preferred Shares or the
Corporation.
7. Purchase of Preferred Shares by Remarketing Agent
The Remarketing Agent may purchase for its own account Series C Preferred
Shares in a Remarketing, provided that it purchases all tendered (or deemed
tendered) Series C Preferred Shares not sold in such Remarketing to other
purchasers and that the Applicable Dividend Rate established with respect to
such shares in such Remarketing is no higher than the Applicable Dividend Rate
that would have been established if the Remarketing Agent had not purchased such
shares. Except as provided in the previous sentence, the Remarketing Agent shall
not be obligated to purchase any Series C Preferred Shares that would otherwise
remain unsold in a Remarketing. If the Remarketing Agent owns any Series C
Preferred Shares subject to a Remarketing immediately prior to such Remarketing
and if all Series C Preferred Shares tendered for sale by other owners have been
sold in such Remarketing, then the Remarketing Agent may sell such number of its
shares in such Remarketing as there are outstanding orders to purchase that have
not been filled by shares tendered for sale by other Holders. Neither the
Corporation, the Paying Agent nor the Remarketing Agent shall be obligated in
any case to provide funds to make payment to a Holder upon such Holder's tender
of its Series C Preferred Shares in a Remarketing.
8. Applicable Dividend Rate During a Non-Payment Period
So long as a Non-Payment Period shall continue, paragraphs 1, 2, 3, 4, 5, 6
and 7 of this Part II shall not be applicable to any of the Series C Preferred
Shares and the Series C Preferred Shares shall not be subject to Tender and
Dividend Reset and the Applicable Dividend Rate for such shares shall be the
Non-Payment Period Rate.
9. Transfers
As a condition precedent to purchasing Series C Preferred Shares in any
offering, in any Remarketing or outside any Remarketing, each purchaser of
Series C Preferred Shares, or an Agent Member on behalf of such purchaser, shall
be required to sign and deliver a Master Purchaser's Letter. The sufficiency of
any Master Purchaser's Letter is to be determined by the Remarketing Agent in
its sole discretion. In a Master Purchaser's Letter, such purchaser, or an Agent
Member on behalf of such purchaser shall agree, among other things, (a) unless
the Corporation has elected, during a Non-Payment Period, to waive this
requirement, to have its ownership of Series C Preferred Shares maintained in
book entry form by the Securities Depository, for the account of a designated
Agent Member which, in turn, shall maintain records of such purchaser's
beneficial ownership, (b) to be conclusively bound by the remarketing
procedures, including the Remarketing Agent's determination of the Applicable
Dividend Rate, (c) that its notice to tender Series C Preferred Shares in a
Remarketing shall constitute an irrevocable offer, except as set forth in such
Master Purchaser's Letter, to sell the shares specified in such notice and
authorization to the Remarketing agent to sell, transfer or otherwise dispose of
such shares as set forth herein, and (d) unless the Corporation shall have
elected, during a Non-Payment Period, to waive this requirement, to sell,
transfer or otherwise dispose of any Series C Preferred Shares held by it only
pursuant to orders placed in Remarketing or to a person that has signed and
delivered a Master Purchaser's Letter as provided herein, and, in the case of
any transfer other than pursuant to a Remarketing, to ensure that an Agent
Member advises the Remarketing Agent of such transfer. The Agent Member shall be
authorized and instructed to disclose to the Remarketing Agent and/or the Paying
Agent such information with respect to such purchaser's beneficial ownership as
the Remarketing Agent or the Paying Agent shall request.
10. Miscellaneous
To the extent permitted by applicable law, the Board of Directors of the
Corporation may interpret or adjust the provisions hereof to resolve any
inconsistency or ambiguity, or to remedy any formal defect.
11. Securities Depository; Stock Certificates
(a) If there is a Securities Depository, one certificate for all of the
Series C Preferred Shares shall be issued to the Securities Depository and
registered in the name of the Securities Depository or its nominee. Any such
certificate shall bear a legend to the effect that such certificate is issued
subject to the provisions contained in this Statement and each Master
Purchaser's Letter. Unless the Corporation shall have elected, during a
Non-Payment Period, to waive this requirement, the Corporation will also issue
stop-transfer instructions to the Paying Agent for the Series C Preferred
Shares. Except as provided in paragraph (b) below, the Securities Depository or
its nominee will be the only holder of certificates representing Series C
Preferred Shares, and no Holder shall receive certificates representing its
ownership interest in such shares.
(b) If the Applicable Dividend Rate applicable to all Series C Preferred
Shares shall be the Non-Payment Period Rate or there is no Securities
Depository, the Corporation may at its option issue one or more new certificates
with respect such shares (without the legend referred to in paragraph 11(a) of
this Part II) registered in the names of the Holders or their nominees and
rescind the stop-transfer instructions referred to in paragraph 11(a) of this
Part II with respect to such shares.
IN WITNESS WHEREOF, DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND
II, INC. has caused these presents to be signed in its name and on its behalf by
its _______________[officer title], and attested by its Secretary, and the said
officers of the Corporation further acknowledged said instrument to be the
corporate act of the Corporation, and stated under the penalties of perjury that
to the best of their knowledge, information and belief the matters and facts
therein set forth with respect to approval are true in all material respects,
all on _____________, 2006.
DELAWARE INVESTMENTS MINNESOTA
MUNICIPAL INCOME FUND II, INC.
By:
Name:
Title:
ATTEST:
Secretary
EXHIBIT D : STATEMENT OF RIGHTS AND PREFERENCES OF SERIES D PREFERRED SHARES
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
Statement Establishing and Fixing the Rights and Preferences
Of Municipal Income Preferred Shares, Series D
Delaware Investments Minnesota Municipal Income Fund II, Inc., a Minnesota
corporation (the "Corporation"), certifies to the Secretary of State of
Minnesota that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article 5 of its Articles of Incorporation (which, as
hereafter restated or amended from time to time are, together with this
Statement, herein called the "Articles"), the Board of Directors has, by
resolution adopted at a meeting held on August 17, 2005, authorized the issuance
of one series of 300 shares of its authorized preferred stock, par value $.01
per share, liquidation preference $50,000 per share, designated "Municipal
Income Preferred Shares, Series D" (such series of Municipal Income Preferred
Shares, Series D is referred to in this Statement as "Series D Preferred
Shares"). SECOND: The preferences, voting powers, restrictions, limitations as
to dividends, qualifications, and terms and conditions of redemption of the
Series D Preferred Shares of such series are as follows:
DESIGNATION
A series of 300 shares of preferred stock, par value $.01 per share,
liquidation preference $50,000 per share, is hereby designated "Municipal Income
Preferred Shares, Series D" (each, a "Series D Preferred Share" and,
collectively, the "Series D Preferred Shares"). Each Series D Preferred Share
shall: (i) be issued upon on the closing of the reorganization (the
"Reorganization") of Delaware Investments Minnesota Municipal Income Fund III,
Inc. ("VYM") into the Corporation pursuant to the Agreement and Plan of
Acquisition dated _____________, 2005 (the "Agreement") by and among the
Corporation, VYM and Delaware Management Company, a series of Delaware
Management Business Trust; (ii) have a dividend rate for its Initial Dividend
Period equal to such dividend rate applicable to the Municipal Income Preferred
Shares of VYM as of the closing date of the Reorganization; (iii) have an
Initial Dividend Period ending _________, 2006; and (iv) have such other
preferences, limitations and relative voting rights, in addition to those
required by applicable law or set forth in the Articles applicable to preferred
stock of the Corporation, as are set forth in Part I and Part II of this
Statement. The Series D Preferred Shares shall constitute a separate series of
preferred stock of the Corporation, and each Series D Preferred Share shall be
identical except as provided in Section 4 of Part I of this Statement.
No holder of Series D Preferred Shares shall, as such holder, have any
right to acquire, purchase or subscribe for any Series D Preferred Shares,
shares of Common Stock, $.01 par value, of the Corporation or other securities
of the Corporation which it may hereafter issue or sell (whether out of the
number of shares authorized by the Articles, out of any shares acquired by the
Corporation after the issuance thereof, or otherwise).
PART I
1. Definitions
"AA Composite Commercial Paper Rate," on any date of determination, means
(a) the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated AA by S&P or Aa by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day immediately preceding
such date, or (b) in the event that the Federal Reserve Bank of New York does
not make available such a rate, then the arithmetic average of the Interest
Equivalent of the rate on commercial paper placed on behalf of such issuers, as
quoted on a discount basis or otherwise by the Commercial Paper Dealers to the
Remarketing Agent for the close of business on the Business Day immediately
preceding such date. If one of the Commercial Paper Dealers does not quote a
rate required to determine the AA Composite Commercial Paper Rate, the AA
Composite Commercial Paper Rate will be determined on the basis of the quotation
or quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Corporation to provide such rate or
rates not being supplied by the Commercial Paper Dealer. If the number of
Dividend Period Days shall be (a) fewer than 49 days, such rate shall be the
Interest Equivalent of the 30-day rate on such commercial paper; (b) 49 or more
days but fewer than 70 days, such rate shall be the Interest Equivalent of the
60-day rate on such commercial paper; (c) 70 or more days but fewer than 85
days, such rate shall be the arithmetic average of the Interest Equivalent of
the 60-day and 90-day rates on such commercial paper; (d) 85 or more days but
fewer than 91 days, such rate shall be the Interest Equivalent of the 90-day
rate on such commercial paper; and (e) 91 days but less than one year, such rate
shall be the Interest Equivalent of the 180-day rate on such commercial paper.
"Additional Dividend" means payment to a Holder of Series D Preferred
Shares of an amount which, after taking into account the Retroactive Taxable
Allocations made to such Holder with respect to the taxable year in question,
would cause such Holder's dividends in dollars (after federal and Minnesota
personal income tax consequences, as defined below) to be equal to the dollar
amount of the dividends which would have been received by such Holder if the
Retroactive Taxable Allocations had not been made. Such Additional Dividend
shall be calculated (a) without consideration being given to the time value of
money, (b) assuming that no Holder of Series D Preferred Shares is subject to
the federal or Minnesota alternative minimum tax with respect to dividends
received from the Corporation, (c) assuming the portion of the dividend to which
each Retroactive Taxable Allocation applies would be taxable in the hands of
each Holder of Series D Preferred Shares at (i) in the case of an allocation of
capital gains, the maximum marginal combined regular federal and Minnesota
income tax rate (taking into account the federal income tax deductibility of
state taxes paid or incurred) on net capital gains applicable to individuals or
corporations in effect during the taxable year in question, whichever is
greater, or (ii) in the case of an allocation of ordinary income, the maximum
marginal combined regular federal and Minnesota income tax rate (taking into
account the federal income tax deductibility of state taxes paid or incurred) on
ordinary income applicable to individuals or corporations in effect during the
taxable year in question, whichever is greater, and (d) assuming the Additional
Dividend will not be subject to federal or state income tax.
"Administrator" means Delaware Service Company, Inc. and any additional or
successor companies or entities which have entered into an agreement with the
Corporation to provide administrative services to the Corporation.
"Adviser" means Delaware Management Company ("DMC"), a series of Delaware
Management Business Trust, a statutory trust formed under the laws of the State
of Delaware, with its principal place of business at One Commerce Square,
Philadelphia, PA 19103.
"Agent Member" means a designated member of the Securities Depository that
will maintain records for a beneficial owner of one or more Series D Preferred
Shares.
"Agreement" means the Agreement and Plan of Acquisition dated
______________, 2005 by and among Delaware Investments Minnesota Municipal
Income Fund III, Inc., the Corporation and the Adviser.
"Anticipation Notes" means the following obligations: tax anticipation
notes, revenue anticipation notes, and tax and revenue anticipation notes.
"Applicable Dividend Rate" means, with respect to the Initial Dividend
Period, the initial dividend rate per annum described in the "Designation" of
this Statement and, with respect to any subsequent Dividend Period, the dividend
rate per annum that (a) except for a Dividend Period commencing during a
Non-Payment Period, will be equal to the lower of the rate per annum that the
Remarketing Agent advises results on the Remarketing Date preceding the first
day of such Dividend Period from implementation of the remarketing procedures
described herein in Part II and the Maximum Dividend Rate, or (b) for each
Dividend Period commencing during a Non-Payment Period, will be equal to the
Non-Payment Period Rate.
"Applicable Percentage" means the percentage of the Reference Rate on each
Remarketing Date, which will be determined with reference to the lower of the
credit rating assigned on such date to the Series D Preferred Shares by Moody's
and S&P (or, if Moody's or S&P, or both, shall not make such rating available,
the equivalent of either or both of such ratings by a Substitute Rating Agency
or two Substitute Rating Agencies or, in the event that only one such rating
shall be available, such rating), as follows:
Credit Ratings Applicable Percentage of Reference Rate
Moody's S&P
aa3 or higher AA- or higher 110%
a3 to a1 A- to A+ 125%
baa3 to baa1 BBB- to BB+ 150%
ba3 to ba1 BB- to BB+ 200%
below ba3 Below BB- 250%
; provided, however, that in the event the Corporation has notified the Paying
Agent and the Remarketing Agent of its intent to allocate income taxable for
federal income tax purposes to the Series D Preferred Shares prior to the
Remarketing establishing the Applicable Dividend Rate for such shares, the
applicable percentage in the foregoing table shall be divided by the quantity 1
minus (a) in the case of capital gains dividends, the maximum marginal combined
regular federal and Minnesota income tax rate (taking into account the federal
income tax deductibility of state taxes paid or incurred) on capital gains
applicable to individuals or corporations, whichever is greater, or (b) in the
case of ordinary income dividends, the maximum marginal combined regular federal
and Minnesota income tax rate (taking into account the federal income tax
deductibility of state taxes paid or incurred) on ordinary income applicable to
individuals or corporations, whichever is greater. If the ratings for the Series
D Preferred Shares are split between two of the foregoing credit rating
categories, the lower rating will determine the prevailing rating.
"Articles" means the Articles of Incorporation, as amended, of the
Corporation, including this Statement.
"Beneficial Owner" means a person who is listed as the beneficial owner of
one or more Series D Preferred Shares on the records of the Paying Agent or,
with respect to any Series D Preferred Shares not registered in the name of the
Securities Depository on the share transfer books of the Corporation, the person
in whose name such share is so registered.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in the City of New York are authorized or obligated by law to close.
"Closing Transaction" means the termination of a futures contract or option
position by taking an equal position opposite thereto in the same delivery month
as such initial position being terminated.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Citigroup Global Markets, Inc. and such
other dealers as the Corporation may from time to time appoint or, in lieu of
any thereof, their respective affiliates or successors.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common shares, par value $.01 per share, of the
Corporation.
"Date of Original Issue" means, with respect to any Series D Preferred
Share, the date on which the Corporation originally issued such share.
"Deposit Securities" has the meaning set forth in Part I, Section 7(c) of
this Statement.
"Directors" shall mean members of the Board of Directors.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"Discounted Value" of any asset of the Corporation means the market value
thereof, as determined by the Corporation in accordance with the Pricing
Service, discounted by the applicable Moody's Discount Factor or S&P Discount
Factor, as the case may be, in connection with the Corporation's receipt of
ratings on the Series D Preferred Shares from Moody's and S&P, provided that
with respect to a Moody's Eligible Asset, Discounted Value shall not exceed the
par value of such asset at any time.
"Dividend Coverage Amount" has the meaning set forth in Part I, Section
7(c) of this Statement.
"Dividend Coverage Assets" has the meaning set forth in Part I, Section
7(c) of this Statement.
"Dividend Payment Date" has the meaning described in Part I, Section 3(e)
of this Statement.
"Dividend Period" means a Seven-day Dividend Period, a 28-day Dividend
Period or a Special Dividend Period.
"DTC" means The Depository Trust Company, which will register the Series D
Preferred Shares in the name of its nominee, Cede & Co.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Holder" of Series D Preferred Shares means, unless the context otherwise
requires, a person who is listed in the records of the Paying Agent as the
beneficial owner of one or more Series D Preferred Shares.
"Initial Dividend Period" means the period commencing on and including the
Date of Original Issue and ending _________, 2006.
"Initial Margin" means the amount of cash or securities deposited with a
futures commission merchant as a good faith deposit at the time of the
initiation of a purchase or sale position with respect to a futures contract or
a sale position with respect to an option position thereon.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"IRS" means the Internal Revenue Service.
"Mandatory Redemption Price" means $50,000 per Series D Preferred Share
plus an amount equal to accumulated but unpaid dividends thereon to the date of
redemption (whether or not earned or declared).
"Marginal Tax Rate" means the maximum marginal regular federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation means the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service values portfolio
securities at the mean between the quoted bid and asked price or the yield
equivalent when quotations are readily available. Securities for which
quotations are not readily available are valued at fair value as determined by
the Pricing Service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
The Pricing Service may employ electronic data processing techniques and/or a
matrix system to determine valuations. In the event the Pricing Service fails to
provide a valuation for a portfolio security or, in the judgment of the Adviser,
provides a valuation which is incorrect, Market Value of such security shall
mean the lower of two independent bid price quotations received from members of
the National Association of Securities Dealers, Inc. who make a market in such
security, one of which shall be in writing.
"Maximum Dividend Rate" means a maximum dividend rate for Series D
Preferred Shares determined with reference to the credit rating assigned to such
shares and the duration of the applicable Dividend Period. The Maximum Dividend
Rate for any Dividend Period at any date on which an Applicable Dividend Rate is
determined will be the Applicable Percentage of the Reference Rate.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Corporation were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Corporation, as of the end of the calendar month immediately preceding such
Valuation Date, and assuming such Additional Dividends are fully taxable.
"Minimum Liquidity Level" has the meaning set forth in Part I, Section 7(c)
of this Statement.
"Minnesota Municipal Obligations" means "Minnesota Municipal Obligations"
as defined in the Corporation's Registration Statement on Form N-2 (File Nos.
33-60636 and 811-7420) on file with the Commission, as such Registration
Statement may be amended from time to time.
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation,
and its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined by reference to
the rating on such asset and the shortest period set forth opposite such rating
that is the same length as or is longer than the Moody's Exposure Period, in
accordance with the table set forth below:
Moody's Discount Factors
Rating Category
Exposure Period Aaa (1) Aa (1) A (1) Baa (1) Other (2) VMIG-1 (1) (3)(4) SP-1+ (3) (4)
7 weeks or less............................ 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than 7 weeks... 154% 164% 173% 205% 235% 137% 149%
9 weeks or less but greater than 8 weeks... 158% 169% 179% 209% 242% 138% 150%
___________________
(1) Moody's rating
(2) Municipal Obligations not rated by Moody's but rated BBB or BBB+ by S&P
(3) Municipal Obligations rated MIG-1 or VMIG-1 or, if not rated by Moody's,
rated SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating.
(4) For the purposes of the definition of Moody's Eligible Assets, these
securities will have an assumed rating of A by Moody's.
Notwithstanding the foregoing, (a) no Moody's Discount Factor will be
applied to short-term Municipal Obligations so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's which mature or
have a demand feature at par exercisable within the Moody's Exposure Period and
the Moody's Discount Factor for such Municipal Obligations will be 125% so long
as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable within the Moody's Exposure
Period; and (b) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within the Moody's Exposure Period,
and if the trades which generated such receivables are (A) settled through
clearing house firms with respect to which the Corporation has received prior
written authorization from Moody's or (B) with counterparties having a Moody's
long-term debt rating of at least Baa3; and (ii) the Moody's Discounted Value of
Municipal Obligations sold as of or prior to such Valuation Date which generated
receivables, if such receivables are due within the Moody's Exposure Period but
do not comply with either of conditions (A) or (B).
"Moody's Eligible Assets" means cash or a Municipal Obligation that (a)
pays interest in cash, (b) is publicly rated Baa or better by Moody's or, if not
rated by Moody's but rated by S&P, is rated at least BBB by S&P (provided that,
for purposes of determining the Moody's Discount Factor applicable to any such
S&P-rated Municipal Obligation, such Municipal Obligation (excluding any
short-term Municipal Obligation) will be deemed to have a Moody's rating which
is one full rating category lower than its S&P rating), (c) does not have its
rating suspended, (d) is part of an issue of Minnesota Municipal Obligations of
at least $5,000,000 if rated Aaa, Aa or A by Moody's (or, if not rated by
Moody's, rated AAA or AA by S&P), or $10,000,000 if rated Baa by Moody's (or, if
not rated by Moody's rated A or BBB by S&P), or is part of an issue of Municipal
Obligations other than Minnesota Municipal Obligations of at least $10,000,000,
(e) is not a private placement, and (f) is not convertible. In addition,
Receivables for Municipal Obligations Sold (as defined under "Moody's Discount
Factor") shall constitute Moody's Eligible Assets. Municipal Obligations in the
Corporation's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
Minimum Maximum Maximum Maximum
Issue Size Underlying Issue Type County
($ Millions) (2) Obligor (%) (3) Concentration (%) (3)(4)(5) Concentration (%) (3)(6)
Rating
Aaa................. 5 100 100 100
Aa.................. 5 20 60 60
A................... 5 10 40 40
Baa................. 10 6 20 20
Other (1) 10 4 12 12
__________________
(1) Municipal securities not rated by Moody's but rated BBB or BBB+ by S&P.
(2) Applicable to Minnesota Municipal Obligations only. Municipal Obligations
other than Minnesota Municipal
Obligations must be part of an issue of at least $10,000,000.
(3) The referenced percentages represent cumulative totals for the related
rating category and each lower rating category.
(4) For purposes of the issue type concentration requirement, Municipal
Obligations will be classified within one of the following categories:
health care issues, housing issues, educational facilities (public and
private schools) issues, student loan issues, resource recovery issues,
transportation issues, industrial revenue and pollution control bond
issues, utility issues (including water, sewer and electric), general
obligation issues, lease obligations and certificates of participation,
escrowed bonds and other issues ("Other Issues") including special
obligations to crossover, excise and sales tax revenue, recreation revenue,
special assessments, and telephone revenue bonds only. The following issue
types will be further limited as follows for all rating categories listed:
student loan issues-10%; resource recovery issues-10%; Other Issues-10%.
(5) Does not apply to general obligation Municipal Obligations.
(6) Applicable to general obligation Municipal Obligations only.
For purposes of the maximum underlying obligor requirement described above,
any Municipal Obligation backed by the guaranty, letter of credit or insurance
issued by a third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating of
such Municipal Obligation. In the event any of the Moody's Eligible Assets in
the Corporation's portfolio consist of Municipal Obligations other than
Minnesota Municipal Obligations, then such Municipal Obligations shall be
subject to the following requirements regarding the maximum percentage of
Moody's Eligible Assets that may be invested in Municipal Obligations of issuers
located in a particular state of United States territory: such Municipal
Obligations rated BBB or BBB+ by S&P may comprise no more than 12% of total
Moody's Eligible Assets; such BBB or BBB+ rated Municipal Obligations, if any,
together with any such Municipal Obligations rated Baa by Moody's or A by S&P,
may comprise no more than 20% of total Moody's Eligible Assets; such BBB, BBB+,
Baa and A-rated Municipal Obligations, if any, together with any such Municipal
Obligations rated A by Moody's or AA by S&P, may comprise no more than 40% of
total Moody's Eligible Assets; and such BBB, BBB+, Baa, A and AA-rated Municipal
Obligations, if any, together with any such Municipal Obligations rated Aa by
Moody's or AAA by S&P, may comprise no more than 60% of total Moody's Eligible
Assets; provided, however, that, notwithstanding the foregoing, no more than an
aggregate of 10% of the Moody's Eligible Assets may consist of Municipal
Obligations of issuers located in United States Territories, other than Puerto
Rico. For purposes of applying the foregoing requirements, Municipal Obligations
rated MIG-1 or VMIG-1 or, if not rated by Moody's, rated SP-1+ by S&P, which do
not mature or have a demand feature at par exercisable in 30 days and which do
not have a long-term rating, will be considered to have a long-term rating of A.
For purposes of calculation of Minimum Issue Size, Underlying Obligor,
Maximum Issue Type and Maximum County Concentration, Moody's Eligible Assets
shall be calculated without including cash and Municipal Obligations rated MIG-1
or VMIG-1 or, if not rated by Moody's, rated SP-1+ by S&P, which either mature
or have a demand feature at par exercisable with the Moody's Exposure Period.
Where the Corporation sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Moody's Eligible
Asset and the amount the Corporation is required to pay upon repurchase of such
asset will count as a liability for the purposes of the Preferred Share Basic
Maintenance Amount. Where the Corporation purchases an asset and agrees to sell
it to a third party in the future, cash receivable by the Corporation thereby
will constitute a Moody's Eligible Asset if the long-term debt of such other
party is rated at least A2 by Moody's and such agreement has a term of 30 days
or less; otherwise the Discounted Value of such asset will constitute a Moody's
Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if (a) it is subject to any material lien, mortgage, pledge,
security interest or security agreement of any kind (collectively, "Liens"),
except for (i) Liens which are being contested in good faith by appropriate
proceedings and which Moody's has indicated to the Corporation will not affect
the status of such assets as a Moody's Eligible Asset, (ii) Liens for taxes that
are not then due and payable or that can be paid thereafter without penalty,
(iii) Liens to secure payment for services rendered or cash advanced to the
Corporation by the Adviser, the Paying Agent, the Administrator or the
Remarketing Agent and (iv) Liens by virtue of any repurchase agreement; or (b)
it is irrevocably deposited by the Corporation for the payment of any amounts
set forth in (a)(i) through (a)(vii) under "Preferred Share Basic Maintenance
Amount."
"Moody's Exposure Period" on a given Valuation Date means the period
commencing on such date and ending 47 days thereafter, as such exposure period
may be modified by the Board of the Corporation; provided, however, that the
Corporation shall have received confirmation in writing from Moody's that any
such modification shall not adversely affect the then-current Moody's rating of
the Series D Preferred Shares.
"Moody's Hedging Transactions" means options on securities, futures
contracts based on the Municipal Index or Treasury Bonds and options on such
futures contracts.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
% Change in Marginal Tax Moody's Volatility
Rate Factor
Less than or equal to 5%............... 292%
Greater than 5% but less than 10%...... 313%
Greater than 10% but less than 15%..... 338%
Greater than 15% but less than 20%..... 364%
Greater than 20% but less than 25%..... 396%
Greater than 25% but less than 30%..... 432%
Greater than 30% but less than 35%..... 472%
Greater than 35% but less than 40%..... 520%
"Municipal Index" means The Bond Buyer Municipal Bond Index.
"Municipal Obligations" means "Municipal Obligations" as defined in the
Corporation's Registration Statement on Form N-2 (File Nos. 33-60636 and
811-7420) on file with the Commission, as such Registration Statement may be
amended from time to time.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act Asset Coverage" means asset coverage (determined in accordance
with Section 18 of the 1940 Act) of at least 200% with respect to senior
securities which are stock, including the Series D Preferred Shares (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of paying dividends on its common
stock).
"1940 Act Cure Date" means the last Business Day of the calendar month
following the failure by the Corporation to maintain the 1940 Act Asset Coverage
as of the last Business Day of any calendar month in which any Series D
Preferred Shares are Outstanding.
"Non-Call Period" has the meaning described in "Specific Redemption
Provisions," below.
"Non-Payment Period" has the meaning set forth in Part I, Section 3(g) of
this Statement.
"Non-Payment Period Rate" has the meaning set forth in Part I, Section 3(g)
of this Statement
"Notice of Redemption" has the meaning set forth in Part I, Section 4(d) of
this Statement.
"Optional Redemption Price" means (a) $50,000 per Series D Preferred Share
in the case of a Seven-day Dividend Period, a 28-day Dividend Period or a
Special Dividend Period of less than 365 days, or (b) with respect to a Special
Dividend Period applicable to such series of 365 days or more, the redemption
price set forth in the Specific Redemption Provisions in connection therewith;
in each case plus an amount equal to accumulated but unpaid dividends thereon to
the date of redemption (whether or not earned or declared).
"Outstanding" means, as of any date, Series D Preferred Shares theretofore
issued by the Corporation except, without duplication, (a) any of the Series D
Preferred Shares theretofore canceled or redeemed by the Corporation, or with
respect to which the Corporation has given notice of redemption and irrevocably
deposited with the Paying Agent sufficient funds to redeem such Series D
Preferred Shares, (b) any Series D Preferred Shares as to which the Corporation
or any affiliate thereof is a Holder, and (c) any Series D Preferred Shares
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Corporation; provided, however, that for so long
as Moody's is rating the Series D Preferred Shares, any Series D Preferred
Shares as to which any affiliate of the Corporation is a Holder shall be
considered Outstanding for purposes of determining the Preferred Share Basic
Maintenance Amount.
"Paying Agent" means Bankers Trust Company, or any successor company or
entity, which has entered into a Paying Agent Agreement with the Corporation to
act, among other things, as the transfer agent, registrar, dividend and
redemption price disbursing agent, settlement agent and agent for certain
notifications for the Corporation in connection with the Series D Preferred
Shares in accordance with such agreement.
"Paying Agent Agreement" means an agreement to be entered into between the
Corporation and the Paying Agent.
"Preferred Share Basic Maintenance Amount" as of any Valuation Date with
respect to all of the outstanding preferred stock of the Corporation, including
the Series D Preferred Shares, means the dollar amount equal to (a) the sum of
(i) the product of the number of shares of preferred stock of the Corporation
outstanding on such date multiplied by the liquidation preference of such
preferred stock, (ii) the aggregate amount of dividends (whether or not earned
or declared) that will have accumulated to (but not including) the next Dividend
Payment Date that follows such Valuation Date or a date 47 days after such
Valuation Date, whichever is sooner, at the Applicable Dividend Rate, (iii) the
amount equal to the Projected Dividend Amount (based upon the number of shares
of preferred stock of the Corporation outstanding on such date), (iv) the amount
of anticipated Corporation expenses for the 90 days subsequent to such Valuation
Date, (v) the premium, if any, resulting from the designation of a Premium Call
Period, (vi) the amount of the Corporation's Maximum Potential Additional
Dividend Liability as of such Valuation Date, and (vii) any current liabilities
as of such Valuation Date, including but not limited to liabilities relating to
the payment of the redemption price for any shares of preferred stock of the
Corporation for which the Corporation has given notice of redemption, to the
extent not reflected in any of (a)(i) through (a)(vi) (including, without
limitation, any amounts described below as required to be treated as liabilities
in connection with the Corporation's transactions in futures and options and
including payables for Municipal Obligations purchased as of such Valuation
Date); less (b) either (1) the face value of any Corporation assets irrevocably
deposited by the Corporation for the payment of any of (a)(i) through (a)(vii)
if, with respect to any such liability, such assets mature by the payment date
for such liability or by a date 47 days after such Valuation Date, whichever is
sooner, and are either securities issued or guaranteed by the United States
Government or have a rating assigned by Moody's of P-1, VMIG1 or MIG-1 (or, with
respect to S&P, SP-1+ or A-1+) or (2) the Discounted Value of such assets. The
Preferred Share Basic Maintenance Amount shall be calculated based on all
outstanding preferred stock of the Corporation and, therefore, for purposes of
this calculation, defined terms will be deemed to apply to all outstanding
preferred stock of the Corporation as the context requires.
For purposes of the Preferred Share Basic Maintenance Amount in connection
with S&P's rating of the Series D Preferred Shares, with respect to any
transactions by the Corporation in futures contracts, the Corporation shall
include as liabilities (a) 30% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on the Municipal Index which
are owned by the Corporation plus (b) 25% of the aggregate settlement value, as
marked to market, of any outstanding futures contracts based on Treasury Bonds
which contracts are owned by the Corporation.
For purposes of the Preferred Share Basic Maintenance Amount in connection
with Moody's rating of the Series D Preferred Shares, with respect to any
transactions by the Corporation in futures contracts, options on futures
contracts and securities options, the Corporation shall include as liabilities
(a) 10% of the exercise price of a call option written by the Corporation and
(b) the exercise price of any written put option.
"Preferred Share Basic Maintenance Cure Date" means the third Business Day
after a failure by the Corporation to have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Share Basic Maintenance Amount
on any Valuation Date.
"Preferred Share Provisions" means the rights and preferences of the Series
D Preferred Shares established by this Statement establishing the Series D
Preferred Shares.
"Premium Call Period" has the meaning described in "Specific Redemption
Provisions," below.
"Pricing Service" means S&P Pricing Services or such other pricing service
as may be designated from time to time by the Board of Directors, provided that,
for so long as Series D Preferred Shares are rated by Moody's and S&P, no
pricing service shall be so designated without the prior consent of Moody's and
S&P.
"Projected Dividend Amount" means, with respect to the Series D Preferred
Shares, on any Valuation Date the aggregate amount of dividends that would
accumulate on all outstanding preferred stock of the Corporation, including the
Series D Preferred Shares, during the period beginning on the next Dividend
Payment Date that follows such Valuation Date and ending on a date 47 days after
such Valuation Date at a dividend rate equal to the Maximum Dividend Rate for a
Dividend Period of 28 days or less (or at the Non-Payment Period Rate if such
calculation is made during a Non-Payment Period) multiplied by the larger of the
Moody's Volatility Factor or the S&P Volatility Factor determined from time to
time by Moody's and S&P, respectively. The Projected Dividend Amount shall be
calculated based on all outstanding preferred stock of the Corporation and,
therefore, for purposes of this calculation, defined terms will be deemed to
apply to all outstanding preferred stock of the Corporation as the context
requires.
A "record holder" of Series D Preferred Shares shall mean the Securities
Depository or its nominee or such other person or persons listed in the stock
transfer books of the Corporation as the registered holder of one or more Series
D Preferred Shares.
"Reference Rate" means (a) with respect to any Dividend Period of less than
one year, the higher of the applicable AA Composite Commercial Paper Rate and
the Taxable Equivalent of the Short-Term Municipal Bond Rate, and (b) with
respect to any Special Dividend Period of one year or longer, the Treasury Rate.
"Remarketing" means each periodic operation of the process for remarketing
Series D Preferred Shares, as described in Part II of this Statement.
"Remarketing Agent" means Citigroup Global Markets, Inc. and any additional
or successor companies or entities which have entered into an agreement with the
Corporation to follow the remarketing procedures for the purposes of determining
the Applicable Dividend Rate.
"Remarketing Agreement" means the agreement entered into between the
Corporation and the Remarketing Agent which provides, among other things, that
the Remarketing Agent will follow certain procedures for remarketing Series D
Preferred Shares on behalf of the Holders as provided in the Series D Preferred
Share Provisions for the purpose of determining the Applicable Dividend Rate
that will enable the Remarketing Agent to remarket Series D Preferred Shares
tendered to it at $50,000 per share for the next applicable Dividend Period.
"Remarketing Date," means the last Business Day of a Dividend Period.
"Reorganization" means the reorganization of VYM into the Corporation
pursuant to the Agreement.
"Retroactive Taxable Allocation" has the meaning set forth in Part I,
Section 3(i) of this Statement.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and its successors.
"S&P Discount Factor" means, for purposes of calculating the Discounted
Value of any S&P Eligible Asset, the percentage determined by reference to the
rating on such asset and the shortest S&P Exposure Period set forth opposite
such rating that is the same length as or is longer than the S&P Exposure Period
on the date of such determination, in accordance with the table set forth below:
S&P Discount Factors
Rating Category
----------------------------------------------------
------------ ------------ ------------- ------------
Exposure Period AAA AA A BBB
40 Business Days......... 205% 210% 225% 265%
22 Business Days......... 185 190 205 245
10 Business Days......... 170 175 190 230
7 Business Days.......... 165 170 185 225
3 Business Days.......... 145 150 165 205
Notwithstanding the foregoing, (a) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, provided such Municipal Obligations must be
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in 30
days or less, or 125% if such Municipal Obligations are not rated by S&P but are
rated VMIG-1, P-1 or MIG-1 by Moody's and mature or have a demand feature
exercisable in 30 days or less; provided, however, that any such Moody's-rated
short-term Municipal Obligations which have demand features exercisable within
30 days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution and such bank or
institution must have a short-term rating of at least A-1+ from S&P ; and
further provided that such Moody's-rated short-term Municipal Obligations may
comprise no more than 50% of short-term Municipal Obligations that qualify as
S&P Eligible Assets, and (b) no S&P Discount Factor will be applied to cash or
to Receivables for Municipal Obligations Sold. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated MIG-1 or VMIG-1 by
Moody's, which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating, shall be considered to be
short-term Municipal Obligations. "Receivables for Municipal Obligations Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for Municipal Obligations sold as of or prior to
such Valuation Date if such receivables are due within five business days of
such Valuation Date.
"S&P Eligible Assets" means cash (excluding any cash irrevocably deposited
by the Corporation for the payment of any liabilities within the meaning of
Preferred Share Basic Maintenance Amount), Receivables for Municipal Obligations
Sold (as defined above under "S&P Discount Factor") or a Municipal Obligation
that is: (a) issued by any of the 50 states, U.S. territories, and their
subdivisions, counties, cities, towns, villages, school districts, and agencies,
such as authorities and special districts created by the states and certain
federally sponsored agencies such as local housing authorities (payments made on
Municipal Obligations are exempt from federal income tax and are generally
exempt from state and local taxes in the state of issuance); (b) interest
bearing and pays interest at least semi-annually; (c) payable in U.S. dollars;
(d) publicly rated BBB or higher by S&P or, if not rated by S&P but rated by
Moody's, rated at least A by Moody's; provided that such Moody's-rated Municipal
Obligations will be included in S&P Eligible Assets only to the extent the fair
market value of such Municipal Obligations does not exceed 50% of the aggregate
fair market value of the S&P Eligible Assets (for purposes of determining the
S&P Discount Factors applicable to such Moody's-rated Municipal Obligations, any
such Municipal Obligations will be deemed to have an S&P rating which is one
full rating category lower than its Moody's rating); (e) not a private
placement; (f) part of an issue with an original issue size of at least $10
million or, if of an issue with an original issue size below $10 million but in
no event lower than $5 million, be issued by an issuer with a total of at least
$50 million of issues outstanding; and (g) owned by the Corporation.
Notwithstanding the foregoing:
(a) Municipal Obligations of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the fair market value of such Municipal Obligations does not exceed 10% of
the aggregate fair market value of the S&P Eligible Assets, provided that
2% is added to the applicable S&P Discount Factor for every 1% by which the
fair market value of such Municipal Obligations exceeds 5% of the aggregate
fair market value of the S&P Eligible Assets.
(b) Municipal Obligations of any one issue type category will be
considered S&P Eligible Assets only to the extent the fair market value of
such Municipal Obligations does not exceed 20% of the aggregate fair market
value of S&P Eligible Assets. For purposes of this requirement, Municipal
Obligations will be classified into one of the following categories: health
care issues, housing issues, educational facilities issues, student loan
issues, transportation issues, industrial development bond issues, public
power utilities issues, water and sewer utilities issues, special utilities
issues, general obligation issues, lease obligations, escrowed bonds and
other issues not falling within one of the aforementioned categories.
Furthermore, special utilities issues that are not rated by S&P- will not
be considered S&P Eligible Assets.
(c) Non-Minnesota Municipal Obligations will be considered S&P
Eligible Assets only to the extent the fair market value of such Municipal
Obligations does not exceed 20% of the aggregate fair market value of S&P
Eligible Assets.
"S&P Exposure Period" on a given Valuation Date means the period commencing
on such date and ending three Business Days thereafter, as such exposure period
may be modified by the Board of Directors of the Corporation; provided, however,
that any such modification shall not adversely affect the then-current S&P
rating of the Series D Preferred Shares.
"S&P Hedging Transaction" means a purchase or sale position with respect to
futures contracts based on the Municipal Index or Treasury Bonds, a purchase of
a put or call option on such contracts, or the sale of a covered call option or
a secured put option on such contracts or on Municipal Obligations.
"S&P Volatility Factor" means, depending upon the applicable Reference
Rate, the following percentages:
Rate Percentage
Taxable Equivalent of the Short-Term Municipal Bond Rate............ 277%
30-day "AA" Composite Commercial Paper Rate......................... 228%
60-day "AA" Composite Commercial Paper Rate......................... 228%
Average of 60-day and 90-day "AA" Composite Commercial Paper Rate... 228%
90-day "AA" Composite Commercial Paper Rate......................... 222%
180-day "AA" Composite Commercial Paper Rate........................ 217%
1-year U.S. Treasury Bill Rate...................................... 198%
2-year U.S. Treasury Note Rate...................................... 185%
3-year U.S. Treasury Note Rate...................................... 178%
4-year U.S. Treasury Note Rate...................................... 171%
5-year U.S. Treasury Note Rate...................................... 169%
Notwithstanding the foregoing, the S&P Volatility Factor may mean such other
potential dividend rate increase factor as S&P advises the Corporation in
writing is applicable.
"Securities Depository" means DTC or any successor company or other entity
selected by the Corporation as securities depository for the Series D Preferred
Shares that agrees to follow the procedures required to be followed by such
securities depository in connection with the Series D Preferred Shares.
"Settlement Date" means the first Business Day after a Remarketing Date.
"Seven-day Dividend Period" means (a) any Dividend Period commencing after
a failed Remarketing, or (b) any Dividend Period commencing after the first day
of, and during, a Non-Payment Period and, in all such cases, generally
containing seven days.
"Special Dividend Period" means a Dividend Period established by the Board
of Directors for the Series D Preferred Shares as described in Part 1, Section
3(d) of this Statement.
"Specific Redemption Provisions" means, with respect to any Special
Dividend Period of 365 or more days, either, or any combination of, (a) a period
(a "Non-Call Period") determined by the Board of Directors, after consultation
with the Remarketing Agent, during which the shares subject to such Special
Dividend Period are not subject to redemption at the option of the Corporation,
and (b) a period (a "Premium Call Period") consisting of a number of whole years
and determined by the Board of Directors, after consultation with the
Remarketing Agent, during each year of which the shares subject to such Special
Dividend Period shall be redeemable at the Corporation's option at a price per
share equal to $50,000 plus accumulated but unpaid dividends plus a premium
expressed as a percentage of $50,000 as determined by the Board of Directors,
after consultation with the Remarketing Agent.
"Statement" means this Statement Establishing and Fixing the Rights and
Preferences of Municipal Income Preferred Shares, Series D, on file with the
Secretary of State of Minnesota.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations selected by the Corporation to act
as the substitute rating agency or substitute rating agencies, as the case may
be, to determine the credit ratings of the Series D Preferred Shares.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (a) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index or any successor
index (the "Kenny Index"), made available for the Business Day immediately
preceding such date but in any event not later than 8:30 a.m., New York City
time, on such date by the Pricing Service or any successor thereto, based upon
30-day yield evaluations at par of bonds the interest on which is excludable for
regular federal income tax purposes under the Code of "high grade" component
issuers selected by the Pricing Service or any such successor from time to time
in its discretion, which component issuers shall include, without limitation,
issuers of general obligation bonds but shall exclude any bonds the interest on
which constitutes an item of tax preference under Section 57(a)(5) of the Code
or successor provisions, for purposes of the "alternative minimum tax," divided
by (b) 1.00 minus the Marginal Tax Rate (expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 a.m., New York
City time, on such date by the Pricing Service or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (i)
the per annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day, divided by
(ii) 1.00 minus the Marginal Tax Rate (expressed as a decimal). For so long as
Series D Preferred Shares are rated by Moody's and/or S&P, the Corporation will
not use a successor index to the Kenny S&P 30-day High Grade Index unless it
receives confirmation in writing from Moody's and/or S&P, as the case may be,
that the use of such successor index would not impair the then current rating of
the Series D Preferred Shares.
"Tender and Dividend Reset" means the process pursuant to which Series D
Preferred Shares may be tendered in a Remarketing or held and become subject to
the new Applicable Dividend Rate determined by the Remarketing Agent in such
Remarketing.
"Treasury Bonds" means United States Treasury Bonds backed by the full
faith and credit of the United States government with remaining maturities of
ten years or more.
"Treasury Rate," on any date for any Dividend Period, means:
(a) the yield on the most recently auctioned non-callable direct
obligations of the U.S. Government (excluding "flower" bonds) with a
remaining maturity within three months of the duration of such Dividend
Period, as quoted in The Wall Street Journal on such date for the Business
Day next preceding such date; or
(b) in the event that any such rate is not published by The Wall
Street Journal, then the arithmetic average of the yields (expressed as an
interest equivalent in the case of a Dividend Period which is one year or
less and expressed as a bond equivalent in the case of any longer Dividend
Period) on the most recently auctioned non-callable direct obligations of
the U.S. Government (excluding "flower" bonds) with a remaining maturity
within three months of the duration of such Dividend Period as quoted on a
discount basis or otherwise by the U.S. Government Securities Dealers to
the Remarketing Agent for the close of business on the Business Day
immediately preceding such date.
If any U.S. Government Securities Dealer does not quote a rate required to
determine the Treasury Rate, the Treasury Rate shall be determined on the basis
of the quotation or quotations furnished by the remaining U.S. Government
Securities Dealer or U.S. Government Securities Dealers and any Substitute U.S.
Government Securities Dealers selected by the Corporation to provide such rate
or rates not being supplied by any U.S. Government Securities Dealer or U.S.
Government Securities Dealers, as the case may be, or, if the Corporation does
not select any such Substitute U.S. Government Securities Dealer or U.S.
Government Securities Dealers, by the remaining U. S. Government Securities
Dealer or U.S. Government Securities Dealers. As used herein, "U.S. Government
Securities Dealer" means Citigroup Global Investments, Inc. and Morgan Guaranty
Trust Company of New York or their respective affiliates or successors, if such
entity is a U.S. Government securities dealer. As used herein, "Substitute U.S.
Government Securities Dealer" shall mean Credit Suisse First Boston Corporation
and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their respective
affiliates or successors, if such entity is a U.S. Government securities dealer,
provided that none of such entities shall be a U.S. Government Securities
Dealer.
"28-day Dividend Period" means the Dividend Period generally applicable to
Series D Preferred Shares and generally contains 28 days.
"Valuation Date" means every Business Day, beginning with the Date of
Original Issue.
"Variation Margin" means, in connection with outstanding purchase or sale
positions in futures contracts and outstanding sales positions with respect to
options thereon by the Corporation, the amount of cash or securities paid to and
received from a futures commission merchant (subsequent to the Initial Margin
payment) from time to time as the value of such position fluctuates.
"VYM" means Delaware Investments Minnesota Municipal Income Fund III, Inc.
2. Number of Shares; Ranking
(a) There are 300 authorized shares constituting the Series D Preferred
Shares. No fractional Series D Preferred Shares shall be issued.
