The Funds enter into contracts in the normal course of business that contain a variety of indemnifications. The Funds’ maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts. Management has reviewed the Funds’ existing contracts and expects the risk of loss to be remote.
Other Fund information (unaudited)
Delaware Investments Closed-End Municipal Bond Funds
Change in the Funds’ Service Providers
Effective October 1, 2007, Mellon Bank, N.A. provides fund accounting and financial administration services to each Fund. Those services include performing functions related to calculating each Fund’s NAV and providing financial reporting information, regulatory compliance testing and other related accounting services. For these services, each Fund pays Mellon Bank, N.A. an asset-based fee, subject to certain fee minimums, plus certain out-of-pocket expenses and transactional charges. Effective October 1, 2007, Delaware Service Company, Inc. (“DSC”) provides fund accounting and financial administration oversight services to the Funds. Those services include overseeing the Funds’ pricing process, the calculation and payment of fund expenses, and financial reporting in shareholder reports, registration statements and other regulatory filings. DSC also manages the process for the payment of dividends and distributions and the dissemination of Fund NAVs and performance data. For these services, each Fund pays DSC an asset-based fee, plus certain out-of-pocket expenses and transactional charges. The fees payable to Mellon Bank, N.A. and DSC under the service agreements described above will be allocated among all Funds in the Delaware Investments Family of Funds on a relative net asset value basis. Prior to October 1, 2007, DSC provided fund accounting and financial administration services to the Funds at an annual rate of 0.04% of each Fund’s average daily net assets.
Change to the Funds’ Investment Policies
At a meeting of the Funds’ Board of Directors/Trustees on August 16, 2007, the Board approved the Funds’ ability to invest up to 15% of total net assets in credit default swaps. The Funds began investing in credit default swaps on October 23, 2007.
Credit Default Swaps
A Fund may enter into credit default swap (“CDS”) contracts to the extent consistent with its investment objectives and strategies. A CDS contract is a risk-transfer instrument (in the form of a derivative security) through which one party (the “purchaser of protection”) transfers to another party (the “seller of protection”) the financial risk of a Credit Event (as defined below), as it relates to a particular reference security or basket of securities (such as an index). In exchange for the protection offered by the seller of protection, the purchaser of protection agrees to pay the seller of protection a periodic premium. In the most general sense, the benefit for the purchaser of protection is that, if a Credit Event should occur, it has an agreement that the seller of protection will make it whole in return for the transfer to the seller of protection of the reference security or securities. The benefit for the seller of protection is the premium income it receives. A Fund might use CDS contracts to limit or to reduce the risk exposure of the Fund to defaults of the issuer or issuers of its holdings (i.e., to reduce risk when the Fund owns or has exposure to such securities). A Fund also might use CDS contracts to create or vary exposure to securities or markets or as a tax management tool.
CDS transactions may involve general market, illiquidity, counterparty, and credit risks. CDS prices may also be subject to rapid movements in response to news and events affecting the underlying securities. In addition, the CDS market for municipal securities is less mature than the CDS market for taxable fixed income securities. The aggregate notional amount (typically, the principal amount of the reference security or securities) of a Fund’s investments in the CDS contracts will be limited to 15% of its total net assets. As the purchaser or seller of protection, a Fund may be required to segregate cash or other liquid assets to cover its obligations under certain CDS contracts.
Where a Fund is a purchaser of protection, it will designate on its books and records cash or liquid securities sufficient to cover its premium payments under the CDS. To the extent that a Fund, as a purchaser of protection, may be required in the event of a credit default to deliver to the counterparty (1) the reference security (or basket of securities), (2) a security (or basket of securities) deemed to be the equivalent of the reference security (or basket of securities), or (3) the negotiated monetary value of the obligation, the Fund will designate the reference security (or basket of securities) on its books and records as being held to satisfy its obligation under the CDS or, where the Fund does not own the reference security (or basket of securities), the Fund will designate on its books and records cash or liquid securities sufficient to satisfy the potential obligation. To the extent that the Fund, as a seller of protection, may be required in the event of a credit default to deliver to the counterparty some or all of the notional amount of the CDS, it will designate on its books and records cash or liquid securities sufficient to cover the obligation. If the CDS permits a Fund to offset its obligations against the obligations of the counterparty under the CDS, then the Fund will only designate on its books and records cash or liquid securities sufficient to cover the Fund’s net obligation to the counterparty, if any. All cash and liquid securities designated by a Fund to cover its obligations under CDS will be marked to market daily to cover these obligations.