(b) Any Series D Preferred Shares which at any time hereafter have been
redeemed, exchanged, or otherwise acquired by the Corporation shall return to
the status of authorized and unissued preferred shares of the Corporation
without designation as to series. Upon the redemption, exchange, or other
acquisition by the Corporation of all outstanding Series D Preferred Shares, all
provisions of this Statement shall cease to be of further effect and shall cease
to be a part of the Articles. Upon the occurrence of such events, the Board of
Directors shall have the power, pursuant to Minnesota Statutes Section 302A.135,
Subdivision 5 or any successor provision and without shareholder action, to
cause restated articles of incorporation of the Corporation to be prepared and
filed with the Secretary of State of the State of Minnesota which reflect the
removal of this Statement and of all other provisions of the Articles, if any,
relating to the Series D Preferred Shares.
(c) The Series D Preferred Shares shall rank on a parity with the
Corporation's Series A, Series B and Series C Preferred Shares and the shares of
any other series of preferred stock of the Corporation as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Corporation.
3. Dividends
(a) Holders of Series D Preferred Shares will be entitled to receive, when,
as and if declared by the Corporation, out of funds legally available therefor,
cumulative cash dividends, at the rate per annum referred to in this Statement
under "Designation" for the Initial Dividend Period and, in the case of any
other Dividend Period, at the Applicable Dividend Rate for the applicable
Dividend Period and no more (except as otherwise provided below in Section 3(i)
of this Statement), payable on the respective dates set forth below and, except
as described below, set by the Remarketing Agent in accordance with the
remarketing procedures described in Part II of this Statement.
(b) Initial Dividend Payment Date and Dividend Period. The Initial Dividend
Period for Series D Preferred Shares will commence on their Date of Original
Issue and end on _________, 2006. Dividends for the Initial Dividend Period will
be paid, when, as and if declared, out of funds legally available therefor, on
_________, 2006 to the Securities Depository or such other record holder as of
the Business Day preceding the date of such payment. Dividends for each Dividend
Period thereafter will be payable, when, as and if declared, on each Dividend
Payment Date, subject to certain exceptions.
(c) Subsequent Dividend Periods.
(i) After the Initial Dividend Period for each Series D Preferred
Share, a Dividend Period therefor will commence on each Dividend Payment
Date with respect to such share (which, except during a Non-Payment Period,
will be a Settlement Date). Each subsequent Dividend Period for any series
of Preferred Shares, with the exception of Seven-day Dividend Periods, will
comprise, beginning with and including the date on which it commences, 28
consecutive days or, in the event the Board of Directors has designated
such Dividend Period as a Special Dividend Period, such number of
consecutive days or whole years as shall be designated by the Board of
Directors. Notwithstanding the foregoing, any adjustment of the remarketing
schedule by the Remarketing Agent which includes an adjustment of a
Settlement Date will lengthen or shorten Dividend Periods by causing them
always to end on and include the day before the Settlement Date as so
adjusted.
(ii) Except during a Non-Payment Period, by 12:00 noon, New York City
time, on the Remarketing Date in each applicable Remarketing, the Holder of
a Series D Preferred Share may elect to tender such share or to hold such
share for the next applicable Dividend Period. If the holder of such share
fails to tender such share on such Remarketing Date, such Holder will
continue to hold such share at the Applicable Dividend Rate determined in
such Remarketing for the next Dividend Period; provided that, if there is
no Remarketing Agent, the Remarketing Agent is not required to conduct a
Remarketing or the Remarketing Agent is unable to remarket in the
Remarketing following such Remarketing Date all shares tendered to it at a
price of $50,000 per share, then the next Dividend Period for such share
and for all other shares will be a Seven-day Dividend Period and the
Applicable Dividend Rate therefor will be the Maximum Dividend Rate for a
Seven-day Dividend Period. If a Series D Preferred Share is tendered (or
deemed tendered) but not sold in a Remarketing, the Holder of such share
will hold such share for a Seven-day Dividend Period at the Maximum
Dividend Rate therefor.
(d) Special Dividend Periods. The Board of Directors may at any time
designate a subsequent Dividend Period, on the Remarketing Date next preceding
the commencement of such Dividend Period as a Special Dividend Period with such
number of days or whole years (subject to adjustment as described above) as the
Board of Directors shall specify; provided that (i) written notice of any such
designation, of the Maximum Dividend Rate, if applicable, and Specific
Redemption Provisions, if applicable, in respect thereof and of the consequences
of failure to tender, or to elect to hold, shares must be given at least seven
days prior to such Remarketing Date to the Remarketing Agent, the Paying Agent,
the Securities Depository and the Holders of Series D Preferred Shares which are
to be subject to such Special Dividend Period; (ii) no Special Dividend Period
may commence during a Non-Payment Period; and (iii) in respect of any Special
Dividend Period of 365 or more days, the Board of Directors, after consultation
with the Remarketing Agent, may establish Specific Redemption Provisions;
provided further that prior to such designation, the Corporation shall provide a
Certificate of Preferred Share Basic Maintenance Amount showing, as of the third
Business Day next preceding such proposed Special Dividend Period, (x) Moody's
Eligible Assets, assuming for the purposes of calculating Moody's Eligible
Assets, in connection with a Certificate of Preferred Share Basic Maintenance
Amount required to be prepared pursuant to this proviso, a Moody's Exposure
Period of "eight weeks or less but greater than seven weeks" (if Moody's is then
rating the Series D Preferred Shares) and (y) S&P Eligible Assets (if S&P is
then rating the Series D Preferred Shares), each with a Discounted Value at
least equal to the Preferred Share Basic Maintenance Amount as of such Business
Day (assuming for purposes of the foregoing calculation that the Maximum
Dividend Rate is the Maximum Dividend Rate on such Business Day as if such
Business Day were the last Business Day prior to the proposed Special Dividend
Period). If for any reason, subsequent to giving notice of the designation of a
Special Dividend Period with respect to the Series D Preferred Shares, the Board
of Directors determines to rescind such designation, written notice of such
determination shall be given to the Remarketing Agent, the Paying Agent, the
Securities Depository and the Holders of Series D Preferred Shares which were to
be subject to such Special Dividend Period, at least two Business Days prior to
such previously proposed Special Dividend Period, and the next succeeding
Dividend Period shall be a 28-day Dividend Period. The existence or rescission
of any Special Dividend Period will not affect the current Dividend Period or
prevent the Board of Directors from establishing other Special Dividend Periods
of similar duration or in any way restrict the Maximum Dividend Rate or Specific
Redemption Provisions which may be designated in connection with any other
Special Dividend Period. The Board of Directors will not change the frequency of
the Valuation Dates unless it receives confirmation in writing from each of S&P
and Moody's that such change would not so impair the then current rating of the
Series D Preferred Shares.
(e) Dividend Payment Dates. Dividends on each Series D Preferred Share will
accumulate from its Date of Original Issue and will be payable, when, as and if
declared by the Board of Directors, out of funds legally available therefor, on
the applicable Dividend Payment Dates to the Securities Depository (or such
other record holder) as of the Business Day preceding the applicable Dividend
Payment Date. The Dividend Payment Dates will be: (i) with respect to a Special
Dividend Period of more than 28 days, the first Business Day of each calendar
month after the designation of such Special Dividend Period and the day after
the last business day thereof; and (ii) with respect to any other Dividend
Period, the day after the last day thereof; provided that, if any such day is
not a Business Day, the Dividend Payment Date will be the first Business Day
after such day.
(f) Dividend Payments.
(i) So long as there is a Securities Depository with respect to the
Series D Preferred Shares, each dividend on such shares will be paid to the
Securities Depository or its nominee as the record holder of all shares.
The Securities Depository will credit the accounts of the Agent Members of
the Beneficial Owners of Series D Preferred Shares in accordance with the
Securities Depository's normal procedures. Each Agent Member will be
responsible for holding or disbursing such payments to the Holders of the
Series D Preferred Shares for which it is acting in accordance with the
instructions of such Holders. Dividends on any Series D Preferred Share in
arrears with respect to any past Dividend Payment Date may be declared and
paid at any time, without reference to any regular Dividend Payment Date,
to the Holder thereof as of a date not exceeding five Business Days
preceding the date of payment thereof as may be fixed by the Board of
Directors. Any dividend payment made on Series D Preferred Shares will be
first credited against the dividends accumulated but unpaid (whether or not
earned or declared) with respect to the earliest Dividend Payment Date on
which dividends were not paid. Holders of Series D Preferred Shares will
not be entitled to any dividends, whether payable in cash, property or
stock, in excess of full cumulative dividends thereon. Except for the late
charge described in paragraph (g) of this Section 3, Holders of Series D
Preferred Shares will not be entitled to any interest or other additional
amount on any dividend payment on any Series D Preferred Share which may be
in arrears.
(ii) The amount of declared dividends for each Series D Preferred
Share payable on each Dividend Payment Date in respect of a Seven-day
Dividend Period, a 28-day Dividend Period or a Special Dividend Period of
fewer than 365 days will be computed by the Corporation by multiplying the
Applicable Dividend Rate in effect with respect to dividends payable on
such share on such Dividend Payment Date by a fraction the numerator of
which will be the number of days such share was Outstanding from and
including its Date of Original Issue or the preceding Dividend Payment Date
for such share, as the case may be, to and including the last day of such
Dividend Period, and the denominator of which will be 365, and then
multiplying the rate so obtained by $50,000, and the amount of declared
dividends for each Series D Preferred Share in respect of a Special
Dividend Period for such series of 365 or more days will be computed on the
basis of a 360-day year of twelve 30-day months.
(g) Non-Payment Period; Late Charge. A Non-Payment Period will commence if
the Corporation fails to (i) declare, prior to 12:00 noon, New York City time,
on any Dividend Payment Date for Series D Preferred Shares, for payment on or
within three Business Days after such Dividend Payment Date to the persons who
held such shares as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date, the full amount of any dividend on such
Series D Preferred Shares payable on such Dividend Payment Date, or (ii)
deposit, irrevocably and in trust, in same-day funds, with the Paying Agent by
12:00 noon, New York City time, (A) on or within three Business Days after any
Dividend Payment Date for Series D Preferred Shares the full amount of any
dividend on such shares (whether or not earned or declared) payable on such
Dividend Payment Date, or (B) on or within three Business Days after any
redemption date for Series D Preferred Shares called for redemption, the
Mandatory Redemption Price or the Optional Redemption Price per share. Such
Non-Payment Period will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be, and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid dividends and unpaid redemption prices shall have been so
deposited or shall have otherwise been made available to the applicable holders
in same-day funds; provided that a Non-Payment Period will not end during the
first seven days thereof unless the Corporation shall have given at least three
days' written notice to the Paying Agent, the Remarketing Agent and the
Securities Depository and thereafter will not end unless the Corporation shall
have given at least fourteen days' written notice to the Paying Agent, the
Remarketing Agent, the Securities Depository and all Holders of Series D
Preferred Shares. The Applicable Dividend Rate for each Dividend Period
commencing during a Non-Payment Period will be equal to the Non-Payment Period
Rate; any share for which a Special Dividend Period would otherwise have
commenced on the first day of a Non-Payment Period will have, instead, a
Seven-day Dividend Period; and each Dividend Period for Series D Preferred
Shares commencing after the first day of, and during, a Non-Payment Period shall
be a Seven-day Dividend Period. Any dividend on Series D Preferred Shares due on
any Dividend Payment Date for such shares (if, prior to 12:00 noon, New York
City time, on such Dividend Payment Date, the Corporation has declared such
dividend payable on or within three Business Days after such Dividend Payment
Date to the persons who held such shares as of 12:00 noon, New York City time,
on the Business Day preceding such Dividend Payment Date) or redemption price
with respect to such shares not paid to such persons when due (if such
non-payment is not solely due to the willful failure of the Corporation) but
paid to such persons in the same form of funds by 12:00 noon, New York City
time, on any of the first three Business Days after such Dividend Payment Date
or due date, as the case may be, will incur a late charge to be paid therewith
to such persons and calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on the actual number
of days comprising such period divided by 365. For the purposes of the
foregoing, payment to a person in same-day funds on any Business Day at any time
will be considered equivalent to payment to that person in New York Clearing
House (next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day. The
Non-Payment Period Rate will be 250% (300% at any time the Corporation has
notified the Remarketing Agent of its intent to allocate income that is taxable
for federal income tax purposes to the Series D Preferred Shares prior to any
Remarketing with respect to such shares) of the Reference Rate.
(h) Restrictions on Dividends and Other Payments.
(i) Under the 1940 Act, the Corporation may not declare dividends
(except a dividend payable in shares of Common Stock) or make other
distributions on shares of Common Stock or purchase any such shares if, at
the time of the declaration, distribution or purchase, as applicable (and
after giving effect thereto), asset coverage (as defined in the 1940 Act)
with respect to the outstanding preferred stock of the Corporation would be
less than 200% (or such other percentage as may in the future be required
by law).
(ii) In addition, for so long as any Series D Preferred Shares are
Outstanding, (A) the Corporation will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, Common Stock or other capital stock, if any, ranking
junior to Series D Preferred Shares as to dividends and upon liquidation)
in respect of Common Stock or any other capital stock of the Corporation
ranking junior to or on a parity with Series D Preferred Shares as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of Common Stock or any other
such junior capital stock (except by conversion into or exchange for shares
of the Corporation ranking junior to Series D Preferred Shares as to
dividends and upon liquidation) or any such parity capital stock (except by
conversion into or exchange for shares of the Corporation ranking junior to
or on a parity with Series D Preferred Shares as to dividends and upon
liquidation), unless (1) full cumulative dividends on Series D Preferred
Shares through the most recently ended Dividend Period (or, if such
transaction is on a Dividend Payment Date, through the Dividend Period
ending on the day prior to such Dividend Payment Date) shall have been paid
or shall have been declared and sufficient funds for the payment thereof
deposited with the Paying Agent, and (2) the Corporation has redeemed the
full number of Series D Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in the Articles, and (B) the
Corporation will not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares
of, or options, warrants or rights to subscribe for or purchase, Common
Stock or other capital stock, if any, ranking junior to Series D Preferred
Shares as to dividends and upon liquidation) in respect of Common Stock or
any other capital stock of the Corporation ranking junior to or on a parity
with Series D Preferred Shares as to dividends or upon liquidation, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
shares of Common Stock or any other such junior capital stock (except by
conversion into or exchange for stock of the Corporation ranking junior to
Series D Preferred Shares as to dividends or upon liquidation) or any such
parity capital stock (except by conversion into or exchange for shares of
the Corporation ranking junior to or on a parity with Series D Preferred
Shares as to dividends and upon liquidation), unless immediately after such
transaction the aggregate Discounted Value of the Corporation's Eligible
Assets would at least equal the Preferred Share Basic Maintenance Amount.
(i) Additional Dividends. If the Corporation allocates any net capital
gains or other income taxable for federal income tax purposes to Series D
Preferred Shares without having given advance notice of such allocation to the
Paying Agent and the Remarketing Agent as provided in Section 2 of Part II (such
allocation being referred to herein as a "Retroactive Taxable Allocation"), the
Corporation shall, within 270 days after the end of the Corporation's taxable
year in which a Retroactive Taxable Allocation is made, provide notice thereof
to the Remarketing Agent, the Paying Agent and to each Holder of such shares
during such taxable year at such Holder's address as the same appears or last
appeared on the stock books of the Corporation. Such Holders of such shares
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available therefor, dividends in an amount equal
to the aggregate Additional Dividends with respect to all Retroactive Taxable
Allocations made to such shares during the taxable year in question, such
dividends to be payable by the Corporation to the Paying Agent, for distribution
to such Holders, within 30 days after the notice described above is given to the
Remarketing Agent and the Paying Agent.
4. Redemption
(a) Optional Redemption.
(i) After the Initial Dividend Period, upon giving a Notice of
Redemption, as provided below, the Corporation at its option may redeem
Series D Preferred Shares, in whole or in part, on any scheduled Dividend
Payment Date, out of funds legally available therefor, at a redemption
price equal to the Optional Redemption Price; provided that no Series D
Preferred Share will be subject to optional redemption during any Non-Call
Period. Additionally, without the consent of the Remarketing Agent, the
Series D Preferred Shares may not be redeemed in part if after such partial
redemption fewer than 100 Series D Preferred Shares remain Outstanding.
(ii) So long as either Moody's or S&P is rating the Series D Preferred
Shares, no Series D Preferred Shares shall be redeemed pursuant to this
Section 4(a) unless (A) on the date on which the Corporation intends to
give notice of such redemption pursuant to paragraph (d) of this Section 4,
the Corporation has available Deposit Securities with maturity or tender
dates not later than the day preceding the applicable redemption date and
having a value not less than the amount (including any applicable premium)
due to Holders of Series D Preferred Shares by reason of the redemption of
such shares on such redemption date, and (B) on the date on which the
Corporation intends to give notice of such redemption and on the redemption
date, Moody's Eligible Assets (if Moody's is then rating the Series D
Preferred Shares) and S&P Eligible Assets (if S&P is then rating the Series
D Preferred Shares) each at least equal the Preferred Share Basic
Maintenance Amount, and would at least equal the Preferred Share Basic
Maintenance Amount immediately subsequent to such redemption if such
redemption were to occur on such date.
(b) Mandatory Redemption.
(i) The Corporation will redeem, at a redemption price equal to the
Mandatory Redemption Price, certain of the Outstanding Series D Preferred
Shares, if the Corporation fails to maintain as of each Valuation Date
Eligible Assets having in the aggregate a Discounted Value at least equal
to the Preferred Share Basic Maintenance Amount or as of the last Business
Day of any calendar month fails to maintain the 1940 Act Asset Coverage and
such failure is not cured on or before the Preferred Share Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein respectively
referred to as a "Cure Date"), as the case may be. The number of Series D
Preferred Shares to be redeemed will be equal to the lesser of (A) the
minimum number of Series D Preferred Shares the redemption of which, if
deemed to have occurred immediately prior to the opening of business on the
Cure Date, would, together with any other outstanding preferred stock of
the Corporation to be redeemed, result in the satisfaction of the Preferred
Share Basic Maintenance Amount or the 1940 Act Asset Coverage, as the case
may be, on such Cure Date (provided that, if there is no such minimum
number of shares the redemption of which would have such result, all Series
D Preferred Shares then Outstanding will be redeemed; and provided further
that, if less than 100 Series D Preferred Shares would remain Outstanding
following any partial redemption hereunder, the Remarketing Agent may
direct the Corporation to redeem all of the Series D Preferred Shares then
Outstanding), and (B) the maximum number of Series D Preferred Shares that,
together with any other outstanding preferred stock of the Corporation to
be redeemed, can be redeemed out of funds expected to be legally available
therefor. To the extent practicable, the Series D Preferred Shares shall
participate in any such redemption on a pro rata basis with all other
outstanding preferred stock of the Corporation.
(ii) The Corporation will effect such a mandatory redemption not
earlier than 20 days and not later than 40 days after such Cure Date,
except that if the Corporation does not have funds legally available for
the redemption of all of the required number of Series D Preferred Shares
which are subject to mandatory redemption or the Corporation otherwise is
unable to effect such redemption on or prior to 40 days after such Cure
Date, the Corporation will redeem those Series D Preferred Shares which it
was unable to redeem on the earliest practicable date on which it is able
to effect such redemption.
(c) Allocation. If fewer than all the outstanding Series D Preferred Shares
are to be redeemed, the number of Series D Preferred Shares to be so redeemed
will be a whole number of shares and will be determined by the Board of
Directors (subject to the provisions described above under subparagraph (b)) and
the Corporation will give a Notice of Redemption. Unless certificates
representing shares are held by persons other than the Securities Depository or
its nominee, the Securities Depository, upon receipt of such Notice of
Redemption, shall use its best efforts to determine, by 10:00 a.m., New York
City time, on the second Business Day immediately succeeding the date on which
it receives such Notice of Redemption, by lot the number of Series D Preferred
Shares to be redeemed from the account of each Agent Member (which may include
an Agent Member, including the Remarketing Agent, holding shares for its own
account) and shall immediately notify the Paying Agent of such determination.
The Paying Agent, upon receipt of such notice, will in turn determine by lot the
number of shares to be redeemed from the accounts of the Holders of the shares
whose Agent Members have been selected by the Securities Depository. In doing
so, the Paying Agent may determine that shares will be redeemed from the
accounts of some Holders, which may include the Remarketing Agent, without
shares being redeemed from the accounts of other Holders. Notwithstanding the
foregoing, if any certificates for Series D Preferred Shares are not held by the
Securities Depository or its nominee, the shares to be redeemed will be selected
by the Corporation by lot.
(d) Notice of Redemption.
(i) The Corporation will give 30 days' Notice of Redemption. Such
notice shall be given by telephone or facsimile, to the Securities
Depository (and any other record holder), the Paying Agent and the
Remarketing Agent, and promptly confirmed in writing. In the event the
Corporation obtains appropriate exemptive or no-action relief from the
Commission, the number of days' notice required for a mandatory redemption
may be reduced by the Board of Directors of the Corporation to as few as
two Business Days if Moody's and S&P each has agreed in writing that the
revised notice provision would not adversely affect its then current rating
of the Series D Preferred Shares. The Paying Agent will use its reasonable
efforts to provide telephonic notice to each Holder of Series D Preferred
Shares called for redemption not later than the close of business on the
Business Day on which the Paying Agent determines the shares to be redeemed
(as described above) (or, during a Non-Payment Period with respect to such
shares, not later than the close of business on the Business Day
immediately following the day on which the Paying Agent receives Notice of
Redemption from the Corporation). Such telephonic notice will be confirmed
promptly in writing not later than the close of business on the third
Business Day preceding the redemption date by notice sent by the Paying
Agent to each Holder of record of Series D Preferred Shares called for
redemption, the Remarketing Agent and the Securities Depository.
(ii) Every Notice of Redemption and other redemption notice with
respect to Series D Preferred Shares will state (A) the redemption date,
(B) the number of Series D Preferred Shares to be redeemed, (C) the
redemption price, (D) that dividends on the Series D Preferred Shares to be
redeemed will cease to accumulate as of such redemption date, and (E) the
provision of the Articles pursuant to which such shares are being redeemed.
No defect in the Notice of Redemption or other redemption notice or in the
transmittal or the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law.
(iii) Series D Preferred Shares, the Holders of which shall have been
given Notice of Redemption, will not be transferable outside of a
Remarketing.
(e) Other Redemption Procedures.
(i) To the extent that any redemption for which Notice of Redemption
has been given is not made by reason of the absence of legally available
funds therefor, such redemption will be made as soon as practicable to the
extent such funds become available. Failure to redeem Series D Preferred
Shares will be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Corporation shall have
failed, for any reason whatsoever, to deposit with the Paying Agent funds
with respect to any shares for which such Notice of Redemption has been
given. Notwithstanding the fact that the Corporation may not have redeemed
Series D Preferred Shares for which a Notice of Redemption has been given,
dividends may be declared and paid on such shares and will include those
shares for which Notice of Redemption has been given.
(ii) Upon the deposit of funds sufficient to redeem Series D Preferred
Shares with the Paying Agent and the giving of Notice of Redemption, all
rights of the Holders of the shares so called for redemption will cease and
terminate, except the right of the Holders thereof to receive the Optional
Redemption Price or the Mandatory Redemption Price, as the case may be, but
without any interest or other additional amount (except for the late charge
described under Part I, Section 3(g) hereof), and such shares will no
longer be deemed Outstanding for any purpose. The Corporation will be
entitled to receive from the Paying Agent, promptly after the date fixed
for redemption, any cash deposited with the Paying Agent in excess of (A)
the aggregate redemption price of the Series D Preferred Shares called for
redemption on such date and (B) all other amounts to which Holders of
Series D Preferred Shares called for redemption may be entitled. Any funds
so deposited that are unclaimed at the end of 90 days from such redemption
date will, to the extent permitted by law, be repaid to the Corporation,
after which time the holders of Series D Preferred Shares so called for
redemption will look only to the Corporation for payment of the redemption
price and all other amounts to which they may be entitled. The Corporation
will be entitled to receive, from time to time after the date fixed for
redemption, any interest on the funds so deposited.
(iii) Nothing contained in the Articles limits any legal right of the
Corporation or any affiliate to purchase or otherwise acquire Series D
Preferred Shares outside of a Remarketing at any price, whether higher or
lower than the Optional Redemption Price or Mandatory Redemption Price, so
long as, at the time of any such purchase, there is no arrearage in the
payment of dividends on any outstanding preferred stock of the Corporation
and the Corporation is in compliance with the 1940 Act Asset Coverage and
has assets with a Discounted Value at least equal, in the aggregate, to the
Preferred Share Basic Maintenance Amount after giving effect to such
purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Corporation shall have no
voting rights. If fewer than all the Outstanding Series D Preferred Shares
are redeemed or otherwise acquired by the Corporation, the Corporation
shall give notice of such transaction in accordance with the procedures
agreed upon the Board of Directors. Subject to Section 18 of the 1940 Act
and the Preferred Share Provisions, any Series D Preferred Shares redeemed
or otherwise acquired by the Corporation may be reissued by the
Corporation; provided, however, that after giving effect to such reissuance
the Corporation shall have Eligible Assets with an aggregate Discounted
Value at least equal to the Preferred Share Basic Maintenance Amount.
(iv) The Corporation has the right to arrange for others to purchase
from the Holders thereof Series D Preferred Shares which are to be redeemed
as described in paragraph 4(a) above.
(v) The Remarketing Agent may, in its sole discretion, modify the
procedures concerning notification of redemption described above so long as
any such modification does not adversely affect the Holders of the Series D
Preferred Shares.
(vi) In effecting any redemption pursuant to this Section 4, the
Corporation shall use its best efforts to comply with all applicable
procedural conditions precedent to effecting such redemption under the 1940
Act and Minnesota law, but shall effect no redemption except in accordance
with the 1940 Act and Minnesota law.
5. Liquidation
(a) Upon a liquidation, dissolution or winding up of the affairs of the
Corporation, whether voluntary or involuntary, the Holders of Series D Preferred
Shares then Outstanding will be entitled, whether from capital or surplus,
before any assets of the Corporation will be distributed among or paid over to
the holders of the Common Stock or any other class of capital stock of the
Corporation junior to the Series D Preferred Shares as to liquidation payments,
to be paid an amount equal to the liquidation preference with respect to such
shares. The liquidation preference for Series D Preferred Shares is $50,000 per
share plus an amount equal to all accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date of final distribution in
same-day funds, together with any payments required to be made pursuant to Part
I, Section 3(i) of this Statement in connection with liquidation of the
Corporation. After any such payment, the Holders of Series D Preferred Shares
will not be entitled to any further participation in any distribution of assets
of the Corporation. If, upon any such liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation shall be insufficient to make
such full payments to the Holders of Series D Preferred Shares and to the
holders of any shares of preferred stock of the Corporation with preference
rights ranking as to liquidation, dissolution or winding up, on a parity with
the Series D Preferred Shares, then such assets will be distributed pro rata
among the holders of Series D Preferred Shares and any other such preferred
stock.
(b) Neither the consolidation nor the merger of the Corporation with or
into any other entity or entities nor a reorganization of the Corporation alone
nor the sale, lease or transfer by the Corporation of all or substantially all
of its assets shall be deemed to be a dissolution or liquidation of the
Corporation.
6. Voting Rights
(a) Except as otherwise indicated in the Articles and except as otherwise
required by applicable law, Holders of Series D Preferred Shares will have equal
voting rights with holders of shares of Common Stock and any other preferred
stock (one vote per share) and will vote together with holders of shares of
Common Stock and any other preferred stock as a single class.
(b) In connection with the election of the Corporation's Directors, holders
of shares of preferred stock, including Holders of Series D Preferred Shares,
voting as a separate class, shall be entitled to elect two of the Corporation's
Directors, and the remaining Directors will be elected by holders of shares of
Common Stock and shares of preferred stock, including Holders of Series D
Preferred Shares, voting together as a single class. In addition, if at any time
dividends on outstanding shares of preferred stock, including Series D Preferred
Shares, shall be unpaid in an amount equal to two full years' dividends thereon,
then the number of Directors constituting the Board of Directors shall
automatically be increased by the smallest number that, when added to the two
Directors elected exclusively by the holders of shares of preferred stock,
including Holders of Series D Preferred Shares, as described above, would
constitute a majority of the Board of Directors as so increased by such smallest
number; and at a special meeting of shareholders, which will be called and held
as soon as practicable, and at all subsequent meetings at which Directors are to
be elected, the holders of shares of preferred stock, including Holders of
Series D Preferred Shares, voting as a separate class, will be entitled to elect
the smallest number of additional Directors that, together with the two
Directors which such holders will be in any event entitled to elect, constitutes
a majority of the total number of Directors of the Corporation as so increased.
The terms of office of the persons who are Directors at the time of that
election will continue. If the Corporation thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding shares
of preferred stock, including Series D Preferred Shares, for all past dividend
periods, the voting rights stated in the preceding sentence shall cease, and the
terms of office of all of the additional Directors elected by the holders of
shares of preferred stock, including Holders of Series D Preferred Shares (but
not of the Directors with respect to whose election the holders of Common Stock
were entitled to vote or the two Directors the holders of shares of preferred
stock, including Holders of Series D Preferred Shares, have the right to elect
in any event), will terminate automatically. If at any time the holders of any
series of preferred stock other than the Series D Preferred Shares are entitled
under the 1940 Act to elect a majority of the Board of Directors, then Holders
of Series D Preferred Shares will have equal voting rights with holders of
shares of such other series (one vote per share) with respect to the election of
the Corporation's Directors.
(c) (i) So long as any Series D Preferred Shares are outstanding, the
Corporation shall not, without the affirmative vote or consent of the
Holders of a majority of the Outstanding Series D Preferred Shares in
person or by proxy, either in writing or at a meeting (voting separately as
one class): (A) authorize, create or issue any class or series of stock
ranking prior to or on a parity with the Series D Preferred Shares with
respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Corporation,
or increase the authorized amount of Series D Preferred Shares (except
that, notwithstanding the foregoing, but subject to the provisions of
Section 9(a)(iv) of this Part I, the Board of Directors, without the vote
or consent of the Holders of Series D Preferred Shares, may from time to
time authorize and create, and the Corporation may from time to time issue,
classes or series of preferred stock ranking on a parity with the Series D
Preferred Shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation, subject to continuing compliance by the
Corporation with the 1940 Act Asset Coverage and Preferred Share Basic
Maintenance Amount requirements, provided that the Corporation obtains
written confirmation from Moody's (if Moody's is then rating the Series D
Preferred Shares) and S&P (if S&P is then rating the Series D Preferred
Shares) that the issuance of any such additional class or series would not
impair the rating then assigned by such rating agency or agencies, as the
case may be, to the Series D Preferred Shares); (B) amend, alter or repeal
the provisions of the Articles, including this Statement, whether by
merger, consolidation or otherwise, so as to affect any preference, right
or power of such Series D Preferred Shares or the Holders thereof; provided
that the authorization, creation and issuance of classes or series of stock
ranking junior to the Series D Preferred Shares with respect to the payment
of dividends and the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Corporation, will not be deemed to
affect such preferences, rights or powers unless such issuance would, at
the time thereof, cause the Corporation not to satisfy the 1940 Act Asset
Coverage or the Preferred Shares Basic Maintenance Amount; or (C) file a
voluntary application for relief under federal bankruptcy law or any
similar application under state law for so long as the Corporation is
solvent and does not foresee becoming insolvent.
(ii) To the extent permitted by Minnesota law, the Board of Directors,
without the vote or consent of the Holders of Series D Preferred Shares,
may from time to time amend, alter or repeal any or all of the rating
agency guidelines described herein, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of
Series D Preferred Shares or the Holders thereof, provided the Board of
Directors receives written confirmation from Moody's and S&P that any such
amendment, alteration or repeal would not impair the ratings then assigned
by Moody's or S&P, as the case may be, to the Series D Preferred Shares.
(d) Unless otherwise required by law, the Holders of Series D Preferred
Shares shall not have any relative rights or preferences or other special rights
other than those specifically set forth herein. The Holders of Series D
Preferred Shares shall have no preemptive rights or rights to cumulative voting.
In the event that the Corporation fails to pay any dividends on the Series D
Preferred Shares, the exclusive remedy of the Holders shall be the right to vote
for Directors pursuant to the provisions of this Section 6.
(e) Unless a higher percentage is specifically provided for in the
Articles, the affirmative vote of the Holders of a majority of the outstanding
Series D Preferred Shares, voting as a separate class, shall be required to
approve any plan of reorganization (as such term is defined in the 1940 Act)
adversely affecting such shares or any action requiring a vote of security
holders of the Corporation under Section 13(a) of the 1940 Act. In the event a
vote of Holders of Series D Preferred Shares is required pursuant to the
provisions of Section 13(a) of the 1940 Act, the Corporation (i) shall, not
later than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's and S&P that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken, and (ii) not later
than three Business Days after the date of such vote, notify Moody's and S&P of
the results of such vote.
(f) The foregoing voting provisions will not apply with respect to Series D
Preferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
7. Asset Maintenance
(a) 1940 Act Asset Coverage. The Corporation will maintain, with respect to
Series D Preferred Shares, as of the last Business Day of each month in which
any Series D Preferred Shares are Outstanding, 1940 Act Asset Coverage.
(b) Preferred Share Basic Maintenance Amount. So long as Series D Preferred
Shares are Outstanding, the Corporation will maintain as of each Valuation Date
Eligible Assets having in the aggregate a Discounted Value at least equal to the
Preferred Share Basic Maintenance Amount.
(c) Minimum Liquidity Level. The Corporation will have, as of each
Valuation Date, Deposit Securities with maturities or tender dates not later
than the day preceding the first respective Dividend Payment Dates
(collectively, "Dividend Coverage Assets") that follows such Valuation Date and
having a value of not less than the Dividend Coverage Amount (the "Minimum
Liquidity Level"). If, as of each Valuation Date, the Corporation does not have
the required Dividend Coverage Assets, the Corporation shall, as soon as
practicable, adjust its portfolio in order to meet the Minimum Liquidity Level,
but only if S&P is then rating the Series D Preferred Shares. The "Dividend
Coverage Amount," as of any Valuation Date, means (i) the aggregate amount of
dividends that will accumulate on each Series D Preferred Share to (but not
including) the first Dividend Payment Date for such share that follows such
Valuation Date plus any liabilities of the Corporation that are required to be
paid on or prior to the next Dividend Payment Date for such share, less (ii) the
combined value of Deposit Securities irrevocably deposited for the payment of
dividends on Series D Preferred Shares. "Deposit Securities" means cash,
Receivables for Municipal Obligations Sold (as defined above in Part I, Section
1 under "S&P Discount Factor") which become due before the Dividend Payment
Date, interest with respect to Municipal Obligations which is payable to the
Corporation prior to or on such Dividend Payment Date, and Municipal Obligations
rated at least A-1+ or SP-1+ by S&P, except that, for purposes of the
requirements regarding Optional Redemption and the definition of "Outstanding,"
as set forth in Section 1 of this Part I, such Municipal Obligations shall be
considered "Deposit Securities" only if they are also rated P-1, MIG-1 or VMIG-1
by Moody's. The definitions of "Deposit Securities," "Dividend Coverage Assets"
and "Dividend Coverage Amount" may be changed from time to time by the
Corporation without shareholder approval, but only in the event the Corporation
receives written confirmation from S&P that any such change would not impair the
ratings then assigned by S&P to the Series D Preferred Shares.
8. Compliance Procedures for Asset Maintenance
(a) As of each Valuation Date, the Corporation shall determine in
accordance with the procedures specified herein (i) the Market Value of each
Eligible Asset owned by the Corporation on that date, (ii) the Discounted Value
of each such Eligible Asset using discount factors the ranges of which are set
forth herein, (iii) whether the Corporation has Moody's Eligible Assets and S&P
Eligible Assets with a Discounted Value at least equal, in the aggregate, to the
Preferred Share Basic Maintenance Amount as of that date, (iv) the Dividend
Coverage Assets owned by the Corporation on that date, (v) the Dividend Coverage
Amount on that date, (vi) whether the Minimum Liquidity Level is met as of that
date, (vii) the value of the total assets of the Corporation, less all
liabilities, (viii) statutory asset coverage on that date, and (ix) whether the
1940 Act Asset Coverage is met as of that date. In managing the Corporation's
portfolio, the Adviser will not alter the composition of the Corporation's
portfolio if, in the reasonable belief of the Adviser, the effect of any such
alteration would be to cause the Corporation to have Eligible Assets with an
aggregate Discounted Value, as of the immediately preceding Valuation Date, less
than the Preferred Share Basic Maintenance Amount as of such Valuation Date;
provided, however, that in the event that, as of the immediately preceding
Valuation Date, the aggregate Discounted Value of the Corporation's Eligible
Assets exceeded the Preferred Share Basic Maintenance Amount by five percent or
less, the Adviser will not alter the composition of the Corporation's portfolio
in a manner reasonably expected to reduce the aggregate Discounted Value of the
Corporation's Eligible Assets unless the Corporation shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of the
Corporation's Eligible Assets would exceed the Preferred Share Basic Maintenance
Amount.
(b) If the Corporation does not maintain as of any Valuation Date Moody's
Eligible Assets and S&P Eligible Assets with an aggregate Discounted Value at
least equal to the Preferred Share Basic Maintenance Amount or the Corporation
fails to meet, as of the last Business Day of the month, the 1940 Act Asset
Coverage, then the Corporation shall, by the Preferred Share Basic Maintenance
Cure Date or 1940 Act Cure Date, as the case may be, (i) change the composition
of the portfolio of Municipal Obligations or (ii) purchase shares of outstanding
preferred stock of the Corporation, including Series D Preferred Shares, outside
of a remarketing, or both, so that the Preferred Share Basic Maintenance Amount
and 1940 Act Asset Coverage would be met on a pro forma basis as of such Cure
Date. Any such purchase of shares of outstanding preferred stock of the
Corporation, including Series D Preferred Shares, outside of a remarketing must
be made in compliance with the applicable requirements of the 1940 Act and the
rules and regulations thereunder.
(c) For purposes of determining whether any such asset maintenance test is
met, no shares of preferred stock of the Corporation, including Series D
Preferred Shares, shall be deemed to be outstanding for purposes of any
computation if, prior to or concurrently with the determination of such asset
maintenance test, (i) the requisite funds for the redemption of any such share
shall have been deposited in trust with the applicable remarketing agent for
that purpose and the requisite notice of redemption shall have been given or
(ii) any such share shall have been redeemed, purchased or otherwise acquired by
the Corporation.
(d) Such determinations, as of any date as to which they are made, shall be
set forth in Certificates of Preferred Share Basic Maintenance Amount (which
will include a determination of items (i) through (iii) in Section 8(a) above),
Minimum Liquidity Level (which will include a determination of items (iv)
through (vi) in Section 8(a) above) and 1940 Act Asset Coverage (which will
include a determination of items (vii) through (ix) in Section 8(a) above), as
the case may be. On or before the third Business Day after a Valuation Date on
which the Corporation fails to meet any asset maintenance test, the Corporation
is required to deliver to the Remarketing Agent, S&P and Moody's the relevant
Certificates of Preferred Share Basic Maintenance Amount, Minimum Liquidity
Level and 1940 Act Asset Coverage, as the case may be.
(e) The Corporation will also deliver Certificates of Preferred Share Basic
Maintenance Amount, Minimum Liquidity Level and 1940 Act Asset Coverage (i) to
the Remarketing Agent, S&P and Moody's as of the Date of Original Issue, any
Cure Date and the last Business Day of each fiscal quarter of the Corporation,
in each case on or before the third Business Day after such day; (ii) to Moody's
or S&P on or before the third Business Day after any day on which the Discounted
Value of Moody's Eligible Assets or S&P Eligible Assets, respectively, is equal
to or less than the Preferred Share Basic Maintenance Amount or does not exceed
the Preferred Share Basic Maintenance Amount by more than 5%; (iii) to Moody's
on or before the third Business Day after the Corporation redeems any shares of
Common Stock; and (iv) to S&P upon request.
(f) Within ten Business Days after delivery of such report relating to the
last Business Day of each fiscal year end of the Corporation, and within ten
Business Days after delivery of such report relating to the Date of Original
Issue and any Cure Date, the Corporation will deliver to the Remarketing Agent,
S&P and Moody's a letter prepared by the Corporation's independent accountants
regarding the accuracy of the calculations made by the Corporation in its most
recent Certificates of Preferred Share Basic Maintenance Amount, Minimum
Liquidity Level and the 1940 Act Asset Coverage and in Certificates of Preferred
Share Basic Maintenance Amount, Minimum Liquidity Level and 1940 Act Asset
Coverage on a Valuation Date during such fiscal year selected at random by such
accountants. If any such letter prepared by the Corporation's independent
accountants shows that an error was made in any of the most recent Certificates
of Preferred Share Basic Maintenance Amount, Minimum Liquidity Level and 1940
Act Asset Coverage, the calculation or determination made by the Corporation's
independent accountants will be conclusive and binding on the Corporation and
notice of such discrepancy shall be given in writing to each of Moody's and S&P.
(g) The letter referred to in subsection (f) will confirm (i) the
mathematical accuracy of the calculations reflected in the related Certificates
of Preferred Share Basic Maintenance Amount, Minimum Liquidity Level and 1940
Act Asset Coverage, (ii) that the method used by the Corporation in determining
whether or not the Preferred Share Basic Maintenance Amount, Minimum Liquidity
Level and 1940 Act Asset Coverage are met is in accordance with the applicable
requirements of the Corporation's Preferred Share Provisions, (iii) that the
written price quotations used by the Corporation in such determination conform
to the written quotations obtained by the Corporation in accordance with the
applicable requirements of the Corporation's Preferred Share Provisions, and
(iv) that the assets listed as Eligible Assets and Dividend Coverage Assets in
the Preferred Share Basic Maintenance Amount and Minimum Liquidity Level tests
conform to the description of Eligible Assets and Dividend Coverage Assets, as
the case may be, set forth in the Corporation's Series D Preferred Share
Provisions.
(h) The Corporation shall give prompt written notice to S&P and to Moody's
of (i) any material change to the Articles of the Corporation, including the
Preferred Share Provisions, or the by-laws of the Corporation, (ii) any failure
by the Corporation to declare or pay any dividend on the Series D Preferred
Shares, (iii) any issuance of a notice of optional or mandatory redemption of
the Series D Preferred Shares, (iv) the assumption of control of the Board of
Directors of the Corporation by holders of preferred stock pursuant to Section
6(b) of Part I of the Series D Preferred Share Provisions, (v) the
unavailability of pricing information with respect to the Municipal Obligations
in the Corporation's portfolio, whether pursuant to a pricing service or through
dealer bids, (vi) any change in any pricing service utilized by the Corporation,
(vii) any Dividend Period in which the Applicable Dividend Rate is greater than
or equal to 95% of the "AA" Composite Commercial Paper Rate, (viii) the
designation by the Board of Directors of any Special Dividend Period, (ix) any
person's acquisition, to the knowledge of the Corporation, of beneficial
ownership of 5% or more of any class of the Corporation's voting securities
(including the Series D Preferred Shares), (x) any change in the index used in
determining the Reference Rate, (xi) any tax changes that affect the calculation
of the Additional Dividends, and (xii) any change in the Corporation's Adviser.
In addition, the Corporation shall give prompt written notice to Moody's of (A)
any increase in the Marginal Tax Rate of 40% or more and (B) any increase in the
Marginal Tax Rate such that the Marginal Tax Rate equals or exceeds 50%.
9. Certain Other Restrictions
(a) For so long as any Series D Preferred Shares are Outstanding and
Moody's and S&P are rating such shares, the Corporation will not, unless it has
received written confirmation from Moody's and S&P, as appropriate, that any
such action would not impair the ratings then assigned by Moody's and S&P to
Series D Preferred Shares, engage in any one or more of the following
transactions:
(i) borrow money, except that the Corporation may, without obtaining
the written confirmation described above, borrow money for the purpose of
clearing securities transactions if the Preferred Share Basic Maintenance
Amount would continue to be satisfied after giving effect to such
borrowing, provided that so long as any Series D Preferred Shares are rated
by Moody's, such borrowing will not exceed 5% of the value of the total
assets of the Corporation, will be required to be repaid within 60 days and
will not be extendable or renewable;
(ii) engage in any short sales of securities;
(iii) lend securities; or
(iv) issue any class of stock ranking prior to or on a parity with the
Series D Preferred Shares with respect to paying dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Corporation.
(b) For so long as Series D Preferred Shares are rated by Moody's and such
shares remain Outstanding, the Corporation will not, except as necessary to
effect Closing Transactions, engage in transactions in options on securities,
futures contracts or options on futures contracts, except that, in connection
with Moody's Hedging Transactions, (i) the Corporation may buy call or put
option contracts, (ii) the Corporation may write covered call options, and (iii)
the Corporation may write put options, in each case on securities. For purposes
of valuation of Moody's Eligible Assets, (i) if the Corporation writes a call
option, the underlying asset will be valued as follows: (A) if the option is
exchange-traded and may be offset readily or if the option expires before the
earliest possible redemption date of the Series D Preferred Shares, at the lower
of the Discounted Value of the underlying security and exercise price of the
option or (B) otherwise, it has no value; (ii) if the Corporation writes a put
option, the underlying asset will be valued as follows: the lesser of (A)
exercise price and (B) the Discounted Value of the underlying security; and
(iii) call or put option contracts which the Corporation buys have no value. For
so long as Series D Preferred Shares are rated by Moody's, (i) the Corporation
will not engage in options transactions for leveraging or speculative purposes;
(ii) the Corporation will not write any anticipatory call options pursuant to
which the Corporation hedges the anticipated purchase of an asset prior to
completion of such purchase; (iii) the Corporation will not enter into an option
unless, after giving effect thereto, the Corporation would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the Preferred Share Basic Maintenance Amount; (iv) the Corporation will not
enter into an option unless after giving effect to such transaction the
Corporation would continue to be in compliance with Section 7(b) of this Part I;
(v) for purposes of the Preferred Share Basic Maintenance Amount, (A) assets in
margin accounts are not Moody's Eligible Assets, (B) 10% of the settlement price
of assets sold under a futures contract, the settlement price of assets
purchased under a futures contract and the settlement price of an underlying
futures contract if the Corporation writes put options on futures contracts will
constitute liabilities of the Corporation, and (C) if the Corporation writes
call options on futures contracts and does not own the underlying futures
contract, 105% of the fair market value of the underlying futures contract will
constitute a liability of the Corporation; (vi) the Corporation shall write only
exchange-traded options on exchanges approved by Moody's; (vii) where delivery
may be made to the Corporation with any of a class of securities, the
Corporation shall assume for purposes of the Preferred Share Basic Maintenance
Amount that it takes delivery of that security which yields it the least value;
(viii) the Corporation will not engage in forward contracts; (ix) the
Corporation will enter into future contracts as sellers only if it owns the
underlying securities; and (x) there shall be a quarterly audit made of the
Corporation's futures and options transactions by the Corporation's independent
accountants to confirm that the Corporation is in compliance with these
standards. Notwithstanding the foregoing restrictions on options and futures,
the Corporation may engage in such transactions if the Corporation receives
written confirmation from Moody's that the action the Corporation proposes to
take would not impair the rating then assigned to the Series D Preferred Shares.
(c) For so long as Series D Preferred Shares are rated by S&P and such
shares remain Outstanding, the Corporation will not merge or consolidate with
any other corporation or change pricing services. In addition, the Corporation
will not purchase or sell futures contracts or options thereon or write
unsecured put or uncovered call options on portfolio securities, except that (i)
the Corporation may engage in any S&P Hedging Transactions based on the
Municipal Index, provided that (A) the Corporation shall not engage in any S&P
Hedging Transactions based on the Municipal Index (other than Closing
Transactions) which would cause the Corporation at the time of such transaction
to own or have sold the least of (1) more than 1,000 outstanding futures
contracts based on the Municipal Index, (2) outstanding futures contracts based
on the Municipal Index and on Treasury Bonds exceeding in number 25% of the
quotient of the fair market value of the Corporation's total assets divided by
100,000, or (3) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the month prior to the time of effecting such
transaction as reported by The Wall Street Journal; and (ii) the Corporation may
engage in S&P Hedging Transactions based on Treasury Bonds, provided that (A)
the Corporation shall not engage in any S&P Hedging Transactions based on
Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold the lesser of
(1) outstanding futures contracts based on Treasury Bonds and on the Municipal
Index exceeding in number 25% of the quotient of the fair market value of the
Corporation's total assets divided by 100,000 or (2) outstanding futures
contracts based on Treasury Bonds exceeding in number 10% of the average number
of daily traded futures contracts based on Treasury Bonds in the month prior to
the time of effecting such transaction as reported by The Wall Street Journal.
For so long as Series D Preferred Shares are rated by S&P, the Corporation will
engage in Closing Transactions to close out any outstanding futures contract
which the Corporation owns or has sold or any outstanding option thereon owned
by the Corporation in the event (i) the Corporation does not have S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Share Basic Maintenance Amount on two consecutive Valuation Dates and (ii) the
Corporation is required to pay Variation Margin on the second such Valuation
Date. For so long as Series D Preferred Shares are rated by S&P, the Corporation
will engage in a Closing Transaction to close out any outstanding futures
contract or option thereon in the month prior to the delivery month under the
terms of such futures contract or option thereon unless the Corporation holds
securities deliverable under such terms. For purposes of determining S&P
Eligible Assets to determine compliance with the Preferred Share Basic
Maintenance Amount, no amounts on deposit with the Corporations, custodian or
broker representing Initial Margin or Variation Margin shall constitute S&P
Eligible Assets. For so long as Series D Preferred Shares are rated by S&P, when
the Corporation writes a futures contract or option thereon, it will maintain an
amount of cash, cash equivalents or short-term, fixed-income securities in a
segregated account with the Corporation's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in the
account of the Corporation's broker equals the fair market value of the futures
contract, except that in the event the Corporation writes a futures contract or
option thereon which requires delivery of an underlying security, the
Corporation shall hold such underlying security. Notwithstanding the foregoing
restrictions, the Corporation may engage in such transactions if the Corporation
receives written confirmation from S&P that the action the Corporation proposes
to take would not impair the rating then assigned to the Series D Preferred
Shares.
PART II
1. Remarketing Schedule
Each Remarketing shall take place over a two-day period consisting of the
Remarketing Date and the Settlement Date. Such dates or the method of
establishing such dates shall be determined by the Board of Directors from time
to time.
2. Advance Notice of Allocation of Taxable Income
If the Corporation intends to allocate any net capital gains or other
income taxable for federal income tax purposes to any dividend on Series D
Preferred Shares, the Corporation may notify the Remarketing Agent and the
Paying Agent of the amount to be so included seven days prior to the Remarketing
on which the Applicable Dividend Rate for such dividend is to be established.
Whenever the Remarketing Agent receives such notice from the Corporation, it
will in turn notify the Holders of Series D Preferred Shares and prospective
purchasers believed by it to be interested in purchasing Series D Preferred
Shares in such Remarketing.
3. Procedure for Tendering
(a) Series D Preferred Shares are subject to Tender and Dividend Reset at
the end of each Dividend Period in the Remarketing which commences on the
Remarketing Date immediately prior to the end of such Dividend Period. By 9:00
a.m., New York City time, on each Remarketing Date, the Remarketing Agent shall,
after canvassing the market and considering prevailing market conditions at the
time for Series D Preferred Shares and similar securities, provide Beneficial
Owners of Series D Preferred Shares non-binding indications of the Applicable
Dividend Rate for such shares for the next succeeding 28-day Dividend Period;
provided that, if the Board of Directors has designated the next Dividend Period
as a Special Dividend Period, the Remarketing Agent will provide to Beneficial
Owners a non-binding indication only of the Applicable Dividend Rate for such
Special Dividend Period. The actual Applicable Dividend Rate for such Dividend
Period may be greater than or less than the rate per annum indicated in such
non-binding indications (but not greater than the applicable Maximum Dividend
Rate) and will not be determined until after a Holder is required to elect to
hold or sell its Series D Preferred Shares. By 12:00 noon, New York City time,
on such Remarketing Date, each Holder of Series D Preferred Shares must notify
the Remarketing Agent of its desire, on a share-by-share basis, either to tender
such Series D Preferred Shares at a price of $50,000 per share or to continue to
hold such share for the next Dividend Period. Any notice given to the
Remarketing Agent to tender or hold shares for a particular Dividend Period
shall be irrevocable and may not be waived by the Remarketing Agent, except that
the Remarketing Agent may, in its sole discretion (i) at the request of a Holder
that has tendered one or more shares to the Remarketing Agent, waive such
Holder's tender, and thereby enable such Holder to continue to hold the share or
shares for a 28-day Dividend Period or a designated Special Dividend Period, if
applicable, as agreed to by such Holder and the Remarketing Agent at such time,
so long as such tendering Holder has indicated to the Remarketing Agent that it
would accept the new Applicable Dividend Rate for such Dividend Period, such
waiver to be contingent upon the Remarketing Agent's ability to remarket all
shares tendered in such Remarketing, and (ii) at the request of a Holder that
has elected to hold one or more of its Series D Preferred Shares, waive such
Holder's election with respect thereto. Notwithstanding the foregoing, any
holder or prospective purchaser may informally indicate to the Remarketing Agent
its Applicable Dividend Rate preferences. The Applicable Dividend Rate with
respect to a Dividend Period may be greater or less than such informal rate
preferences.
(b) The right of each Holder to tender Series D Preferred Shares in a
Remarketing shall be limited to the extent that (i) the Remarketing Agent
conducts a Remarketing pursuant to the terms of the Remarketing Agreement, (ii)
shares tendered have not been called for redemption, and (iii) the Remarketing
Agent is able to find a purchaser or purchasers for tendered Series D Preferred
Shares at an Applicable Dividend Rate for a 28-day Dividend Period or a
designated Special Dividend Period, if any, not in excess of any applicable
Maximum Dividend Rate.
(c) Subject to the condition set forth in the next sentence, holders of
Series D Preferred Shares that fail on a Remarketing Date for such shares to
elect to tender or hold such shares will be deemed to have elected to continue
to hold such shares for the next applicable Dividend Period. If, on a
Remarketing Date, the current Dividend Period with respect to such shares is a
Special Dividend Period of more than 90 days, or the succeeding Dividend Period
with respect to such shares has been designated by the Board of Directors as a
Special Dividend Period of more than 90 days, then holders of such shares that
fail to tender or hold such shares will be deemed to have elected to tender such
shares.
4. Determination of Applicable Dividend Rates
(a) By 3:00 p.m., New York City time, on each Remarketing Date, the
Remarketing Agent shall determine the Applicable Dividend Rate to the nearest
one-thousandth (0.001) of one percent per annum for the next Dividend Period.
The Applicable Dividend Rate for each such Dividend Period, except as otherwise
required herein, shall be the dividend rate per annum which the Remarketing
Agent determines, in its sole judgment, to be the lowest rate that will enable
it to remarket on behalf of the Holders thereof of the Series D Preferred Shares
in such Remarketing and tendered to it on such Remarketing Date at a price of
$50,000 per share.
(b) If no Applicable Dividend Rate shall have been established on a
Remarketing Date in a Remarketing for the next Dividend Period, for any reason
(other than because there is no Remarketing Agent or the Remarketing Agent is
not required to conduct a Remarketing pursuant to the terms of the Remarketing
Agreement), then the Remarketing Agent, in its sole discretion, shall, if
necessary and except during a Non-Payment Period, after taking into account
market conditions as reflected in the prevailing yields on fixed and variable
rate taxable and tax-exempt debt securities and the prevailing dividend yields
of fixed and variable rate preferred stock, determine such Applicable Dividend
Rate which will be the rate per annum that would be the initial dividend rate
fixed in an offering on such Remarketing Date, assuming in each case a
comparable dividend period, issuer and security. If there is no Remarketing
because there is no Remarketing Agent or the Remarketing Agent is not required
to conduct a Remarketing pursuant to the Remarketing Agreement, then, except
during a Non-Payment Period, the Applicable Dividend Rate for shares for the
subsequent Dividend Period and for each subsequent Dividend Period for which no
Remarketing takes place because of the foregoing shall be the applicable Maximum
Dividend Rate and the next succeeding Dividend Period shall be a Seven-day
Dividend Period.
(c) In determining such Applicable Dividend Rate, the Remarketing Agent
shall, after taking into account market conditions as reflected in the
prevailing yields on fixed and variable rate taxable and tax-exempt debt
securities and the prevailing dividend yields of fixed and variable rate
preferred stocks determined for the purpose of providing non-binding indications
of the Applicable Dividend Rate to Holders and potential purchasers of Series D
Preferred Shares, (i) consider the number of Series D Preferred Shares tendered
and the number of Series D Preferred Shares potential purchasers are willing to
purchase, and (ii) contact by telephone or otherwise current and potential
Holders of Series D Preferred Shares to ascertain the dividend rates at which
they would be willing to hold Series D Preferred Shares.
(d) The Applicable Dividend Rate shall be determined as aforesaid by the
Remarketing Agent in its sole discretion (except as otherwise provided in this
Statement with respect to an Applicable Dividend Rate that shall be the
Non-Payment Period Rate or the Maximum Dividend Rate) and shall be conclusive
and binding on Holders.
(e) Except during a Non-Payment Period, the Applicable Dividend Rate for
any Dividend Period shall not be more than the applicable Maximum Dividend Rate.
5. Allocation of Shares: Failure to Remarket at $50,000 Per Share
(a) If the Remarketing Agent is unable to remarket by 1:00 p.m., New York
City time, on a Settlement Date all Series D Preferred Shares tendered to it in
the related Remarketing at a price of $50,000 per share, (i) each Holder that
tendered or was deemed to have tendered Series D Preferred Shares for sale shall
sell a number of Series D Preferred Shares on a pro rata basis, to the extent
practicable, or by lot, as determined by the Remarketing Agent in its sole
discretion, based upon the number of orders to purchase Series D Preferred
Shares in such Remarketing, and (ii) the Dividend Period for such series will be
a Seven-day Dividend Period and the Applicable Dividend Rate for such Dividend
Period shall be the Maximum Dividend Rate for a Seven-day Dividend Period.
(b) If the allocation procedures described above would result in the sale
of a fraction of a Series D Preferred Share, the Remarketing Agent shall, in its
sole discretion, round up or down the number of Series D Preferred Shares sold
by each Holder on the applicable Settlement Date so that each share sold by a
Holder shall be a whole Series D Preferred Share, and the total number of shares
sold equals the total number of shares purchased on such Settlement Date.
6. Notification of Results; Settlement
(a) Subject to a failure to remarket as described in Part II, Section 5 of
this Statement, by telephone at approximately 3:30 p.m., New York City time, on
each Remarketing Date, the Remarketing Agent shall advise each Holder of
tendered shares and each purchaser thereof (or the Agent Member thereof who in
turn will advise such Holder or purchaser) (i) of the number of shares such
Holder or purchaser is to sell or purchase and (ii) to give instructions to its
Agent Member to deliver such shares against payment therefor or to pay the
purchase price against delivery as appropriate. The Remarketing Agent will also
advise each Holder or purchaser that is to continue to hold, or to purchase,
shares with a Dividend Period beginning on such Settlement Date of the
Applicable Dividend Rate for such shares.
(b) In accordance with the Securities Depository's normal procedures, on
the Settlement Date, the transactions described above with respect to each
Series D Preferred Share shall be executed through the Securities Depository, if
the Securities Depository or its nominee holds or is to hold the certificate
relating to the shares to be purchased, and the accounts of the respective Agent
Members of the Securities Depository shall be debited and credited and shares
delivered by book entry as necessary to effect the purchases and sales of Series
D Preferred Shares in the related Remarketing. Purchasers of Series D Preferred
Shares shall make payment to the Paying Agent in same-day funds against delivery
to other purchasers or their nominees of one or more certificates representing
Series D Preferred Shares, or, if the Securities Depository or its nominee holds
or is to hold the certificate relating to the shares to be purchased, through
their Agent Members in same-day funds to the Securities Depository against
delivery by book entry of Series D Preferred Shares through their Agent Members.
The Securities Depository shall make payment in accordance with its normal
procedures. If the certificate for Series D Preferred Shares is not held by the
Securities Depository or its nominee, payment with respect to such shares will
be made in same-day funds to the Paying Agent against delivery of certificates
for such shares. As long as the Securities Depository or its nominee holds the
certificates representing the Series D Preferred Shares, no share certificates
will need to be delivered by any selling Holder to reflect any transfer of
Series D Preferred Shares effected in a Remarketing.
(c) If any Holder selling Series D Preferred Shares in a Remarketing fails
to deliver such shares, the Agent Member of such selling Holder and of any other
person that was to have purchased Series D Preferred Shares in such Remarketing
may deliver to any such other person a number of whole Series D Preferred Shares
that is less than the number of shares that otherwise was to be purchased by
such person. In such event, the number of Series D Preferred Shares to be so
delivered shall be determined by such Agent Member. Delivery of such lesser
number of Series D Preferred Shares shall constitute good delivery.
(d) The Remarketing Agent, the Paying Agent and the Securities Depository
each will use its reasonable commercial efforts to meet the timing requirements
set forth in paragraphs (a) and (b) above; provided that, in the event that
there is a delay in the occurrence of any delivery or other event connected with
a Remarketing, the Remarketing Agent, the Paying Agent and the Securities
Depository each will use its reasonable commercial efforts to accommodate such
delay in furtherance of the Remarketing.
(e) Notwithstanding any of the foregoing provisions of this Section 6, the
Remarketing Agent may, in its sole discretion, modify the settlement procedures
set forth above with respect to any Remarketing, provided any such modification
does not adversely affect the Holders of Series D Preferred Shares or the
Corporation.
7. Purchase of Preferred Shares by Remarketing Agent
The Remarketing Agent may purchase for its own account Series D Preferred
Shares in a Remarketing, provided that it purchases all tendered (or deemed
tendered) Series D Preferred Shares not sold in such Remarketing to other
purchasers and that the Applicable Dividend Rate established with respect to
such shares in such Remarketing is no higher than the Applicable Dividend Rate
that would have been established if the Remarketing Agent had not purchased such
shares. Except as provided in the previous sentence, the Remarketing Agent shall
not be obligated to purchase any Series D Preferred Shares that would otherwise
remain unsold in a Remarketing. If the Remarketing Agent owns any Series D
Preferred Shares subject to a Remarketing immediately prior to such Remarketing
and if all Series D Preferred Shares tendered for sale by other owners have been
sold in such Remarketing, then the Remarketing Agent may sell such number of its
shares in such Remarketing as there are outstanding orders to purchase that have
not been filled by shares tendered for sale by other Holders. Neither the
Corporation, the Paying Agent nor the Remarketing Agent shall be obligated in
any case to provide funds to make payment to a Holder upon such Holder's tender
of its Series D Preferred Shares in a Remarketing.
8. Applicable Dividend Rate During a Non-Payment Period
So long as a Non-Payment Period shall continue, paragraphs 1, 2, 3, 4, 5, 6
and 7 of this Part II shall not be applicable to any of the Series D Preferred
Shares and such Series D Preferred Shares shall not be subject to Tender and
Dividend Reset and the Applicable Dividend Rate for such shares shall be the
Non-Payment Period Rate.
9. Transfers
Unless the Corporation has elected, during a Non-Payment Period, to waive
this requirement, ownership of Series D Preferred Shares will be maintained in
book entry form by the Securities Depository, for the account of an Agent Member
designated by each purchaser of Series D Preferred Shares to the Remarketing
Agent. Such Agent Member, in turn, shall maintain records of such purchaser's
beneficial ownership. Furthermore, unless the Corporation shall have elected,
during a Non-Payment Period, to waive this requirement, a Beneficial Owner may
sell, transfer or otherwise dispose of any Series D Preferred Shares held by it
only pursuant to orders placed in a Remarketing or, in the case of any transfer
other than pursuant to a Remarketing, if such Beneficial Owner or its Agent
Member advises the Remarketing Agent of such transfer and the Remarketing Agent
is provided such information about the new Beneficial Owner as may be required
by the Paying Agent.
10. Miscellaneous
To the extent permitted by applicable law, the Board of Directors of the
Corporation may interpret or adjust the provisions hereof to resolve any
inconsistency or ambiguity, or to remedy any formal defect.
11. Securities Depository; Stock Certificates
(a) If there is a Securities Depository, one certificate for all of the
Series D Preferred Shares shall be issued to the Securities Depository and
registered in the name of the Securities Depository or its nominee. Such
certificate shall bear a legend to the effect that such certificate is issued
subject to the provisions contained in this Statement. Unless the Corporation
shall have elected, during a Non-Payment Period, to waive this requirement, the
Corporation will also issue stop-transfer instructions to the Paying Agent for
the Series D Preferred Shares. Except as provided in paragraph (b) below, the
Securities Depository or its nominee will be the only holder of certificates
representing Series D Preferred Shares, and no Holder shall receive certificates
representing its ownership interest in such shares.
(b) If the Applicable Dividend Rate shall be the Non-Payment Period Rate or
there is no Securities Depository, the Corporation may at its option issue one
or more new certificates with respect Series D Preferred Shares (without the
legend referred to in paragraph 11(a) of this Part II) registered in the names
of the Holders or their nominees and rescind the stop-transfer instructions
referred to in paragraph 11(a) of this Part II with respect to such shares.
IN WITNESS WHEREOF, DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND
II, INC. has caused these presents to be signed in its name and on its behalf by
its ________________________ [officer title], and attested by its Secretary, and
the said officers of the Corporation further acknowledged said instrument to be
the corporate act of the Corporation, and stated under the penalties of perjury
that to the best of their knowledge, information and belief the matters and
facts therein set forth with respect to approval are true in all material
respects, all on _____________, 2006.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL
INCOME FUND II, INC.
By:
Name: __________________________________
Title: __________________________________
ATTEST:
Secretary
TABLE OF CONTENTS
PAGE
[Front cover page].............................................................1
Summary .......................................................................1
Key Features of the Funds.............................................1
Key Features of the Acquisitions......................................1
The Acquisitions.............................................1
Common Shares................................................2
Preferred Shares.............................................2
Key Features of the Acquiring Fund and the Acquired Funds.............3
Investment Objectives and Policies...........................3
Trading of Common Shares on the Exchange.....................3
Preferred Shares.............................................3
Primary Consequences of the Proposed Acquisitions.....................4
Primary Federal Tax Consequences......................................4
Principal Risk Factors.........................................................5
Investment Risks......................................................5
Potential Restrictions on Acquiring Fund's Payment of
Dividends.............................................................8
Current and Pro Forma Fees.....................................................9
Information About the Acquisitions............................................11
Material Features of the Acquisitions................................11
Terms of the Plans..........................................11
Description of Acquiring Fund Common Shares to
be Issued...................................................15
Description of Acquiring Fund Preferred Shares
to be Issued................................................17
Reasons for the Acquisitions.........................................25
Federal Income Tax Consequences......................................26
Comparison of Acquiring and Acquired Fund Shares.....................27
General.....................................................27
Capitalization..............................................28
Common Shares...............................................28
Preferred Shares............................................29
Provisions for Delaying or Preventing Changes in
Control.....................................................31
Taxes.......................................................32
Existing and Pro Forma Capitalization................................32
Information About the Funds...................................................35
General Description..................................................35
Organization; Investment Company Classification.............35
Investment Objective and Policies...........................36
Other Investment Policies and Strategies....................37
Fundamental Investment Restrictions.........................38
How the Fundamental Investment Restrictions Are
Interpreted.................................................39
Hedging Strategies..........................................40
Share Price Data............................................41
Financial Highlights.................................................45
Management...........................................................48
Board of Directors..........................................48
Investment Adviser..........................................48
Portfolio Management........................................48
Administrators, Transfer Agent and Custodian................49
Expenses....................................................49
Proxy Material, Reports and Other Information...............50
Voting information............................................................50
Revocability of Proxy................................................50
Persons Making the Solicitation......................................50
Dissenters' Right of Appraisal.......................................51
Notice of Dissent...........................................51
Notice of Procedure; Deposit of Shares......................52
Payment; Return of Shares...................................53
Supplemental Payment; Demand................................54
Petition; Determination.....................................54
Costs; Fees; Expenses.......................................55
Voting Requirements..................................................55
Acquired Fund Shares........................................55
Acquiring Fund Shares.......................................55
Quorum; Adjournment; Tabulation.............................55
Principal Holders of Voting Securities...............................56
Record Date Information.....................................56
5% Record and Beneficial Owners.............................56
Ownership by Officers and Directors.........................57
Interest of Certain Persons and Experts.......................................57
Information on Re-offerings...................................................58
Exhibit A: Form of Agreement and Plan of Acquisition.........................A-1
Exhibit B: Minnesota Statutes................................................B-1
Exhibit C: Statement of Rights and Preferences of Series C
Preferred Shares.............................................................C-1
Exhibit D: Statement of Rights and Preferences of Series D
Preferred Shares.............................................................D-1
Table of Contents..............................................................i
STATEMENT OF ADDITIONAL INFORMATION
FOR
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC.
Dated October __, 2005
Acquisitions of Substantially All of the Assets of
Delaware Investments Minnesota Municipal Income Fund, Inc. (ASE: VMN) and
Delaware Investments Minnesota Municipal Income Fund III, Inc. (ASE: VYM)
By, and In Exchange For Shares of,
Delaware Investments Minnesota Municipal Income Fund II, Inc. (ASE: VMM)
This Statement of Additional Information ("SAI") specifically relates to
the proposed acquisitions of substantially all of the assets of Delaware
Investments Minnesota Municipal Income Fund, Inc. ("Minnesota I") and Delaware
Investments Minnesota Municipal Income Fund III, Inc. ("Minnesota III" and,
together with Minnesota I, the "Acquired Funds") in exchange solely for shares
of Delaware Investments Minnesota Municipal Income Fund II, Inc. ("Acquiring
Fund").
This SAI incorporates by reference the respective Annual Reports of the
Acquired Funds and the Acquiring Fund (collectively, the "Funds") for the fiscal
year ended March 31, 2005, as previously filed via EDGAR on June 7, 2005
[Accession No. 0000950116-05-002114], and is legally considered to be a part of
this SAI.
This SAI is not a Prospectus; you should read this SAI in conjunction with
the Proxy Statement/Prospectus dated October ___, 2005, relating to the
above-referenced transaction. You can request a copy of the Proxy
Statement/Prospectus by calling 1-800-523-1918 or by writing to Delaware
Investments Minnesota Municipal Income Fund II, Inc., Account Services, 2005
Market Street, Philadelphia, PA 19103.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Table of Contents..............................................................i
Investment Considerations......................................................1
Investment Policies...................................................1
Municipal Obligations........................................1
Special Considerations Regarding Investments in Minnesota
Municipal Obligations........................................3
Hedging......................................................4
Non-Fundamental Investment Restrictions......................6
Portfolio Turnover....................................................7
Additional Risk Factors...............................................8
Risks of Futures.............................................8
Risks of Options.............................................9
Minnesota Economic Factors...........................................10
Economic Outlook............................................11
Revenues and Expenditures...................................12
Legislation/Litigation......................................13
Debt Management.............................................14
Rating......................................................15
Management Of The Funds.......................................................15
Directors and Officers...............................................15
Board, Shareholder and Committee Meetings...................19
Board Compensation..........................................20
Officers....................................................21
Codes of Ethics...............................................................21
Proxy Voting Policies and Procedures..........................................21
Independent Auditor and Legal Counsel.........................................23
Independent Registered Public Accounting Firm........................23
Legal Counsel........................................................23
Portfolio Transactions........................................................23
Taxes.........................................................................24
Federal Tax..........................................................24
General.....................................................24
Jobs and Growth Tax Relief Reconciliation Act of 2003.......25
Minnesota State Tax..................................................26
Financial Statements..........................................................27
INVESTMENT CONSIDERATIONS
The following section contains further information about the Funds'
investments. Capitalized terms not defined in this SAI shall have the
definitions given them in the Proxy Statement/Prospectus.
INVESTMENT POLICIES
Municipal Obligations
Municipal Obligations may be issued to obtain funds for various public
purposes, including the construction of public facilities such as airports,
bridges, highways, housing, hospitals, mass transportation, schools, streets,
and water and sewer works. Other public purposes for which Municipal Obligations
may be issued include the refinancing of outstanding obligations and the
obtaining of funds for general operating expenses and for loans to other public
institutions and facilities. In addition, certain industrial development,
private activity and pollution control bonds may be included within the term
Municipal Obligations if the interest paid thereon qualifies as exempt from
federal income tax.
The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" or "special obligation" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith, credit and taxing
power for the payment of principal and interest. Revenue or special obligation
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source; accordingly, the timely payment of principal
and interest in accordance with the terms of the revenue or special obligation
bond is a function of the economic viability of such facility or such revenue
source. Industrial development, private activity and pollution control bonds are
in most cases revenue bonds and do not generally constitute the pledge of the
credit or taxing power of the issuer of such bonds. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications, depending upon numerous factors.
Also included within the general category of Municipal Obligations are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, a Fund's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition of the property in the event
of foreclosure might prove difficult. Each Fund will seek to minimize these
risks by not investing more than 5% of its total investment assets in lease
obligations that contain "non-appropriation" clauses, and by only investing in
those "non-appropriation" lease obligations where (a) the nature of the leased
equipment or property is such that its ownership or use is essential to a
governmental function of the municipality; (b) the lease payments will commence
amortization of principal at an early date, resulting in an average life of
seven years for the lease obligation; (c) appropriate covenants will be obtained
from the municipal obligor prohibiting the substitution or purchase of similar
equipment if lease payments are not appropriated; (d) the lease obligor has
maintained good market acceptability in the past; (e) the investment is of a
size that will be attractive to institutional investors; and (f) the underlying
leased equipment has elements of portability and/or use that enhance its
marketability in the event that foreclosure on the underlying equipment were
ever required. Each Fund has not imposed any percentage limitations with respect
to its investment in lease obligations not subject to the "non-appropriation"
risk, except to the extent such obligations are illiquid, as discussed in the
following paragraph.
Lease obligations held by the Funds will be treated as illiquid unless they
are determined to be liquid pursuant to guidelines established by each Fund's
Board of Directors. Determinations concerning the liquidity of a municipal lease
obligation will be based on all relevant factors, including (a) the frequency of
trades and quotes for the obligations; (b) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (c) the
willingness of dealers to undertake to make a market in the securities; and (d)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics of transfer. In
no event will such obligations be considered liquid unless they are sold in a
public offering and are rated BBB or better by S&P or Baa or better by Moody's.
The lack of an established trading market for lease obligations may make the
determination of the fair market value of such securities more difficult.
Certain Municipal Obligations may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indexes, such as a bank prime rate or a tax-exempt
money market index. As used in the Proxy Statement/Prospectus and in this SAI,
the term Municipal Obligations also includes obligations, such as tax-exempt
notes, municipal commercial paper and municipal lease obligations, having
relatively short-term maturities, although each Fund generally intends to
emphasize investments in Municipal Obligations with long-term maturities.
The yields on Municipal Obligations are dependent upon a variety of
factors, including the condition of the market in general and the Municipal
Obligations market in particular, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of Moody's
and S&P represent their opinions as to the quality of those Municipal
Obligations that they rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, Municipal
Obligations with the same maturity, coupon and rating may have different yields,
while obligations of the same maturity and coupon with different ratings may
have the same yield. The market value of outstanding Municipal Obligations will
vary with changes in prevailing interest rate levels and as a result of changing
evaluations of the ability of their issuers to meet interest and principal
payments. Generally, a rise in interest rates will result in a decrease in a
Fund's net asset value per share, while a drop in interest rates will result in
an increase in a Fund's net asset value per share.
Although Municipal Obligations in which a Fund may invest will be, at the
time of investment, rated investment grade or determined by the investment
adviser to be of comparable quality, Municipal Obligations, like other debt
obligations, are subject to the risk of non-payment. The ability of issuers of
Municipal Obligations to make timely payments of interest and principal may be
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such non-payment would result in a reduction of income to a
Fund and in a decrease in the net asset value of such Fund.
Municipal Obligations are also subject to the provisions of bankruptcy,
insolvency, reorganization and other laws affecting the rights and remedies of
creditors, such as the federal Bankruptcy Code, and laws, if any, which may be
enacted by the United State Congress or a state's legislature extending time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations within constitutional limitations. There is also
the possibility that, as a result of litigation or other conditions, the power
or ability of issuers to meet their obligations for the payment of interest on
and principal of the Municipal Obligations may be materially affected.
From time to time, legislation has been introduced in the United States
Congress for the purpose of restricting the availability of or eliminating the
federal income tax exemption for interest on Municipal Obligations, some of
which have been enacted. Additional proposals may be introduced in the future
that, if enacted, could affect the availability of Municipal Obligations for
investment by a Fund and the value of such Fund's portfolio. In such event,
management of the Fund may reevaluate the Fund's investment objective and
policies.
The Municipal Obligations market is rapidly evolving; types of Municipal
Obligations other than those described above can be expected to be developed and
marketed from time to time. Consistent with its investment limitations, each
Fund expects to invest in those new types of Municipal Obligations that the
investment adviser believes may assist the Fund in achieving its investment
objective. Each Fund will notify shareholders to the extent that it intends to
invest more than 15% of its net assets in such obligations.
Special Considerations Regarding Investments in Minnesota Municipal Obligations
As described in the Proxy Statement/Prospectus, except to the extent the
Funds invest in temporary investments, each Fund will invest substantially all
of its total assets in Minnesota Municipal Obligations. Each Fund is, therefore,
susceptible to political, economic or regulatory factors affecting issuers of
Minnesota Municipal Obligations. The following information is a brief summary of
particular state factors affecting the Funds and does not purport to be a
complete description of such factors. The financial condition of the State of
Minnesota, its public authorities and local governments could affect the market
values and marketability of, and therefore the net asset value per share and the
interest income of the Funds, or result in the default of existing obligations,
including obligations which may be held by a Fund. Further, the State of
Minnesota may face numerous forms of litigation seeking significant damages
that, if awarded, may adversely affect the financial situation of the state or
issuers located in the state. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
the State of Minnesota, and there is no obligation on the part of the state to
make payment on such local obligations in the event of default in the absence of
a specific guarantee or pledge provided by the state.
Bond ratings received on Minnesota's general obligation bonds, if any, are
discussed below. Moody's, S&P and/or Fitch, Inc. ("Fitch") provide an
assessment/rating of the creditworthiness of an obligor. The debt rating is not
a recommendation to purchase, sell, or hold a security, inasmuch as it does not
comment as to market price or suitability for a particular investor. The ratings
are based on current information furnished by the issuer or obtained by the
rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstances. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised or
withdrawn entirely by any such rating agencies, if in their respective
judgments, circumstances so warrant. The ratings are based, in varying degrees,
on the following considerations:
1. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of the
obligation.
2. Nature and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement(s) under the laws of
bankruptcy and other laws affecting creditors' rights.
A revision or withdrawal of any such credit rating could have an effect on
the market price of the related debt obligations. An explanation of the
significance and status of such credit ratings may be obtained from the rating
agencies furnishing the same.
Hedging
Although in normal circumstances each Fund does not intend to invest more
than 5% of its assets in instruments other than Municipal Obligations, each Fund
may attempt to hedge its investment portfolio against market risk (including
interest rate risk) by engaging in various hedging transactions. In particular,
the Funds may purchase and sell futures contracts, enter into various interest
rate transactions, and may purchase and sell (or write) exchange-listed and
over-the-counter put and call options on securities and futures contracts
(collectively, "Hedging Transactions"). Hedging Transactions may be used to
attempt to protect against possible changes in the market value of a Fund's
portfolio resulting from trends in the debt securities markets, to protect a
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to establish a position in
the securities markets as a temporary substitute for purchasing particular
securities, to manage the effective dollar-weighted average duration of a Fund's
portfolio or for other risk management purposes. Any or all of these techniques
may be used at any time. There is no particular strategy that requires use of
one technique rather than another. Use of any Hedging Transaction is a function
of market conditions. The Hedging Transactions that the Funds may use are
described below. The ability of each Fund to hedge successfully will depend upon
the investment adviser's ability to predict pertinent market movements, which
cannot be assured.
Interest Rate Transactions Among the Hedging Transactions into which each
Fund may enter are interest rate swaps and the purchase or sale of interest rate
caps and floors. Each Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, as a duration management technique or to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date. Each
Fund intends to use these transactions as a hedge and not as a speculative
investment. Each Fund will not sell interest rate caps or floors on securities
that it does not own. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
Each Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending upon whether it is hedging its
assets or liabilities, and will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. A Fund will
accrue the net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap on a daily basis and will
segregate an amount of cash or liquid securities having an aggregate net asset
value at least equal to the accrued excess. If a Fund enters into an interest
rate swap on other than a net basis, the Fund will maintain a segregated account
in the full amount accrued on a daily basis of the Fund's obligations with
respect to the swap. To the extent a Fund sells (i.e., writes) caps and floors,
it will maintain in a segregated account cash or liquid debt securities having
an aggregate net asset value at least equal to the full amount, accrued on a
daily basis, of the Fund's obligations with respect to any caps or floors. A
Fund will not enter into any interest rate swap, cap or floor transaction unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated at least A by at least one nationally recognized rating
organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, a Fund will have contractual
remedies pursuant to the agreements related to the transaction.
There is no limit on the amount of interest rate swap transactions that may
be entered into by the Funds. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that a Fund is contractually obligated to make. If the other
party to an interest rate swap defaults, a Fund's risk of loss consists of the
net amount of interest payments that the Fund contractually is entitled to
receive. The aggregate purchase price of caps and floors held by a Fund may not
exceed 5% of the Fund's assets. Each Fund may sell (i.e., write) caps and floors
without limitation, subject to the segregated asset requirement described above.
Futures Contracts Each Fund may also enter into contracts for the purchase
or sale for future delivery ("futures contracts") of debt securities, aggregates
of debt securities or indices of prices thereof, other financial indices and
U.S. Government debt securities to hedge against a decline in the value of its
portfolio securities that might result from a change in interest rates. A Fund
will engage in such transactions for bona fide hedging, risk management
(including duration management) and other portfolio management purposes, in each
case in accordance with the rules and regulations of the Commodity Futures
Trading Commission.
In connection with transactions in futures contracts and writing related
options, each Fund will be required to deposit as "initial margin" a specified
amount of cash or short-term, U.S. government securities. The initial margin
required for a futures contract is set by the exchange on which the contract is
traded. It is expected that the initial margin would be approximately 1/2% to 5%
of a contract's face value. Thereafter, subsequent payments (referred to as
"variation margin") are made to and from the futures commission merchant to
reflect changes in the value of the futures contract. No Fund will purchase or
sell futures contracts or related options if, as a result, the sum of the
initial margin deposit on that Fund's existing futures and related options
positions and premiums paid for options or futures contracts entered into for
other than bona fide hedging purposes would exceed 5% of such Fund's assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
through offsetting before the date of the contract without having to make or
take delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded, a
Fund will incur brokerage fees when it purchases or sells futures contracts.
Calls on Securities and Futures In order to reduce fluctuations in net
asset value, a Fund may sell or purchase call options ("calls") on Municipal
Obligations that are traded on U.S. securities exchanges and in the
over-the-counter markets and related futures on such securities. A call option
gives the purchaser of the option the right to buy, and obligates the seller to
sell, the underlying security or futures contracts at the exercise price at any
time or at a specified time during the option period. All such calls sold by a
Fund must be "covered" as long as the call is outstanding (i.e., the Fund must
own the securities or futures contract subject to the call). Calls on futures on
Municipal Obligations must also be covered by deliverable securities or by
liquid assets segregated to satisfy the futures contract. A call sold by a Fund
exposes the Fund during the term of the option to possible loss of opportunity
to realize appreciation in the market price of the underlying security or
futures contract and may require the Fund to hold a security or futures contract
which it might otherwise have sold. The purchase of a call gives a Fund the
right to buy a security or futures contract at a fixed price.
A Fund may purchase call options to the extent that premiums paid by the
Fund do not aggregate more than 2% of the Fund's total assets. A Fund may
liquidate such a position by effecting a closing transaction, although there is
no guarantee that a Fund will be able to enter into a closing transaction.
Puts on Securities and Futures Each Fund may purchase put options ("puts")
that relate to Municipal Obligations (whether or not it holds such securities in
its portfolio) or futures on such securities. Each Fund may also write put
options on a secured basis, which means that the Fund will segregate cash or
U.S. government securities in an amount not less than the exercise price of the
option at all times during the option period. The amount of cash or U.S.
government securities segregated will be adjusted on a daily basis to reflect
changes in the market value of the securities covered by the put option written
by a Fund. Secured put options will generally be written in circumstances where
the investment adviser wishes to purchase the underlying security for a Fund's
portfolio at a price lower than the current market price of the security. In
such event, a Fund would write a secured put option at an exercise price which,
reduced by the premium received on the option, reflects the lower price it is
willing to pay. A Fund may effect closing transactions with respect to put
options it previously wrote.
A Fund will not sell puts if, as a result, more than 50% of such Fund's
assets would be required to cover its potential obligation under its hedging and
other investment transactions. In selling puts, there is a risk that a Fund may
be required to buy the underlying security at a disadvantageous price.
Non-Fundamental Investment Restrictions
In addition to the fundamental policies and investment restrictions and the
various general investment policies described in the Proxy Statement/Prospectus
and this SAI, each Fund will be subject to the following investment
restrictions, which are considered to be non-fundamental and may be changed by
the Board of Directors of such Fund without shareholder approval.
(1) Each Fund may not borrow money, except from banks for temporary or
emergency purposes or for repurchase of its shares, and then only in an
amount not exceeding one-third of the value of the Fund's total assets,
including the amount borrowed. No purchases of investment securities will
be made while any such borrowings exceed 5% of a Fund's total assets.
(2) Each Fund shall not pledge, mortgage, hypothecate or otherwise encumber its
assets, except to secure borrowings permitted by restriction (1) above
(collateral arrangements with respect to margin for future contracts and
options are not deemed to be pledges or other encumbrances for purposes of
this restriction).
(3) Each Fund shall not issue senior securities, as defined in the 1940 Act,
other than preferred stock, except to the extent such issuance might be
involved with respect to borrowings described under the restriction (2)
above. Each Fund's collateral arrangements with respect to options, futures
contracts and options on futures contracts and collateral requirements with
respect to initial and variation margin are not considered by each Fund's
Board of Directors to be the issuance of a senior security. Similarly, each
Fund's obligations under interest rate swaps, caps and floors, when-issued
and forward commitment transactions and similar transactions are not
considered by the Fund's Board of Directors to be the issuance of a senior
security if covering assets are appropriately segregated.
(4) Each Fund shall not make short sales of securities.
(5) Each Fund shall not invest for the purpose of exercising control over
management of any company.
(6) Each Fund may invest up to 15% of its net assets in illiquid securities,
which may include securities with contractual restrictions on resale,
securities exempt from registration under Rule 144A of the Securities Act
of 1933, as amended, and other securities which may not be readily
marketable. An investment is generally deemed to be "illiquid" if it cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund is valuing the investment.
PORTFOLIO TURNOVER
Portfolio trading will be undertaken principally to accomplish each Fund's
objective in relation to anticipated movements in the general level of interest
rates. A Fund is free to dispose of portfolio securities at any time, subject to
complying with the Code and the 1940 Act, when changes in circumstances or
conditions make such a move desirable in light of the Fund's investment
objective. A Fund will not attempt to achieve or be limited to a predetermined
rate of portfolio turnover. Such a turnover always will be incidental to
transactions undertaken with a view to achieving a Fund's investment objective.
The degree of portfolio activity may affect the transaction costs of a Fund
and taxes paid by such Fund's shareholders. A turnover rate of 100% or more
could occur, for example, if all the investments in a Fund's portfolio at the
beginning of the year were replaced by the end of the year, or if a single
investment was frequently traded. In investing to achieve its investment
objective, a Fund may hold securities for any period of time. A Fund's portfolio
turnover will be increased if that Fund writes a large number of call options
which are subsequently exercised. To the extent a Fund realizes gain on
securities held for less than six months, such gains are taxable to the
shareholder subject to tax or to a Fund at ordinary income tax rates.
The portfolio turnover rate of a Fund is calculated by dividing the lesser
of purchases or sales of securities for the particular fiscal year by the
monthly average of the value of the securities owned by the Fund during the
particular fiscal year, exclusive of securities whose maturities at the time of
acquisition are one year or less.
The portfolio turnover rates for each Fund for the past two fiscal years
ending March 31 were as follows:
- ----------------------------------- ---------------------
Fund 2005 2004
- ----------------------------------- ---------------------
Delaware Investments Minnesota
Municipal Income Fund, Inc. 12% 50%
- ----------------------------------- ---------------------
Delaware Investments Minnesota
Municipal Income Fund II, Inc. 15% 34%
- ----------------------------------- ---------------------
Delaware Investments Minnesota
Municipal Income Fund III, Inc. 12% 41%
- ----------------------------------- ---------------------
ADDITIONAL RISK FACTORS
Risks of Futures
General Risks There are several risks in using securities index or interest
rate futures contracts as hedging devices. One risk arises because the prices of
futures contracts may not correlate perfectly with movements in the underlying
index or financial instrument due to certain market distortions. First, all
participants in the futures market are subject to initial margin and variation
margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the index or security and the futures
market. Second, the margin requirements in the futures market are lower than
margin requirements in the securities market, and as a result the futures market
may attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in indexes of securities
and movements in the prices of futures contracts, even a correct forecast of
general market trends may not result in a successful hedging transaction over a
very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the financial instruments included in the applicable index.
Although each Fund believes that the use of futures contracts and options
thereon will benefit it, if the investment adviser's judgment about the general
direction of securities prices or interest rates is incorrect, a Fund's overall
performance may be poorer than if it had not entered into futures contracts or
purchased or sold options thereon at all. Successful use of futures contracts by
a Fund is subject to the ability of the investment adviser to predict correctly
movements in the direction of interest rates or the relevant underlying
securities market. If a Fund has hedged against the possibility of an increase
in interest rates adversely affecting the value of fixed-income securities held
in its portfolio and interest rates decrease instead, that Fund will lose part
or all of the benefit of the increased value of its securities which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if a Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. A Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Liquidity of Futures Contracts A Fund may elect to close some or all of its
contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by that Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to a Fund, and that
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risks of Options
The use of options on financial instruments and indexes and on interest
rate and index futures contracts also involves additional risk. Compared to the
purchase or sale of futures contracts, the purchase of call or put options
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transactions costs). The writing of a call
option generates a premium, which may partially offset a decline in the value of
a Fund's portfolio assets. By writing a call option, such Fund becomes obligated
to sell an underlying instrument or a futures contract, which may have a value
higher than the exercise price. Conversely, the writing of a put option
generates a premium, but such Fund becomes obligated to purchase the underlying
instrument or futures contract, which may have a value lower than the exercise
price. Thus, the loss incurred by a Fund in writing options may exceed the
amount of the premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the investment
adviser deems it desirable to do so. Although a Fund will enter into an option
position only if the investment adviser believes that a liquid secondary market
exists for such option, there is no assurance that such Fund will be able to
effect closing transactions at any particular time or at an acceptable price.
The Funds' transactions involving options on futures contracts will be conducted
only on recognized exchanges.
A Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by the investment
adviser, which could prove to be inaccurate. Even if the expectations of the
investment adviser are correct, there may be an imperfect correlation between
the change in the value of the options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option. The writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of a purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is "covered" by segregated cash or liquid
securities. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If a Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will effect a
closing transaction prior to or concurrent with the sale of the security.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that a Fund would have to exercise the options in order to
realize any profit. If a Fund is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise. Reasons
for the absence of a liquid secondary market may include the following: (i)
there may be insufficient trading interest in certain options; (ii) restrictions
may be imposed by a national securities exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on a national securities exchange; (v) the
facilities of a national securities exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading volume; or (vi) one
or more national securities exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that national securities exchange (or in that class or series of
options) would cease to exist, although outstanding options on that national
securities exchange that had been issued by the Options Clearing Corporation as
a result of trades on that national securities exchange would continue to be
exercisable in accordance with their terms.
The Funds may purchase put options to hedge against a decline in the value
of their portfolios. By using put options in this way, such Funds will reduce
any profit they might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Funds may purchase call options to hedge against an increase in the
price of securities that such Funds anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to that Fund.