As the seller of protection in a CDS contract, a Fund would be required to pay the par (or other agreed-upon) value of a reference security (or basket of securities) to the counterparty in the event of a default, bankruptcy, failure to pay, obligation acceleration, modified restructuring or agreed upon event (each of these events is a “Credit Event”). If a Credit Event occurs, a Fund generally would receive the security or securities to which the Credit Event relates in return for the payment to the purchaser of the par value. Provided that no Credit Event occurs, a Fund would receive from the counterparty a periodic stream of payments over the term of the contract in return for this credit protection. In addition, if no Credit Event occurs during the term of the CDS contract, a Fund would have no delivery requirement or payment obligation to the purchaser of protection. As the seller of protection, a Fund would have credit exposure to the reference security (or basket of securities). A Fund will not sell protection in a CDS contract if it cannot otherwise hold the security (or basket of securities).
As the purchaser of protection in a CDS contract, a Fund would pay a premium to the seller of protection. In return, the Fund would be protected by the seller of protection from a Credit Event on the reference security (or basket of securities). A risk in this type of transaction is that the seller of protection may fail to satisfy its payment obligations to the Fund if a Credit Event should occur. This risk is known as counterparty risk and is described in further detail below.
26
If the purchaser of protection does not own the reference security (or basket of securities), the purchaser of protection may be required to purchase the reference security (or basket of securities) in the case of a Credit Event on the reference security (or basket of securities). If the purchaser of protection cannot obtain the security (or basket of securities), it may be obligated to deliver a security (or basket of securities) that is deemed to be equivalent to the reference security (or basket of securities) or the negotiated monetary value of the obligation.
Each CDS contract is individually negotiated. The term of a CDS contract, assuming no Credit Event occurs, is typically between two and five years, but there is no restriction on the term of the CDS contracts in which a Fund may invest. CDS contracts may be unwound through negotiation with the counterparty. Additionally, a CDS contract may be assigned to a third party. In either case, the unwinding or assignment involves the payment or receipt of a separate payment by a Fund to terminate the CDS contract.
A significant risk in CDS transactions is the creditworthiness of the counterparty because the integrity of the transaction depends on the willingness and ability of the counterparty to meet its contractual obligations. If there is a default by a counterparty who is a purchaser of protection, a Fund’s potential loss is the agreed upon periodic stream of payments from the purchaser of protection. If there is a default by a counterparty that is a seller of protection, the Fund’s potential loss is the failure to receive the par value or other agreed upon value from the seller of protection if a Credit Event should occur. CDS contracts do not involve the delivery of collateral to support each party’s obligations; therefore, a Fund will only have contractual remedies against the counterparty pursuant to the CDS agreement. As with any contractual remedy, there is no guarantee that a Fund would be successful in pursuing such remedies. For example, the counterparty may be judgment proof due to insolvency. A Fund thus assumes the risk that it will be delayed or prevented from obtaining payments owed to it.
Changes in the Delaware Investments Florida Insured Municipal Income Fund (renamed Delaware National Municipal Income Fund)
On September 13, 2007, shareholders of Delaware Investments Florida Insured Municipal Income Fund, renamed Delaware Investments National Municipal Income Fund (ASE: VFL) (the “Fund”), approved a proposal to change certain of the Fund’s fundamental investment policies at the Fund’s reconvened annual shareholders meeting. These changes were effective on Tuesday, October 16, 2007.
Shareholders of the Fund approved a proposal to eliminate a fundamental investment policy requiring the Fund to invest 80% of its net assets in insured, AAA-rated municipal bonds issued by the State of Florida. This change permits the Fund to, as a non-fundamental policy, (1) invest without limitation in un-insured, investment grade municipal securities (including those rated below AAA) of states other than Florida and to (2) invest up to 20% of its net assets in non-investment grade municipal securities. Consistent with its new, national investment strategy, the Fund has changed its name to Delaware Investments National Municipal Income Fund.