Options may be traded over-the-counter ("OTC options"). In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. OTC options are illiquid and it
may not be possible for the Funds to dispose of options they have purchased or
terminate their obligations under an option they have written at a time when the
investment adviser believes it would be advantageous to do so. Accordingly, OTC
options are subject to each Fund's limitation that a maximum of 15% of its net
assets be invested in illiquid securities. In the event of the bankruptcy of the
counterparty to an OTC option, a Fund could experience a loss of all or part of
the value of the option. DMC anticipates that options on Municipal Obligations
will consist primarily of OTC options.
MINNESOTA ECONOMIC FACTORS
Each Fund is susceptible to political, economic or regulatory factors
affecting issuers of Minnesota Municipal Obligations. These include the possible
adverse effects of certain Minnesota constitutional amendments, legislative
measures, voter initiatives and other matters that are described below. The
information provided below is only a brief summary of the complex factors
affecting the financial situation in Minnesota and is derived from sources that
are generally available to investors and are believed to be accurate, including
information obtained from state agencies in Minnesota. The Funds have made no
independent verification of the accuracy or completeness of any of the following
information, and the Funds make no representation or warranty regarding the
completeness or accuracy of this information.
Economic Outlook
According to the February 2005 Economic Forecast of the Minnesota State
Department of Finance (the "Finance Department"), 2004 was the Minnesota
economy's best since 2000. However, the state's expansion was not as robust as
nationwide. Jobs increased by 0.7 percent, less than the 1.0 percent experienced
nationally. And wage income rose 4.1 percent, compared to 4.7 percent for the
U.S. Both the Minnesota and national labor markets were soft, but Minnesota's
was much more volatile with seasonally adjusted monthly job gains sometimes
offset by subsequent losses. By year's end, the U.S. jobs market was gaining
momentum while Minnesota's languished. The last time Minnesota wage income
lagged significantly behind the U.S. was in 1998.
Payroll employment in 2004 grew by 23,000 jobs, but just 5000 of those jobs
were added in the last eight months of the year. Between May and December
payroll employment in Minnesota grew by just 0.2 percent, while nationally
employment grew by 0.8 percent. If Minnesota had grown as rapidly as the
national average the state would have 20,000 more jobs at the start of 2005 than
it does. During November and December employment actually declined in Minnesota.
Nationally, it grew by 0.1 percent.
Despite the unstable job market, other indicators suggest the state's
modest expansion will continue. Perhaps the best sign is that Minnesota's income
tax withholding implies wage income is on its way to increasing at least 5.5
percent from 2004's first quarter. Other indicators are also positive, but less
so. Job vacancies are flat. Initial claims for unemployment insurance are
holding at a level the Minnesota Department of Employment and Economic
Development (DEED) indicates is consistent with "weak and sporadic job growth"
while continuing claims have improved recently. And, the Federal Reserve Bank of
Minneapolis notes modest signs of growth in consumer spending, manufacturing,
construction, energy, and mining, with price increases appearing in some
sectors.
It is not clear what is holding back job growth in Minnesota, or where the
weaknesses in the economy are. Manufacturing employment in the U.S. and in
Minnesota has fallen since mid 2000, but when viewed on a percentage basis the
decline was less in Minnesota than nationally. Minnesota added just over 3,000
manufacturing jobs in 2004, a growth rate of 0.9 percent. U.S. manufacturing
employment grew by just 0.2 percent.
Recent experience explains much of the difference in the jobs outlook for
the U.S. and Minnesota. Beginning in January 2004, the U.S. employment reports
have shown monthly increases in seasonally adjusted jobs which were accelerating
at year's end. Minnesota job gains have been much more erratic, with some
monthly increases being reversed by subsequent losses. After growing in January
2004, employment declined in February and March, grew in April and May, and went
flat in June. It then declined in July, rose in August, fell in September, grew
in October, declined again in November, and showed no increase in December. That
performance leads Finance Department economists to expect Minnesota's employment
recovery will continue to lag behind its U.S. counterpart in 2005. While U.S.
jobs reached their pre-recession peak in January 2005, Minnesota will not reach
that point until sometime this spring.
Strong employment growth is expected in Minnesota during 2005. More than
44,000 jobs are expected to be added between fourth quarter 2004 and fourth
quarter 2005, an average of 11,000 new jobs per quarter. Manufacturing
employment is expected to grow by 6,600 by the end of 2005 and 15,700 by the end
of 2007. By the end of 2007 total employment in Minnesota is projected to reach
2.778 million, 103,000 more than at the end of 2004.
If the February outlook is to materialize, Minnesota's economy must
immediately begin adding about 2,500 jobs per month on a seasonally adjusted
basis. The outlook indicated by the Finance Department model of the state
economy assumes employer caution and just-in-time hiring will not continue to
slow jobs growth. Two other assumptions concerning jobs must also be met during
the next year. First, the current slowdown in mortgage refinancing and the
coming softening in housing must not cause a significant decline in financial
services employment. Second, the outlook assumes local government and higher
education budgets ease enough to permit modest increases in public employment
beginning in 2005's third quarter.
Minnesota's February outlook shows employment growth highly concentrated in
just a few industries. Health care, professional and business services,
manufacturing, and construction which currently comprise some 41 percent of
total employment account for 72 percent of the projected 103,500 job increase
through the end of 2007.
Depending on simultaneous uninterrupted expansion in each of a handful of
industries is somewhat risky. Health care has been growing steadily for years
and seems the least likely to soon experience unanticipated setbacks. The other
industries are another story. Professional and business services has experienced
a steady loss of national share for many years and may not resume growth in the
spring of 2005 as projected. Manufacturing has lost jobs recently and is exposed
to strong international competition. Construction has been flat since last
summer and the outlook is uncertain. Rising interest rates, a soft labor market,
and a slowdown in Minnesota population growth could dampen homebuilding more
than expected. A recent news article indicates one developer is concerned that
there has been overbuilding in condominiums. It is also unclear when office
vacancy rates will decline enough to warrant a pickup in commercial
construction.
In addition to increases in employment, Minnesota's outlook also assumes
real or inflation adjusted wage income per job will rise throughout the forecast
horizon, with increases accelerating in some industries. Ordinarily, that can
happen only with productivity improvements economists are largely unable to
predict. The general consensus, shared by Global Insight, is that economy-wide
productivity growth will continue, though slowing from rates experienced during
the past several years. Finance Department economists are unaware of any
credible industry productivity forecasts that could be used to validate
projections for real wage growth in specific Minnesota industries.
Revenues and Expenditures
In the Finance Department's February 2005 annual economic forecast, the
Finance Department forecast a $175 million budget balance for 2005. General fund
revenues for the 2006-07 biennium were forecasted in February to total $29.711
billion, with a projected budget shortfall of $466 million. Revenues were
projected in February to exceed current law expenditures in FY2008 by $134
million and by $570 million in FY2009.
The planning estimates do not include general inflation. General inflation
is expected to average just under 1.7 percent per year in FY2006-07. Adjusting
spending for that level of inflation would add approximately $700 million to
spending. Inflation for 2008-09 is expected to average 2.1 percent. Uniformly
adjusting spending for inflation would add about $2 billion to the expenditure
projections for FY2008-09. The inflation estimate, however, could overstate
FY2008-09 spending pressures since it compounds inflationary costs over four
years. Nor does it make allowance for the fact that a budget will be set this
year for 2006-07. Planning estimates become more meaningful when specific budget
proposals for FY2006-07 are being considered and a starting point for the
following biennium is being established.
According to the Finance Department's July, 2005 Update, Minnesota's net
general fund receipts in FY 2005 were estimated to total $14.248 billion, $286
million (2.0 percent) more than forecast in February. That reported variance is
the difference between actual receipts and February's projections for fiscal
2005, not a new forecast. No adjustments have been made for changes in the
economic outlook or expected changes in revenues due to court rulings, such as
the recent Hutchinson Technology decision discussed below. Those changes are
recognized only at the time of a forecast.
More than 90 percent of the additional revenue came from the individual
income tax and the corporate income tax. Almost all additional individual income
tax revenue came from higher than projected final payments for tax year 2004.
Payments accompanying tax year 2004 returns, including payments accompanying
extensions, were $199 million more than anticipated. That gain was partially
offset by income tax refunds which exceeded forecast by $41 million. Individual
income tax withholding for tax year 2005 is now $9 million (0.2 percent) below
forecast. Corporate income tax payments were greater than forecast, while
corporate refunds were less than forecast. As with the individual income tax
much of the corporate variance reflects economic conditions in tax year 2004.
Estimated corporate tax payments for the current year remain close to forecast.
Gross sales tax receipts in Minnesota also continue to track the forecast
closely; through June 30 they were $8 million (0.2 percent) above February's
forecast.
All FY 2005 revenue variances are preliminary and subject to change. As in
the past, forecast levels for some revenue sources were adjusted to reflect
anticipated accruals in this first report of receipts for the full fiscal year.
A complete accounting of fiscal 2005 revenues reflecting the final closing will
be part of the Finance Department's October Economic Update.
Legislation/Litigation
At any given time there may be numerous civil actions pending against the
state of Minnesota which could, if determined adversely to the state, affect the
state's expenditures and, in some cases, its revenues.
Hutchinson Technology Litigation According to the Finance Department,
June's Minnesota Supreme Court decision in Hutchinson Technology v. Commissioner
of Revenue, will have a material impact on Minnesota's corporate franchise tax
revenues. While much of the revenue loss is expected to be through increased
refunds and audit revenues foregone for tax years already completed, prospective
receipts will also be lower since corporate taxable income in Minnesota will be
reduced for firms benefiting from the Court's interpretation of current tax law.
The Hutchinson decision covered three separate decisions made by the
Minnesota Tax Court. All affect the tax liabilities of firms with subsidiaries
located out of state and taxed on a unitary, or combined, basis. Two of the
decisions expand the use of the dividend received deduction; the third broadens
the definition of what constitutes a permissible fee in the foreign royalty
subtraction. In each instance corporate franchise tax receipts are reduced.
Under current law, 80 percent of dividends received by parent companies from
their foreign subsidiaries may be excluded from state taxation and only 20
percent of foreign royalty income received by a corporation is subject to tax.
While a small amount of refunds was paid in fiscal 2005, the bulk of the
costs are expected to fall in the current biennium after refund claims by firms
eligible for the expanded use of the dividend received deduction or the royalty
subtraction are filed and processed. Preliminary estimates by the Finance
Department of Revenue indicate that these retrospective liabilities could total
as much as $200 million in the current biennium, with some additional
liabilities also being paid in the 2008-09 biennium. The Revenue Department also
estimates that the Court's decision will reduce future corporate franchise tax
payments by about $100 million in the 2006-07 biennium and in all future
biennia. November's revenue forecast will be adjusted to reflect both the
additional expected refunds and the prospective revenue losses. Net corporate
franchise tax receipts in Minnesota were projected to be $1.469 billion in the
2006-07 biennium in February's forecast.
Tobacco Settlement On May 8, 1998, Minnesota settled its lawsuit with the
tobacco industry, resulting in a new revenue stream for the state. A small
portion of the settlement ($202 million) was dedicated by the courts for
specific purposes and will not be a part of the state's general revenues. A
larger portion of the settlement (the one-time payments) was dedicated by the
Governor and the legislature to be placed into endowments for specific purposes.
The balance (the annual payments) will be deposited into the state's General
Fund.
The 2002 legislature expanded the uses of one-time tobacco settlement funds
to allow for short-term borrowing by the state effective July 2003. The
legislature created the endowments in response to the 1998 settlement and
dedicated the proceeds to medical education and tobacco prevention. Up to five
percent of the endowment's value is appropriated each year for health programs.
After the recent law changes, appropriations may still be issued for medical
education and tobacco prevention, but the state may use endowment balances it
deems necessary to meet short-term cash flow needs.
Debt Management
The state's Debt Management Policy has three goals. They are:
o Maintain/Regain Aaa/AAA bond ratings;
o Minimize state borrowing costs; and
o Provide a reasonable financing capacity within a prudent debt limit.
The Debt Management Policy has five guidelines. They are:
o The general fund appropriation for debt service shall not exceed 3.0%
of non-dedicated revenues. As of May, 2004 this ratio was 2.23%
o General obligation debt shall not exceed 2.5% of state personal
income. As of May, 2004 this ratio was 1.83%
o State agency debt shall not exceed 3.5% of state personal income. As
of the end of the 2003 biennium this ratio was 3.01%.
o The total amount of state general obligation debt, moral obligation
debt, state bond guarantees, equipment capital leases, and real estate
leases are not to exceed 5.0% of state personal income. As of the end
of the 2003 fiscal year this ratio was 3.03%.
o 40% of general obligation debt shall be due within five years and 70%
within ten years. As of June 30, 2004, 70.9% of the state's general
obligation bonds were scheduled to mature within ten years and 40.1%
were scheduled to mature within five years.
On November 1, 2004, the State of Minnesota had $3,460,795,000 of general
obligation bonds outstanding. The state has no general obligation notes
outstanding. The state has authorized and unissued general obligation bonds
totaling $887,591,500. This amount includes $387,968,000 of capital projects
that have been vetoed by Governors.
Future general obligation debt capacity is forecast through the 2012-13
biennium. To make this forecast, many variables must be forecasted. The state's
debt management policy has a guideline that limits the appropriation for debt
service from the general fund to 3% of general fund revenues. The Finance
Department revenue forecast is used for forecasted revenues in the next two
biennia and is increased in future years based upon projected economic growth
factors. The 3% limit under the guideline is then used to estimate the maximum
amount of general fund revenues available for debt service.
Other variables that need to be forecast are interest rates on bonds sold,
interest rates for investment earnings on balances in the debt service fund and
the bond proceeds fund, various receipts coming into the debt service fund, cash
flow on future capital projects and the dollar amount of bonds to be sold and
when they will be sold. The forecast of future debt capacity also assumes that
major capital budgets will be approved in the even numbered legislative sessions
and small emergency capital budgets will be approved in the odd numbered years.
The large capital budgets are passed by the legislature in level amounts.
Based upon all these assumptions, the maximum debt capacity for capital
budgets in even numbered years is $1,090,000,000 each even numbered year through
2010 and is $110,000,000 in each odd numbered year through 2013.
Ratings
The state receives credit rating on its general obligation bonds from three
credit rating agencies. As of September 9, 2005, Fitch IBCA, Inc. rated State of
Minnesota general obligation bonds as AAA; Moody's rated State of Minnesota
general obligation bonds as Aa1; and S&P rated the State's general obligation
bonds at AAA. There can be no assurance that such ratings will be maintained in
the future. It should be noted that the creditworthiness of obligations issued
by local Minnesota issuers may be unrelated to the creditworthiness of
obligations issued by the State of Minnesota, and that there is no obligation on
the part of the State to make payment on such local obligations in the event of
default.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The names, addresses, principal occupations and other affiliations of the
directors and officers of the Funds are given below:
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Number of
Portfolio in Other
Position(s) Principal Fund Complex Directorships
Name, Address and Held with Length of Time Occupation(s) During Overseen By Held By
Birthdate Fund(s) Served Past 5 Years Director Director
- ---------------------------------------------------------------------------------------------------------------------
Interested Director
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Jude T. Driscoll(1) Chairman, 5 Years - Since August 2000, 86 None
2005 Market Street President, Executive Mr. Driscoll has
Philadelphia, PA Chief Officer served in various
19103-7094 Executive executive capacities
Officer and at different times at
March 10, 1963 Director Delaware
Investments(2)
2 Years -
Director Senior Vice
President, and
Director of Fixed
Income Process -
Conseco Capital
Management (June 1998
- August 2000)
- ---------------------------------------------------------------------------------------------------------------------
Independent Directors
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Thomas L. Bennett Director 1 Year Private Investor 86 None
2005 Market Street (March 2004 - Present)
Philadelphia, PA Investment Manager -
19103 Morgan Stanley & Co.
(January 1984 - March
October 4, 1947 2004)
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
John A. Fry Director 4 Years President - Franklin 86 Director -
2005 Market Street & Marshall College Community
Philadelphia, PA (June 2002 - Present) Health Systems
19103
May 28, 1960
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Anthony D. Knerr Director 15 Years Founder/Managing 86 None
2005 Market Street Director - Anthony
Philadelphia, PA Knerr & Associates
19103 (1990 - Present)
(Strategic Consulting)
December 7, 1938
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Lucinda S. Landreth Director 1 Year Chief Investment 86 None
2005 Market Street Officer - Assurant,
Philadelphia, PA Inc. (Insurance)
19103 (2002 - 2004)
June 24, 1947 Chief Investment
Officer - Fortis,
Inc. (1997 - 2001)
- ---------------------------------------------------------------------------------------------------------------------
Independent Directors (continued)
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Ann R. Leven Director 16 Years Treasurer/Chief 86 Director and
2005 Market Street Fiscal Officer - Audit
Philadelphia, PA National Gallery of Committee
19103 Art (1994 - 1999) Member -
Systemax Inc.
November 1, 1940
Director and
Audit
Committee
Chairperson -
Andy Warhol
Foundation
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Thomas F. Madison Director 11 Years President/Chief 86 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (January 1993 - Director and
Present) Audit
February 25, 1936 Committee
Member -
Digital River
Inc.
Director and
Audit
Committee
Member -
Rimage
Corporation
Director and
Audit
Committee
Member -
CenterPoint
Energy
Director -
Valmont
Industries,
Inc.
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Janet L. Yeomans Director 6 Years Vice 86 None
2005 Market Street President/Mergers &
Philadelphia, PA Acquisitions - 3M
19103 Corporation (January
2003 - Present)
July 31, 1948
Ms. Yeomans has held
various management
positions at 3M
Corporation since 1983
- ---------------------------------------------------------------------------------------------------------------------
Independent Directors (continued)
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
J. Richard Zecher Director 1 Year Founder - Investor 86 Director and
2005 Market Street Analytics (Risk Audit
Philadelphia, PA Management) (May 1999 Committee
19103 - Present) Member -
Investor
July 3, 1940 Founder/Principal - Analytics
Sutton Asset
Management (September Director and
1998 to Present) Audit
Committee
Member -
Oxigene, Inc.
- ---------------------------------------------------------------------------------------------------------------------
Officers
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Michael P. Bishof Senior Vice Chief Financial Mr. Bishof has served N/A None
2005 Market Street President and Officer since in various executive
Philadelphia, PA Chief February 17, capacities at
19103 Financial 2005 different times at
Officer Delaware Investments
August 18, 1962
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
Richelle S. Maestro Senior Vice Chief Legal Ms. Maestro has N/A None
2005 Market Street President, Officer since served in various
Philadelphia, PA Chief Legal March 17, 2003 executive capacities
19103 Officer and at different times at
Secretary Delaware Investments
November 26, 1957
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
John J. O'Connor Senior Vice Treasurer since Mr. O'Connor has N/A None
2005 Market Street President and February 17, served in various
Philadelphia, PA Treasurer 2005 executive capacities
19103 at different times at
Delaware Investments
June 16, 1957
- -------------------------- ---------------- ----------------- ----------------------- -------------- ----------------
___________________
(1) Mr. Driscoll is considered to be an "Interested Director" because he is an
executive officer of the Funds' investment adviser. Mr. Driscoll acquired
shares of common stock of Lincoln National Corporation ("LNC"), of which
the Funds' investment adviser is a wholly owned subsidiary, in the ordinary
course of business during 2004, but those transactions involved less than
1% of the outstanding shares of common stock of LNC.
(2) Delaware Investments is the marketing name for Delaware Management
Holdings, Inc. and its subsidiaries, including the Funds' investment
adviser and its transfer agent.
The following table shows each director's ownership of shares of the Funds
and of all other funds in the Delaware Investments Family of Funds (the "Fund
Complex") as of December 31, 2004.
- ----------------------------- --------------------------- --------------------------------------
Aggregate Dollar Range of Equity
Securities in All Registered
Common Stock of the Funds Investment Companies Overseen By
Name of Director Beneficially Owned Director in Fund Complex
- ------------------------------------------------------------------------------------------------
Interested Director
- ----------------------------- --------------------------- --------------------------------------
Jude T. Driscoll None over $100,000
- ------------------------------------------------------------------------------------------------
Independent Directors
- ----------------------------- --------------------------- --------------------------------------
Thomas L. Bennett None None
- ----------------------------- --------------------------- --------------------------------------
John A. Fry None over $100,000*
- ----------------------------- --------------------------- --------------------------------------
Anthony D. Knerr None $10,001 - $50,000
- ----------------------------- --------------------------- --------------------------------------
Lucinda S. Landreth None None
- ----------------------------- --------------------------- --------------------------------------
Ann R. Leven None over $100,000
- ----------------------------- --------------------------- --------------------------------------
Thomas F. Madison None $10,001 - $50,000
- ----------------------------- --------------------------- --------------------------------------
Janet L. Yeomans None $50,001 - $100,000
- ----------------------------- --------------------------- --------------------------------------
J. Richard Zecher None None
- ----------------------------- --------------------------- --------------------------------------
_______________________
* As of May 31, 2005, Mr. Fry held assets in a 529 Plan Account. Under the
terms of the 529 Plan, a portion of the assets held in the 529 Plan may be
invested in the Delaware Investments Funds. Mr. Fry held no shares of the
Delaware Investments Funds outside of the 529 Plan as of May 31, 2005.
Board, Shareholder and Committee Meetings
During the last full fiscal year, each Fund held five Board meetings, four
of which were two day meetings and a one day meeting. All of the directors,
other than those elected on March 23, 2005, attended at least 75% of those
meetings. Directors are encouraged to attend each annual meeting of shareholders
either in person or by telephone, if possible. All directors were present at the
Funds' annual meeting held on August 17, 2005.
Each Fund has an Audit Committee for the purpose of meeting, on a regular
basis, with the Fund's officers and independent auditors to oversee the quality
of financial reporting and the internal controls of each Fund, and for such
other purposes as the Board of Directors may from time to time direct. The Audit
Committee of each Fund consists of the following four directors appointed by the
Board: Thomas F. Madison, Chairperson; Thomas L. Bennett; Janet L. Yeomans; and
J. Richard Zecher. Each Audit Committee member is not an "interested person" of
the Funds under the 1940 Act, and each meets the standard of independence for
Audit Committee members set forth in the listing standards of the New York Stock
Exchange (the "NYSE") and the Exchange. Members of the Audit Committee serve for
two year terms or until their successors have been appointed and qualified. The
Audit Committee held four meetings for the Funds for the fiscal year ended March
31, 2005. The Board of Directors of each Fund has adopted a written charter for
each Fund's Audit Committee.
Each Fund's Nominating and Corporate Governance Committee (the "Nominating
Committee") is comprised of the following three directors appointed by the
Board: John A. Fry, Chairperson; Anthony D. Knerr; and Lucinda S. Landreth, all
of whom meet the independence requirements set forth in the listing standards of
the NYSE and the Exchange and are not "interested persons" under the 1940 Act.
The Nominating Committee recommends nominees for independent directors for
consideration by the incumbent independent directors of each Fund, and the
Nominating Committee recommends nominees for interested directors for
consideration by the full Board of each Fund. The Nominating Committee held 13
meetings for the Funds for the fiscal year ended March 31, 2005.
The Fund's Board of Directors has adopted a formal charter for the
Nominating Committee setting forth its responsibilities. A current copy of the
Nominating Committee's charter is available on the Funds' website at
www.delawareinvestments.com.
The Nominating Committee will consider shareholder recommendations for
nominations to the Board of Directors only in the event that there is a vacancy
on the Board of Directors. Shareholders who wish to submit recommendations for
nominations to the Board to fill a vacancy must submit their recommendations in
writing to John A. Fry, Chairman of the Nominating Committee, c/o the Funds at
2005 Market Street, Philadelphia, Pennsylvania 19103. Shareholders should
include appropriate information on the background and qualifications of any
person recommended to the Nominating Committee (e.g., a resume), as well as the
candidate's contact information and a written consent from the candidate to
serve if nominated and elected. Shareholder recommendations for nominations to
the Board will be accepted on an ongoing basis and such recommendations will be
kept on file for consideration when there is a vacancy on the Board of
Directors.
The Nominating Committee generally identifies candidates for Board
membership through personal and business contacts of Directors and shareholders.
In addition, the Nominating Committee may use a search firm to identify
candidates for the Board of Directors, if deemed necessary and appropriate to
use such a firm. The Nominating Committee's process for evaluating a candidate
generally includes a review of the candidate's background and experience, a
check of the candidate's references and other due diligence and, when
appropriate, interviews with Nominating Committee members. In evaluating a
candidate, the Nominating Committee will also consider whether the candidate, if
elected, would be an independent director for purposes of the 1940 Act and the
listing standards of the NYSE and the Exchange.
The Nominating Committee has not established any specific minimum
requirements that candidates must meet in order to be recommended by the
Nominating Committee for nomination for election to the Board. Rather, the
Nominating Committee seeks candidates who, in its judgment, will serve the best
interests of the Funds' long-term shareholders and whose background will
complement the experience, skills and diversity of the other directors and add
to the overall effectiveness of the Board.
Board Compensation
Each independent director receives compensation from each Fund of which
he/she is a member of the Board of Directors. The interested directors are
compensated by the investment adviser and do not receive compensation from the
Funds. Each independent director currently receives a total annual retainer fee
of $70,000 for serving as a director of all 33 investment companies within the
Fund Complex, plus $5,000 per day for each day the Board meets (normally four
regular meetings, all of which are two day meetings). Ann R. Leven is the
current Coordinating Director for the Funds and receives an additional annual
retainer totaling $25,000 with respect to all 33 investment companies within the
Fund Complex. Members of the Audit Committee receive additional compensation of
$2,500 for each Audit Committee meeting. The chairperson of the Audit Committee
receives an additional annual retainer of $10,000. Independent directors who are
members of the Nominating Committee receive $1,700 for each committee meeting.
In addition, the chairperson of the Nominating Committee receives an annual
retainer of $1,500.
Under the terms of each Fund's retirement plan for directors, each
independent director who, at the time of his or her retirement from the Board of
Directors, has attained the age of 70 and has served on the Board of Directors
for at least five continuous years, is entitled to receive payments from the
Fund Complex for a period of time equal to the lesser of the number of years
that the person served as a director or the remainder of the person's life. The
annual amount of such payments will be equal to the amount of the annual
retainer that is paid to directors of the investment companies in the Fund
Complex at the time of the person's retirement. If an eligible director of each
investment company within the Fund Complex had retired as of March 31, 2005, he
or she would have been entitled to annual payments in the amount of $70,000. The
following table identifies the amount each director received from each Fund
during its last fiscal year and from the Fund Complex as a whole during the
twelve months ended March 31, 2005.
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
TOTAL
COMPENSATION
DELAWARE DELAWARE DELAWARE PENSION OR FROM FUND
INVESTMENTS INVESTMENTS INVESTMENTS RETIREMENT COMPLEX (86
MINNESOTA MINNESOTA MINNESOTA BENEFITS ESTIMATED FUNDS) FOR THE
MUNICIPAL MUNICIPAL MUNICIPAL ACCRUED AS ANNUAL 12 MONTHS
INCOME FUND, INCOME FUND INCOME FUND PART OF FUND BENEFITS UPON ENDED MARCH
INC. II, INC. III, INC. EXPENSES RETIREMENT 31, 2005
- --------------------------------------------------------------------------------------------------------------------------
Interested Director
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
Jude T. Driscoll NONE NONE NONE NONE NONE NONE
- --------------------------------------------------------------------------------------------------------------------------
Independent Directors
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
Thomas L. Bennett NONE NONE NONE NONE $70,000 NONE
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
John A. Fry (1) $579 $941 $517 NONE $70,000 $92,599
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
Anthony D. Knerr $632 $1,093 $553 NONE $70,000 $134,615
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
Lucinda S. Landreth NONE NONE NONE NONE $70,000 NONE
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
Ann R. Leven $566 $1,019 $488 NONE $70,000 $130,624
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
Thomas F. Madison $549 $971 $476 NONE $70,000 $122,290
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
Janet L. Yeomans $549 $971 $476 NONE $70,000 $122,290
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
J. Richard Zecher NONE NONE NONE NONE $70,000 NONE
- ----------------------- --------------- ---------------- ----------------- -------------- --------------- ----------------
(1) In addition to this compensation, for the 12-month period ended on March 31,
2005, Mr. Fry received $12,998 in professional fees from the Funds for services
provided to the Funds' Board.
Officers
Each Board of Directors and the senior management of the Funds appoint
officers each year, and from time to time as necessary. The following
individuals are executive officers of one or more of the Funds: Jude T.
Driscoll, Michael P. Bishof, Richelle S. Maestro and John J. O'Connor. The above
officers of the Funds own shares of common stock and/or options to purchase
shares of common stock of LNC, the ultimate parent of DMC. They are considered
to be "interested persons" of the Funds under the 1940 Act.
CODES OF ETHICS
The Delaware Investments Family of Funds and DMC, in compliance with SEC
Rule 17j-1 under the 1940 Act, have adopted Codes of Ethics which govern
personal securities transactions. Under the Codes of Ethics, persons subject to
the Codes of Ethics are permitted to engage in personal securities transactions,
including securities that may be purchased or held by the Funds, subject to the
requirements set forth in Rule 17j-1 and certain other procedures set forth in
the applicable Code of Ethics. The Codes of Ethics are also available on the
EDGAR Database on the SEC's website at http://www.sec.gov, and copies of the
Codes of Ethics may be obtained, after paying a duplicating fee, by electronic
request at the following email address: publicinfo@sec.gov, or by writing the
SEC's Public Reference Section, Washington, D.C. 20549-0102.
PROXY VOTING POLICIES AND PROCEDURES
Each Fund has formally delegated to DMC the ability to make all proxy
voting decisions in relation to portfolio securities held by a Fund. If and when
proxies need to be voted on behalf of a Fund, DMC will vote such proxies
pursuant to its Proxy Voting Policies and Procedures (the "Procedures"). DMC has
established a Proxy Voting Committee (the "Committee") which is responsible for
overseeing DMC's proxy voting process for the Funds. One of the main
responsibilities of the Committee is to review and approve the Procedures to
ensure that the Procedures are designed to allow DMC to vote proxies in a manner
consistent with the goal of voting in the best interests of a Fund. Because the
Funds invest primarily in Municipal Obligations, however, DMC does not
anticipated that it will be required to vote a significant number of proxies on
behalf of the Funds.
In order to facilitate the actual process of voting proxies, DMC has
contracted with Institutional Shareholder Services ("ISS") to analyze proxy
statements on behalf of a Fund and other manager clients and vote proxies
generally in accordance with the Procedures. The Committee is responsible for
overseeing ISS's proxy voting activities. If a proxy has been voted for a Fund,
ISS will create a record of the vote. Information (if any) regarding how a Fund
voted proxies relating to portfolio securities during the most recent 12-month
period ended June 30 is available without charge (i) through the Fund's website
at http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
The Procedures contain a general guideline that recommendations of company
management on an issue (particularly routine issues) should be given a fair
amount of weight in determining how proxy issues should be voted. However, DMC
will normally vote against management's position when it runs counter to its
specific Proxy Voting Guidelines (the "Guidelines"), and DMC will also vote
against management's recommendation when it believes that such position is not
in the best interests of a Fund.
As stated above, the Procedures also list specific Guidelines on how to
vote proxies on behalf of a Fund. Some examples of the Guidelines are as
follows: (i) generally vote for shareholder proposals asking that a majority or
more of directors be independent; (ii) generally vote against proposals to
require a supermajority shareholder vote; (iii) generally vote for debt
restructuring if it is expected that the company will file for bankruptcy if the
transaction is not approved; (iv) votes on mergers and acquisitions should be
considered on a case-by-case basis, determining whether the transaction enhances
shareholder value; (v) generally vote against proposals to create a new class of
common stock with superior voting rights; (vi) generally vote for proposals to
authorize preferred stock in cases where the company specifies the voting,
dividend, conversion, and other rights of such stock and the terms of the
preferred stock appear reasonable; (vii) generally vote for management proposals
to institute open-market share repurchase plans in which all shareholders may
participate on equal terms; (viii) votes with respect to management compensation
plans are determined on a case-by-case basis; (ix) generally vote for reports on
the level of greenhouse gas emissions from a company's operations and products;
and (x) generally vote for proposals asking for a report on the feasibility of
labeling products containing genetically modified ingredients.
Because each Fund has delegated proxy voting to DMC, each Fund is not
expected to encounter any conflict of interest issues regarding proxy voting and
therefore does not have procedures regarding this matter. However, DMC does have
a section in its Procedures that address the possibility of conflicts of
interest. Most proxies that DMC receives on behalf of a Fund are voted by ISS in
accordance with the Procedures. Because almost all Fund proxies are voted by ISS
pursuant to the pre-determined Procedures, it normally will not be necessary for
DMC to make an actual determination of how to vote a particular proxy, thereby
largely eliminating conflicts of interest for DMC during the proxy voting
process. In the very limited instances where DMC is considering voting a proxy
contrary to ISS's recommendation, the Committee will first assess the issue to
see if there is any possible conflict of interest involving DMC or affiliated
persons of DMC. If a member of the Committee has actual knowledge of a conflict
of interest, the Committee will normally use another independent third party to
do additional research on the particular proxy issue in order to make a
recommendation to the Committee on how to vote the proxy in the best interests
of a Fund. The Committee will then review the proxy voting materials and
recommendation provided by ISS and the independent third party to determine how
to vote the issue in a manner which the Committee believes is consistent with
the Procedures and in the best interests of a Fund.
INDEPENDENT AUDITOR AND LEGAL COUNSEL
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young, LLP ("Ernst & Young"), 2001 Market Street, Philadelphia, PA
19103, serves as the independent registered public accounting firm for each Fund
and, in its capacity as such, audits the annual financial statements of the
Funds.
LEGAL COUNSEL
Stradley Ronon Stevens & Young, LLP, One Commerce Square, Suite 2600,
Philadelphia, PA 19103, serves as counsel to each of the Funds.
PORTFOLIO TRANSACTIONS
DMC, in effecting purchases and sales of portfolio securities for the
accounts of the Funds, will place orders in such manner as, in the opinion of
DMC, will offer the best price and market for the execution of each transaction.
Portfolio securities will normally be purchased directly from an underwriter or
in the over-the-counter market from the principal dealers in such securities,
unless it appears that a better price or execution may be obtained elsewhere.
The Funds expect that all portfolio transactions will be effected on a
principal (as opposed to an agency) basis and, accordingly, does not expect to
pay any brokerage commissions. Purchases from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include the spread between the bid and asked price. Given the
best price and execution obtainable, it will be the practice of the Funds to
select dealers which, in addition, furnish research information (primarily
credit analyses of issuers) and statistical and other services to DMC. It is not
possible to place a dollar value on information and statistical and other
services received from dealers. Since it is only supplementary to DMC's own
research efforts, the receipt of research information is not expected to reduce
significantly DMC's expenses. Any research benefits obtained will be available
to all of DMC's clients and DMC may not use all of the research it receives from
broker-dealers in connection with the Funds. The Funds will not purchase at a
higher price or sell at a lower price in connection with transactions effected
with a dealer, acting as a principal, who furnishes research services to DMC
than would be the case if no weight were given by DMC to the dealer's furnishing
of such services. While DMC will be primarily responsible for the manner of
execution of portfolio transactions of the Funds, the policies and practices of
DMC in this regard must be consistent with the foregoing and will at all times
be subject to review by the Boards of Directors of the Funds.
DMC reserves the right to, and does, manage other investment accounts and
investment companies for other clients which may have investment objectives
similar or identical to those of the Funds. Subject to applicable laws and
regulations, DMC will attempt to allocate equitably the portfolio transactions
among the Funds and the portfolios of its other clients purchasing or selling
securities whenever decisions are made to purchase or sell securities by the
Funds and one or more of such other clients simultaneously. In making such
allocations, the main factors to be considered will be the respective investment
objectives of the Funds and such other clients, and opinions of the persons
responsible for recommending investments to the Funds and such other clients.
While this procedure could have a detrimental effect on the price or amount of
the securities available to the Funds from time to time, it is the opinion of
each Fund's Board of Directors that the benefits available from DMC's
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions. Notwithstanding the similarity of the investment
objectives of the Funds with those of other funds managed by DMC, each of these
funds will be separately managed and the composition of their investment
portfolios will differ. Accordingly, the investment performance of each of these
Funds will likely not be the same.
TAXES
FEDERAL TAXES
Distributions of Net Investment Income. Each Fund receives income generally
in the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of a Fund, constitutes the Fund's net
investment income from which dividends may be paid to shareholders.
Exempt-Interest Dividends. By meeting certain requirements of the Code, the
Funds qualify to pay exempt-interest dividends to shareholders. These dividends
are derived from interest income exempt from regular federal income tax, and are
not subject to regular federal income tax when they are paid to shareholders.
Exempt-Interest dividends that are excluded from federal taxable income, may
still be subject to federal alternative minimum tax. See the discussion below
under the heading, "Alternative Minimum Tax."
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
Dividends from Taxable Income. Each Fund may earn taxable income from many
sources, including income from temporary investments, discount from stripped
obligations or their coupons, income from securities loans or other taxable
transactions, and ordinary income from the sale of market discount bonds. Any
distributions by a Fund from this income will be taxable to shareholders as
ordinary income, whether shareholders receive them in cash or in additional
shares.
Capital Gain Distributions. Each Fund may realize a capital gain or loss in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gain will be taxable to shareholders
as ordinary income. Distributions from net long-term capital gain will be
taxable to shareholders as long-term capital gain, regardless of how long
shareholders have held their shares in a Fund. Any net capital gain realized by
a Fund generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on the
Fund.
Information on the Amount and Tax Character of Distributions. The Funds
will inform shareholders of the amount of their taxable ordinary income and
capital gain dividends at the time they are paid, and will advise shareholders
of their tax status for federal income tax purposes shortly after the end of
each calendar year, including the portion of the distributions that on average
are comprised of taxable income or interest income that is a tax preference item
when determining shareholders' alternative minimum tax. If shareholders have not
held a Fund's shares for a full year, the Fund may designate and distribute to
shareholders, as taxable, tax-exempt or tax preference income, a percentage of
income that may not be equal to the actual amount of this type of income earned
during the period of shareholders' investment in the Fund. Taxable distributions
declared by a Fund in December but paid in January are taxed to shareholders as
if made in December.
Election to be Taxed as a Regulated Investment Company. Each Fund has
elected to be treated as a regulated investment company under Subchapter M of
the Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. As a regulated investment company,
each Fund generally pays no federal income tax on the income and gain it
distributes to shareholders. The Board reserves the right not to maintain the
qualification of a Fund as a regulated investment company if it determines such
a course of action to be beneficial to shareholders. In that case, a Fund would
be subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to shareholders would be taxed as dividend income
to the extent of the Fund's earnings and profits.
Excise Tax Distribution Requirements. To avoid federal excise taxes, the
Code requires each Fund to distribute to shareholders by December 31 of each
year, at a minimum, the following amounts: 98% of its taxable ordinary income
earned during the calendar year; 98% of its capital gain net income earned
during the twelve-month period ending October 31; and 100% of any undistributed
amounts from the prior year. Each Fund intends to declare and pay these
distributions in December (or to pay them in January, in which case shareholders
must treat them as received in December) but can give no assurances that its
distributions will be sufficient to eliminate all taxes.
U.S. Government Obligations. The income earned on certain U.S. government
securities is exempt from state and local personal income taxes if earned
directly by shareholders. Minnesota also grants tax-free status to dividends
paid to shareholders from interest earned on these securities, subject to
special rules where less than the full amount of a Fund's dividends is derived
from interest on exempt obligations. The income on Fund investments in certain
securities, such as repurchase agreements, commercial paper and federal
agency-backed obligations (e.g., GNMA or FNMA securities), generally does not
qualify for tax-free treatment. The rules on exclusion of this income are
different for corporations.
Qualified Dividend Income for Individuals. Because each Fund's income is
derived primarily from interest rather than dividends, none of its distributions
are expected to be qualified dividend income eligible for taxation by
individuals at long-term capital gain rates.
Dividends-Received Deduction for Corporations. Because each Fund's income
is derived primarily from interest rather than dividends, none of its
distributions are expected to qualify for the corporate dividends-received
deduction.
Investment in Complex Securities. The Funds may invest in complex
securities that may be subject to numerous special and complex tax rules. These
rules could affect whether gain or loss recognized by a Fund is treated as
ordinary or capital, or as interest or dividend income. These rules could also
accelerate the recognition of income, or defer losses, to a Fund (possibly
causing a Fund to sell securities to raise the cash for necessary
distributions). These rules could, therefore, affect the amount, timing, or
character of the income distributed to shareholders by a Fund.
Alternative Minimum Tax. Interest on certain private activity bonds, while
exempt from regular federal income tax, is a preference item for shareholders
when determining their federal alternative minimum tax. Private activity bond
interest could subject shareholders to or increase their liability under federal
alternative minimum taxes, depending on their personal or corporate tax
position. If shareholders are a person defined in the Code as a "substantial
user" (or person related to a user) of a facility financed by private activity
bonds, shareholders should consult with their tax advisor before buying shares
of a Fund.
Treatment of Interest on Debt Incurred to Hold Fund Shares. Interest on
debt shareholders incur to buy or hold Fund shares may not be deductible for
federal income tax purposes. Indebtedness may be allocated to shares of a Fund
even though not directly traceable to the purchase of such shares.
Loss of Status of Securities as Tax-Exempt. Failure of the issuer of a
tax-exempt security to comply with certain legal or contractual requirements
relating to the security could cause interest on the security, as well as Fund
distributions derived from this interest, to become taxable, perhaps
retroactively to the date the security was issued. In such a case, a Fund may be
required to report to the IRS and send to shareholders amended Forms 1099 for a
prior taxable year in order to report additional taxable income. This, in turn,
could require shareholders to file amended federal and state income tax returns
for such prior year to report and pay tax and interest on their pro rata share
of the additional amount of taxable income.
Non-U.S. Investors. Non-U.S. investors may be subject to U.S. withholding
and estate tax, and are subject to special U.S. tax certification requirements.
Shareholders should consult their tax advisor about the federal, state, local or
foreign tax consequences of their investment in a Fund.
MINNESOTA STATE TAX
Minnesota Municipal Obligations. Individuals, estates and trusts may
exclude the portion of exempt-interest dividends that is excluded from gross
income for federal income tax purposes and that is derived from interest income
on Minnesota Municipal Obligations from their Minnesota taxable net income as
long as the following condition is met:
o interest income from Minnesota Municipal Obligations must represent
95% of the total exempt-interest dividends paid to shareholders by a
Fund.
Exempt-interest dividends that are excluded from Minnesota taxable net
income but that are subject to the federal alternative minimum tax are also
subject to the Minnesota alternative minimum tax on individuals, estates and
trusts. Corporations that receive distributions from the Minnesota Funds,
including exempt-interest dividends, may not exclude those distributions from
taxable income in determining the Minnesota income tax or the Minnesota
alternative income tax imposed on corporations.
U.S. Government Obligations. The income earned on certain U.S. government
securities is exempt from state and local personal income taxes if earned
directly by shareholders. Minnesota also grants tax-free status to dividends
paid to shareholders from interest earned on these securities, subject to
special rules where less than the full amount of a Fund's dividends is derived
from interest on exempt obligations. The income on Fund investments in certain
securities, such as repurchase agreements, commercial paper and federal
agency-backed obligations (e.g., GNMA or FNMA securities), generally does not
qualify for tax-free treatment. Corporations that receive distributions from the
Funds, including dividends from U.S. government securities, may not exclude
those distributions from taxable income in determining the Minnesota income tax
imposed on corporations.
FINANCIAL STATEMENTS
Ernst & Young audits the annual financial statements of the Funds. Each
Fund's Statement of Net Assets, Statement of Operations, Statement of Changes in
Net Assets, Financial Highlights and Notes to Financial Statements, as well as
the reports of Ernst & Young for the fiscal year ended March 31, 2005 are
included in each Fund's Annual Report to shareholders. The financial statements
and financial highlights, the notes relating thereto and the reports of Ernst &
Young are incorporated by reference from the Annual Reports into this SAI.
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005 % of Total
(Unaudited) Investments Delaware Investments Minnesota
(Pro Forma Municipal Income Fund, Inc.
Combined) Par Market Value
----------- ----------------------------------
----------- ----------------------------------
Municipal Bonds 98.22%
Airport Revenue Bonds 6.61%
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $0 $0
5.00% 1/1/22 (MBIA) 1,000,000 1,041,310
5.00% 1/1/28 (MBIA) 0 0
5.00% 1/1/30 (AMBAC) 250,000 253,460
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 0 0
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 2,500,000 2,609,075
-----------------
3,903,845
-----------------
City General Obligation Bonds 2.58%
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950
Moorhead Series B 5.00% 2/1/33 (MBIA) 0 0
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,000,000 1,032,970
-----------------
1,554,920
-----------------
Continuing Care/Retirement Revenue Bonds 1.54%
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project) 6.00%
10/1/27 0 0
Moorhead Economic Development Authority
Multifamily Revenue (Eventide Lutheran Home
Project) Series B 6.00% 6/1/18 0 0
St. Paul Housing & Redevelopment Authority
Revenue Franciscan Health Project) 5.40%
11/20/42 (GNMA)(FHA) 880,000 917,426
-----------------
917,426
-----------------
Corporate Backed Revenue Bonds 3.40%
Anoka County Solid Waste Disposal National
Rural Co-Op Utility (United Power
Association) Series A 6.95% 12/1/08 (AMT) 560,000 563,455
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 0 0
Cloquet Pollution Control Revenue (Potlatch
Corporation Project) 5.90% 10/0/26 0 0
Sartell Environmental Improvement Revenue
(International Paper) Series A 5.20% 6/1/27 1,000,000 1,003,290
-----------------
1,566,745
-----------------
Escrowed to Maturity Bonds 9.71%
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) 2,555,000 3,715,762
Southern Minnesota Municipal Power Agency
Series B
5.50% 1/1/15 (AMBAC) 390,000 392,613
5.75% 1/1/11 (FGIC) 1,000,000 999,910
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 0 0
5.55% 11/1/23 (MBIA) 0 0
Western Minnesota Municipal Power Agency 6.625% 1/1/16 0 0
-----------------
5,108,285
-----------------
Higher Education Revenue Bonds 5.97%
Minnesota State Higher Education Facilities
Authority
(College of St. Benedict) Series 5-W
5.00% 3/1/20 1,000,000 1,025,250
(St. Catherine College) Series 5-N1
5.375% 10/1/32 0 0
(St. Mary's University) Series 5-U 4.80%
10/1/23 0 0
(St.Thomas University) Series 4-A1 5.625%
10/1/21 0 0
(St. Thomas University) Series 5-Y 5.25%
10/1/34 0 0
St. Cloud Housing & Redevelopment Authority
Revenue (State University Foundation
Project) 5.00% 5/1/23 0 0
University of Minnesota Series A 5.50%
7/1/21 1,000,000 1,139,840
-----------------
2,165,090
-----------------
Hospital Revenue Bonds 14.38%
Bemidji Hospital Facilities Revenue (North
County Health Services)
5.00% 9/1/24 (RADIAN) 1,000,000 1,027,390
Duluth Economic Development Authority
Health Care Facilities
Revenue (Benedictine Health System - St.
Mary's Hospital) 5.25% 1,250,000 1,268,963
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,100,000 1,164,262
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 0 0
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A 6.375%
11/15/29 1,750,000 1,902,740
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series 97A 5.75%
11/15/26 (MBIA) 0 0
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B
5.50% 11/15/27 0 0
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center) 5.25%
9/1/34 500,000 505,160
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 0 0
St. Paul Housing & Redevelopment Authority
Health Care Facilities Revenue (Regions
Hospital Project) 5.30% 5/15/28 700,000 703,892
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project) Series A
6.10% 1/1/19 (RADIAN) 0 0
-----------------
6,572,407
-----------------
Miscellaneous Revenue Bonds 3.08%
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project)
5.125% 7/1/21 1,600,000 1,664,976
Minneapolis Community Development Agency
(Supported Development
Revenue Limited Tax Common Bond Fund)
Series G1 5.70% 12/1/19 0 0
Minneapolis Community Development Agency
(Supported Development
Revenue Limited Tax Common Bond Fund)
Series G-3 5.45% 12/1/31 1,000,000 1,046,740
Minneapolis Community Development Agency
Supported Development Revenue Limited Tax
Common Bond Fund) Series 5 5.70% 12/1/27 0 0
-----------------
2,711,716
-----------------
Multifamily Housing Revenue Bonds 5.61%
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8) 6.20%
7/1/30 (FHA) (AMT) 0 0
Harmony Multifamily Housing Revenue
Refunding Section 8 (Zedakah Foundation
Project) Series A 5.95% 9/1/20 0 0
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 0 0
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 0 0
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 0 0
Southeastern Minnesota Multi County Housing
& Redevelopment Authority (Winona County)
5.35% 1/1/28 300,000 301,974
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project) (Orleans
Homes Number One) 7.25% 11/1/27 (AMT) 0 0
Washington County Housing & Redevelopment
Authority Governmental
Revenue (Woodland Park Apartments
Project) 4.70% 10/1/32 1,000,000 1,001,940
-----------------
2,313,204
-----------------
Municipal Lease Revenue Bonds 6.25%
Andover Economic Development Authority
Public Facilities Lease
Revenue (Andover Community Center) 5.20%
2/1/29 0 0
Minneapolis Development Revenue (Limited
Tax Supported Common Bond Fund) 5.50%
12/1/24 (AMT) 0 0
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 0 0
5.125% 12/1/27 500,000 522,445
5.25% 12/1/27 1,150,000 1,211,732
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 0 0
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 0 0
-----------------
1,734,177
-----------------
Parking Revenue Bonds 0.91%
St. Paul Housing & Redevelopment Authority
Parking Revenue (Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 650,000 691,867
-----------------
691,867
-----------------
Political Subdivision General Obligation
Bonds 4.76%
Hennepin County Series B 5.00% 12/1/18 1,300,000 1,375,595
Hennepin Regional Railroad Authority 5.00%
12/1/26 0 0
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 0 0
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 855,000 909,669
5.50% 2/1/32 (MBIA) 1,000,000 1,058,500
-----------------
3,343,764
-----------------
§Pre-Refunded Bonds 7.80%
Esko Independent School District #99 5.65%
4/1/12-05 (FSA) 0 0
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 0 0
Minneapolis/St. Paul Housing &
Redevelopment Authority Health Care Systems
(Children's Health Care) Series A 5.50%
8/15/25-05 (FSA) 0 0
Puerto Rico Commonwealth 6.00% 7/1/26-07 1,000,000 1,083,230
Puerto Rico Commonwealth Public Improvement
Series A 5.00% 7/1/27-12 0 0
Puerto Rico Electric Power Authority Power
Revenue Series Z 5.25% 7/1/21 0 0
Puerto Rico Highway & Transportation
Authority Revenue Series Y 5.50% 7/1/26-06 0 0
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 845,000 916,664
Rosemount Independent School District #196
Series A 5.70% 4/1/12-06 0 0
Southern Minnesota Municipal Power Agency
Supply Revenue Series A 5.75% 1/1/18-05 0 0
St. Francis Independent School District #15
Series A 6.30% 2/1/11-06 (FSA) 1,250,000 1,286,888
-----------------
3,286,782
-----------------
Public Power Revenue Bonds 11.06%
Chaska Electric Revenue Series A 6.00%
10/1/25-10 1,000,000 1,093,430
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 0 0
5.25% 10/1/19 1,110,000 1,183,504
Rochester Electric Utility Revenue 5.25%
12/1/30 (AMBAC) 150,000 157,992
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189-3 8.096% 1/1/14 (AMBAC) 2,500,000 3,001,874
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189 8.096% 1/1/15 (AMBAC) 0 0
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/12 (AMBAC) 1,000,000 1,081,000
5.00% 1/1/13 (MBIA) 500,000 540,445
5.25% 1/1/15 (AMBAC) 570,000 631,150
5.25% 1/1/16 (AMBAC) 1,000,000 1,105,980
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,900,000 1,964,581
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 765,000 827,179
-----------------
11,587,135
-----------------
School District General Obligation Bonds 9.02%
Centennial Independent School District #012
Series A 5.00% 2/1/20 (FSA) 400,000 418,404
Elk River Independent School District #728
5.00% 2/1/16 (FGIC) 0 0
Farmington Independent School District #192
5.00% 2/1/23 (FSA) 1,200,000 1,248,924
Farmington Independent School District #192
Series B 5.00% 2/1/27 (FSA) 0 0
Lakeville Independent School District #194
Series A 4.75% 2/1/22 (FSA) 500,000 511,295
Minneapolis Special School District #001
5.00% 2/1/19 (FSA) 675,000 713,232
Morris Independent School District #769
5.00% 2/1/28 (MBIA) 1,000,000 1,035,650
Mounds View Independent School District
#621 5.00% 2/1/23 (FSA) 1,020,000 1,063,901
Princeton Independent School District #477
Series A 5.00% 2/1/24 (FSA) 0 0
Robbinsdale Independent School District
#281 5.00% 2/1/21 (FSA) 500,000 521,165
St. Michael Independent School District
#885
5.00% 2/1/22 (FSA) 500,000 519,665
5.00% 2/1/24 (FSA) 400,000 413,056
-----------------
6,445,292
-----------------
Single Family Housing Revenue Bonds 1.64%
Dakota County Housing & Redevelopment
Authority Single Family
Mortgage Revenue 5.85% 10/1/30 (GNMA)
(FNMA) (AMT) 42,000 42,926
Minnesota State Housing Finance Agency
Single Family Housing Series 1992-C2 6.15%
7/1/23 (AMT) 0 0
Minnesota State Housing Finance Agency
Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 0 0
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 785,000 808,228
-----------------
851,154
-----------------
State General Obligation Bonds 2.67%
Minnesota State 5.00% 8/1/21 1,150,000 1,207,857
&Minnesota State, Inverse Floater
ROLs 7.824% 11/1/17 0 0
-----------------
1,207,857
-----------------
Tax Increment / Special Assessment Bonds 0.48%
Moorhead Economic Development Authority Tax
Increment Series A
5.25% 2/1/25 (MBIA) 500,000 529,535
-----------------
529,535
-----------------
Territorial General Obligation Bonds 0.52%
Puerto Rico Commonwealth Public Improvement
Series A 5.50% 7/1/19 (MBIA) 0 0
-----------------
0
-----------------
Territorial Revenue Bonds 0.24%
Virgin Islands Public Finance Authority
5.25% 10/1/23 0 0
-----------------
0
-----------------
Total Municipal Bonds 56,491,201
Short Term Investments 1.78%
o Variable Rate Demand Notes
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 250,000 250,000
Minneapolis Block E Buildings Series A
2.13% 3/1/27 0 0
Minneapolis Library 2.13% 12/1/32 300,000 300,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project) 2.23%
11/1/31 0 0
Minnesota State Higher Education Facilities
Authority (Carleton College)
Series 5-G 2.13% 11/1/29 0 0
-----------------
Total Short Term Investments 550,000
-----------------
Total Investments at Market 100.00% $ 57,041,201
-----------------
Total Investments at Cost $ 55,141,248
-----------------
- -----------------------------------------------
- -----------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
(A) No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply with
its Prospectus and SEC and IRS guidelines and restrictions. However, the
foregoing sentence shall not restrict in any way the ability of the investment
advisor of any of the Funds from buying or selling securities in the normal
course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005 Delaware Investments Minnesota
(Unaudited) Delaware Investments Minnesota Municipal Income Fund II, Inc.
Municipal Income Fund II, Inc. Pro Forma Combined
Par Market Value Par Market Value
-------------------------------- ------------------------------------
Municipal Bonds
Airport Revenue Bonds
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $1,000,000 $1,078,730 $1,000,000 $1,078,730
5.00% 1/1/22 (MBIA) 2,000,000 2,082,620 3,000,000 3,123,930
5.00% 1/1/28 (MBIA) 1,370,000 1,414,758 1,370,000 1,414,758
5.00% 1/1/30 (AMBAC) 1,450,000 1,470,068 1,700,000 1,723,528
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 1,000,000 1,030,150 1,000,000 1,030,150
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 3,500,000 3,652,705 6,000,000 6,261,780
----------------- -----------------
10,729,031 14,632,876
----------------- -----------------
City General Obligation Bonds
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950 1,000,000 1,043,900
Moorhead Series B 5.00% 2/1/33 (MBIA) 2,000,000 2,074,320 2,000,000 2,074,320
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,500,000 1,549,455 2,500,000 2,582,425
----------------- -----------------
4,145,725 5,700,645
----------------- -----------------
Continuing Care/Retirement Revenue Bonds
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project) 6.00%
10/1/27 1,565,000 1,489,285 1,565,000 1,489,285
Moorhead Economic Development Authority
Multifamily Revenue (Eventide Lutheran Home
Project) Series B 6.00% 6/1/18 1,000,000 1,000,730 1,000,000 1,000,730
St. Paul Housing & Redevelopment Authority
Revenue Franciscan Health Project) 5.40%
11/20/42 (GNMA)(FHA) 0 0 880,000 917,426
----------------- -----------------
2,490,015 3,407,441
----------------- -----------------
Corporate Backed Revenue Bonds
Anoka County Solid Waste Disposal National
Rural Co-Op Utility (United Power
Association) Series A 6.95% 12/1/08 (AMT) 0 0 560,000 563,455
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 1,430,000 1,415,228 1,430,000 1,415,228
Cloquet Pollution Control Revenue (Potlatch
Corporation Project) 5.90% 10/0/26 4,500,000 4,535,280 4,500,000 4,535,280
Sartell Environmental Improvement Revenue
(International Paper) Series A 5.20% 6/1/27 0 0 1,000,000 1,003,290
----------------- -----------------
5,950,508 7,517,253
----------------- -----------------
Escrowed to Maturity Bonds
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) 5,500,000 7,998,705 8,055,000 11,714,467
Southern Minnesota Municipal Power Agency
Series B
5.50% 1/1/15 (AMBAC) 0 0 390,000 392,613
5.75% 1/1/11 (FGIC) 0 0 1,000,000 999,910
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 2,300,000 2,329,624 2,300,000 2,329,624
5.55% 11/1/23 (MBIA) 4,200,000 4,254,096 4,200,000 4,254,096
Western Minnesota Municipal Power Agency 6.625% 1,535,000 1,801,583 1,535,000 1,801,583
----------------- -----------------
16,384,008 21,492,293
----------------- -----------------
Higher Education Revenue Bonds
Minnesota State Higher Education Facilities
Authority
(College of St. Benedict) Series 5-W
5.00% 3/1/20 1,000,000 1,025,250 2,000,000 2,050,500
(St. Catherine College) Series 5-N1
5.375% 10/1/32 1,500,000 1,561,935 1,500,000 1,561,935
(St. Mary's University) Series 5-U 4.80%
10/1/23 1,400,000 1,400,490 1,400,000 1,400,490
(St.Thomas University) Series 4-A1 5.625%
10/1/21 1,000,000 1,033,090 1,000,000 1,033,090
(St. Thomas University) Series 5-Y 5.25%
10/1/34 1,500,000 1,563,795 1,500,000 1,563,795
St. Cloud Housing & Redevelopment Authority
Revenue (State University Foundation
Project) 5.00% 5/1/23 1,000,000 1,035,830 1,000,000 1,035,830
University of Minnesota Series A 5.50%
7/1/21 3,000,000 3,419,520 4,000,000 4,559,360
----------------- -----------------
11,039,910 13,205,000
----------------- -----------------
Hospital Revenue Bonds
Bemidji Hospital Facilities Revenue (North
County Health Services)
5.00% 9/1/24 (RADIAN) 0 0 1,000,000 1,027,390
Duluth Economic Development Authority
Health Care Facilities
Revenue (Benedictine Health System - St.
Mary's Hospital) 5.25% 5,000,000 5,075,850 6,250,000 6,344,813
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,000,000 1,058,420 2,100,000 2,222,682
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 2,750,000 2,898,308 2,750,000 2,898,308
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A 6.375%
11/15/29 3,300,000 3,588,024 5,050,000 5,490,764
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series 97A 5.75%
11/15/26 (MBIA) 5,550,000 5,956,703 5,550,000 5,956,703
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B
5.50% 11/15/27 3,365,000 3,570,904 3,365,000 3,570,904
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center) 5.25%
9/1/34 0 0 500,000 505,160
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 1,250,000 1,270,038 1,250,000 1,270,038
St. Paul Housing & Redevelopment Authority
Health Care Facilities Revenue (Regions
Hospital Project) 5.30% 5/15/28 300,000 301,668 1,000,000 1,005,560
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project) Series A
6.10% 1/1/19 (RADIAN) 1,405,000 1,534,246 1,405,000 1,534,246
----------------- -----------------
25,254,161 31,826,568
----------------- -----------------
Miscellaneous Revenue Bonds
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project)
5.125% 7/1/21 2,400,000 2,497,464 4,000,000 4,162,440
Minneapolis Community Development Agency
(Supported Development
Revenue Limited Tax Common Bond Fund)
Series G1 5.70% 12/1/19 1,100,000 1,225,444 1,100,000 1,225,444
Minneapolis Community Development Agency
(Supported Development
Revenue Limited Tax Common Bond Fund)
Series G-3 5.45% 12/1/31 0 0 1,000,000 1,046,740
Minneapolis Community Development Agency
Supported Development Revenue Limited Tax
Common Bond Fund) Series 5 5.70% 12/1/27 375,000 381,795 375,000 381,795
----------------- -----------------
4,104,703 6,816,419
----------------- -----------------
Multifamily Housing Revenue Bonds
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8) 6.20%
7/1/30 (FHA) (AMT) 1,105,000 1,141,454 1,105,000 1,141,454
Harmony Multifamily Housing Revenue
Refunding Section 8 (Zedakah Foundation
Project) Series A 5.95% 9/1/20 1,000,000 847,950 1,000,000 847,950
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290 2,000,000 2,018,580
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 3,575,000 3,586,868 3,575,000 3,586,868
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 1,000,000 983,930 1,000,000 983,930
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 155,000 158,257 155,000 158,257
Southeastern Minnesota Multi County Housing
& Redevelopment Authority (Winona County)
5.35% 1/1/28 870,000 875,725 1,170,000 1,177,699
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project) (Orleans
Homes Number One) 7.25% 11/1/27 (AMT) 1,540,000 1,490,951 1,540,000 1,490,951
Washington County Housing & Redevelopment
Authority Governmental
Revenue (Woodland Park Apartments
Project) 4.70% 10/1/32 0 0 1,000,000 1,001,940
----------------- -----------------
10,094,425 12,407,629
----------------- -----------------
Municipal Lease Revenue Bonds
Andover Economic Development Authority
Public Facilities Lease
Revenue (Andover Community Center) 5.20%
2/1/29 1,000,000 1,018,000 1,000,000 1,018,000
Minneapolis Development Revenue (Limited
Tax Supported Common Bond Fund) 5.50%
12/1/24 (AMT) 1,000,000 1,043,730 1,000,000 1,043,730
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 2,385,000 2,483,429 2,385,000 2,483,429
5.125% 12/1/27 0 0 500,000 522,445
5.25% 12/1/27 2,650,000 2,792,252 3,800,000 4,003,984
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 2,545,000 2,641,634 2,545,000 2,641,634
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 2,000,000 2,115,360 2,000,000 2,115,360
----------------- -----------------
12,094,405 13,828,582
----------------- -----------------
Parking Revenue Bonds
St. Paul Housing & Redevelopment Authority
Parking Revenue (Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 1,250,000 1,330,513 1,900,000 2,022,380
----------------- -----------------
1,330,513 2,022,380
----------------- -----------------
Political Subdivision General Obligation
Bonds 4.76%
Hennepin County Series B 5.00% 12/1/18 1,000,000 1,058,150 2,300,000 2,433,745
Hennepin Regional Railroad Authority 5.00%
12/1/26 3,500,000 3,599,680 3,500,000 3,599,680
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 1,250,000 1,324,125 1,250,000 1,324,125
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 0 0 855,000 909,669
5.50% 2/1/32 (MBIA) 1,140,000 1,206,690 2,140,000 2,265,190
----------------- -----------------
7,188,645 10,532,409
----------------- -----------------
§Pre-Refunded Bonds
Esko Independent School District #99 5.65%
4/1/12-05 (FSA) 550,000 550,000 550,000 550,000
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 1,000,000 1,025,020 1,000,000 1,025,020
Minneapolis/St. Paul Housing &
Redevelopment Authority Health Care Systems
(Children's Health Care) Series A 5.50%
8/15/25-05 (FSA) 1,400,000 1,444,114 1,400,000 1,444,114
Puerto Rico Commonwealth 6.00% 7/1/26-07 0 0 1,000,000 1,083,230
Puerto Rico Commonwealth Public Improvement
Series A 5.00% 7/1/27-12 1,250,000 1,356,163 1,250,000 1,356,163
Puerto Rico Electric Power Authority Power
Revenue Series Z 5.25% 7/1/21 1,500,000 1,511,100 1,500,000 1,511,100
Puerto Rico Highway & Transportation
Authority Revenue Series Y 5.50% 7/1/26-06 2,000,000 2,100,480 2,000,000 2,100,480
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 625,000 678,006 1,470,000 1,594,670
Rosemount Independent School District #196
Series A 5.70% 4/1/12-06 1,270,000 1,307,148 1,270,000 1,307,148
Southern Minnesota Municipal Power Agency
Supply Revenue Series A 5.75% 1/1/18-05 3,715,000 3,996,337 3,715,000 3,996,337
St. Francis Independent School District #15
Series A 6.30% 2/1/11-06 (FSA) 0 0 1,250,000 1,286,888
----------------- -----------------
13,968,368 17,255,150
----------------- -----------------
Public Power Revenue Bonds
Chaska Electric Revenue Series A 6.00%
10/1/25-10 0 0 1,000,000 1,093,430
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 5,750,000 5,845,680 5,750,000 5,845,680
5.25% 10/1/19 0 0 1,110,000 1,183,504
Rochester Electric Utility Revenue 5.25%
12/1/30 (AMBAC) 450,000 473,976 600,000 631,968
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189-3 8.096% 1/1/14 (AMBAC) 3,000,000 3,602,250 5,500,000 6,604,124
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189 8.096% 1/1/15 (AMBAC) 1,500,000 1,821,840 1,500,000 1,821,840
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/12 (AMBAC) 0 0 1,000,000 1,081,000
5.00% 1/1/13 (MBIA) 0 0 500,000 540,445
5.25% 1/1/15 (AMBAC) 0 0 570,000 631,150
5.25% 1/1/16 (AMBAC) 0 0 1,000,000 1,105,980
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,100,000 1,137,389 3,000,000 3,101,970
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 0 0 765,000 827,179
----------------- -----------------
12,881,135 24,468,270
----------------- -----------------
School District General Obligation Bonds
Centennial Independent School District #012
Series A 5.00% 2/1/20 (FSA) 400,000 418,404 800,000 836,808
Elk River Independent School District #728
5.00% 2/1/16 (FGIC) 1,500,000 1,615,200 1,500,000 1,615,200
Farmington Independent School District #192
5.00% 2/1/23 (FSA) 1,080,000 1,124,032 2,280,000 2,372,956
Farmington Independent School District #192
Series B 5.00% 2/1/27 (FSA) 1,000,000 1,042,950 1,000,000 1,042,950
Lakeville Independent School District #194
Series A 4.75% 2/1/22 (FSA) 1,500,000 1,533,885 2,000,000 2,045,180
Minneapolis Special School District #001
5.00% 2/1/19 (FSA) 1,000,000 1,056,640 1,675,000 1,769,872
Morris Independent School District #769
5.00% 2/1/28 (MBIA) 2,750,000 2,848,037 3,750,000 3,883,687
Mounds View Independent School District
#621 5.00% 2/1/23 (FSA) 1,000,000 1,043,040 2,020,000 2,106,941
Princeton Independent School District #477
Series A 5.00% 2/1/24 (FSA) 500,000 524,725 500,000 524,725
Robbinsdale Independent School District
#281 5.00% 2/1/21 (FSA) 0 0 500,000 521,165
St. Michael Independent School District
#885
5.00% 2/1/22 (FSA) 1,500,000 1,558,995 2,000,000 2,078,660
5.00% 2/1/24 (FSA) 725,000 748,664 1,125,000 1,161,720
----------------- -----------------
13,514,572 19,959,864
----------------- -----------------
Single Family Housing Revenue Bonds
Dakota County Housing & Redevelopment
Authority Single Family
Mortgage Revenue 5.85% 10/1/30 (GNMA)
(FNMA) (AMT) 0 0 42,000 42,926
Minnesota State Housing Finance Agency
Single Family Housing Series 1992-C2 6.15%
7/1/23 (AMT) 920,000 922,585 920,000 922,585
Minnesota State Housing Finance Agency
Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 1,145,000 1,157,802 1,145,000 1,157,802
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 670,000 689,825 1,455,000 1,498,053
----------------- -----------------
2,770,212 3,621,366
----------------- -----------------
State General Obligation Bonds
Minnesota State 5.00% 8/1/21 3,875,000 4,069,951 5,025,000 5,277,808
&Minnesota State, Inverse Floater
ROLs 7.824% 11/1/17 570,000 631,936 570,000 631,936
----------------- -----------------
4,701,887 5,909,744
----------------- -----------------
Tax Increment / Special Assessment Bonds
Moorhead Economic Development Authority Tax
Increment Series A
5.25% 2/1/25 (MBIA) 500,000 529,535 1,000,000 1,059,070
----------------- -----------------
529,535 1,059,070
----------------- -----------------
Territorial General Obligation Bonds
Puerto Rico Commonwealth Public Improvement
Series A 5.50% 7/1/19 (MBIA) 1,000,000 1,151,650 1,000,000 1,151,650
----------------- -----------------
1,151,650 1,151,650
----------------- -----------------
Territorial Revenue Bonds
Virgin Islands Public Finance Authority
5.25% 10/1/23 500,000 525,375 500,000 525,375
----------------- -----------------
525,375 525,375
----------------- -----------------
Total Municipal Bonds 160,848,783 217,339,984
Short Term Investments
o Variable Rate Demand Notes
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 250,000 250,000 500,000 500,000
Minneapolis Block E Buildings Series A
2.13% 3/1/27 1,250,000 1,250,000 1,250,000 1,250,000
Minneapolis Library 2.13% 12/1/32 700,000 700,000 1,000,000 1,000,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project) 2.23%
11/1/31 300,000 300,000 300,000 300,000
Minnesota State Higher Education Facilities
Authority (Carleton College)
Series 5-G 2.13% 11/1/29 900,000 900,000 900,000 900,000
----------------- -----------------
Total Short Term Investments 3,400,000 3,950,000
----------------- -----------------
----------------- -----------------
Total Investments at Market $ 164,248,783 $ 221,289,984
----------------- -----------------
Total Investments at Cost $ 157,846,585 $ 212,987,833
Total Market Value $ 221,289,984.00
----------------- -----------------
- -----------------------------------------------
- -----------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
(A) No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply with
its Prospectus and SEC and IRS guidelines and restrictions. However, the
foregoing sentence shall not restrict in any way the ability of the investment
advisor of any of the Funds from buying or selling securities in the normal
course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(Unaudited) Delaware Investments
Minnesota Municipal
Delaware Investments Delaware Investments Income Fund II, Inc.
Minnesota Municipal Minnesota Municipal Pro Forma Pro Forma
Income Fund, Inc. Income Fund II, Inc. Adjustments Combined
-------------------- ---------------------- ------------------ ----------------------------
Assets
Investments, at market value $ 57,041,201 $ 164,248,783 $ - 221,289,984
Cash 10,173 621,277 (112,966)/A/ 518,484
Receivable for securities sold 108,401 2,451,314 - 2,559,715
Interest receivable 721,469 2,525,220 - 3,246,689
----------------- -------------------- ---------------- --------------------------
Total Assets 57,881,244 169,846,594 (112,966) 227,614,872
----------------- -------------------- ---------------- --------------------------
Liabilities
Accrued expenses and other
liabilities 112,966 326,746 (112,966)/A/ 326,746
Acquisition costs payable - - 150,000 /A/,/B/ 150,000
Payable for securities purchased 30,684 1,561,973 - 1,592,657
----------------- -------------------- ---------------- --------------------------
Total Liabilities 143,650 1,888,719 37,034 2,069,403
Liquidation Value of Preferred Stock 20,000,000 60,000,000 - 80,000,000
----------------- -------------------- ---------------- --------------------------
Net Assets $ 37,737,594 $ 107,957,875 $ (150,000) $ 145,545,469
================= ==================== ================ ==========================
Investment at Cost $ 55,141,248 $ 157,846,585 $ - $ 212,987,833
Analysis of Net Assets
Accumulated paid in capital $ 35,426,619 $ 99,710,000 $ - $ 135,136,619
Undistributed net investment income 389,101 2,250,617 (150,000)/A/,/B/ 2,489,718
Accumulated net realized gain (loss)
on investments 21,921 (404,940) - (383,019)
Unrealized appreciation of
investments 1,899,953 6,402,198 - 8,302,151
----------------- -------------------- ---------------- --------------------------
Net Assets $ 37,737,594 $ 107,957,875 $ (150,000) $ 145,545,469
================= ==================== ================ ==========================
Net Assets $37,737,594 $107,957,875 $ (150,000) $145,545,469
Outstanding Common Shares 2,594,700 7,252,200 (62,931) 9,783,969
Net asset value per common share $14.54 $14.89 $14.88 /C/
/A/ Under the Plan, Delaware Investments Minnesota Municipal Income Fund, Inc.
will deliver to Minnesota Municipal Income Fund II, Inc. at the Closing all of
its existing assets except for cash, bank deposits or cash equivalent securities
in an estimated amount necessary to: (i) pay the costs and expenses of carrying
out the Plan, which costs and expenses shall be established on its books as
liability reserves; (ii) discharge its unpaid liabilities on its books at the
Closing Date; and (iii) pay such contingent liabilities as its Board of
Directors or its officers shall reasonably deem to exist, if any, at the Closing
Date, for which contingent and other appropriate liability reserves shall be
established on its books.
/B/Adjustments reflect the costs of carrying out the Plan, which are estimated
to be approximately $300,000, of which $75,000 will be borne by each Fund.
/C/As a result of the expenses of the Acquisition borne by each Fund and
rounding certain calculations, the net asset value per share of the Acquiring
Fund Common Shares after the Acquisition, as shown in the table above, is $0.01
less than then the net asset per share of the Acquiring Fund Common Shares
before the Acquisition. At the Closing, holders of Acquired Fund Common Shares
will receive Acquiring Fund Common Shares that will have an aggregate net asset
value equal to the aggregate net asset value of the Acquired Fund Common Shares
previously held by such shareholders.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Operations
For the Twelve Months Ended March 31, 2005
(Unaudited) Delaware Investments
Minnesota Municipal
Delaware Investments Delaware Investments Income Fund II, Inc.
Minnesota Municipal Minnesota Municipal Pro Forma Pro Forma
Income Fund, Inc. Income Fund II, Inc. Adjustments Combined
-------------------- ---------------------- ------------------ ----------------------------
Investment Income
Interest income $ 2,805,252 $ 8,517,640 $ - $ 11,322,892
-------------------- ---------------------- ------------------ ----------------------------
Expenses
Management fees 232,006 674,164 906,170
Accounting and administration
expenses 85,000 85,000 (56,757)/A/ 113,243
Remarketing agent fees 50,354 150,815 201,169
Dividend disbursing and
transfer agent fees and
expenses 40,318 58,423 (30,818)/A/ 67,923
Legal and professional fees 38,703 47,348 (34,720)/A/ 51,331
Rating agency fees 9,000 6,416 (5,583)/A/ 9,833
Reports and statements to
shareholders 7,387 22,481 29,868
Taxes (other than taxes on
income) 6,948 17,237 24,185
Directors' fees 4,571 7,953 12,524
Pricing fees 3,454 5,973 (3,454)/A/ 5,973
Custodian fees 2,279 4,888 (800)/A/ 6,367
Stock exchange fees 2,258 6,282 8,540
Other 995 2,988 3,983
-------------------- ---------------------- ------------------ ----------------------------
483,273 1,089,968 (132,132) 1,441,109
Less expenses paid indirectly (2,197) (4,763) 800/A/ (6,160)
-------------------- ---------------------- ------------------ ----------------------------
Total expenses 481,076 1,085,205 (131,332) 1,434,949
-------------------- ---------------------- ------------------ ----------------------------
Net Investment Income 2,324,176 7,432,435 131,332 9,887,943
-------------------- ---------------------- ------------------ ----------------------------
Net Realized and Unrealized
Gain/(Loss) on Investments:
Net realized gain (loss) on
investments 268,227 257,523 - 525,750
Change in unrealized
appreciation/(depreciation)
of investments (1,027,949) (2,017,417) - (3,045,366)
-------------------- ---------------------- ------------------ ----------------------------
Net Realized and Unrealized
Loss on Investments (759,722) (1,759,894) - (2,519,616)
Dividends on Preferred Stock (305,320) (927,702) - (1,233,022)
-------------------- ---------------------- ------------------ ----------------------------
Change in Net Assets Resulting
from Operations $ 1,259,134 $ 4,744,839 $ 131,332 $ 6,135,305
==================== ====================== ================== ============================
/A/ Adjustment to reflect appropriate expense levels by merging the funds.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Annual Fund Operating Expenses (as a percentage of net assets attributable to
Common Shares)
As of March 31, 2005
(Unaudited)
Minnesota Municipal
Delaware Investments Delaware Investments Income Fund II, Inc.
Minnesota Municipal Minnesota Municipal Pro Forma
Income Fund, Inc. Income Fund II, Inc. Combined
-------------------- ---------------------- ---------------------------
Management fees 0.61% 0.62% 0.62%
Dividends to Preferred Shares 0.81% 0.86% 0.84%
Other expenses 0.66% 0.38% 0.36%
-------------------- ---------------------- ---------------------------
Total fund operating
expenses 2.08% 1.86% 1.82%
-------------------- ---------------------- ---------------------------
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Notes to Financial Statements
March 31, 2005 (Unaudited)
Delaware Investments Minnesota Municipal Income Fund II, Inc. (the "Fund") is
organized as a Minnesota corporation. The Fund is a diversified closed-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund's common shares trade on the American Stock Exchange. The
Fund's preferred shares are traded privately through a remarketing agent.
The investment objective of the Fund is to provide current income exempt from
both regular federal income tax and Minnesota state personal income tax,
consistent with the preservation of capital. The Fund seeks to achieve its
investment objective by investing substantially all (in excess of 80%) of its
net assets in investment grade, tax-exempt Minnesota municipal obligations.
1. Basis of Pro forma Presentation
The accompanying pro forma financial statements are presented to show the effect
of the proposed acquisition of Delaware Investments Minnesota Municipal Income
Fund, Inc. by the Fund, as if such acquisition had taken place as of April 1,
2004.
Under the terms of the Agreement and Plan of Acquisition, the combination of
Delaware Investments Minnesota Municipal Income Fund, Inc. and the Fund will be
accounted for by a method of accounting for tax-free mergers of investment
companies. The acquisition would be accomplished by an acquisition of
substantially all of the assets of Delaware Investments Minnesota Municipal
Income Fund, Inc., in exchange for common shares of the Fund of equivalent
aggregate net asset value (or, for preferred shares, for the same number of
preferred shares having the same liquidation preference). The statement of
assets and liabilities and the related statement of operations of Delaware
Investments Minnesota Municipal Income Fund, Inc. and the Fund have been
combined as of and for the twelve months ended March 31, 2005.
The accompanying pro forma financial statements should be read in conjunction
with the financial statements of Delaware Investments Minnesota Municipal Income
Fund, Inc. and the Fund included in their annual report dated March 31, 2005.
The following notes refer to the accompanying pro forma financial statements as
if the above-mentioned acquisition of Delaware Investments Minnesota Municipal
Income Fund, Inc. and the Fund had taken place as of April 1, 2004.
2. 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 - Long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Fund's Board of
Directors.
Federal Income Taxes - The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other - Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date).
Costs used in calculating realized gains and losses on the sale of investment
securities are those of the specific securities sold. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. The Fund declares and pays
dividends from net investment income monthly and declares and pays distributions
from net realized gain on investments, if any, annually. In addition, in order
to satisfy certain distribution requirements of the Tax Reform Act of 1986, the
Fund may declare special year-end dividend and capital gains distributions
during November or December to shareholders of record on a date in such month.
Such distributions, if received by shareholders by January 31, are deemed to
have been paid by the Fund and received by shareholders on the earlier of the
date paid or December 31 of the prior year.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The earnings
credits for the twelve months ended March 31, 2005 were approximately $6,160.
The expense paid under the above arrangement is included in the "custodian fees"
expense caption on the Statement of Operations with the corresponding expense
offset shown as "expenses paid indirectly."
3. 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 of 0.40% which is calculated
daily based on the average daily net assets of the Fund, excluding the
liquidation value of preferred stock that may be outstanding.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of DMC,
to provide accounting and administration services which are based on average net
assets and paid on a monthly basis, subject to certain minimums.
Certain officers of DMC and DSC are officers and/or directors of the Fund. These
officers and directors are paid no compensation by the Fund.
4. Capital Stock
Pursuant to the articles of incorporation, the Fund has 200 million shares of
$0.01 par value common shares authorized. The Fund did not repurchase any shares
under the Share Repurchase Program during the twelve months ended March 31,
2005. Shares issuable under the Fund's dividend reinvestment plan are purchased
by the Fund's transfer agent, Mellon Investor Services, LLC, in the open market.
The Fund has one million shares of $0.01 par value Preferred Shares authorized.
Under resolutions adopted by the Board of Directors, the Fund has issued 600,
600 and 400 Series A, B and C Preferred Shares, respectively. Series A, B, and C
Preferred Shares have substantially similar preferences, voting powers,
restrictions as to dividends, qualifications, liquidation rights and terms and
conditions of redemption. The preferred shares of the Fund have a liquidation
preference of $50,000 per share plus an amount equal to accumulated but unpaid
dividends.
Dividends for the outstanding preferred shares of the Fund are cumulative at a
rate established at the initial public offering and are typically reset every 28
days based on the results of an auction. Dividend rates (adjusted for any
capital gain distributions) ranged from 1% to 2.6% during the twelve-month
period ended March 31, 2005.
Citigroup Global Markets, Inc. (formerly Smith Barney, Harris Upham & Co.,
Inc.), as the remarketing agent, receives an annual fee from the Fund of 0.25%
of the average amount of preferred stock outstanding.
Under the 1940 Act, the Fund may not declare dividends or make other
distributions on common shares or purchase any such shares if, at the time of
the declaration, distribution or purchase, asset coverage with respect to the
outstanding preferred stock is less than 200%. The preferred shares are
redeemable at the option of the Fund, in whole or in part, on any dividend
payment date at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared. The preferred shares are also subject to mandatory
redemption at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared, if certain requirements relating to the composition of
the assets and liabilities of the Fund are not satisfied. The holders of
preferred shares have voting rights equal to the holders of common shares (one
vote per share) and will vote together with holders of common shares as a single
class. However, holders of preferred shares are also entitled to elect two of
each Fund's Directors. In addition, the 1940 Act requires that along with
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding preferred shares, voting separately as
a class, would be required to (a) adopt any plan of reorganization that would
adversely affect the preferred shares, and (b) take any action requiring a vote
of security holders pursuant of Section 13(a) of the 1940 Act, including, among
other things, changes in the Fund's subclassification as a closed-end investment
company or (c) changes in their fundamental investment restrictions.
5. Credit and Market Risks
The Fund uses leverage in the form of preferred shares. Leveraging may result in
a higher degree of volatility because a Fund's Net Asset Value could be more
sensitive to fluctuations in short-term interest rates and changes in market
value of portfolio securities attributable to the leverage.
The Fund invests substantially all of its assets in securities issued by
Minnesota municipalities. The value of these investments may be adversely
affected by new legislation within state, regional or local economic conditions
and differing levels of supply and demand for municipal bonds. Many
municipalities insure repayment for their obligations. Although bond insurance
reduces the risk of loss due to default by an issuer, such bonds remain subject
to the risk of loss due to default by an issuer, such bonds remain subject to
the risk that the market may fluctuate for other reasons and there is no
assurance that the insurance company will meet its obligations. These securities
have been identified in the Portfolio of Investments.
The Fund may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Portfolio of Investments.
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased
bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding." "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates. Bonds are considered "pre-refunded" when
the refunding issue's proceeds are escrowed only until a permitted call date or
dates on the refunded issue with the refunded issue being redeemed at that time,
including any required premium. Bonds become "defeased" when the rights and
interests of the bondholders and their lien on the pledged revenues or other
security under the terms of the bond contract are substituted with an
alternative source of revenues (the escrow securities) sufficient to meet
payments of principal and interest to maturity or to the first call dates.
Escrowed secured bonds will often receive a rating of "AAA" or the equivalent
from Moody's, S&P and/or Fitch due to the strong credit quality of the escrow
securities and the irrevocable nature of the escrow deposit agreement.
The Fund may invest up to 15% of its net assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
Such securities are denoted on the Portfolio of Investments.
6. 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.
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005
(Unaudited)
% of Total
Investments Delaware Investments Minnesota
(Pro Forma Municipal Income Fund III, Inc.
Combined) Par Market Value
------------------ -----------------------------------------------------------
Municipal Bonds 98.06%
Airport Revenue Bonds 6.47%
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $0 $0
5.00% 1/1/22 (MBIA) 0 0
5.125% 1/1/25 (FGIC) 900,000 928,557
5.00% 1/1/28 (MBIA) 750,000 774,503
5.00% 1/1/30 (AMBAC) 750,000 760,380
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 0 0
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 0 0
---------------------------
2,463,440
---------------------------
City General Obligation Bonds 2.67%
Metropolitan Council Minnesota (Minneapolis/
St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 0 0
Moorhead Series B 5.00% 2/1/33 (MBIA) 1,250,000 1,296,450
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 0 0
---------------------------
1,296,450
---------------------------
Continuing Care/Retirement Revenue Bonds 2.44%
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project)
6.00% 10/1/27 0 0
Minnesota Agriculture & Economic Development
Board Revenue
(Benedictine Health Systems) 5.75% 2/1/29 600,000 585,060
Moorhead Economic Development Authority
Multifamily Revenue
(Eventide Lutheran Home Project)
Series B 6.00% 6/1/18 0 0
St. Paul Housing & Redevelopment Authority
Revenue
(Franciscan Health Project)
5.40% 11/20/42 (GNMA)(FHA) 1,820,000 1,897,405
---------------------------
2,482,465
---------------------------
Corporate Backed Revenue Bonds 3.86%
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 0 0
Cloquet Pollution Control Revenue (Potlatch
Corporation Project) 5.90% 10/1/26 1,000,000 1,007,840
Minneapolis Community Development Agency
Supported Development
Revenue (Pajor Graphics) Series 1
(LOC US Bank NA) 6.75% 12/1/25 (AMT) 865,000 924,382
---------------------------
1,932,222
---------------------------
Escrowed to Maturity Bonds 9.56%
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) (FHA) (AMT) 0 0
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 0 0
5.55% 11/1/23 (MBIA) 0 0
University of Minnesota Hospital & Clinics
6.75% 12/1/16 2,580,000 3,122,393
Western Minnesota Municipal Power Agency
6.625% 1/1/16 0 0
---------------------------
3,122,393
---------------------------
Higher Education Revenue Bonds 6.07%
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict)
Series 5-W 5.00% 3/1/20 0 0
(College of St. Benedict)
Series 5-W 5.25% 3/1/24 300,000 309,888
(St. Catherine College)
Series 5-N1 5.375% 10/1/32 0 0
(St. Mary's University)
Series 5-U 4.80% 10/1/23 0 0
(St.Thomas University)
Series 4-A1 5.625% 10/1/21 1,010,000 1,043,421
(St. Thomas University)
Series 5-Y 5.25% 10/1/34 0 0
St. Cloud Housing & Redevelopment Authority
Revenue
(State University Foundation Project)
5.00% 5/1/23 0 0
University of Minnesota
Series A 5.50% 7/1/21 0 0
---------------------------
1,353,309
---------------------------
Hospital Revenue Bonds 15.04%
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) 500,000 513,695
Duluth Economic Development Authority
Health Care Facilities Revenue
(Benedictine Health System -
St. Mary's Hospital) 5.25% 2/15/33 1,000,000 1,015,170
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,100,000 1,164,262
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 0 0
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital)
Series A 6.375% 11/15/29 1,250,000 1,359,099
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital)
Series 97A 5.75% 11/15/26 (MBIA) 0 0
Rochester Health Care Facilities Revenue
(Mayo Foundation)
Series B 5.50% 11/15/27 1,000,000 1,061,190
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 310,000 313,199
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 0 0
St. Paul Housing & Redevelopment Authority
Health Care Facilities Revenue
(Regions Hospital Project) 5.30% 5/15/28 0 0
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project)
Series A 6.10% 1/1/19 (RADIAN) 0 0
---------------------------
5,426,615
---------------------------
Miscellaneous Revenue Bonds 2.14%
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project)
5.125% 7/1/21 250,000 260,153
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund)
Series G1 5.70% 12/1/19 0 0
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund)
Series 5 5.70% 12/1/27 0 0
---------------------------
260,153
---------------------------
Multifamily Housing Revenue Bonds 5.91%
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8)
6.20% 7/1/30 (FHA) (AMT) 0 0
Harmony Multifamily Housing Revenue
Refunding Section 8
(Zedakah Foundation Project)
Series A 5.95% 9/1/20 0 0
Minneapolis Multifamily Housing Revenue
(Gaar Scott Loft Project)
5.95% 5/1/30 (AMT) 975,000 1,029,785
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 965,000 943,307
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 0 0
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 0 0
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 0 0
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 0 0
Southeastern Minnesota Multi County Housing
& Redevelopment Authority
(Winona County) 5.35% 1/1/28 0 0
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project)
(Orleans Homes Number One)
7.25% 11/1/27 (AMT) 0 0
---------------------------
1,973,092
---------------------------
Municipal Lease Revenue Bonds 7.20%
Andover Economic Development Authority
Public Facilities Lease
Revenue (Andover Community Center)
5.125% 2/1/24 500,000 508,850
Andover Economic Development Authority
Public Facilities Lease Revenue
(Andover Community Center) 5.20% 2/1/29 0 0
Minneapolis Development Revenue
(Limited Tax Supported Common Bond Fund)
5.50% 12/1/24 (AMT) 0 0
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 0 0
5.125% 12/1/27 500,000 522,445
5.25% 12/1/27 1,000,000 1,053,680
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 500,000 518,985
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 0 0
---------------------------
2,603,960
---------------------------
Parking Revenue Bonds 1.41%
St. Paul Housing & Redevelopment Authority
Parking Revenue
(Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 1,450,000 1,543,395
---------------------------
1,543,395
---------------------------
Political Subdivision General Obligation
Bonds 4.74%
Hennepin County Series B 5.00% 12/1/18 0 0
Hennepin Regional Railroad Authority
5.00% 12/1/26 0 0
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 750,000 794,475
Minneapolis Sports Arena Project
5.125% 10/1/20 750,000 782,033
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 850,000 904,349
5.50% 2/1/32 (MBIA) 0 0
---------------------------
2,480,857
---------------------------
§Pre-Refunded Bonds 8.76%
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) 0 0
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 1,645,000 1,645,000
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 0 0
Minneapolis/St. Paul Housing & Redevelopment
Authority Health Care Systems
(Children's Health Care)
Series A 5.50% 8/15/25-05 (FSA) 0 0
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15 2,200,000 2,256,452
Puerto Rico Commonwealth Public Improvement
Series A 5.00% 7/1/27-12 0 0
Puerto Rico Electric Power Authority Power
Revenue
Series Z 5.25% 7/1/21 0 0
Puerto Rico Highway & Transportation
Authority Revenue
Series Y
5.50% 7/1/26-06 0 0
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 0 0
Rosemount Independent School District #196
Series A 5.70% 4/1/12-06 0 0
Southern Minnesota Municipal Power Agency
Supply Revenue
Series A 5.75% 1/1/18-05 0 0
---------------------------
3,901,452
---------------------------
Public Power Revenue Bonds 9.07%
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 750,000 762,480
5.25% 10/1/19 500,000 533,110
Rochester Electric Utility Revenue
5.25% 12/1/30 (AMBAC) 0 0
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189-3 8.096% 1/1/14 (AMBAC) 1,500,000 1,801,124
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189 8.096% 1/1/15 (AMBAC) 0 0
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/13 (MBIA) 500,000 540,445
5.25% 1/1/15 (AMBAC) 700,000 775,096
5.25% 1/1/16 (AMBAC) 500,000 552,990
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 0 0
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 600,000 648,768
---------------------------
5,614,013
---------------------------
School District General Obligation Bonds 7.14%
Centennial Independent School
District #012 Series A 5.00% 2/1/20 (FSA) 0 0
Elk River Independent School
District #728 5.00% 2/1/16 (FGIC) 0 0
Farmington Independent School
District #192 5.00% 2/1/23 (FSA) 0 0
Farmington Independent School
District #192 Series B 5.00% 2/1/27 (FSA) 500,000 521,475
Lakeville Independent School
District #194 Series A 4.75% 2/1/22 (FSA) 0 0
Minneapolis Special School
District #001 5.00% 2/1/19 (FSA) 0 0
Morris Independent School
District #769 5.00% 2/1/28 (MBIA) 0 0
Mounds View Independent School
District #621 5.00% 2/1/23 (FSA) 0 0
Princeton Independent School
District #477 Series A 5.00% 2/1/24 (FSA) 500,000 524,725
St. Michael Independent School
District #885
5.00% 2/1/22 (FSA) 0 0
5.00% 2/1/24 (FSA) 0 0
---------------------------
1,046,200
---------------------------
Single Family Housing Revenue Bonds 1.68%
Minnesota State Housing Finance Agency
Single Family Housing Series
1992-C2 6.15% 7/1/23 (AMT) 640,000 647,155
Minnesota State Housing Finance Agency
Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 0 0
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 0 0
---------------------------
647,155
---------------------------
State General Obligation Bonds 2.30%
Minnesota State 5.00% 8/1/21 0 0
&Minnesota State, Inverse Floater ROLs
7.824% 11/1/17 0 0
---------------------------
0
---------------------------
Tax Increment / Special Assessment Bonds 0.26%
Moorhead Economic Development Authority
Tax Increment Series A
5.25% 2/1/25 (MBIA) 0 0
---------------------------
0
---------------------------
Territorial General Obligation Bonds 0.82%
Puerto Rico Commonwealth Public Improvement
Series A 5.50% 7/1/19 (MBIA) 0 0
University Virgin Islands
Series A 5.375% 6/1/34 500,000 520,070
---------------------------
520,070
---------------------------
Territorial Revenue Bonds 0.53%
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities Revenue
Series D (Unrefunded Portion) 5.25% 7/1/27 530,000 554,990
Virgin Islands Public Finance Authority
5.25% 10/1/23 0 0
---------------------------
554,990
---------------------------
Total Municipal Bonds 39,222,231
Short Term Investments 1.94%
oVariable Rate Demand Notes
City of St. Cloud 2.18% 2/1/16 550,000 550,000
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 0 0
Minneapolis Block E Buildings
Series A 2.13% 3/1/27 0 0
Minneapolis Library 2.13% 12/1/32 0 0
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 0 0
Minnesota State Higher Education Facilities
Authority (Carleton College)
Series 5-G 2.13% 11/1/29 0 0
---------------------------
Total Short Term Investments 550,000
---------------------------
---------------------------
Total Investments at Market 100.00% $ 39,772,231
---------------------------
Total Investments at Cost $ 38,128,090
---------------------------
- -----------------------------------------------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
A No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply
with its Prospectus and SEC and IRS guidelines and restrictions. However,
the foregoing sentence shall not restrict in any way the ability of the
investment advisor of any of the Funds from buying or selling securities in
the normal course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
================================================================================================================================
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005
(Unaudited)
Delaware Investments Minnesota
Municipal Income Fund II, Inc.