In addition, the Fund’s non-fundamental investment objective was changed to provide current income exempt from regular federal income tax, consistent with the preservation of capital. As a fundamental policy, under normal circumstances the Fund will invest at least 80% of its net assets in securities the income from which is exempt from federal income taxes. The Fund will be able to invest up to 20% of its net assets in municipal bonds with an investment rating of Ba/BB or lower, or that are unrated but judged to be of comparable quality by the Fund’s investment adviser. Investment in municipal bonds of below investment grade quality involves special risks as compared with investment in higher grade municipal bonds. These risks include greater sensitivity to general economic downturns. Securities rated below investment grade are commonly known as “junk bonds.” These securities are regarded as predominantly speculative with respect to the issuer’s ability to pay interest and repay principal owed.
The changes described above cause the Fund to be subject to the following additional risks, most notably increased industry and security risk, credit risk and high-yield bond risk.
Industry and Security Risk. Industry risk is the risk that the value of securities in a particular industry will decline because of changing expectations for the performance of that industry. Securities risk is the risk that the value of an individual security will decline because of changing expectations for the performance of the individual issuer of the security. To mitigate this risk, DMC spreads the Fund’s assets across different types of municipal bonds and among bonds representing different industries and regions within Colorado. DMC will generally concentrate investments in a particular sector when the supply of bonds in other sectors does not suit the Fund’s investment needs. This will expose the Fund to greater industry and security risk. However, if the Fund’s fundamental policy requiring it to invest primarily in insured securities is eliminated, it may be more subject to industry and security risk than it was previously because payment of interest and principal on a substantial portion of the bonds in its portfolio is no longer insured.
Geographical Diversification. It is anticipated that the Fund will transition its portfolio over time to include municipal bonds from other states and territories. During that transition period, the Fund may have significant investments in Florida municipal bonds. This could make the Fund more sensitive to economic conditions in Florida than other more geographically diversified national municipal income funds.
Credit Risk. Credit risk is the possibility that an issuer of a debt security - or an entity that insures the debt security - will be unable to make interest payments on, and to pay the principal of, a security when due. A change in the credit risk associated with a particular debt security may cause a corresponding change in that security’s price and, therefore, impact the Fund’s net asset value. The purpose of insurance is to protect against credit risk. In the event of a default of an insured municipal security, the insurer is contractually required to make payments of interest and principal under the terms of the municipal security. To the extent that the Fund invests more of its assets in insured municipal securities or in securities that are more highly rated, the Fund may be subject to less credit risk. There is no assurance, however, that an insurance company will meet its obligations with respect
(continues) 27
Other Fund information (unaudited)
Delaware Investments Closed-End Municipal Bond Funds
to the insured securities. DMC recognizes that both eliminating the Fund’s mandated investment policy concerning insured securities and increasing the Fund’s ability to invest in non-investment grade securities may entail an increase in credit risk. It is the portfolio manager’s and credit analyst’s responsibility to perform due diligence around security selection with respect to credit risk to ensure that securities within the Fund are adding value to the portfolio. The team responsible for managing the Fund meets on a weekly basis to discuss and address such risks.
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 is typically 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 that backs the bond would pose a significant risk. In striving to manage these risks, DMC will limit the amount that the Fund may invest in lower quality, higher yielding bonds.
Interest Rates. The Fund is affected by changes in interest rates. When interest rates rise, the value of bonds in the 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.