Par Market Value
---------------------------------------------------------
Municipal Bonds
Airport Revenue Bonds
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $1,000,000 $1,078,730
5.00% 1/1/22 (MBIA) 2,000,000 2,082,620
5.125% 1/1/25 (FGIC) 0 0
5.00% 1/1/28 (MBIA) 1,370,000 1,414,758
5.00% 1/1/30 (AMBAC) 1,450,000 1,470,068
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 1,000,000 1,030,150
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 3,500,000 3,652,705
-----------------------------
10,729,031
-----------------------------
City General Obligation Bonds
Metropolitan Council Minnesota (Minneapolis/
St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950
Moorhead Series B 5.00% 2/1/33 (MBIA) 2,000,000 2,074,320
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,500,000 1,549,455
-----------------------------
4,145,725
-----------------------------
Continuing Care/Retirement Revenue Bonds
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project)
6.00% 10/1/27 1,565,000 1,489,285
Minnesota Agriculture & Economic Development
Board Revenue
(Benedictine Health Systems) 5.75% 2/1/29 0 0
Moorhead Economic Development Authority
Multifamily Revenue
(Eventide Lutheran Home Project)
Series B 6.00% 6/1/18 1,000,000 1,000,730
St. Paul Housing & Redevelopment Authority
Revenue
(Franciscan Health Project)
5.40% 11/20/42 (GNMA)(FHA) 0 0
-----------------------------
2,490,015
-----------------------------
Corporate Backed Revenue Bonds
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 1,430,000 1,415,228
Cloquet Pollution Control Revenue (Potlatch
Corporation Project) 5.90% 10/1/26 4,500,000 4,535,280
Minneapolis Community Development Agency
Supported Development
Revenue (Pajor Graphics) Series 1
(LOC US Bank NA) 6.75% 12/1/25 (AMT) 0 0
-----------------------------
5,950,508
-----------------------------
Escrowed to Maturity Bonds
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) (FHA) (AMT) 5,500,000 7,998,705
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 2,300,000 2,329,624
5.55% 11/1/23 (MBIA) 4,200,000 4,254,096
University of Minnesota Hospital & Clinics
6.75% 12/1/16 0 0
Western Minnesota Municipal Power Agency
6.625% 1/1/16 1,535,000 1,801,583
-----------------------------
16,384,008
-----------------------------
Higher Education Revenue Bonds
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict)
Series 5-W 5.00% 3/1/20 1,000,000 1,025,250
(College of St. Benedict)
Series 5-W 5.25% 3/1/24 0 0
(St. Catherine College)
Series 5-N1 5.375% 10/1/32 1,500,000 1,561,935
(St. Mary's University)
Series 5-U 4.80% 10/1/23 1,400,000 1,400,490
(St.Thomas University)
Series 4-A1 5.625% 10/1/21 1,000,000 1,033,090
(St. Thomas University)
Series 5-Y 5.25% 10/1/34 1,500,000 1,563,795
St. Cloud Housing & Redevelopment Authority
Revenue
(State University Foundation Project)
5.00% 5/1/23 1,000,000 1,035,830
University of Minnesota
Series A 5.50% 7/1/21 3,000,000 3,419,520
-----------------------------
11,039,910
-----------------------------
Hospital Revenue Bonds
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) 0 0
Duluth Economic Development Authority
Health Care Facilities Revenue
(Benedictine Health System -
St. Mary's Hospital) 5.25% 2/15/33 5,000,000 5,075,850
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,000,000 1,058,420
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 2,750,000 2,898,308
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital)
Series A 6.375% 11/15/29 3,300,000 3,588,024
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital)
Series 97A 5.75% 11/15/26 (MBIA) 5,550,000 5,956,703
Rochester Health Care Facilities Revenue
(Mayo Foundation)
Series B 5.50% 11/15/27 3,365,000 3,570,904
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 0 0
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 1,250,000 1,270,038
St. Paul Housing & Redevelopment Authority
Health Care Facilities Revenue
(Regions Hospital Project) 5.30% 5/15/28 300,000 301,668
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project)
Series A 6.10% 1/1/19 (RADIAN) 1,405,000 1,534,246
-----------------------------
25,254,161
-----------------------------
Miscellaneous Revenue Bonds
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project)
5.125% 7/1/21 2,400,000 2,497,464
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund)
Series G1 5.70% 12/1/19 1,100,000 1,225,444
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund)
Series 5 5.70% 12/1/27 375,000 381,795
-----------------------------
4,104,703
-----------------------------
Multifamily Housing Revenue Bonds
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8)
6.20% 7/1/30 (FHA) (AMT) 1,105,000 1,141,454
Harmony Multifamily Housing Revenue
Refunding Section 8
(Zedakah Foundation Project)
Series A 5.95% 9/1/20 1,000,000 847,950
Minneapolis Multifamily Housing Revenue
(Gaar Scott Loft Project)
5.95% 5/1/30 (AMT) 0 0
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 0 0
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 3,575,000 3,586,868
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 1,000,000 983,930
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 155,000 158,257
Southeastern Minnesota Multi County Housing
& Redevelopment Authority
(Winona County) 5.35% 1/1/28 870,000 875,725
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project)
(Orleans Homes Number One)
7.25% 11/1/27 (AMT) 1,540,000 1,490,951
-----------------------------
10,094,425
-----------------------------
Municipal Lease Revenue Bonds
Andover Economic Development Authority
Public Facilities Lease
Revenue (Andover Community Center)
5.125% 2/1/24 0 0
Andover Economic Development Authority
Public Facilities Lease Revenue
(Andover Community Center) 5.20% 2/1/29 1,000,000 1,018,000
Minneapolis Development Revenue
(Limited Tax Supported Common Bond Fund)
5.50% 12/1/24 (AMT) 1,000,000 1,043,730
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 2,385,000 2,483,429
5.125% 12/1/27 0 0
5.25% 12/1/27 2,650,000 2,792,252
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 2,545,000 2,641,634
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 2,000,000 2,115,360
-----------------------------
12,094,405
-----------------------------
Parking Revenue Bonds
St. Paul Housing & Redevelopment Authority
Parking Revenue
(Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 1,250,000 1,330,513
-----------------------------
1,330,513
-----------------------------
Political Subdivision General Obligation
Bonds
Hennepin County Series B 5.00% 12/1/18 1,000,000 1,058,150
Hennepin Regional Railroad Authority
5.00% 12/1/26 3,500,000 3,599,680
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 1,250,000 1,324,125
Minneapolis Sports Arena Project
5.125% 10/1/20 0 0
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 0 0
5.50% 2/1/32 (MBIA) 1,140,000 1,206,690
-----------------------------
7,188,645
-----------------------------
§Pre-Refunded Bonds
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) 550,000 550,000
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 0 0
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 1,000,000 1,025,020
Minneapolis/St. Paul Housing & Redevelopment
Authority Health Care Systems
(Children's Health Care)
Series A 5.50% 8/15/25-05 (FSA) 1,400,000 1,444,114
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15 0 0
Puerto Rico Commonwealth Public Improvement
Series A 5.00% 7/1/27-12 1,250,000 1,356,163
Puerto Rico Electric Power Authority Power
Revenue
Series Z 5.25% 7/1/21 1,500,000 1,511,100
Puerto Rico Highway & Transportation
Authority Revenue
Series Y
5.50% 7/1/26-06 2,000,000 2,100,480
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 625,000 678,006
Rosemount Independent School District #196
Series A 5.70% 4/1/12-06 1,270,000 1,307,148
Southern Minnesota Municipal Power Agency
Supply Revenue
Series A 5.75% 1/1/18-05 3,715,000 3,996,337
-----------------------------
13,968,368
-----------------------------
Public Power Revenue Bonds
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 5,750,000 5,845,680
5.25% 10/1/19 0 0
Rochester Electric Utility Revenue
5.25% 12/1/30 (AMBAC) 450,000 473,976
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189-3 8.096% 1/1/14 (AMBAC) 3,000,000 3,602,250
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189 8.096% 1/1/15 (AMBAC) 1,500,000 1,821,840
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/13 (MBIA) 0 0
5.25% 1/1/15 (AMBAC) 0 0
5.25% 1/1/16 (AMBAC) 0 0
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,100,000 1,137,389
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 0 0
-----------------------------
12,881,135
-----------------------------
School District General Obligation Bonds
Centennial Independent School
District #012 Series A 5.00% 2/1/20 (FSA) 400,000 418,404
Elk River Independent School
District #728 5.00% 2/1/16 (FGIC) 1,500,000 1,615,200
Farmington Independent School
District #192 5.00% 2/1/23 (FSA) 1,080,000 1,124,032
Farmington Independent School
District #192 Series B 5.00% 2/1/27 (FSA) 1,000,000 1,042,950
Lakeville Independent School
District #194 Series A 4.75% 2/1/22 (FSA) 1,500,000 1,533,885
Minneapolis Special School
District #001 5.00% 2/1/19 (FSA) 1,000,000 1,056,640
Morris Independent School
District #769 5.00% 2/1/28 (MBIA) 2,750,000 2,848,037
Mounds View Independent School
District #621 5.00% 2/1/23 (FSA) 1,000,000 1,043,040
Princeton Independent School
District #477 Series A 5.00% 2/1/24 (FSA) 500,000 524,725
St. Michael Independent School
District #885
5.00% 2/1/22 (FSA) 1,500,000 1,558,995
5.00% 2/1/24 (FSA) 725,000 748,664
-----------------------------
13,514,572
-----------------------------
Single Family Housing Revenue Bonds
Minnesota State Housing Finance Agency
Single Family Housing Series
1992-C2 6.15% 7/1/23 (AMT) 920,000 922,585
Minnesota State Housing Finance Agency
Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 1,145,000 1,157,802
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 670,000 689,825
-----------------------------
2,770,212
-----------------------------
State General Obligation Bonds
Minnesota State 5.00% 8/1/21 3,875,000 4,069,951
&Minnesota State, Inverse Floater ROLs
7.824% 11/1/17 570,000 631,936
-----------------------------
4,701,887
-----------------------------
Tax Increment / Special Assessment Bonds
Moorhead Economic Development Authority
Tax Increment Series A
5.25% 2/1/25 (MBIA) 500,000 529,535
-----------------------------
529,535
-----------------------------
Territorial General Obligation Bonds
Puerto Rico Commonwealth Public Improvement
Series A 5.50% 7/1/19 (MBIA) 1,000,000 1,151,650
University Virgin Islands
Series A 5.375% 6/1/34 0 0
-----------------------------
1,151,650
-----------------------------
Territorial Revenue Bonds
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities Revenue
Series D (Unrefunded Portion) 5.25% 7/1/27 0 0
Virgin Islands Public Finance Authority
5.25% 10/1/23 500,000 525,375
-----------------------------
525,375
-----------------------------
Total Municipal Bonds 160,848,783
Short Term Investments
oVariable Rate Demand Notes
City of St. Cloud 2.18% 2/1/16 0 0
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 250,000 250,000
Minneapolis Block E Buildings
Series A 2.13% 3/1/27 1,250,000 1,250,000
Minneapolis Library 2.13% 12/1/32 700,000 700,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 300,000 300,000
Minnesota State Higher Education Facilities
Authority (Carleton College)
Series 5-G 2.13% 11/1/29 900,000 900,000
-----------------------------
Total Short Term Investments 3,400,000
-----------------------------
-----------------------------
Total Investments at Market $ 164,248,783
-----------------------------
Total Investments at Cost $ 157,846,585
-----------------------------
- -----------------------------------------------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
A No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply
with its Prospectus and SEC and IRS guidelines and restrictions. However,
the foregoing sentence shall not restrict in any way the ability of the
investment advisor of any of the Funds from buying or selling securities in
the normal course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
===========================================================================================================
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005
(Unaudited)
Delaware Investments Minnesota
Municipal Income Fund II, Inc.
Pro Forma Combined
Par Market Value
---------------------------------------------------------------
Municipal Bonds
Airport Revenue Bonds
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $1,000,000 $1,078,730
5.00% 1/1/22 (MBIA) 2,000,000 2,082,620
5.125% 1/1/25 (FGIC) 900,000 928,557
5.00% 1/1/28 (MBIA) 2,120,000 2,189,261
5.00% 1/1/30 (AMBAC) 2,200,000 2,230,448
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 1,000,000 1,030,150
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 3,500,000 3,652,705
------------------------------
13,192,471
------------------------------
City General Obligation Bonds
Metropolitan Council Minnesota (Minneapolis/
St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950
Moorhead Series B 5.00% 2/1/33 (MBIA) 3,250,000 3,370,770
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,500,000 1,549,455
------------------------------
5,442,175
------------------------------
Continuing Care/Retirement Revenue Bonds
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project)
6.00% 10/1/27 1,565,000 1,489,285
Minnesota Agriculture & Economic Development
Board Revenue
(Benedictine Health Systems) 5.75% 2/1/29 600,000 585,060
Moorhead Economic Development Authority
Multifamily Revenue
(Eventide Lutheran Home Project)
Series B 6.00% 6/1/18 1,000,000 1,000,730
St. Paul Housing & Redevelopment Authority
Revenue
(Franciscan Health Project)
5.40% 11/20/42 (GNMA)(FHA) 1,820,000 1,897,405
------------------------------
4,972,480
------------------------------
Corporate Backed Revenue Bonds
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 1,430,000 1,415,228
Cloquet Pollution Control Revenue (Potlatch
Corporation Project) 5.90% 10/1/26 5,500,000 5,543,120
Minneapolis Community Development Agency
Supported Development
Revenue (Pajor Graphics) Series 1
(LOC US Bank NA) 6.75% 12/1/25 (AMT) 865,000 924,382
------------------------------
7,882,730
------------------------------
Escrowed to Maturity Bonds
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) (FHA) (AMT) 5,500,000 7,998,705
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 2,300,000 2,329,624
5.55% 11/1/23 (MBIA) 4,200,000 4,254,096
University of Minnesota Hospital & Clinics
6.75% 12/1/16 2,580,000 3,122,393
Western Minnesota Municipal Power Agency
6.625% 1/1/16 1,535,000 1,801,583
------------------------------
19,506,401
------------------------------
Higher Education Revenue Bonds
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict)
Series 5-W 5.00% 3/1/20 1,000,000 1,025,250
(College of St. Benedict)
Series 5-W 5.25% 3/1/24 300,000 309,888
(St. Catherine College)
Series 5-N1 5.375% 10/1/32 1,500,000 1,561,935
(St. Mary's University)
Series 5-U 4.80% 10/1/23 1,400,000 1,400,490
(St.Thomas University)
Series 4-A1 5.625% 10/1/21 2,010,000 2,076,511
(St. Thomas University)
Series 5-Y 5.25% 10/1/34 1,500,000 1,563,795
St. Cloud Housing & Redevelopment Authority
Revenue
(State University Foundation Project)
5.00% 5/1/23 1,000,000 1,035,830
University of Minnesota
Series A 5.50% 7/1/21 3,000,000 3,419,520
------------------------------
12,393,219
------------------------------
Hospital Revenue Bonds
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) 500,000 513,695
Duluth Economic Development Authority
Health Care Facilities Revenue
(Benedictine Health System -
St. Mary's Hospital) 5.25% 2/15/33 6,000,000 6,091,020
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 2,100,000 2,222,682
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 2,750,000 2,898,308
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital)
Series A 6.375% 11/15/29 4,550,000 4,947,123
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital)
Series 97A 5.75% 11/15/26 (MBIA) 5,550,000 5,956,703
Rochester Health Care Facilities Revenue
(Mayo Foundation)
Series B 5.50% 11/15/27 4,365,000 4,632,094
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 310,000 313,199
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 1,250,000 1,270,038
St. Paul Housing & Redevelopment Authority
Health Care Facilities Revenue
(Regions Hospital Project) 5.30% 5/15/28 300,000 301,668
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project)
Series A 6.10% 1/1/19 (RADIAN) 1,405,000 1,534,246
------------------------------
30,680,776
------------------------------
Miscellaneous Revenue Bonds
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project)
5.125% 7/1/21 2,650,000 2,757,617
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund)
Series G1 5.70% 12/1/19 1,100,000 1,225,444
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund)
Series 5 5.70% 12/1/27 375,000 381,795
------------------------------
4,364,856
------------------------------
Multifamily Housing Revenue Bonds
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8)
6.20% 7/1/30 (FHA) (AMT) 1,105,000 1,141,454
Harmony Multifamily Housing Revenue
Refunding Section 8
(Zedakah Foundation Project)
Series A 5.95% 9/1/20 1,000,000 847,950
Minneapolis Multifamily Housing Revenue
(Gaar Scott Loft Project)
5.95% 5/1/30 (AMT) 975,000 1,029,785
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 965,000 943,307
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 3,575,000 3,586,868
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 1,000,000 983,930
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 155,000 158,257
Southeastern Minnesota Multi County Housing
& Redevelopment Authority
(Winona County) 5.35% 1/1/28 870,000 875,725
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project)
(Orleans Homes Number One)
7.25% 11/1/27 (AMT) 1,540,000 1,490,951
------------------------------
12,067,517
------------------------------
Municipal Lease Revenue Bonds
Andover Economic Development Authority
Public Facilities Lease
Revenue (Andover Community Center)
5.125% 2/1/24 500,000 508,850
Andover Economic Development Authority
Public Facilities Lease Revenue
(Andover Community Center) 5.20% 2/1/29 1,000,000 1,018,000
Minneapolis Development Revenue
(Limited Tax Supported Common Bond Fund)
5.50% 12/1/24 (AMT) 1,000,000 1,043,730
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 2,385,000 2,483,429
5.125% 12/1/27 500,000 522,445
5.25% 12/1/27 3,650,000 3,845,932
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 3,045,000 3,160,619
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 2,000,000 2,115,360
------------------------------
14,698,365
------------------------------
Parking Revenue Bonds
St. Paul Housing & Redevelopment Authority
Parking Revenue
(Block 19 Ramp Project)
Series A 5.35% 8/1/29 (FSA) 2,700,000 2,873,908
------------------------------
2,873,908
------------------------------
Political Subdivision General Obligation
Bonds
Hennepin County Series B 5.00% 12/1/18 1,000,000 1,058,150
Hennepin Regional Railroad Authority
5.00% 12/1/26 3,500,000 3,599,680
Metropolitan Council Waste Water Treatment
Series B 5.00% 12/1/21 2,000,000 2,118,600
Minneapolis Sports Arena Project
5.125% 10/1/20 750,000 782,033
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 850,000 904,349
5.50% 2/1/32 (MBIA) 1,140,000 1,206,690
------------------------------
9,669,502
------------------------------
§Pre-Refunded Bonds
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) 550,000 550,000
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 1,645,000 1,645,000
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 1,000,000 1,025,020
Minneapolis/St. Paul Housing & Redevelopment
Authority Health Care Systems
(Children's Health Care)
Series A 5.50% 8/15/25-05 (FSA) 1,400,000 1,444,114
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15 2,200,000 2,256,452
Puerto Rico Commonwealth Public Improvement
Series A 5.00% 7/1/27-12 1,250,000 1,356,163
Puerto Rico Electric Power Authority Power
Revenue
Series Z 5.25% 7/1/21 1,500,000 1,511,100
Puerto Rico Highway & Transportation
Authority Revenue
Series Y
5.50% 7/1/26-06 2,000,000 2,100,480
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 625,000 678,006
Rosemount Independent School District #196
Series A 5.70% 4/1/12-06 1,270,000 1,307,148
Southern Minnesota Municipal Power Agency
Supply Revenue
Series A 5.75% 1/1/18-05 3,715,000 3,996,337
------------------------------
17,869,820
------------------------------
Public Power Revenue Bonds
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 6,500,000 6,608,160
5.25% 10/1/19 500,000 533,110
Rochester Electric Utility Revenue
5.25% 12/1/30 (AMBAC) 450,000 473,976
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189-3 8.096% 1/1/14 (AMBAC) 4,500,000 5,403,374
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater ROLs
Series II-R-189 8.096% 1/1/15 (AMBAC) 1,500,000 1,821,840
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/13 (MBIA) 500,000 540,445
5.25% 1/1/15 (AMBAC) 700,000 775,096
5.25% 1/1/16 (AMBAC) 500,000 552,990
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,100,000 1,137,389
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 600,000 648,768
------------------------------
18,495,148
------------------------------
School District General Obligation Bonds
Centennial Independent School
District #012 Series A 5.00% 2/1/20 (FSA) 400,000 418,404
Elk River Independent School
District #728 5.00% 2/1/16 (FGIC) 1,500,000 1,615,200
Farmington Independent School
District #192 5.00% 2/1/23 (FSA) 1,080,000 1,124,032
Farmington Independent School
District #192 Series B 5.00% 2/1/27 (FSA) 1,500,000 1,564,425
Lakeville Independent School
District #194 Series A 4.75% 2/1/22 (FSA) 1,500,000 1,533,885
Minneapolis Special School
District #001 5.00% 2/1/19 (FSA) 1,000,000 1,056,640
Morris Independent School
District #769 5.00% 2/1/28 (MBIA) 2,750,000 2,848,037
Mounds View Independent School
District #621 5.00% 2/1/23 (FSA) 1,000,000 1,043,040
Princeton Independent School
District #477 Series A 5.00% 2/1/24 (FSA) 1,000,000 1,049,450
St. Michael Independent School
District #885
5.00% 2/1/22 (FSA) 1,500,000 1,558,995
5.00% 2/1/24 (FSA) 725,000 748,664
------------------------------
14,560,772
------------------------------
Single Family Housing Revenue Bonds
Minnesota State Housing Finance Agency
Single Family Housing Series
1992-C2 6.15% 7/1/23 (AMT) 1,560,000 1,569,740
Minnesota State Housing Finance Agency
Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 1,145,000 1,157,802
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 670,000 689,825
------------------------------
3,417,367
------------------------------
State General Obligation Bonds
Minnesota State 5.00% 8/1/21 3,875,000 4,069,951
&Minnesota State, Inverse Floater ROLs
7.824% 11/1/17 570,000 631,936
------------------------------
4,701,887
------------------------------
Tax Increment / Special Assessment Bonds
Moorhead Economic Development Authority
Tax Increment Series A
5.25% 2/1/25 (MBIA) 500,000 529,535
------------------------------
529,535
------------------------------
Territorial General Obligation Bonds
Puerto Rico Commonwealth Public Improvement
Series A 5.50% 7/1/19 (MBIA) 1,000,000 1,151,650
University Virgin Islands
Series A 5.375% 6/1/34 500,000 520,070
------------------------------
1,671,720
------------------------------
Territorial Revenue Bonds
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities Revenue
Series D (Unrefunded Portion) 5.25% 7/1/27 530,000 554,990
Virgin Islands Public Finance Authority
5.25% 10/1/23 500,000 525,375
------------------------------
1,080,365
------------------------------
Total Municipal Bonds 200,071,014
Short Term Investments
o Variable Rate Demand Notes
City of St. Cloud 2.18% 2/1/16 550,000 550,000
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 250,000 250,000
Minneapolis Block E Buildings
Series A 2.13% 3/1/27 1,250,000 1,250,000
Minneapolis Library 2.13% 12/1/32 700,000 700,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 300,000 300,000
Minnesota State Higher Education Facilities
Authority (Carleton College)
Series 5-G 2.13% 11/1/29 900,000 900,000
------------------------------
Total Short Term Investments 3,950,000
------------------------------
------------------------------
Total Investments at Market $ 204,021,014
------------------------------
Total Investments at Cost $ 195,974,675
Total Market Value 204,021,014.00
------------------------------
- -----------------------------------------------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
A No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply
with its Prospectus and SEC and IRS guidelines and restrictions. However,
the foregoing sentence shall not restrict in any way the ability of the
investment advisor of any of the Funds from buying or selling securities in
the normal course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(Unaudited)
Delaware Investments
Minnesota Municipal Income Fund III, Inc.
-----------------------------------------------
Assets
Investments, at market value $ 39,772,231
Cash 1,469,634
Receivable for securities sold 5,067
Interest receivable 623,454
---------------------------------------------
Total Assets 41,870,386
---------------------------------------------
Liabilities
Accrued expenses and other liabilities 106,822
Acquisition costs payable -
Payable for securities purchased 1,043,819
---------------------------------------------
Total Liabilities 1,150,641
Liquidation Value of Preferred Stock 15,000,000
---------------------------------------------
Net Assets $ 25,719,745
=============================================
Investment at Cost $ 38,128,090
Analysis of Net Assets
Accumulated paid in capital $ 23,648,910
Undistributed net investment income
(Distribution in excess of net investment
income) 522,026
Accumulated net realized loss on investments (95,332)
Unrealized appreciation of investments 1,644,141
---------------------------------------------
Net Assets $ 25,719,745
=============================================
Net Assets $ 25,719,745
Outstanding Common Shares 1,837,200
Net asset value per common share: $14.00
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(Unaudited)
Delaware Investments Pro Forma
Minnesota Municipal Income Fund II, Inc. Adjustments
----------------------------------------------- -----------------------
Assets
Investments, at market value $ 164,248,783 $ -
Cash 621,277 (106,822)/A/
Receivable for securities sold 2,451,314 -
Interest receivable 2,525,220 -
----------------------------------------------- -----------------------
Total Assets 169,846,594 (106,822)
----------------------------------------------- -----------------------
Liabilities
Accrued expenses and other liabilities 326,746 (106,822)/A/
Acquisition costs payable - 150,000 /A/,/B/
Payable for securities purchased 1,561,973 -
----------------------------------------------- -----------------------
Total Liabilities 1,888,719 43,178
Liquidation Value of Preferred Stock 60,000,000 -
----------------------------------------------- -----------------------
Net Assets $ 107,957,875 $ (150,000)
=============================================== =======================
Investment at Cost $ 157,846,585 $ -
Analysis of Net Assets
Accumulated paid in capital $ 99,710,000 $ -
Undistributed net investment income
(Distribution in excess of net investment
income) 2,250,617 (150,000)/A/,/B/
Accumulated net realized loss on investments (404,940) -
Unrealized appreciation of investments 6,402,198 -
----------------------------------------------- -----------------------
Net Assets $ 107,957,875 $ (150,000)
=============================================== =======================
Net Assets $ 107,957,875 $ (150,000)
Outstanding Common Shares 7,252,200 (113,299)
Net asset value per common share: $14.89
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(Unaudited) Delaware Investments
Minnesota Municipal Income Fund II, Inc.
Pro Forma
Combined
----------------------------------------------
Assets
Investments, at market value $ 204,021,014
Cash 1,984,089
Receivable for securities sold 2,456,381
Interest receivable 3,148,674
----------------------------------------------
Total Assets 211,610,158
----------------------------------------------
Liabilities
Accrued expenses and other liabilities 326,746
Acquisition costs payable 150,000
Payable for securities purchased 2,605,792
----------------------------------------------
Total Liabilities 3,082,538
Liquidation Value of Preferred Stock 75,000,000
----------------------------------------------
Net Assets $ 133,527,620
==============================================
Investment at Cost $ 195,974,675
Analysis of Net Assets
Accumulated paid in capital $ 123,358,910
Undistributed net investment income
(Distribution in excess of net investment
income) 2,622,643
Accumulated net realized loss on investments (500,272)
Unrealized appreciation of investments 8,046,339
----------------------------------------------
Net Assets $ 133,527,620
==============================================
Net Assets $ 133,527,620
Outstanding Common Shares 8,976,101
Net asset value per common share: $14.88/C/
/A/ Under the Plan, Delaware Investments Minnesota Municipal Income Fund III,
Inc. will deliver to Minnesota Municipal Income Fund II, Inc. at the
Closing all of its existing assets except for cash, bank deposits or cash
equivalent securities in an estimated amount necessary to: (i) pay the
costs and expenses of carrying out the Plan, which costs and expenses shall
be established on its books as liability reserves; (ii) discharge its
unpaid liabilities on its books at the Closing Date; and (iii) pay such
contingent liabilities as its Board of Directors or its officers shall
reasonably deem to exist, if any, at the Closing Date, for which contingent
and other appropriate liability reserves shall be established on its books.
/B/ Adjustments reflect the costs of carrying out the Plan, which are estimated
to be approximately $300,000, of which $75,000 will be borne by each Fund.
/C/ As a result of the expenses of the Acquisition borne by each Fund and
rounding certain calculations, the net asset value per share of the
Acquiring Fund Common Shares after the Acquisition, as shown in the table
above, is $0.01 less than the net asset per share of the Acquiring Fund
Common Shares before the Acquisition. At the Closing, holders of Acquired
Fund Common Shares will receive Acquiring Fund Common Shares that will have
an aggregate net asset value equal to the aggregate net asset value of the
Acquired Fund Common Shares previously held by such shareholders.
See Pro Forma Notes to Financial Statements
=================================
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Operations
For the Twelve Months Ended March 31, 2005
(Unaudited)
Delaware Investments Delaware Investments
Minnesota Municipal Income Fund III Minnesota Municipal Income Fund II, Inc.
----------------------------------- ----------------------------------
Investment Income
Interest income $ 2,110,341 $ 8,517,640
-------------------------------- ----------------------------------
Expenses
Management fees 163,520 674,164
Accounting and administration expenses 60,500 85,000
Remarketing agent fees 37,070 150,815
Dividend disbursing and transfer agent fees
and expenses 21,842 58,423
Legal and professional fees 32,198 47,348
Rating agency fees 9,417 6,416
Reports and statements to shareholders 7,868 22,481
Taxes (other than taxes on income) 3,760 17,237
Directors' fees 3,915 7,953
Pricing fees 2,192 5,973
Custodian fees 1,728 4,888
Stock exchange fees 1,595 6,282
Other 1,444 2,988
-------------------------------- ----------------------------------
347,049 1,089,968
Less expenses paid indirectly (1,712) (4,763)
-------------------------------- ----------------------------------
Total expenses 345,337 1,085,205
-------------------------------- ----------------------------------
Net Investment Income 1,765,004 7,432,435
-------------------------------- ----------------------------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain (loss) on investments 114,703 257,523
Change in unrealized appreciation/(depreciation)
of investments (762,302) (2,017,417)
-------------------------------- ----------------------------------
Net Realized and Unrealized Loss on Investments (647,599) (1,759,894)
Dividends on Preferred Stock (235,128) (927,702)
-------------------------------- ----------------------------------
Change in Net Assets Resulting from Operations $ 882,277 $ 4,744,839
================================ ==================================
============================
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Operations
For the Twelve Months Ended March 31, 2005
(Unaudited) Delaware Investments
Minnesota Municipal Income Fund II, Inc.
Pro Forma Pro Forma
Adjustments Combined
------------ ---------------------------------
Investment Income
Interest income $ - $ 10,627,981
----------- ---------------------------------
Expenses
Management fees 837,684
Accounting and administration expenses (40,814)/A/ 104,686
Remarketing agent fees 187,885
Dividend disbursing and transfer agent fees
and expenses (13,500)/A/ 66,765
Legal and professional fees (28,984)/A/ 50,562
Rating agency fees (6,000)/A/ 9,833
Reports and statements to shareholders (3,000)/A/ 27,349
Taxes (other than taxes on income) 20,997
Directors' fees 11,868
Pricing fees (2,192)/A/ 5,973
Custodian fees (705)/A/ 5,911
Stock exchange fees 7,877
Other 4,432
----------- ---------------------------------
(95,195) 1,341,822
Less expenses paid indirectly 705/A/ (5,770)
----------- ---------------------------------
Total expenses (94,490) 1,336,052
----------- ---------------------------------
Net Investment Income 94,490 9,291,929
----------- ---------------------------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain (loss) on investments - 372,226
Change in unrealized appreciation/(depreciation)
of investments - (2,779,719)
----------- ---------------------------------
Net Realized and Unrealized Loss on Investments - (2,407,493)
Dividends on Preferred Stock (1,162,830)
----------- ---------------------------------
Change in Net Assets Resulting from Operations $ 94,490 $ 5,721,606
=========== =================================
/A/ Adjustment to reflect appropriate expense levels by merging the funds.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Annual Fund Operating Expenses (as a percentage of net assets attributable to
Common Shares)
As of March 31, 2005
(Unaudited)
Delaware Investments
Delaware Investments Delaware Investments Minnesota Municipal
Minnesota Municipal Minnesota Municipal Income Fund II, Inc.
Income Fund III, Inc. Income Fund II, Inc. Pro Forma Combined
----------------------- ----------------------- ----------------------
Management fees 0.63% 0.62% 0.62%
Dividends to Preferred Shares 0.90% 0.86% 0.86%
Other expenses 0.70% 0.38% 0.37%
----------------------- ----------------------- ----------------------
Total fund operating
expenses 2.23% 1.86% 1.85%
----------------------- ----------------------- ----------------------
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Notes to Financial Statements
March 31, 2005 (Unaudited)
Delaware Investments Minnesota Municipal Income Fund II, Inc. (the "Fund") is
organized as a Minnesota corporation. The Fund is a diversified closed-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund's common shares trade on the American Stock Exchange. The
Fund's preferred shares are traded privately through a remarketing agent.
The investment objective of the Fund is to provide current income exempt from
both regular federal income tax and Minnesota state personal income tax,
consistent with the preservation of capital. The Fund seeks to achieve its
investment objective by investing substantially all (in excess of 80%) of its
net assets in investment grade, tax-exempt Minnesota municipal obligations.
1. Basis of Pro forma Presentation
The accompanying pro forma financial statements are presented to show the effect
of the proposed acquisition of Delaware Investments Minnesota Municipal Income
Fund III, Inc. by the Fund, as if such acquisition had taken place as of April
1, 2004.
Under the terms of the Agreement and Plan of Acquisition, the combination of
Delaware Investments Minnesota Municipal Income Fund III, Inc. and the Fund will
be accounted for by a method of accounting for tax-free mergers of investment
companies. The acquisition would be accomplished by an acquisition of
substantially all of the assets of Delaware Investments Minnesota Municipal
Income Fund III, Inc., in exchange for common shares of the Fund of equivalent
aggregate net asset value (or, for preferred shares, for the same number of
preferred shares having the same liquidation preference). The statement of
assets and liabilities and the related statement of operations of Delaware
Investments Minnesota Municipal Income Fund III, Inc. and the Fund have been
combined as of and for the twelve months ended March 31, 2005.
The accompanying pro forma financial statements should be read in conjunction
with the financial statements of Delaware Investments Minnesota Municipal Income
Fund III, Inc. and the Fund included in their annual report dated March 31,
2005.
The following notes refer to the accompanying pro forma financial statements as
if the above-mentioned acquisition of Delaware Investments Minnesota Municipal
Income Fund III, Inc. and the Fund had taken place as of April 1, 2004.
2. 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 - Long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Fund's Board of
Directors.
Federal Income Taxes - The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other - Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date).
Costs used in calculating realized gains and losses on the sale of investment
securities are those of the specific securities sold. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. The Fund declares and pays
dividends from net investment income monthly and declares and pays distributions
from net realized gain on investments, if any, annually. In addition, in order
to satisfy certain distribution requirements of the Tax Reform Act of 1986, the
Fund may declare special year-end dividend and capital gains distributions
during November or December to shareholders of record on a date in such month.
Such distributions, if received by shareholders by January 31, are deemed to
have been paid by the Fund and received by shareholders on the earlier of the
date paid or December 31 of the prior year.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The earnings
credits for the twelve months ended March 31, 2005 were approximately $5,770.
The expense paid under the above arrangement is included in the "custodian fees"
expense caption on the Statement of Operations with the corresponding expense
offset shown as "expenses paid indirectly."
3. 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 of 0.40% which is calculated
daily based on the average daily net assets of the Fund, excluding the
liquidation value of preferred stock that may be outstanding.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of DMC,
to provide accounting and administration services which are based on average net
assets and paid on a monthly basis, subject to certain minimums.
Certain officers of DMC and DSC are officers and/or directors of the Fund. These
officers and directors are paid no compensation by the Fund.
4. Capital Stock
Pursuant to the articles of incorporation, the Fund has 200 million shares of
$0.01 par value common shares authorized. The Fund did not repurchase any shares
under the Share Repurchase Program during the twelve months ended March 31,
2005. Shares issuable under the Fund's dividend reinvestment plan are purchased
by the Fund's transfer agent, Mellon Investor Services, LLC, in the open market.
The Fund has one million shares of $0.01 par value Preferred Shares authorized.
Under resolutions adopted by the Board of Directors, the Fund has issued 600,
600 and 300 Series A, B and D Preferred Shares, respectively. Series A, B, and D
Preferred Shares have substantially similar preferences, voting powers,
restrictions as to dividends, qualifications, liquidation rights and terms and
conditions of redemption. The preferred shares of the Fund have a liquidation
preference of $50,000 per share plus an amount equal to accumulated but unpaid
dividends.
Dividends for the outstanding preferred shares of the Fund are cumulative at a
rate established at the initial public offering and are typically reset every 28
days based on the results of an auction. Dividend rates (adjusted for any
capital gain distributions) ranged from 1% to 2.4% during the twelve-month
period ended March 31, 2005.
Citigroup Global Markets, Inc. (formerly Smith Barney, Harris Upham & Co.,
Inc.), as the remarketing agent, receives an annual fee from the Fund of 0.25%
of the average amount of preferred stock outstanding.
Under the 1940 Act, the Fund may not declare dividends or make other
distributions on common shares or purchase any such shares if, at the time of
the declaration, distribution or purchase, asset coverage with respect to the
outstanding preferred stock is less than 200%. The preferred shares are
redeemable at the option of the Fund, in whole or in part, on any dividend
payment date at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared. The preferred shares are also subject to mandatory
redemption at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared, if certain requirements relating to the composition of
the assets and liabilities of the Fund are not satisfied. The holders of
preferred shares have voting rights equal to the holders of common shares (one
vote per share) and will vote together with holders of common shares as a single
class. However, holders of preferred shares are also entitled to elect two of
each Fund's Directors. In addition, the 1940 Act requires that along with
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding preferred shares, voting separately as
a class, would be required to (a) adopt any plan of reorganization that would
adversely affect the preferred shares, and (b) take any action requiring a vote
of security holders pursuant of Section 13(a) of the 1940 Act, including, among
other things, changes in the Fund's subclassification as a closed-end investment
company or (c) changes in their fundamental investment restrictions.
5. Credit and Market Risks
The Fund uses leverage in the form of preferred shares. Leveraging may result in
a higher degree of volatility because a Fund's Net Asset Value could be more
sensitive to fluctuations in short-term interest rates and changes in market
value of portfolio securities attributable to the leverage.
The Fund invests substantially all of its assets in securities issued by
Minnesota municipalities. The value of these investments may be adversely
affected by new legislation within state, regional or local economic conditions
and differing levels of supply and demand for municipal bonds. Many
municipalities insure repayment for their obligations. Although bond insurance
reduces the risk of loss due to default by an issuer, such bonds remain subject
to the risk of loss due to default by an issuer, such bonds remain subject to
the risk that the market may fluctuate for other reasons and there is no
assurance that the insurance company will meet its obligations. These securities
have been identified in the Portfolio of Investments.
The Fund may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Portfolio of Investments.
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased
bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding." "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates. Bonds are considered "pre-refunded" when
the refunding issue's proceeds are escrowed only until a permitted call date or
dates on the refunded issue with the refunded issue being redeemed at that time,
including any required premium. Bonds become "defeased" when the rights and
interests of the bondholders and their lien on the pledged revenues or other
security under the terms of the bond contract are substituted with an
alternative source of revenues (the escrow securities) sufficient to meet
payments of principal and interest to maturity or to the first call dates.
Escrowed secured bonds will often receive a rating of "AAA" or the equivalent
from Moody's, S&P and/or Fitch due to the strong credit quality of the escrow
securities and the irrevocable nature of the escrow deposit agreement.
The Fund may invest up to 15% of its net assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
Such securities are denoted on the Portfolio of Investments.
6. 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.
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005 % of Total
(unaudited) Investments Delaware Investments Minnesota
(Pro Forma Municipal Income Fund, Inc.
Combined) Par Market Value
------------------ ----------------------------------------------------------
------------------ ----------------------------------------------------------
Municipal Bonds 98.28%
Airport Revenue Bonds 6.55%
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $0 $0
5.00% 1/1/22 (MBIA) 1,000,000 1,041,310
5.125% 1/1/25 (FGIC) 0 0
5.00% 1/1/28 (MBIA) 0 0
5.00% 1/1/30 (AMBAC) 250,000 253,460
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 0 0
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 2,500,000 2,609,075
-----------------------------
3,903,845
-----------------------------
City General Obligation Bonds 2.68%
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950
Moorhead Series B 5.00% 2/1/33 (MBIA) 0 0
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,000,000 1,032,970
-----------------------------
1,554,920
-----------------------------
Continuing Care/Retirement Revenue Bonds 2.26%
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project) 6.00%
10/1/27 0 0
Minnesota Agriculture & Economic
Development Board Revenue (Benedictine Health
Systems) 5.75% 2/1/29 0 0
Moorhead Economic Development Authority
Multifamily Revenue (Eventide Lutheran Home
Project) Series B 6.00% 6/1/18 0 0
St. Paul Housing & Redevelopment
Authority Revenue (Franciscan Health
Project) 5.40% 11/20/42 (GNMA)(FHA) 880,000 917,426
-----------------------------
917,426
-----------------------------
Corporate Backed Revenue Bonds 3.62%
Anoka County Solid Waste Disposal National
Rural Co-Op Utility (United Power Association)
Series A 6.95% 12/1/08 (AMT) 560,000 563,455
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 0 0
Cloquet Pollution Control Revenue
(Potlatch Corporation Project) 5.90% 10/1/26 0 0
Minneapolis Community Development Agency
Supported Development Revenue (Pajor
Graphics) Series 1(LOC US Bank NA) 6.75%
12/1/25 (AMT) 0 0
Sartell Environmental Improvement Revenue
(International Paper) Series A 5.20% 6/1/27 1,000,000 1,003,290
-----------------------------
1,566,745
-----------------------------
Escrowed to Maturity Bonds 9.43%
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) (FHA) (AMT) 2,555,000 3,715,762
Southern Minnesota Municipal Power Agency
Series B
5.50% 1/1/15 (AMBAC) 390,000 392,613
5.75% 1/1/11 (FGIC) 1,000,000 999,910
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 0 0
5.55% 11/1/23 (MBIA) 0 0
University of Minnesota Hospital & Clinics
6.75% 12/1/16 0 0
Western Minnesota Municipal Power Agency
6.625% 1/1/16 0 0
-----------------------------
5,108,285
-----------------------------
Higher Education Revenue Bonds 5.58%
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict) Series 5-W
5.00% 3/1/20 1,000,000 1,025,250
(College of St. Benedict) Series 5-W
5.25% 3/1/24 0 0
(St. Catherine College) Series 5-N1
5.375% 10/1/32 0 0
(St. Mary's University) Series 5-U
4.80% 10/1/23 0 0
(St.Thomas University) Series 4-A1
5.625% 10/1/21 0 0
(St. Thomas University) Series 5-Y
5.25% 10/1/34 0 0
St. Cloud Housing & Redevelopment
Authority Revenue (State University
Foundation Project) 5.00% 5/1/23 0 0
University of Minnesota Series A 5.50%
7/1/21 1,000,000 1,139,840
-----------------------------
2,165,090
-----------------------------
Hospital Revenue Bonds 14.27%
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) 1,000,000 1,027,390
Duluth Economic Development Authority
Health Care Facilities Revenue (Benedictine
Health System - St. Mary's Hospital) 5.25%
2/15/33 1,250,000 1,268,963
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,100,000 1,164,262
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 0 0
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A 6.375%
11/15/29 1,750,000 1,902,740
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series 97A 5.75%
11/15/26 (MBIA) 0 0
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B 5.50% 11/15/27 0 0
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 500,000 505,160
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 0 0
St. Paul Housing & Redevelopment
Authority Health Care Facilities
Revenue (Regions Hospital Project)
5.30% 5/15/28 700,000 703,892
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project) Series
A 6.10% 1/1/19 (RADIAN) 0 0
-----------------------------
6,572,407
-----------------------------
Miscellaneous Revenue Bonds 2.71%
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project) 5.125% 7/1/21 1,600,000 1,664,976
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund) Series G1 5.70%
12/1/19 0 0
Minneapolis Community Development Agency
(Supported Development Revenue Limited Tax
Common Bond Fund) Series G-3 5.45% 12/1/31 1,000,000 1,046,740
Minneapolis Community Development Agency
)Supported Development Revenue Limited Tax
Common Bond Fund) Series 5 5.70% 12/1/27 0 0
-----------------------------
2,711,716
-----------------------------
Multifamily Housing Revenue Bonds 5.51%
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8) 6.20%
7/1/30 (FHA) (AMT) 0 0
Harmony Multifamily Housing Revenue
Refunding Section 8 (Zedakah Foundation
Project) Series A 5.95% 9/1/20 0 0
Minneapolis Multifamily Housing Revenue
Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) 0
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 0 0
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 0 0
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 0 0
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 0 0
Southeastern Minnesota Multi County
Housing & Redevelopment
Authority (Winona County) 5.35% 1/1/28 300,000 301,974
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project)
(Orleans Homes Number One) 7.25%
11/1/27 (AMT) 0 0
Washington County Housing &
Redevelopment Authority Governmental
Revenue (Woodland Park Apartments
Project) 4.70% 10/1/32 1,000,000 1,001,940
-----------------------------
2,313,204
-----------------------------
Municipal Lease Revenue Bonds 6.29%
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center) 5.125% 2/1/24 0 0
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center) 5.20% 2/1/29 0 0
Minneapolis Development Revenue
(Limited Tax Supported Common Bond Fund)
5.50% 12/1/24 (AMT) 0 0
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 0 0
5.125% 12/1/27 500,000 522,445
5.25% 12/1/27 1,150,000 1,211,732
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 0 0
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 0 0
-----------------------------
1,734,177
-----------------------------
Parking Revenue Bonds 1.37%
St. Paul Housing & Redevelopment
Authority Parking Revenue (Block
19 Ramp Project) Series A 5.35%
8/1/29 (FSA) 650,000 691,867
-----------------------------
691,867
-----------------------------
Political Subdivision General Obligation
Bonds 4.98%
Hennepin County Series B 5.00% 12/1/18 1,300,000 1,375,595
Hennepin Regional Railroad Authority
5.00% 12/1/26 0 0
Metropolitan Council Waste Water
Treatment Series B 5.00% 12/1/21 0 0
Minneapolis Sports Arena Project 5.125%
10/1/20 0 0
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 855,000 909,669
5.50% 2/1/32 (MBIA) 1,000,000 1,058,500
-----------------------------
3,343,764
-----------------------------
§Pre-Refunded Bonds 8.10%
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) 0 0
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 0 0
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 0 0
Minneapolis/St. Paul Housing &
Redevelopment Authority Health Care
Systems (Children's Health Care) Series A
5.50% 8/15/25-05 (FSA) 0 0
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15 0 0
Puerto Rico Commonwealth 6.00% 7/1/26-07 1,000,000 1,083,230
Puerto Rico Commonwealth Public
Improvement Series A 5.00% 7/1/27-12 0 0
Puerto Rico Electric Power Authority
Power Revenue Series Z 5.25% 7/1/21 0 0
Puerto Rico Highway & Transportation
Authority Revenue Series Y
5.50% 7/1/26-06 0 0
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 845,000 916,664
Rosemount Independent School District
#196 Series A 5.70% 4/1/12-06 0 0
Southern Minnesota Municipal Power Agency
Supply Revenue Series A
5.75% 1/1/18-05 0 0
St. Francis Independent School District
#15 Series A 6.30% 2/1/11-06 (FSA) 1,250,000 1,286,888
-----------------------------
3,286,782
-----------------------------
Public Power Revenue Bonds 11.52%
Chaska Electric Revenue Series A 6.00%
10/1/25-10 1,000,000 1,093,430
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 0 0
5.25% 10/1/19 1,110,000 1,183,504
Rochester Electric Utility Revenue 5.25%
12/1/30 (AMBAC) 150,000 157,992
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater
ROLs Series II-R-189-3 8.096% 1/1/14 (AMBAC) 2,500,000 3,001,874
&Southern Minnesota Municipal Power
Agency Supply System Revenue, Inverse
Floater ROLs Series II-R-189 8.096%
1/1/15 (AMBAC) 0 0
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/12 (AMBAC) 1,000,000 1,081,000
5.00% 1/1/13 (MBIA) 500,000 540,445
5.25% 1/1/15 (AMBAC) 570,000 631,150
5.25% 1/1/16 (AMBAC) 1,000,000 1,105,980
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,900,000 1,964,581
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 765,000 827,179
-----------------------------
11,587,135
-----------------------------
School District General Obligation Bonds 8.05%
Centennial Independent School District
#012 Series A 5.00% 2/1/20 (FSA) 400,000 418,404
Elk River Independent School District
#728 5.00% 2/1/16 (FGIC) 0 0
Farmington Independent School District
#192 5.00% 2/1/23 (FSA) 1,200,000 1,248,924
Farmington Independent School District
#192 Series B 5.00% 2/1/27 (FSA) 0 0
Lakeville Independent School District
#194 Series A 4.75% 2/1/22 (FSA) 500,000 511,295
Minneapolis Special School District
#001 5.00% 2/1/19 (FSA) 675,000 713,232
Morris Independent School District
#769 5.00% 2/1/28 (MBIA) 1,000,000 1,035,650
Mounds View Independent School District
#621 5.00% 2/1/23 (FSA) 1,020,000 1,063,901
Princeton Independent School District
#477 Series A 5.00% 2/1/24 (FSA) 0 0
Robbinsdale Independent School District
#281 5.00% 2/1/21 (FSA) 500,000 521,165
St. Michael Independent School District
#885
5.00% 2/1/22 (FSA) 500,000 519,665
5.00% 2/1/24 (FSA) 400,000 413,056
-----------------------------
6,445,292
-----------------------------
Single Family Housing Revenue Bonds 1.64%
Dakota County Housing & Redevelopment
Authority Single Family
Mortgage Revenue 5.85% 10/1/30 (GNMA)
(FNMA) (AMT) 42,000 42,926
Minnesota State Housing Finance Agency
Single Family Housing
Series 1992-C2 6.15% 7/1/23 (AMT) 0 0
Minnesota State Housing Finance
Agency Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 0 0
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 785,000 808,228
-----------------------------
851,154
-----------------------------
State General Obligation Bonds 2.26%
Minnesota State 5.00% 8/1/21 1,150,000 1,207,857
&Minnesota State, Inverse Floater
ROLs 7.824% 11/1/17 0 0
-----------------------------
1,207,857
-----------------------------
Tax Increment / Special Assessment Bonds 0.41%
Moorhead Economic Development Authority
Tax Increment Series A 5.25% 2/1/25 (MBIA) 500,000 529,535
-----------------------------
529,535
-----------------------------
Territorial General Obligation Bonds 0.64%
Puerto Rico Commonwealth Public I
mprovement Series A 5.50% 7/1/19 (MBIA) 0 0
University Virgin Islands Series A
5.375% 6/1/34 0 0
-----------------------------
0
-----------------------------
Territorial Revenue Bonds 0.41%
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities
Revenue Series D (Unrefunded Portion)
5.25% 7/1/27 0 0
Virgin Islands Public Finance Authority
5.25% 10/1/23 0 0
-----------------------------
0
-----------------------------
Total Municipal Bonds 56,491,201
Short Term Investments 1.72%
o Variable Rate Demand Notes
City of St. Cloud 2.18% 2/1/16 0 0
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 250,000 250,000
Minneapolis Block E Buildings Series A
2.13% 3/1/27 0 0
Minneapolis Library 2.13% 12/1/32 300,000 300,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 0 0
Minnesota State Higher Education ]
Facilities Authority (Carleton College)
Series 5-G 2.13% 11/1/29 0 0
-----------------------------
Total Short Term Investments 550,000
-----------------------------
-----------------------------
Total Investments at Market 100.00% $ 57,041,201
-----------------------------
Total Investments at Cost $ 55,141,248
-----------------------------
- ----------------------------------------------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
/A/ No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply
with its Prospectus and SEC and IRS guidelines and restrictions. However,
the foregoing sentence shall not restrict in any way the ability of the
investment advisor of any of the Funds from buying or selling securities in
the normal course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005
(unaudited)
Municipal Income Fund III, Inc.
Par Market Value
---------------------------------------------------------
Municipal Bonds
Airport Revenue Bonds
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $0 $0
5.00% 1/1/22 (MBIA) 0 0
5.125% 1/1/25 (FGIC) 900,000 928,557
5.00% 1/1/28 (MBIA) 750,000 774,503
5.00% 1/1/30 (AMBAC) 750,000 760,380
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 0 0
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 0 0
---------------------------
2,463,440
---------------------------
City General Obligation Bonds
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 0 0
Moorhead Series B 5.00% 2/1/33 (MBIA) 1,250,000 1,296,450
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 0 0
---------------------------
1,296,450
---------------------------
Continuing Care/Retirement Revenue Bonds
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project) 6.00%
10/1/27 0 0
Minnesota Agriculture & Economic
Development Board Revenue (Benedictine Health
Systems) 5.75% 2/1/29 600,000 585,060
Moorhead Economic Development Authority
Multifamily Revenue (Eventide Lutheran Home
Project) Series B 6.00% 6/1/18 0 0
St. Paul Housing & Redevelopment
Authority Revenue (Franciscan Health Project)
5.40% 1/20/42 (GNMA)(FHA) 1,820,000 1,897,405
---------------------------
2,482,465
---------------------------
Corporate Backed Revenue Bonds
Anoka County Solid Waste Disposal National
Rural Co-Op Utility (United Power Association)
Series A 6.95% 12/1/08 (AMT) 0 0
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 0 0
Cloquet Pollution Control Revenue
(Potlatch Corporation Project) 5.90% 10/1/26 1,000,000 1,007,840
Minneapolis Community Development Agency
Supported Development Revenue (Pajor
Graphics) Series 1(LOC US Bank NA) 6.75%
12/1/25 (AMT) 865,000 924,382
Sartell Environmental Improvement Revenue
(International Paper) Series A 5.20% 6/1/27 0 0
---------------------------
1,932,222
---------------------------
Escrowed to Maturity Bonds
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) (FHA) (AMT) 0 0
Southern Minnesota Municipal Power Agency
Series B
5.50% 1/1/15 (AMBAC) 0 0
5.75% 1/1/11 (FGIC) 0 0
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 0 0
5.55% 11/1/23 (MBIA) 0 0
University of Minnesota Hospital & Clinics
6.75% 12/1/16 2,580,000 3,122,393
Western Minnesota Municipal Power Agency
6.625% 1/1/16 0 0
---------------------------
3,122,393
---------------------------
Higher Education Revenue Bonds
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict) Series 5-W
5.00% 3/1/20 0 0
(College of St. Benedict) Series 5-W
5.25% 3/1/24 300,000 309,888
(St. Catherine College) Series 5-N1
5.375% 10/1/32 0 0
(St. Mary's University) Series 5-U
4.80% 10/1/23 0 0
(St.Thomas University) Series 4-A1
5.625% 10/1/21 1,010,000 1,043,421
(St. Thomas University) Series 5-Y
5.25% 10/1/34 0 0
St. Cloud Housing & Redevelopment
Authority Revenue (State University
Foundation Project) 5.00% 5/1/23 0 0
University of Minnesota Series A 5.50%
7/1/21 0 0
---------------------------
1,353,309
---------------------------
Hospital Revenue Bonds
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) 500,000 513,695
Duluth Economic Development Authority
Health Care Facilities Revenue (Benedictine
Health System - St. Mary's Hospital) 5.25%
2/15/33 1,000,000 1,015,170
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,100,000 1,164,262
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 0 0
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A 6.375%
11/15/29 1,250,000 1,359,099
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series 97A 5.75%
11/15/26 (MBIA) 0 0
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B 5.50% 11/15/27 1,000,000 1,061,190
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 310,000 313,199
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 0 0
St. Paul Housing & Redevelopment
Authority Health Care Facilities
Revenue (Regions Hospital Project)
5.30% 5/15/28 0 0
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project) Series
A 6.10% 1/1/19 (RADIAN) 0 0
---------------------------
5,426,615
---------------------------
Miscellaneous Revenue Bonds
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project) 5.125% 7/1/21 250,000 260,153
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund) Series G1 5.70%
12/1/19 0 0
Minneapolis Community Development Agency
(Supported Development Revenue Limited Tax
Common Bond Fund) Series G-3 5.45% 12/1/31 0 0
Minneapolis Community Development Agency
(Supported Development Revenue Limited Tax
Common Bond Fund) Series 5 5.70% 12/1/27 0 0
---------------------------
260,153
---------------------------
Multifamily Housing Revenue Bonds
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8) 6.20%
7/1/30 (FHA) (AMT) 0 0
Harmony Multifamily Housing Revenue
Refunding Section 8 (Zedakah Foundation
Project) Series A 5.95% 9/1/20 0 0
Minneapolis Multifamily Housing Revenue
Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) 975,000 1,029,785
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 965,000 943,307
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 0 0
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 0 0
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 0 0
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 0 0
Southeastern Minnesota Multi County
Housing & Redevelopment
Authority (Winona County) 5.35% 1/1/28 0 0
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project)
(Orleans Homes Number One) 7.25%
11/1/27 (AMT) 0 0
Washington County Housing &
Redevelopment Authority Governmental
Revenue (Woodland Park Apartments
Project) 4.70% 10/1/32 0 0
---------------------------
1,973,092
---------------------------
Municipal Lease Revenue Bonds
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center) 5.125% 2/1/24 500,000 508,850
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center) 5.20% 2/1/29 0 0
Minneapolis Development Revenue
(Limited Tax Supported Common Bond Fund)
5.50% 12/1/24 (AMT) 0 0
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 0 0
5.125% 12/1/27 500,000 522,445
5.25% 12/1/27 1,000,000 1,053,680
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 500,000 518,985
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 0 0
---------------------------
2,603,960
---------------------------
Parking Revenue Bonds
St. Paul Housing & Redevelopment
Authority Parking Revenue (Block
19 Ramp Project) Series A 5.35%
8/1/29 (FSA) 1,450,000 1,543,395
---------------------------
1,543,395
---------------------------
Political Subdivision General Obligation
Bonds
Hennepin County Series B 5.00% 12/1/18 0 0
Hennepin Regional Railroad Authority
5.00% 12/1/26 0 0
Metropolitan Council Waste Water
Treatment Series B 5.00% 12/1/21 750,000 794,475
Minneapolis Sports Arena Project 5.125%
10/1/20 750,000 782,033
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 850,000 904,349
5.50% 2/1/32 (MBIA) 0 0
---------------------------
2,480,857
---------------------------
§Pre-Refunded Bonds
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) 0 0
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 1,645,000 1,645,000
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 0 0
Minneapolis/St. Paul Housing &
Redevelopment Authority Health Care
Systems (Children's Health Care) Series A
5.50% 8/15/25-05 (FSA) 0 0
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15 2,200,000 2,256,452
Puerto Rico Commonwealth 6.00% 7/1/26-07 0 0
Puerto Rico Commonwealth Public
Improvement Series A 5.00% 7/1/27-12 0 0
Puerto Rico Electric Power Authority
Power Revenue Series Z 5.25% 7/1/21 0 0
Puerto Rico Highway & Transportation
Authority Revenue Series Y
5.50% 7/1/26-06 0 0
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 0 0
Rosemount Independent School District
#196 Series A 5.70% 4/1/12-06 0 0
Southern Minnesota Municipal Power Agency
Supply Revenue Series A
5.75% 1/1/18-05 0 0
St. Francis Independent School District
#15 Series A 6.30% 2/1/11-06 (FSA) 0 0
---------------------------
3,901,452
---------------------------
Public Power Revenue Bonds
Chaska Electric Revenue Series A 6.00%
10/1/25-10 0 0
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 750,000 762,480
5.25% 10/1/19 500,000 533,110
Rochester Electric Utility Revenue 5.25%
12/1/30 (AMBAC) 0 0
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater
ROLs Series II-R-189-3 8.096% 1/1/14 (AMBAC) 1,500,000 1,801,124
&Southern Minnesota Municipal Power
Agency Supply System Revenue, Inverse
Floater ROLs Series II-R-189 8.096%
1/1/15 (AMBAC) 0 0
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/12 (AMBAC) 0 0
5.00% 1/1/13 (MBIA) 500,000 540,445
5.25% 1/1/15 (AMBAC) 700,000 775,096
5.25% 1/1/16 (AMBAC) 500,000 552,990
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 0 0
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 600,000 648,768
---------------------------
5,614,013
---------------------------
School District General Obligation Bonds
Centennial Independent School District
#012 Series A 5.00% 2/1/20 (FSA) 0 0
Elk River Independent School District
#728 5.00% 2/1/16 (FGIC) 0 0
Farmington Independent School District
#192 5.00% 2/1/23 (FSA) 0 0
Farmington Independent School District
#192 Series B 5.00% 2/1/27 (FSA) 500,000 521,475
Lakeville Independent School District
#194 Series A 4.75% 2/1/22 (FSA) 0 0
Minneapolis Special School District
#001 5.00% 2/1/19 (FSA) 0 0
Morris Independent School District
#769 5.00% 2/1/28 (MBIA) 0 0
Mounds View Independent School District
#621 5.00% 2/1/23 (FSA) 0 0
Princeton Independent School District
#477 Series A 5.00% 2/1/24 (FSA) 500,000 524,725
Robbinsdale Independent School District
#281 5.00% 2/1/21 (FSA) 0 0
St. Michael Independent School District
#885
5.00% 2/1/22 (FSA) 0 0
5.00% 2/1/24 (FSA) 0 0
---------------------------
1,046,200
---------------------------
Single Family Housing Revenue Bonds
Dakota County Housing & Redevelopment
Authority Single Family
Mortgage Revenue 5.85% 10/1/30 (GNMA)
(FNMA) (AMT) 0 0
Minnesota State Housing Finance Agency
Single Family Housing
Series 1992-C2 6.15% 7/1/23 (AMT) 640,000 647,155
Minnesota State Housing Finance
Agency Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 0 0
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 0 0
---------------------------
647,155
---------------------------
State General Obligation Bonds
Minnesota State 5.00% 8/1/21 0 0
&Minnesota State, Inverse Floater
ROLs 7.824% 11/1/17 0 0
---------------------------
0
---------------------------
Tax Increment / Special Assessment Bonds
Moorhead Economic Development Authority
Tax Increment Series A 5.25% 2/1/25 (MBIA) 0 0
---------------------------
0
---------------------------
Territorial General Obligation Bonds
Puerto Rico Commonwealth Public I
mprovement Series A 5.50% 7/1/19 (MBIA) 0 0
University Virgin Islands Series A
5.375% 6/1/34 500,000 520,070
---------------------------
520,070
---------------------------
Territorial Revenue Bonds
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities
Revenue Series D (Unrefunded Portion)
5.25% 7/1/27 530,000 554,990
Virgin Islands Public Finance Authority
5.25% 10/1/23 0 0
---------------------------
554,990
---------------------------
Total Municipal Bonds 39,222,231
Short Term Investments
o Variable Rate Demand Notes
City of St. Cloud 2.18% 2/1/16 550,000 550,000
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 0 0
Minneapolis Block E Buildings Series A
2.13% 3/1/27 0 0
Minneapolis Library 2.13% 12/1/32 0 0
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 0 0
Minnesota State Higher Education ]
Facilities Authority (Carleton College)
Series 5-G 2.13% 11/1/29 0 0
---------------------------
Total Short Term Investments 550,000
---------------------------
---------------------------
Total Investments at Market $ 39,772,231
---------------------------
Total Investments at Cost $ 38,128,090
---------------------------
- --------------------------------------------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
/A/ No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply
with its Prospectus and SEC and IRS guidelines and restrictions. However,
the foregoing sentence shall not restrict in any way the ability of the
investment advisor of any of the Funds from buying or selling securities in
the normal course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005
(unaudited) Delaware Investments Minnesota
Municipal Income Fund II, Inc.
Par Market Value
----------------------------------------------------------
Municipal Bonds
Airport Revenue Bonds
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $1,000,000 $1,078,730
5.00% 1/1/22 (MBIA) 2,000,000 2,082,620
5.125% 1/1/25 (FGIC) 0 0
5.00% 1/1/28 (MBIA) 1,370,000 1,414,758
5.00% 1/1/30 (AMBAC) 1,450,000 1,470,068
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 1,000,000 1,030,150
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 3,500,000 3,652,705
-----------------------------
10,729,031
-----------------------------
City General Obligation Bonds
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 500,000 521,950
Moorhead Series B 5.00% 2/1/33 (MBIA) 2,000,000 2,074,320
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 1,500,000 1,549,455
-----------------------------
4,145,725
-----------------------------
Continuing Care/Retirement Revenue Bonds
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project) 6.00%
10/1/27 1,565,000 1,489,285
Minnesota Agriculture & Economic
Development Board Revenue (Benedictine Health
Systems) 5.75% 2/1/29 0 0
Moorhead Economic Development Authority
Multifamily Revenue(Eventide Lutheran Home
Project) Series B 6.00% 6/1/18 1,000,000 1,000,730
St. Paul Housing & Redevelopment
Authority Revenue (Franciscan Health Project)
5.40% 11/20/42 (GNMA)(FHA) 0 0
-----------------------------
2,490,015
-----------------------------
Corporate Backed Revenue Bonds
Anoka County Solid Waste Disposal National
Rural Co-Op Utility (United Power Association)
Series A 6.95% 12/1/08 (AMT) 0 0
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 1,430,000 1,415,228
Cloquet Pollution Control Revenue
(Potlatch Corporation Project) 5.90% 10/1/26 4,500,000 4,535,280
Minneapolis Community Development Agency
Supported Development Revenue (Pajor
Graphics) Series 1(LOC US Bank NA) 6.75%
12/1/25 (AMT) 0 0
Sartell Environmental Improvement Revenue
(International Paper) Series A 5.20% 6/1/27 0 0
-----------------------------
5,950,508
-----------------------------
Escrowed to Maturity Bonds
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) (FHA) (AMT) 5,500,000 7,998,705
Southern Minnesota Municipal Power Agency
Series B
5.50% 1/1/15 (AMBAC) 0 0
5.75% 1/1/11 (FGIC) 0 0
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 2,300,000 2,329,624
5.55% 11/1/23 (MBIA) 4,200,000 4,254,096
University of Minnesota Hospital & Clinics
6.75% 12/1/16 0 0
Western Minnesota Municipal Power Agency
6.625% 1/1/16 1,535,000 1,801,583
-----------------------------
16,384,008
-----------------------------
Higher Education Revenue Bonds
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict) Series 5-W
5.00% 3/1/20 1,000,000 1,025,250
(College of St. Benedict) Series 5-W
5.25% 3/1/24 0 0
(St. Catherine College) Series 5-N1
5.375% 10/1/32 1,500,000 1,561,935
(St. Mary's University) Series 5-U
4.80% 10/1/23 1,400,000 1,400,490
(St.Thomas University) Series 4-A1
5.625% 10/1/21 1,000,000 1,033,090
(St. Thomas University) Series 5-Y
5.25% 10/1/34 1,500,000 1,563,795
St. Cloud Housing & Redevelopment
Authority Revenue (State University
Foundation Project) 5.00% 5/1/23 1,000,000 1,035,830
University of Minnesota Series A 5.50%
7/1/21 3,000,000 3,419,520
-----------------------------
11,039,910
-----------------------------
Hospital Revenue Bonds
Bemidji Hospital Facilities Revenue
(North County Health Services)
5.00% 9/1/24 (RADIAN) 0 0
Duluth Economic Development Authority
Health Care Facilities Revenue (Benedictine
Health System - St. Mary's Hospital) 5.25%
2/15/33 5,000,000 5,075,850
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 1,000,000 1,058,420
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 2,750,000 2,898,308
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A 6.375%
11/15/29 3,300,000 3,588,024
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series 97A 5.75%
11/15/26 (MBIA) 5,550,000 5,956,703
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B 5.50% 11/15/27 3,365,000 3,570,904
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 0 0
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 1,250,000 1,270,038
St. Paul Housing & Redevelopment
Authority Health Care Facilities
Revenue (Regions Hospital Project)
5.30% 5/15/28 300,000 301,668
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project) Series
A 6.10% 1/1/19 (RADIAN) 1,405,000 1,534,246
-----------------------------
25,254,161
-----------------------------
Miscellaneous Revenue Bonds
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project) 5.125% 7/1/21 2,400,000 2,497,464
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund) Series G1 5.70%
12/1/19 1,100,000 1,225,444
Minneapolis Community Development Agency
(Supported Development Revenue Limited Tax
Common Bond Fund) Series G-3 5.45% 12/1/31 0 0
Minneapolis Community Development Agency
(Supported Development Revenue Limited Tax
Common Bond Fund) Series 5 5.70% 12/1/27 375,000 381,795
-----------------------------
4,104,703
-----------------------------
Multifamily Housing Revenue Bonds
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8) 6.20%
7/1/30 (FHA) (AMT) 1,105,000 1,141,454
Harmony Multifamily Housing Revenue
Refunding Section 8 (Zedakah Foundation
Project) Series A 5.95% 9/1/20 1,000,000 847,950
Minneapolis Multifamily Housing Revenue
Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) 0 0
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 0 0
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 1,000,000 1,009,290
Minneapolis Multifamily Housing Revenue
(Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 3,575,000 3,586,868
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 1,000,000 983,930
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 155,000 158,257
Southeastern Minnesota Multi County
Housing & Redevelopment
Authority (Winona County) 5.35% 1/1/28 870,000 875,725
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project)
(Orleans Homes Number One) 7.25%
11/1/27 (AMT) 1,540,000 1,490,951
Washington County Housing &
Redevelopment Authority Governmental
Revenue (Woodland Park Apartments
Project) 4.70% 10/1/32 0 0
-----------------------------
10,094,425
-----------------------------
Municipal Lease Revenue Bonds
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center) 5.125% 2/1/24 0 0
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center)5.20% 2/1/29 1,000,000 1,018,000
Minneapolis Development Revenue
(Limited Tax Supported Common Bond Fund)
5.50% 12/1/24 (AMT) 1,000,000 1,043,730
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 2,385,000 2,483,429
5.125% 12/1/27 0 0
5.25% 12/1/27 2,650,000 2,792,252
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 2,545,000 2,641,634
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 2,000,000 2,115,360
-----------------------------
12,094,405
-----------------------------
Parking Revenue Bonds
St. Paul Housing & Redevelopment
Authority Parking Revenue (Block
19 Ramp Project) Series A 5.35%
8/1/29 (FSA) 1,250,000 1,330,513
-----------------------------
1,330,513
-----------------------------
Political Subdivision General Obligation
Bonds
Hennepin County Series B 5.00% 12/1/18 1,000,000 1,058,150
Hennepin Regional Railroad Authority
5.00% 12/1/26 3,500,000 3,599,680
Metropolitan Council Waste Water
Treatment Series B 5.00% 12/1/21 1,250,000 1,324,125
Minneapolis Sports Arena Project 5.125%
10/1/20 0 0
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 0 0
5.50% 2/1/32 (MBIA) 1,140,000 1,206,690
-----------------------------
7,188,645
-----------------------------
§Pre-Refunded Bonds
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) 550,000 550,000
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 0 0
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 1,000,000 1,025,020
Minneapolis/St. Paul Housing &
Redevelopment Authority Health Care
Systems (Children's Health Care) Series A
5.50% 8/15/25-05 (FSA) 1,400,000 1,444,114
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15 0 0
Puerto Rico Commonwealth 6.00% 7/1/26-07 0 0
Puerto Rico Commonwealth Public
Improvement Series A 5.00% 7/1/27-12 1,250,000 1,356,163
Puerto Rico Electric Power Authority
Power Revenue Series Z 5.25% 7/1/21 1,500,000 1,511,100
Puerto Rico Highway & Transportation
Authority Revenue Series Y
5.50% 7/1/26-06 2,000,000 2,100,480
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 625,000 678,006
Rosemount Independent School District
#196 Series A 5.70% 4/1/12-06 1,270,000 1,307,148
Southern Minnesota Municipal Power Agency
Supply Revenue Series A
5.75% 1/1/18-05 3,715,000 3,996,337
St. Francis Independent School District
#15 Series A 6.30% 2/1/11-06 (FSA) 0 0
-----------------------------
13,968,368
-----------------------------
Public Power Revenue Bonds
Chaska Electric Revenue Series A 6.00%
10/1/25-10 0 0
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 5,750,000 5,845,680
5.25% 10/1/19 0 0
Rochester Electric Utility Revenue 5.25%
12/1/30 (AMBAC) 450,000 473,976
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater
ROLs Series II-R-189-3 8.096% 1/1/14 (AMBAC) 3,000,000 3,602,250
&Southern Minnesota Municipal Power
Agency Supply System Revenue, Inverse
Floater ROLs Series II-R-189 8.096%
1/1/15 (AMBAC) 1,500,000 1,821,840
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/12 (AMBAC) 0 0
5.00% 1/1/13 (MBIA) 0 0
5.25% 1/1/15 (AMBAC) 0 0
5.25% 1/1/16 (AMBAC) 0 0
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 1,100,000 1,137,389
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 0 0
-----------------------------
12,881,135
-----------------------------
School District General Obligation Bonds
Centennial Independent School District
#012 Series A 5.00% 2/1/20 (FSA) 400,000 418,404
Elk River Independent School District
#728 5.00% 2/1/16 (FGIC) 1,500,000 1,615,200
Farmington Independent School District
#192 5.00% 2/1/23 (FSA) 1,080,000 1,124,032
Farmington Independent School District
#192 Series B 5.00% 2/1/27 (FSA) 1,000,000 1,042,950
Lakeville Independent School District
#194 Series A 4.75% 2/1/22 (FSA) 1,500,000 1,533,885
Minneapolis Special School District
#001 5.00% 2/1/19 (FSA) 1,000,000 1,056,640
Morris Independent School District
#769 5.00% 2/1/28 (MBIA) 2,750,000 2,848,037
Mounds View Independent School District
#621 5.00% 2/1/23 (FSA) 1,000,000 1,043,040
Princeton Independent School District
#477 Series A 5.00% 2/1/24 (FSA) 500,000 524,725
Robbinsdale Independent School District
#281 5.00% 2/1/21 (FSA) 0 0
St. Michael Independent School District
#885
5.00% 2/1/22 (FSA) 1,500,000 1,558,995
5.00% 2/1/24 (FSA) 725,000 748,664
-----------------------------
13,514,572
-----------------------------
Single Family Housing Revenue Bonds
Dakota County Housing & Redevelopment
Authority Single Family
Mortgage Revenue 5.85% 10/1/30 (GNMA)
(FNMA) (AMT) 0 0
Minnesota State Housing Finance Agency
Single Family Housing
Series 1992-C2 6.15% 7/1/23 (AMT) 920,000 922,585
Minnesota State Housing Finance
Agency Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 1,145,000 1,157,802
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 670,000 689,825
-----------------------------
2,770,212
-----------------------------
State General Obligation Bonds
Minnesota State 5.00% 8/1/21 3,875,000 4,069,951
&Minnesota State, Inverse Floater
ROLs 7.824% 11/1/17 570,000 631,936
-----------------------------
4,701,887
-----------------------------
Tax Increment / Special Assessment Bonds
Moorhead Economic Development Authority
Tax Increment Series A 5.25% 2/1/25 (MBIA) 500,000 529,535
-----------------------------
529,535
-----------------------------
Territorial General Obligation Bonds
Puerto Rico Commonwealth Public I
mprovement Series A 5.50% 7/1/19 (MBIA) 1,000,000 1,151,650
University Virgin Islands Series A
5.375% 6/1/34 0 0
-----------------------------
1,151,650
-----------------------------
Territorial Revenue Bonds
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities
Revenue Series D (Unrefunded Portion)
5.25% 7/1/27 0 0
Virgin Islands Public Finance Authority
5.25% 10/1/23 500,000 525,375
-----------------------------
525,375
-----------------------------
Total Municipal Bonds 160,848,783
Short Term Investments
o Variable Rate Demand Notes
City of St. Cloud 2.18% 2/1/16 0 0
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 250,000 250,000
Minneapolis Block E Buildings Series A
2.13% 3/1/27 1,250,000 1,250,000
Minneapolis Library 2.13% 12/1/32 700,000 700,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 300,000 300,000
Minnesota State Higher Education ]
Facilities Authority (Carleton College)
Series 5-G 2.13% 11/1/29 900,000 900,000
-----------------------------
Total Short Term Investments 3,400,000
-----------------------------
-----------------------------
Total Investments at Market $ 164,248,783
-----------------------------
Total Investments at Cost $ 157,846,585
- ----------------------------------------------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
/A/ No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply
with its Prospectus and SEC and IRS guidelines and restrictions. However,
the foregoing sentence shall not restrict in any way the ability of the
investment advisor of any of the Funds from buying or selling securities in
the normal course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Portfolio of Investments(A)
As of March 31, 2005 Delaware Investments Minnesota
(unaudited) Municipal Income Fund II, Inc.
Pro Forma Combined
Par Market Value
--------------------------------------------------------------
Municipal Bonds
Airport Revenue Bonds
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series A
5.25% 1/1/16 (MBIA) $1,000,000 $1,078,730
5.00% 1/1/22 (MBIA) 3,000,000 3,123,930
5.125% 1/1/25 (FGIC) 900,000 928,557
5.00% 1/1/28 (MBIA) 2,120,000 2,189,261
5.00% 1/1/30 (AMBAC) 2,450,000 2,483,908
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series B
5.25% 1/1/24 (FGIC) (AMT) 1,000,000 1,030,150
Minneapolis/St. Paul Metropolitan Airports
Commission Revenue Series C
5.25% 1/1/32 (FGIC) 6,000,000 6,261,780
-----------------------------
17,096,316
-----------------------------
City General Obligation Bonds
Metropolitan Council Minnesota
(Minneapolis/St. Paul Metropolitan Area)
Series C 5.00% 2/1/22 1,000,000 1,043,900
Moorhead Series B 5.00% 2/1/33 (MBIA) 3,250,000 3,370,770
Willmar (Rice Memorial Hospital Project)
5.00% 2/1/32 (FSA) 2,500,000 2,582,425
-----------------------------
6,997,095
-----------------------------
Continuing Care/Retirement Revenue Bonds
Minneapolis Health Care Facility Revenue
(Jones-Harrison Residence Project) 6.00%
10/1/27 1,565,000 1,489,285
Minnesota Agriculture & Economic
Development Board Revenue (Benedictine Health
Systems) 5.75% 2/1/29 600,000 585,060
Moorhead Economic Development Authority
Multifamily Revenue (Eventide Lutheran Home
Project) Series B 6.00% 6/1/18 1,000,000 1,000,730
St. Paul Housing & Redevelopment
Authority Revenue (Franciscan Health Project)
5.40% 11/20/42 (GNMA)(FHA) 2,700,000 2,814,831
-----------------------------
5,889,906
-----------------------------
Corporate Backed Revenue Bonds
Anoka County Solid Waste Disposal National
Rural Co-Op Utility (United Power Association)
Series A 6.95% 12/1/08 (AMT) 560,000 563,455
Burnsville Commonwealth Development
(Holiday Inn Project) 5.90% 4/1/08 1,430,000 1,415,228
Cloquet Pollution Control Revenue
(Potlatch Corporation Project) 5.90% 10/1/26 5,500,000 5,543,120
Minneapolis Community Development Agency
Supported Development Revenue (Pajor Graphics)
Series 1(LOC US Bank NA) 6.75% 12/1/25 (AMT) 865,000 924,382
Sartell Environmental Improvement Revenue
(International Paper) Series A 5.20% 6/1/27 1,000,000 1,003,290
-----------------------------
9,449,475
-----------------------------
Escrowed to Maturity Bonds
Dakota/Washington Counties Housing &
Redevelopment Authority Bloomington
Single Family Residential Mortgage
Revenue 8.375% 9/1/21 (GNMA) (FHA) (AMT) 8,055,000 11,714,467
Southern Minnesota Municipal Power Agency
Series B
5.50% 1/1/15 (AMBAC) 390,000 392,613
5.75% 1/1/11 (FGIC) 1,000,000 999,910
St. Paul Housing & Redevelopment Authority
Sales Tax (Civic Center Project)
5.55% 11/1/23 2,300,000 2,329,624
5.55% 11/1/23 (MBIA) 4,200,000 4,254,096
University of Minnesota Hospital & Clinics
6.75% 12/1/16 2,580,000 3,122,393
Western Minnesota Municipal Power Agency
6.625% 1/1/16 1,535,000 1,801,583
-----------------------------
24,614,686
-----------------------------
Higher Education Revenue Bonds
Minnesota State Higher Education
Facilities Authority
(College of St. Benedict) Series 5-W
5.00% 3/1/20 2,000,000 2,050,500
(College of St. Benedict) Series 5-W
5.25% 3/1/24 300,000 309,888
(St. Catherine College) Series 5-N1
5.375% 10/1/32 1,500,000 1,561,935
(St. Mary's University) Series 5-U
4.80% 10/1/23 1,400,000 1,400,490
(St.Thomas University) Series 4-A1
5.625% 10/1/21 2,010,000 2,076,511
(St. Thomas University) Series 5-Y
5.25% 10/1/34 1,500,000 1,563,795
St. Cloud Housing & Redevelopment
Authority Revenue (State University
Foundation Project) 5.00% 5/1/23 1,000,000 1,035,830
University of Minnesota Series A 5.50%
7/1/21 4,000,000 4,559,360
-----------------------------
14,558,309
-----------------------------
Hospital Revenue Bonds
Bemidji Hospital Facilities Revenue (
North County Health Services)
5.00% 9/1/24 (RADIAN) 1,500,000 1,541,085
Duluth Economic Development Authority
Health Care Facilities
Revenue (Benedictine Health System -
St. Mary's Hospital) 5.25% 2/15/33 7,250,000 7,359,983
Minneapolis Health Care System Revenue
(Allina Health Systems)
Series A 5.75% 11/15/32 3,200,000 3,386,944
Minneapolis Health Care System Revenue
(Fairview Health Services)
Series A 5.625% 5/15/32 2,750,000 2,898,308
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series A 6.375%
11/15/29 6,300,000 6,849,863
Minnesota Agricultural & Economic
Development Health Care System
(Fairview Hospital) Series 97A 5.75%
11/15/26 (MBIA) 5,550,000 5,956,703
Rochester Health Care Facilities Revenue
(Mayo Foundation) Series B 5.50% 11/15/27 4,365,000 4,632,094
Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center)
5.25% 9/1/34 810,000 818,359
St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
Series B 5.25% 7/1/30 1,250,000 1,270,038
St. Paul Housing & Redevelopment
Authority Health Care Facilities
Revenue (Regions Hospital Project)
5.30% 5/15/28 1,000,000 1,005,560
Waconia Health Care Facilities Revenue
(Ridgeview Medical Center Project) Series
A 6.10% 1/1/19 (RADIAN) 1,405,000 1,534,246
-----------------------------
37,253,183
-----------------------------
Miscellaneous Revenue Bonds
Minneapolis Art Center Facilities Revenue
(Walker Art Center Project) 5.125% 7/1/21 4,250,000 4,422,593
Minneapolis Community Development Agency
(Supported Development Revenue Limited
Tax Common Bond Fund) Series G1 5.70%
12/1/19 1,100,000 1,225,444
Minneapolis Community Development Agency
(Supported Development Revenue Limited Tax
Common Bond Fund) Series G-3 5.45% 12/1/31 1,000,000 1,046,740
Minneapolis Community Development Agency
(Supported Development Revenue Limited Tax
Common Bond Fund) Series 5 5.70% 12/1/27 375,000 381,795
-----------------------------
7,076,572
-----------------------------
Multifamily Housing Revenue Bonds
Chanhassen Multifamily Housing Revenue
(Heritage Park Project-Section 8) 6.20%
7/1/30 (FHA) (AMT) 1,105,000 1,141,454
Harmony Multifamily Housing Revenue
Refunding Section 8 (Zedakah Foundation
Project) Series A 5.95% 9/1/20 1,000,000 847,950
Minneapolis Multifamily Housing Revenue
Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) 975,000 1,029,785
Minneapolis Multifamily Housing Revenue
(Olson Townhomes Project)
6.00% 12/1/19 (AMT) 965,000 943,307
Minneapolis Multifamily Housing Revenue
(Seward Towers Project)
5.00% 5/20/36 (GNMA) 2,000,000 2,018,580
Minneapolis Multifamily Housing Revenue
)Sumner Housing Project)
Series A 5.15% 2/20/45 (GNMA) (AMT) 3,575,000 3,586,868
Minnesota State Housing Finance Agency
Series A 5.00% 2/1/35 (AMT) 1,000,000 983,930
Minnesota State Housing Finance Agency
Series D 5.95% 2/1/18 (MBIA) 155,000 158,257
Southeastern Minnesota Multi County
Housing & Redevelopment
Authority (Winona County) 5.35% 1/1/28 1,170,000 1,177,699
Stillwater Multifamily Housing Revenue
(Stillwater Cottages Project)
(Orleans Homes Number One) 7.25%
11/1/27 (AMT) 1,540,000 1,490,951
Washington County Housing &
Redevelopment Authority Governmental
Revenue (Woodland Park Apartments
Project) 4.70% 10/1/32 1,000,000 1,001,940
-----------------------------
14,380,721
-----------------------------
Municipal Lease Revenue Bonds
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center)5.125% 2/1/24 500,000 508,850
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover
Community Center)5.20% 2/1/29 1,000,000 1,018,000
Minneapolis Development Revenue
(Limited Tax Supported Common Bond Fund)
5.50% 12/1/24 (AMT) 1,000,000 1,043,730
St. Paul Port Authority Lease Revenue
(Cedar Street Office Building Project)
5.00% 12/1/22 2,385,000 2,483,429
5.125% 12/1/27 1,000,000 1,044,890
5.25% 12/1/27 4,800,000 5,057,664
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
5.00% 12/1/27 3,045,000 3,160,619
St. Paul Port Authority Lease Revenue
(Robert Street Office Building Project)
Series 9 5.25% 12/1/27 2,000,000 2,115,360
-----------------------------
16,432,542
-----------------------------
Parking Revenue Bonds
St. Paul Housing & Redevelopment
Authority Parking Revenue (Block
19 Ramp Project) Series A 5.35%
8/1/29 (FSA) 3,350,000 3,565,775
-----------------------------
3,565,775
-----------------------------
Political Subdivision General Obligation
Bonds
Hennepin County Series B 5.00% 12/1/18 2,300,000 2,433,745
Hennepin Regional Railroad Authority
5.00% 12/1/26 3,500,000 3,599,680
Metropolitan Council Waste Water
Treatment Series B 5.00% 12/1/21 2,000,000 2,118,600
Minneapolis Sports Arena Project 5.125%
10/1/20 750,000 782,033
Washington County Housing & Redevelopment
Authority Series B
5.50% 2/1/22 (MBIA) 1,705,000 1,814,018
5.50% 2/1/32 (MBIA) 2,140,000 2,265,190
-----------------------------
13,013,266
-----------------------------
§Pre-Refunded Bonds
Esko Independent School District #99
5.65% 4/1/12-05 (FSA) 550,000 550,000
Esko Independent School District #99
5.75% 4/1/17-05 (FSA) 1,645,000 1,645,000
Hawley Independent School District #150
Series A 5.75% 2/1/17-06 (FSA) 1,000,000 1,025,020
Minneapolis/St. Paul Housing &
Redevelopment Authority Health Care
Systems (Children's Health Care) Series A
5.50% 8/15/25-05 (FSA) 1,400,000 1,444,114
Minnesota Public Facilities Authority
Water Pollution Control Revenue
Series B 5.40% 3/1/15 2,200,000 2,256,452
Puerto Rico Commonwealth 6.00% 7/1/26-07 1,000,000 1,083,230
Puerto Rico Commonwealth Public
Improvement Series A 5.00% 7/1/27-12 1,250,000 1,356,163
Puerto Rico Electric Power Authority
Power Revenue Series Z 5.25% 7/1/21 1,500,000 1,511,100
Puerto Rico Highway & Transportation
Authority Revenue Series Y
5.50% 7/1/26-06 2,000,000 2,100,480
Puerto Rico Public Buildings Authority
Series D 5.25% 7/1/27-12 1,470,000 1,594,670
Rosemount Independent School District
#196 Series A 5.70% 4/1/12-06 1,270,000 1,307,148
Southern Minnesota Municipal Power Agency
Supply Revenue Series A
5.75% 1/1/18-05 3,715,000 3,996,337
St. Francis Independent School District
#15 Series A 6.30% 2/1/11-06 (FSA) 1,250,000 1,286,888
-----------------------------
21,156,602
-----------------------------
Public Power Revenue Bonds
Chaska Electric Revenue Series A 6.00%
10/1/25-10 1,000,000 1,093,430
Minnesota State Municipal Power Agency
Series A
5.00% 10/1/34 6,500,000 6,608,160
5.25% 10/1/19 1,610,000 1,716,614
Rochester Electric Utility Revenue 5.25%
12/1/30 (AMBAC) 600,000 631,968
&Southern Minnesota Municipal Power Agency
Supply System Revenue, Inverse Floater
ROLs Series II-R-189-3 8.096% 1/1/14 (AMBAC) 7,000,000 8,405,248
&Southern Minnesota Municipal Power
Agency Supply System Revenue, Inverse
Floater ROLs Series II-R-189 8.096%
1/1/15 (AMBAC) 1,500,000 1,821,840
Southern Minnesota Municipal Power Agency
Supply System Revenue
Series A
5.00% 1/1/12 (AMBAC) 1,000,000 1,081,000
5.00% 1/1/13 (MBIA) 1,000,000 1,080,890
5.25% 1/1/15 (AMBAC) 1,270,000 1,406,246
5.25% 1/1/16 (AMBAC) 1,500,000 1,658,970
Western Minnesota Municipal Power Agency
Series A 5.00% 1/1/30 (MBIA) 3,000,000 3,101,970
Western Minnesota Municipal Power Agency
Series B 5.00% 1/1/15 (MBIA) 1,365,000 1,475,947
-----------------------------
30,082,283
-----------------------------
School District General Obligation Bonds
Centennial Independent School District
#012 Series A 5.00% 2/1/20 (FSA) 800,000 836,808
Elk River Independent School District
#728 5.00% 2/1/16 (FGIC) 1,500,000 1,615,200
Farmington Independent School District
#192 5.00% 2/1/23 (FSA) 2,280,000 2,372,956
Farmington Independent School District
#192 Series B 5.00% 2/1/27 (FSA) 1,500,000 1,564,425
Lakeville Independent School District
#194 Series A 4.75% 2/1/22 (FSA) 2,000,000 2,045,180
Minneapolis Special School District
#001 5.00% 2/1/19 (FSA) 1,675,000 1,769,872
Morris Independent School District
#769 5.00% 2/1/28 (MBIA) 3,750,000 3,883,687
Mounds View Independent School District
#621 5.00% 2/1/23 (FSA) 2,020,000 2,106,941
Princeton Independent School District
#477 Series A 5.00% 2/1/24 (FSA) 1,000,000 1,049,450
Robbinsdale Independent School District
#281 5.00% 2/1/21 (FSA) 500,000 521,165
St. Michael Independent School District
#885
5.00% 2/1/22 (FSA) 2,000,000 2,078,660
5.00% 2/1/24 (FSA) 1,125,000 1,161,720
-----------------------------
21,006,064
-----------------------------
Single Family Housing Revenue Bonds
Dakota County Housing & Redevelopment
Authority Single Family
Mortgage Revenue 5.85% 10/1/30 (GNMA)
(FNMA) (AMT) 42,000 42,926
Minnesota State Housing Finance Agency
Single Family Housing
Series 1992-C2 6.15% 7/1/23 (AMT) 1,560,000 1,569,740
Minnesota State Housing Finance
Agency Single Family Mortgage
Series B 5.35% 1/1/33 (AMT) 1,145,000 1,157,802
Minnesota State Housing Finance Agency
Single Family Mortgage
Series J 5.90% 7/1/28 (AMT) 1,455,000 1,498,053
-----------------------------
4,268,521
-----------------------------
State General Obligation Bonds
Minnesota State 5.00% 8/1/21 5,025,000 5,277,808
&Minnesota State, Inverse Floater
ROLs 7.824% 11/1/17 570,000 631,936
-----------------------------
5,909,744
-----------------------------
Tax Increment / Special Assessment Bonds
Moorhead Economic Development Authority
Tax Increment Series A 5.25% 2/1/25 (MBIA) 1,000,000 1,059,070
-----------------------------
1,059,070
-----------------------------
Territorial General Obligation Bonds
Puerto Rico Commonwealth Public I
mprovement Series A 5.50% 7/1/19 (MBIA) 1,000,000 1,151,650
University Virgin Islands Series A
5.375% 6/1/34 500,000 520,070
-----------------------------
1,671,720
-----------------------------
Territorial Revenue Bonds
Puerto Rico Public Buildings Authority
Guaranteed Government Facilities
Revenue Series D (Unrefunded Portion)
5.25% 7/1/27 530,000 554,990
Virgin Islands Public Finance Authority
5.25% 10/1/23 500,000 525,375
-----------------------------
1,080,365
-----------------------------
Total Municipal Bonds 256,562,215
Short Term Investments
o Variable Rate Demand Notes
City of St. Cloud 2.18% 2/1/16 550,000 550,000
Midwest Consortium of Municipal Utilites
Series A 2.28% 1/1/25 500,000 500,000
Minneapolis Block E Buildings Series A
2.13% 3/1/27 1,250,000 1,250,000
Minneapolis Library 2.13% 12/1/32 1,000,000 1,000,000
Minneapolis Multifamily Housing Revenue
(Seven Corners Apartments Project)
2.23% 11/1/31 300,000 300,000
Minnesota State Higher Education ]
Facilities Authority (Carleton College)
Series 5-G 2.13% 11/1/29 900,000 900,000
-----------------------------
Total Short Term Investments 4,500,000
-----------------------------
-----------------------------
Total Investments at Market $ 261,062,215
-----------------------------
Total Investments at Cost $ 212,987,833
-----------------------------
Total Market Value 261,062,215.00
- ----------------------------------------------------------------------------------
AMBAC - Insured by the AMBAC Assurance Corporation
AMT - Subject to Alternative Minimum Tax
FGIC - Insured by the Financial Guaranty Insurance Company
FHA - Insured by the Federal Housing Administration
FNMA - Insured by the Federal National Mortgage Association
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Association
LOC - Letter of Credit
MBIA - Insured by the Municipal Bond Insurance Association
RADIAN - Insured by Radian Asset Assurance
ROLs - Residual Option Longs
VA - Insured by the Veterans Administration
§ Pre-Refunded Bonds are municipals that are generally backed or secured by
U.S. Treasury bonds. For Pre-Refunded Bonds, the stated maturity is
followed by the year in which the bond is pre-refunded.
& An inverse floater bond is a type of bond with variable or floating
interest rates that move in the opposite direction of short-term interest
rates. Interest rate disclosed is in effect as of March 31, 2005.
o Variable rate notes. The interest shown is the rate as of March 31, 2005.
/A/ No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon completion of the acquisition, no
securities would need to be sold in order for the Acquiring Fund to comply
with its Prospectus and SEC and IRS guidelines and restrictions. However,
the foregoing sentence shall not restrict in any way the ability of the
investment advisor of any of the Funds from buying or selling securities in
the normal course of such Fund's business and operations.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(unaudited)
Delaware Investments
Minnesota Municipal Income Fund, Inc.
----------------------------------------------
Assets
Investments, at market value $ 57,041,201
Cash 10,173
Receivable for securities sold 108,401
Interest receivable 721,469
----------------------------------------------
Total Assets 57,881,244
----------------------------------------------
Liabilities
Accrued expenses and other liabilities 112,966
Acquisition costs payable -
Payable for securities purchased 30,684
----------------------------------------------
Total Liabilities 143,650
Liquidation Value of Preferred Stock 20,000,000
----------------------------------------------
Net Assets $ 37,737,594
==============================================
Investment at Cost $ 55,141,248
Analysis of Net Assets
Accumulated paid in capital $ 35,426,619
Undistributed net investment income 389,101
Accumulated net realized loss on investments 21,921
Unrealized appreciation of investments 1,899,953
----------------------------------------------
Net Assets $ 37,737,594
==============================================
Net Assets $ 37,737,594
Outstanding Common Shares 2,594,700
Net asset value per common share: $14.54
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(unaudited)
Delaware Investments
Minnesota Municipal Income Fund III, Inc.
----------------------------------------------
Assets
Investments, at market value $ 39,772,231
Cash 1,469,634
Receivable for securities sold 5,067
Interest receivable 623,454
----------------------------------------------
Total Assets 41,870,386
----------------------------------------------
Liabilities
Accrued expenses and other liabilities 106,822
Acquisition costs payable -
Payable for securities purchased 1,043,819
----------------------------------------------
Total Liabilities 1,150,641
Liquidation Value of Preferred Stock 15,000,000
----------------------------------------------
Net Assets $ 25,719,745
==============================================
Investment at Cost $ 38,128,090
Analysis of Net Assets
Accumulated paid in capital $ 23,648,910
Undistributed net investment income 522,026
Accumulated net realized loss on investments (95,332)
Unrealized appreciation of investments 1,644,141
----------------------------------------------
Net Assets $ 25,719,745
==============================================
Net Assets $ 25,719,745
Outstanding Common Shares 1,837,200
Net asset value per common share: $14.00
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(unaudited)
Delaware Investments Pro Forma
Minnesota Municipal Income Fund II, Inc. Adjustments
--------------------------------------------------------------------------
Assets
Investments, at market value $ 164,248,783 $ -
Cash 621,277 (219,788)/A/
Receivable for securities sold 2,451,314 -
Interest receivable 2,525,220 -
------------------------------------------------ ----------------------
Total Assets 169,846,594 (219,788)
------------------------------------------------ ----------------------
Liabilities
Accrued expenses and other liabilities 326,746 (219,788)/A/
Acquisition costs payable - 225,000 /A/,/B/
Payable for securities purchased 1,561,973 -
------------------------------------------------ ----------------------
Total Liabilities 1,888,719 5,212
Liquidation Value of Preferred Stock 60,000,000 -
------------------------------------------------ ----------------------
Net Assets $ 107,957,875 $ (225,000)
================================================ ======================
Investment at Cost $ 157,846,585 $ -
Analysis of Net Assets
Accumulated paid in capital $ 99,710,000 $ -
Undistributed net investment income 2,250,617 (225,000)/A/,/B/
Accumulated net realized loss on investments (404,940) -
Unrealized appreciation of investments 6,402,198 -
------------------------------------------------ ----------------------
Net Assets $ 107,957,875 $ (225,000)
================================================ ======================
Net Assets $ 107,957,875 $ (225,000)
Outstanding Common Shares 7,252,200 (176,230)
Net asset value per common share: $14.89
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Assets and Liabilities
As of March 31, 2005
(unaudited) Delaware Investments
Minnesota Municipal Income Fund II, Inc.
Pro Forma
Combined
------------------------------------------------
Assets
Investments, at market value $261,062,215
Cash 1,881,296
Receivable for securities sold 2,564,782
Interest receivable 3,870,143
------------------------------------------------
Total Assets 269,378,436
------------------------------------------------
Liabilities
Accrued expenses and other liabilities 326,746
Acquisition costs payable 225,000
Payable for securities purchased 2,636,476
------------------------------------------------
Total Liabilities 3,188,222
Liquidation Value of Preferred Stock 95,000,000
------------------------------------------------
Net Assets $ 171,190,214
================================================
Investment at Cost 251,115,923
Analysis of Net Assets
Accumulated paid in capital 158,785,529
Undistributed net investment income 2,936,744
Accumulated net realized loss on investments (478,351)
Unrealized appreciation of investments 9,946,292
------------------------------------------------
Net Assets $ 171,190,214
================================================
Net Assets $ 171,190,214
Outstanding Common Shares 11,507,870
Net asset value per common share: $14.88/C/
/A/ Under the Plans, Delaware Investments Minnesota Municipal Income Fund, Inc.
and Delaware Investments Minnesota Municipal Income III, Inc. will deliver
to Delaware Minnesota Municipal Income Fund II, Inc. at the Closing all of
their existing assets except for cash, bank deposits or cash equivalent
securities in an estimated amount nessary to: (i) pay the costs and
expenses of carrying out the Plans, which costs and expenses shall be
established on their books as liability reserves; (ii) discharges their
unpaid liabilities on their books at the Closing Date; and (iii) pay such
contingent liabilities as their Board of Directors or their officers shall
reasonably deem to exist, if any, at the Closing Date, for which contingent
and other appropriate liability reserves shall be established on their
books.
/B/ Adjustments reflect the costs of carrying out the Plans, which are
estimated to be approximately $300,000, of which $75,000 will be borne by
each Fund.
/C/ As a result of the expenses of the Acquisition borne by each Fund and
rounding certain calculations, the net asset value per share of the
Acquiring Fund Common Shares after the Acquisition, as shown in the table
above, is $0.01 less than the net asset per share of the Acquiring Fund
Common Shares before the Acquisition. At the Closing, holders of Acquired
Fund Common Shares will receive Acquiring Fund Common Shares that will have
an aggregate net asset value equal to the aggregate net asset value of the
Acquired Fund Common Shares previously held by such shareholders.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Operations
For the Twelve Months Ended March 31, 2005
(Unaudited)
Delaware Investments
Minnesota Municipal Income Fund, Inc.
-----------------------------------------------
Investment Income
Interest income $ 2,805,252
-----------------------------------------------
Expenses
Management fees 232,006
Accounting and administration expenses 85,000
Remarketing agent fees 50,354
Dividend disbursing and transfer agent
fees and expenses 40,318
Legal and professional fees 38,703
Rating agency fees 9,000
Reports and statements to shareholders 7,387
Taxes (other than taxes on income) 6,948
Directors' fees 4,571
Pricing fees 3,454
Custodian fees 2,279
Stock exchange fees 2,258
Other 995
-----------------------------------------------
483,273
Less expenses paid indirectly (2,197)
-----------------------------------------------
Total expenses 481,076
-----------------------------------------------
Net Investment Income 2,324,176
-----------------------------------------------
Net Realized and Unrealized Gain/(Loss) on
Investments:
Net realized gain (loss) on investments 268,227
Change in unrealized appreciation/
(depreciation) of investments (1,027,949)
-----------------------------------------------
Net Realized and Unrealized Loss on Investments (759,722)
Dividends on Preferred Stock (305,320)
-----------------------------------------------
Change in Net Assets Resulting from Operations $ 1,259,134
===============================================
/A/ Adjustment to reflect appropriate expense levels by merging the funds.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Operations
For the Twelve Months Ended March 31, 2005
(Unaudited)
Delaware Investments
Minnesota Municipal Income Fund III, Inc.
-----------------------------------------------
Investment Income
Interest income $ 2,110,341
-----------------------------------------------
Expenses
Management fees 163,520
Accounting and administration expenses 60,500
Remarketing agent fees 37,070
Dividend disbursing and transfer agent
fees and expenses 21,842
Legal and professional fees 32,198
Rating agency fees 9,417
Reports and statements to shareholders 7,868
Taxes (other than taxes on income) 3,760
Directors' fees 3,915
Pricing fees 2,192
Custodian fees 1,728
Stock exchange fees 1,595
Other 1,444
-----------------------------------------------
347,049
Less expenses paid indirectly (1,712)
-----------------------------------------------
Total expenses 345,337
-----------------------------------------------
Net Investment Income 1,765,004
-----------------------------------------------
Net Realized and Unrealized Gain/(Loss) on
Investments:
Net realized gain (loss) on investments 114,703
Change in unrealized appreciation/
(depreciation) of investments (762,302)
-----------------------------------------------
Net Realized and Unrealized Loss on Investments (647,599)
Dividends on Preferred Stock (235,128)
-----------------------------------------------
Change in Net Assets Resulting from Operations $ 882,277
===============================================
/A/ Adjustment to reflect appropriate expense levels by merging the funds.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Operations
For the Twelve Months Ended March 31, 2005
(Unaudited)
Delaware Investments Pro Forma
Minnesota Municipal Income Fund II, Inc. Adjustments
------------------------------------------------- -----------------
Investment Income
Interest income $ 8,517,640 $ -
------------------------------------------------- -----------------
Expenses
Management fees 674,164
Accounting and administration expenses 85,000 (96,821)/A/
Remarketing agent fees 150,815
Dividend disbursing and transfer agent
fees and expenses 58,423 (44,318)/A/
Legal and professional fees 47,348 (61,704)/A/
Rating agency fees 6,416 (11,583)/A/
Reports and statements to shareholders 22,481 (3,000)/A/
Taxes (other than taxes on income) 17,237
Directors' fees 7,953
Pricing fees 5,973 (5,646)/A/
Custodian fees 4,888 (1,505)/A/
Stock exchange fees 6,282
Other 2,988
------------------------------------------------- -----------------
1,089,968 (224,577)
Less expenses paid indirectly (4,763) 1,505 /A/
------------------------------------------------- -----------------
Total expenses 1,085,205 (223,072)
------------------------------------------------- -----------------
Net Investment Income 7,432,435 223,072
------------------------------------------------- -----------------
Net Realized and Unrealized Gain/(Loss) on
Investments:
Net realized gain (loss) on investments 257,523 -
Change in unrealized appreciation/
(depreciation) of investments (2,017,417) -
------------------------------------------------- -----------------
Net Realized and Unrealized Loss on Investments (1,759,894) -
Dividends on Preferred Stock (927,702)
------------------------------------------------- -----------------
Change in Net Assets Resulting from Operations $ 4,744,839 $ 223,072
================================================= =================
/A/ Adjustment to reflect appropriate expense levels by merging the funds.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Statement of Operations
For the Twelve Months Ended March 31, 2005
(Unaudited)
Delaware Investments
Minnesota Municipal Income Fund II, Inc.
Pro Forma
Combined
-------------------------------------------------
Investment Income
Interest income $ 13,433,233
-------------------------------------------------
Expenses
Management fees 1,069,690
Accounting and administration expenses 133,679
Remarketing agent fees 238,239
Dividend disbursing and transfer agent
fees and expenses 76,265
Legal and professional fees 56,545
Rating agency fees 13,250
Reports and statements to shareholders 34,736
Taxes (other than taxes on income) 27,945
Directors' fees 16,439
Pricing fees 5,973
Custodian fees 7,390
Stock exchange fees 10,135
Other 5,427
-------------------------------------------------
1,695,713
Less expenses paid indirectly (7,167)
-------------------------------------------------
Total expenses 1,688,546
-------------------------------------------------
Net Investment Income 11,744,687
-------------------------------------------------
Net Realized and Unrealized Gain/(Loss) on
Investments:
Net realized gain (loss) on investments 640,453
Change in unrealized appreciation/
(depreciation) of investments (3,807,668)
-------------------------------------------------
Net Realized and Unrealized Loss on Investments (3,167,215)
Dividends on Preferred Stock (1,468,150)
-------------------------------------------------
Change in Net Assets Resulting from Operations $ 7,109,322
=================================================
/A/ Adjustment to reflect appropriate expense levels by merging the funds.
See Pro Forma Notes to Financial Statements
Delaware Investments Minnesota Municipal Income Fund II, Inc.
PRO FORMA COMBINED
Annual Fund Operating Expenses (as a percentage of net assets attributable to Common Shares)
As of March 31, 2005
(Unaudited)
Delaware Investments Delaware Investments
Minnesota Municipal Income Fund, Inc. Minnesota Municipal Income Fund III, Inc.
------------------------------------- -----------------------------------------
Management fees 0.61% 0.63%
Dividends to Preferred Shares 0.81% 0.90%
Other expenses 0.66% 0.70%
------------------------------------- -----------------------------------------
Total fund operating
expenses 2.08% 2.23%
------------------------------------- -----------------------------------------
Delaware Investments
Minnesota Municipal Income Fund II, Inc.
Delaware Investments Pro Forma
Minnesota Municipal Income Fund II, Inc. Combined
----------------------------------------- -----------------------------------------
Management fees 0.62% 0.62%
Dividends to Preferred Shares 0.86% 0.85%
Other expenses 0.38% 0.36%
----------------------------------------- -----------------------------------------
Total fund operating
expenses 1.86% 1.83%
----------------------------------------- -----------------------------------------
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Pro Forma Notes to Financial Statements
March 31, 2005 (Unaudited)
Delaware Investments Minnesota Municipal Income Fund II, Inc. (the "Fund") is
organized as a Minnesota corporation. The Fund is a diversified closed-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund's common shares trade on the American Stock Exchange. The
Fund's preferred shares are traded privately through a remarketing agent.
The investment objective of the Fund is to provide current income exempt from
both regular federal income tax and Minnesota state personal income tax,
consistent with the preservation of capital. The Fund seeks to achieve its
investment objective by investing substantially all (in excess of 80%) of its
net assets in investment grade, tax-exempt Minnesota municipal obligations.
1. Basis of Pro forma Presentation
The accompanying pro forma financial statements are presented to show the effect
of the proposed acquisitions of Delaware Investments Minnesota Municipal Income
Fund, Inc. and Delaware Investments Minnesota Municipal Income Fund III, Inc. by
the Fund, as if such acquisitions had taken place as of April 1, 2004.
Under the terms of the Agreements and Plans of Acquisition, the combination of
Delaware Investments Minnesota Municipal Income Fund, Inc., Delaware Investments
Minnesota Municipal Income Fund III, Inc. and the Fund will be accounted for by
a method of accounting for tax-free mergers of investment companies. The
acquisitions would be accomplished by an acquisition of substantially all of the
assets of Delaware Investments Minnesota Municipal Income Fund, Inc. and
Delaware Investments Minnesota Municipal Income Fund III, Inc., in exchange for
common shares of the Fund of equivalent aggregate net asset value (or, for
preferred shares, for the same number of preferred shares having the same
liquidation preference). The statement of assets and liabilities and the related
statement of operations of Delaware Investments Minnesota Municipal Income Fund,
Inc., Delaware Investments Minnesota Municipal Income Fund III, Inc. and the
Fund have been combined as of and for the twelve months ended March 31, 2005.
The accompanying pro forma financial statements should be read in conjunction
with the financial statements of Delaware Investments Minnesota Municipal Income
Fund, Inc., Delaware Investments Minnesota Municipal Income Fund III, Inc. and
the Fund included in their annual report dated March 31, 2005.
The following notes refer to the accompanying pro forma financial statements as
if the above-mentioned acquisition of Delaware Investments Minnesota Municipal
Income Fund, Inc., Delaware Investments Minnesota Municipal Income Fund III,
Inc. and the Fund had taken place as of April 1, 2004.
2. 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 - Long-term debt securities are valued by an independent
pricing service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Other securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the Fund's Board of
Directors.
Federal Income Taxes - The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other - Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and some other expenses are paid monthly. Security transactions
are recorded on the date the securities are purchased or sold (trade date).
Costs used in calculating realized gains and losses on the sale of investment
securities are those of the specific securities sold. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. The Fund declares and pays
dividends from net investment income monthly and declares and pays distributions
from net realized gain on investments, if any, annually. In addition, in order
to satisfy certain distribution requirements of the Tax Reform Act of 1986, the
Fund may declare special year-end dividend and capital gains distributions
during November or December to shareholders of record on a date in such month.
Such distributions, if received by shareholders by January 31, are deemed to
have been paid by the Fund and received by shareholders on the earlier of the
date paid or December 31 of the prior year.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The earnings
credits for the twelve months ended March 31, 2005 were approximately $7,167.
The expense paid under the above arrangement is included in the "custodian fees"
expense caption on the Statement of Operations with the corresponding expense
offset shown as "expenses paid indirectly."
3. 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 of 0.40% which is calculated
daily based on the average daily net assets of the Fund, excluding the
liquidation value of preferred stock that may be outstanding.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of DMC,
to provide accounting and administration services which are based on average net
assets and paid on a monthly basis, subject to certain minimums.
Certain officers of DMC and DSC are officers and/or directors of the Fund. These
officers and directors are paid no compensation by the Fund.
4. Capital Stock
Pursuant to the articles of incorporation, the Fund has 200 million shares of
$0.01 par value common shares authorized. The Fund did not repurchase any shares
under the Share Repurchase Program during the twelve months ended March 31,
2005. Shares issuable under the Fund's dividend reinvestment plan are purchased
by the Fund's transfer agent, Mellon Investor Services, LLC, in the open market.
The Fund has one million shares of $0.01 par value Preferred Shares authorized.
Under resolutions adopted by the Board of Directors, the Fund has issued 600,
600, 400 and 300 of Series A, B, C and D Preferred Shares, respectively. Series
A, B, C and D Preferred Shares have substantially similar preferences, voting
powers, restrictions as to dividends, qualifications, liquidation rights and
terms and conditions of redemption. The preferred shares of the Fund have a
liquidation preference of $50,000 per share plus an amount equal to accumulated
but unpaid dividends.
Dividends for the outstanding preferred shares of the Fund are cumulative at a
rate established at the initial public offering and are typically reset every 28
days based on the results of an auction. Dividend rates (adjusted for any
capital gain distributions) ranged from 1% to 2.6% during the twelve-month
period ended March 31, 2005.
Citigroup Global Markets, Inc. (formerly Smith Barney, Harris Upham & Co.,
Inc.), as the remarketing agent, receives an annual fee from the Fund of 0.25%
of the average amount of preferred stock outstanding.
Under the 1940 Act, the Fund may not declare dividends or make other
distributions on common shares or purchase any such shares if, at the time of
the declaration, distribution or purchase, asset coverage with respect to the
outstanding preferred stock is less than 200%. The preferred shares are
redeemable at the option of the Fund, in whole or in part, on any dividend
payment date at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared. The preferred shares are also subject to mandatory
redemption at $50,000 per share plus any accumulated but unpaid dividends
whether or not declared, if certain requirements relating to the composition of
the assets and liabilities of the Fund are not satisfied. The holders of
preferred shares have voting rights equal to the holders of common shares (one
vote per share) and will vote together with holders of common shares as a single
class. However, holders of preferred shares are also entitled to elect two of
each Fund's Directors. In addition, the 1940 Act requires that along with
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding preferred shares, voting separately as
a class, would be required to (a) adopt any plan of reorganization that would
adversely affect the preferred shares, and (b) take any action requiring a vote
of security holders pursuant of Section 13(a) of the 1940 Act, including, among
other things, changes in the Fund's subclassification as a closed-end investment
company or (c) changes in their fundamental investment restrictions.
5. Credit and Market Risks
The Fund uses leverage in the form of preferred shares. Leveraging may result in
a higher degree of volatility because a Fund's Net Value Asset could be more
sensitive to fluctuations in short-term interest rates and changes in market
value of portfolio securities attributable to the leverage.
The Fund invests substantially all of its assets in securities issued by
Minnesota municipalities. The value of these investments may be adversely
affected by new legislation within state, regional or local economic conditions
and differing levels of supply and demand for municipal bonds. Many
municipalities insure repayment for their obligations. Although bond insurance
reduces the risk of loss due to default by an issuer, such bonds remain subject
to the risk of loss due to default by an issuer, such bonds remain subject to
the risk that the market may fluctuate for other reasons and there is no
assurance that the insurance company will meet its obligations. These securities
have been identified in the Portfolio of Investments.
The Fund may invest in inverse floating rate securities ("inverse floaters"), a
type of derivative tax-exempt obligation with floating or variable interest
rates that move in the opposite direction of short-term interest rates, usually
at an accelerated speed. Consequently, the market values of inverse floaters
will generally be more volatile than other tax-exempt investments. Such
securities are denoted on the Portfolio of Investments.
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased
bonds. Under current federal tax laws and regulations, state and local
government borrowers are permitted to refinance outstanding bonds by issuing new
bonds. The issuer refinances the outstanding debt to either reduce interest
costs or to remove or alter restrictive covenants imposed by the bonds being
refinanced. A refunding transaction where the municipal securities are being
refunded within 90 days or less from the issuance of the refunding issue is
known as a "current refunding." "Advance refunded bonds" are bonds in which the
refunded bond issue remains outstanding for more than 90 days following the
issuance of the refunding issue. In an advance refunding, the issuer will use
the proceeds of a new bond issue to purchase high grade interest bearing debt
securities which are then deposited in an irrevocable escrow account held by an
escrow agent to secure all future payments of principal and interest and bond
premium of the advance refunded bond. Bonds are "escrowed to maturity" when the
proceeds of the refunding issue are deposited in an escrow account for
investment sufficient to pay all of the principal and interest on the original
interest payment and maturity dates. Bonds are considered "pre-refunded" when
the refunding issue's proceeds are escrowed only until a permitted call date or
dates on the refunded issue with the refunded issue being redeemed at that time,
including any required premium. Bonds become "defeased" when the rights and
interests of the bondholders and their lien on the pledged revenues or other
security under the terms of the bond contract are substituted with an
alternative source of revenues (the escrow securities) sufficient to meet
payments of principal and interest to maturity or to the first call dates.
Escrowed secured bonds will often receive a rating of "AAA" or the equivalent
from Moody's, S&P and/or Fitch due to the strong credit quality of the escrow
securities and the irrevocable nature of the escrow deposit agreement.
The Fund may invest up to 15% of its net assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
Such securities are denoted on the Portfolio of Investments.
6. 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.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND, INC. (THE "FUND")
JOINT SPECIAL MEETING OF SHAREHOLDERS - DECEMBER 9, 2005
PROXY SOLICITED BY THE DIRECTORS
The undersigned, revoking previous proxies, hereby appoint(s) Michael P. Bishof,
Richelle S. Maestro and Kathryn R. Williams or any of them, attorneys, with full
power of substitution, to vote all shares of the Fund, as indicated above, that
the undersigned is entitled to vote at the above stated Joint Special Meeting of
Shareholders to be held at the offices of Delaware Investments located at 2001
Market Street, 2nd Floor Auditorium, Philadelphia, PA 19103-7055 on December 9,
2005 at 3:00 p.m., Eastern time and at any adjournments thereof. All powers may
be exercised by two or more of said proxy holders or substitutes voting or
acting or, if only one votes and acts, then by that one. This proxy shall be
voted on the proposal described in the Proxy Statement/Prospectus as specified
on the reverse side. Receipt of the Notice of Joint Special Meeting and the
accompanying Proxy Statement/Prospectus is hereby acknowledged.
To vote by mail: Check the appropriate box on the reverse side of this proxy
card, sign and date the card and return in the envelope provided.
To vote by telephone: Call toll free (800) 690-6903.
To vote by internet: Log on to www.proxyweb.com.
UNLESS YOU'RE VOTING BY TELEPHONE OR INTERNET, PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
Date: __________________________
Signature(s) (Title(s), if applicable) (Please sign in box)
NOTE: Please sign exactly as your name appears on this proxy card. When signing
in a fiduciary capacity, such as executor, administrator, trustee, attorney,
guardian, etc., please so indicate. Corporate and partnership proxies should be
signed by an authorized person indicating the person's title.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH RESPECT TO THE
FUND. THE FOLLOWING MATTER IS PROPOSED BY THE FUND. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR THE PROPOSAL. IF NO SPECIFICATION IS MADE AND THIS PROXY
IS SIGNED AND RETURNED, THE PROXY SHALL BE VOTED FOR THE PROPOSAL. PLEASE REFER
TO THE PROXY STATEMENT/PROSPECTUS FOR A DISCUSSION OF THE PROPOSAL. IF OTHER
MATTERS PROPERLY COME BEFORE THE MEETING TO BE VOTED ON, THE SHARES REPRESENTED
BY THE PROXY HOLDERS WILL BE VOTED AND CONSENTED ON THOSE MATTERS IN ACCORDANCE
WITH THE VIEWS OF MANAGEMENT.
PLEASE FILL IN BOX AS SHOWN USING BLACK OR BLUE INK OR NUMBER 2 PENCIL. PLEASE
DO NOT USE FINE POINT PENS. [X]
Proposal: For Against Abstain
[Common Shares and Preferred Shares] To approve an Agreement and Plan of [ ] [ ] [ ]
Acquisition between the Fund and Delaware Investments Minnesota Municipal Income
Fund II, Inc. that would result in the acquisition by Delaware Investments
Minnesota Municipal Income Fund II, Inc. of substantially all of the property,
assets and goodwill of the Fund in exchange solely for full and fractional
Common and Preferred Shares of Delaware Investments Minnesota Municipal Income
Fund II, Inc., as applicable.
[Preferred Shares Only] To approve an Agreement and Plan of Acquisition between [ ] [ ] [ ]
the Fund and Delaware Investments Minnesota Municipal Income Fund II, Inc. that
would result in the acquisition by Delaware Investments Minnesota Municipal
Income Fund II, Inc. of substantially all of the property, assets and goodwill
of the Fund in exchange solely for full and fractional Common and Preferred
Shares of Delaware Investments Minnesota Municipal Income Fund II, Inc., as
applicable.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II, INC. (THE "FUND")
JOINT SPECIAL MEETING OF SHAREHOLDERS - DECEMBER 9, 2005
PROXY SOLICITED BY THE DIRECTORS
The undersigned, revoking previous proxies, hereby appoint(s) Michael P. Bishof,
Richelle S. Maestro and Kathryn R. Williams or any of them, attorneys, with full
power of substitution, to vote all shares of the Fund, as indicated above, that
the undersigned is entitled to vote at the above stated Joint Special Meeting of
Shareholders to be held at the offices of Delaware Investments located at 2001
Market Street, 2nd Floor Auditorium, Philadelphia, PA 19103-7055 on December 9,
2005 at 3:00 p.m., Eastern time and at any adjournments thereof. All powers may
be exercised by two or more of said proxy holders or substitutes voting or
acting or, if only one votes and acts, then by that one. This proxy shall be
voted on the proposals described in the Proxy Statement/Prospectus as specified
on the reverse side. Receipt of the Notice of Joint Special Meeting and the
accompanying Proxy Statement/Prospectus is hereby acknowledged.
To vote by mail: Check the appropriate boxes on the reverse side of this proxy
card, sign and date the card and return in the envelope provided.
To vote by telephone: Call toll free (800) 690-6903.
To vote by internet: Log on to www.proxyweb.com.
UNLESS YOU'RE VOTING BY TELEPHONE OR INTERNET, PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
Date: __________________________
Signature(s) (Title(s), if applicable) (Please sign in box)
NOTE: Please sign exactly as your name appears on this proxy card. When signing
in a fiduciary capacity, such as executor, administrator, trustee, attorney,
guardian, etc., please so indicate. Corporate and partnership proxies should be
signed by an authorized person indicating the person's title.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH RESPECT TO THE
FUND. THE FOLLOWING MATTERS ARE PROPOSED BY THE FUND. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS. IF NO SPECIFICATION IS MADE AND
THIS PROXY IS SIGNED AND RETURNED, THE PROXY SHALL BE VOTED FOR EACH OF THE
PROPOSALS. PLEASE REFER TO THE PROXY STATEMENT/PROSPECTUS FOR A DISCUSSION OF
THE PROPOSALS. IF OTHER MATTERS PROPERLY COME BEFORE THE MEETING TO BE VOTED ON,
THE SHARES REPRESENTED BY THE PROXY HOLDERS WILL BE VOTED AND CONSENTED ON THOSE
MATTERS IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT.
PLEASE FILL IN BOXES AS SHOWN USING BLACK OR BLUE INK OR NUMBER 2 PENCIL. PLEASE
DO NOT USE FINE POINT PENS. [X]
Proposals: For Against Abstain
1. [Common Shares and Preferred Shares] To approve an Agreement and Plan of [ ] [ ] [ ]
Acquisition between the Fund and Delaware Investments Minnesota Municipal Income
Fund, Inc. which would result in the acquisition by the Fund of substantially
all of the property, assets and goodwill of Delaware Investments Minnesota
Municipal Income Fund, Inc. in exchange solely for full and fractional Common
and Preferred Shares of the Fund, as applicable.
2. [Common Shares and Preferred Shares] To approve an Agreement and Plan of [ ] [ ] [ ]
Acquisition between the Fund and Delaware Investments Minnesota Municipal Income
Fund III, Inc. which would result in the acquisition by the Fund of
substantially all of the property, assets and goodwill of Delaware Investments
Minnesota Municipal Income Fund III, Inc. in exchange solely for full and
fractional Common and Preferred Shares of the Fund, as applicable.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND III, INC. (THE "FUND")
JOINT SPECIAL MEETING OF SHAREHOLDERS - DECEMBER 9, 2005
PROXY SOLICITED BY THE DIRECTORS
The undersigned, revoking previous proxies, hereby appoint(s) Michael P. Bishof,
Richelle S. Maestro and Kathryn R. Williams or any of them, attorneys, with full
power of substitution, to vote all shares of the Fund, as indicated above, that
the undersigned is entitled to vote at the above stated Joint Special Meeting of
Shareholders to be held at the offices of Delaware Investments located at 2001
Market Street, 2nd Floor Auditorium, Philadelphia, PA 19103-7055 on December 9,
2005 at 3:00 p.m., Eastern time and at any adjournments thereof. All powers may
be exercised by two or more of said proxy holders or substitutes voting or
acting or, if only one votes and acts, then by that one. This proxy shall be
voted on the proposal described in the Proxy Statement/Prospectus as specified
on the reverse side. Receipt of the Notice of Joint Special Meeting and the
accompanying Proxy Statement/Prospectus is hereby acknowledged.
To vote by mail: Check the appropriate box on the reverse side of this proxy
card, sign and date the card and return in the envelope provided.
To vote by telephone: Call toll free (800) 690-6903.
To vote by internet: Log on to www.proxyweb.com.
UNLESS YOU'RE VOTING BY TELEPHONE OR INTERNET, PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
Date: __________________________
Signature(s) (Title(s), if applicable) (Please sign in box)
NOTE: Please sign exactly as your name appears on this proxy card. When signing
in a fiduciary capacity, such as executor, administrator, trustee, attorney,
guardian, etc., please so indicate. Corporate and partnership proxies should be
signed by an authorized person indicating the person's title.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH RESPECT TO THE
FUND. THE FOLLOWING MATTER IS PROPOSED BY THE FUND. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR THE PROPOSAL. IF NO SPECIFICATION IS MADE AND THIS PROXY
IS SIGNED AND RETURNED, THE PROXY SHALL BE VOTED FOR THE PROPOSAL. PLEASE REFER
TO THE PROXY STATEMENT/PROSPECTUS FOR A DISCUSSION OF THE PROPOSAL. IF OTHER
MATTERS PROPERLY COME BEFORE THE MEETING TO BE VOTED ON, THE SHARES REPRESENTED
BY THE PROXY HOLDERS WILL BE VOTED AND CONSENTED ON THOSE MATTERS IN ACCORDANCE
WITH THE VIEWS OF MANAGEMENT.
PLEASE FILL IN BOX AS SHOWN USING BLACK OR BLUE INK OR NUMBER 2 PENCIL. PLEASE
DO NOT USE FINE POINT PENS. [X]
Proposals: For Against Abstain
[Common Shares and Preferred Shares] To approve an Agreement and Plan of [ ] [ ] [ ]
Acquisition between the Fund and Delaware Investments Minnesota Municipal Income
Fund II, Inc. that would result in the acquisition by Delaware Investments
Minnesota Municipal Income Fund II, Inc. of substantially all of the property,
assets and goodwill of the Fund in exchange solely for full and fractional
Common and Preferred Shares of Delaware Investments Minnesota Municipal Income
Fund II, Inc., as applicable.
[Preferred Shares Only] To approve an Agreement and Plan of Acquisition between [ ] [ ] [ ]
the Fund and Delaware Investments Minnesota Municipal Income Fund II, Inc. that
would result in the acquisition by Delaware Investments Minnesota Municipal
Income Fund II, Inc. of substantially all of the property, assets and goodwill
of the Fund in exchange solely for full and fractional Common and Preferred
Shares of Delaware Investments Minnesota Municipal Income Fund II, Inc., as
applicable.
PART C
OTHER INFORMATION
Item 15. Indemnification. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the
Articles of Incorporation, the By-Laws, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 16. Exhibits. The following exhibits are electronically filed herewith
unless otherwise indicated:
(1) Copies of the charter of the Registrant as now in effect;
(a) Articles of Incorporation dated December 29, 1992 is
electronically filed herewith as Exhibit No. EX-99(1)(a).
(b) Statement of Rights and Preferences of Series A and Series B
Preferred Shares is electronically filed herewith as Exhibit
No. EX-99(1)(b).
(c) Statement of Rights and Preferences of Series C Preferred
Shares is filed herewith as Exhibit C to the Proxy
Statement/Prospectus contained in Part A of this
Registration Statement.
(d) Statement of Rights and Preferences of Series D Preferred
Shares is filed herewith as Exhibit D to the Proxy
Statement/Prospectus contained in Part A of this
Registration Statement.
(2) Copies of the existing by-laws or corresponding instruments of
the Registrant;
(a) Amended and Restated By-Laws of the Registrant dated May 19,
2005 is electronically filed herewith as Exhibit No.
EX-99(2)(a).
(3) Copies of any voting trust agreement affecting more than five
percent of any class of equity securities of the Registrant;
Not Applicable.
(4) Copies of the agreement of acquisition, reorganization, merger,
liquidation and any amendments to it;
(a) Form of Agreement and Plan of Acquisition is filed herewith
as Exhibit A to the Proxy Statement/Prospectus contained in
Part A of this Registration Statement.
(5) Copies of all instruments defining the rights of holders of the
securities being registered including, where applicable, the
relevant portion of the articles of incorporation or by-laws of
the Registrant;
(a) Articles of Incorporation. Articles 5 and 7 of the Articles
of Incorporation, filed electronically herewith as Exhibit
No. EX-99(1)(a).
(b) Statement of Rights and Preferences of Series A and Series B
Preferred Shares is electronically filed herewith as Exhibit
No. EX-99(1)(b).
(c) Statement of Rights and Preferences of Series C Preferred
Shares is filed herewith as Exhibit C to the Proxy
Statement/Prospectus contained in Part A of this
Registration Statement.
(d) Statement of Rights and Preferences of Series D Preferred
Shares is filed herewith as Exhibit D to the Proxy
Statement/Prospectus contained in Part A of this
Registration Statement.
(e) By-Laws. Articles II, VIII and IX of the By-Laws, filed
electronically herewith as Exhibit No. EX-99(2)(a).
(6) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(a) Investment Management Agreement dated January 1, 1999
between Registrant and Delaware Management Company, a series
of Delaware Management Business Trust, is electronically
filed herewith as Exhibit No. EX-99(6)(a).
(7) Copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
Not Applicable.
(8) Copies of all bonus, profit sharing, pension, or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such. Furnish a reasonably detailed description of any plan that
is not set forth in a formal document;
Not Applicable.
(9) Copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940, as amended
(the "1940 Act") for securities and similar investments of the
Registrant, including the schedule of remuneration;
(a) Custodian Agreement between Registrant and Mellon Bank,
N.A., to be filed by pre-effective amendment.
(10) Copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act and any agreements with any person
relating to implementation of the plan, and copies of any plan
entered into by Registrant pursuant to Rule 18f-3 under the 1940
Act, any agreement with any person relating to implementation of
the plan, any amendment to the plan, and a copy of the portion of
the minutes of the meeting of the Registrant's directors
describing any action taken to revoke the plan;
Not Applicable.
(11) An opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will, when
sold, be legally issued, fully paid and nonassessable;
(a) Opinion of counsel to be filed by pre-effective amendment.
(12) An opinion, and consent to their use, of counsel or, in lieu of
an opinion, a copy of the revenue ruling from the Internal
Revenue Service, supporting the tax matters and consequences to
shareholders discussed in the prospectus;
(a) Form of Tax Opinion is electronically filed herewith as
Exhibit No. EX-99(12)(a).
(13) Copies of all material contracts of the Registrant not made in
the ordinary course of business which are to be performed in
whole or in part on or after the date of filing the registration
statement;
(a) Remarketing Agreement between Registrant and Salomon Smith
Barney, Inc., to be filed by pre-effective amendment.
(b) Fund Administration and Accounting Agreement dated July 1,
1998 between Registrant and Delaware Service Company, Inc.
is electronically filed herewith as Exhibit No.
EX-99(13)(b).
(14) Copies of any other opinions, appraisals, or rulings, and
consents to their use, relied on in preparing the registration
statement and required by Section 7 of the Securities Act of
1933, as amended (the "1933 Act" or "Securities Act");
(a) Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm for the Registrant, to be filed by
pre-effective amendment.
(15) All financial statements omitted pursuant to Item 14(a)(1);
Not Applicable.
(16) Manually signed copies of any power of attorney pursuant to which
the name of any person has been signed to the registration
statement; and
(a) Powers of Attorney is electronically filed herewith as
Exhibit No. EX-99(16)(a).
(17) Any additonal exhibits which the Registrant may wish to file.
Not Applicable.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is part of this registration statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may
be deemed underwriters, in addition to the information called for
by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as part of an
amendment to the registration statement and will not be used
until the amendment is effective, and that, in determining any
liability under the 1933 Act, each post-effective amendment shall
be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file by Post-Effective
Amendment the opinion of counsel regarding the tax consequences
of the proposed reorganization required by Item 16 (12) of Form
N-14 within a reasonable time after receipt of such opinion.
SIGNATURES
As required by the Securities Act of 1933, as amended (the "Securities
Act"), this Registration Statement has been signed on behalf of the Registrant,
in the City of Philadelphia, and the Commonwealth of Pennsylvania on the 15th
day of September, 2005.
DELAWARE INVESTMENTS MINNESOTA MUNICIPAL INCOME FUND II,
INC.
By: /s/ Jude T. Driscoll
Jude T. Driscoll
Chairman
As required by the 1933 Act, this Registration Statement has been signed by
the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/ Jude T. Driscoll Chairman/President/ September 15, 2005
Jude T. Driscoll Chief Executive Officer
(Principal Executive
Officer) and Director
/s/ Thomas L. Bennett* Director September 15, 2005
Thomas L. Bennett
/s/ John A. Fry* Director September 15, 2005
John A. Fry
/s/ Anthony D. Knerr* Director September 15, 2005
Anthony D. Knerr
/s/ Lucinda S. Landreth* Director September 15, 2005
Lucinda S. Landreth
/s/ Ann R. Leven* Director September 15, 2005
Ann R. Leven
/s/ Thomas F. Madison* Director September 15, 2005
Thomas F. Madison
/s/ Janet L. Yeomans* Director September 15, 2005
Janet L. Yeomans
/s/ J. Richard Zecher* Director September 15, 2005
J. Richard Zecher
/s/ Michael P. Bishof* Senior Vice President/
Michael P. Bishof Chief Financial Officer September 15, 2005
* By: /s/ Jude T. Driscoll
Jude T. Driscoll
Attorney-in-Fact
(Pursuant to Powers of Attorney herewith filed)
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Exhibits
to
Form N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
EX-99(1)(a) Articles of Incorporation dated December 29, 1992.
EX-99(1)(b) Statement of Rights and Preferences of Series A and Series B
Preferred Shares.
EX-99(2)(a) Amended and Restated By-Laws dated May 19, 2005.
EX-99(6)(a) Investment Management Agreement dated January 1, 1999
between Registrant and Delaware Management Company, a series of
Delaware Management Business Trust.
EX-99(12)(a) Form of Tax Opinion.
EX-99(13)(b) Fund Administration and Accounting Agreement dated
July 1, 1998 between Registrant and Delaware Service Company,
Inc.
EX-99(16)(a) Powers of Attorney.