Proxy Results
The shareholders of Delaware Investments Arizona Municipal Income Fund, Inc., Delaware Investments Colorado Insured Municipal Income Fund, Inc., Delaware Investments Florida Insured Municipal Income Fund, and Delaware Investments Minnesota Municipal Income Fund II, Inc. (each, a “Fund”) voted on the following proposals (as applicable) at the annual meeting of shareholders on August 15, 2007 (the “Annual Meeting”). The description of each proposal and number of shares voted are as follows:
1. To elect a Board of Directors/Trustees for each Fund.
Delaware Investments Arizona Municipal Income Fund, Inc.
| | Common Shareholders | | Preferred Shareholders |
| | | | Shares Voted | | | | Shares Voted |
| | Shares Voted For | | Withheld Authority | | Shares Voted For | | Withheld Authority |
| Patrick P. Coyne | 2,714,694 | | 97,526 | | | | |
| Thomas L. Bennett | 2,714,694 | | 97,526 | | | | |
| John A. Fry | 2,714,694 | | 97,526 | | | | |
| Anthony D. Knerr | 2,712,694 | | 99,526 | | | | |
| Lucinda S. Landreth | 2,714,694 | | 97,526 | | | | |
| Ann R. Leven | 2,712,694 | | 99,526 | | | | |
| Thomas F. Madison | | | | | 497 | | 3 |
| Janet L. Yeomans | | | | | 497 | | 3 |
| J. Richard Zecher | 2,712,694 | | 99,526 | | | | |
Delaware Investments Colorado Insured Municipal Fund, Inc.
| | Common Shareholders | | Preferred Shareholders |
| | | | Shares Voted | | | | Shares Voted |
| | Shares Voted For | | Withheld Authority | | Shares Voted For | | Withheld Authority |
| Patrick P. Coyne | 3,996,995 | | 176,888 | | | | |
| Thomas L. Bennett | 3,960,961 | | 212,922 | | | | |
| John A. Fry | 3,991,049 | | 182,834 | | | | |
| Anthony D. Knerr | 3,965,803 | | 208,080 | | | | |
| Lucinda S. Landreth | 3,995,445 | | 178,438 | | | | |
| Ann R. Leven | 3,996,520 | | 177,363 | | | | |
| Thomas F. Madison | | | | | 648 | | 0 |
| Janet L. Yeomans | | | | | 648 | | 0 |
| J. Richard Zecher | 3,991,607 | | 182,883 | | | | |
28
Delaware Investments Florida Insured Municipal Income Fund
| | Common Shareholders | | Preferred Shareholders |
| | | | Shares Voted | | | | Shares Voted |
| | Shares Voted For | | Withheld Authority | | Shares Voted For | | Withheld Authority |
| Patrick P. Coyne | | 1,904,682 | | 46,806 | | | | |
| Thomas L. Bennett | | 1,905,607 | | 45,881 | | | | |
| John A. Fry | | 1,901,607 | | 49,881 | | | | |
| Anthony D. Knerr | | 1,905,607 | | 45,881 | | | | |
| Lucinda S. Landreth | | 1,905,607 | | 45,881 | | | | |
| Ann R. Leven | | 1,903,385 | | 48,103 | | | | |
| Thomas F. Madison | | | | | | 298 | | 5 |
| Janet L. Yeomans | | | | | | 298 | | 5 |
| J. Richard Zecher | | 1,902,460 | | 49,028 | | | | |
Delaware Investments Minnesota Municipal Income Fund II, Inc.
| | Common Shareholders | | Preferred Shareholders |
| | | | Shares Voted | | | | Shares Voted |
| | Shares Voted For | | Withheld Authority | | Shares Voted For | | Withheld Authority |
| Patrick P. Coyne | | 9,963,948 | | 337,750 | | | | |
| Thomas L. Bennett | | 9,960,404 | | 341,294 | | | | |
| John A. Fry | | 9,957,373 | | 344,325 | | | | |
| Anthony D. Knerr | | 9,947,477 | | 354,221 | | | | |
| Lucinda S. Landreth | | 9,962,248 | | 339,450 | | | | |
| Ann R. Leven | | 9,950,634 | | 351,064 | | | | |
| Thomas F. Madison | | | | | | 1,351 | | 18 |
| Janet L. Yeomans | | | | | | 1,351 | | 18 |
| J. Richard Zecher | | 9,949,969 | | 351,729 | | | | |
The shareholders of Delaware Investments Florida Insured Municipal Income Fund (the “Fund”), voted on the following proposal at the Fund’s reconvened annual shareholders meeting on September 13, 2007. The description of the proposal and the number of shares voted are as follows:
| 2. | | To eliminate a fundamental investment policy requiring Delaware Investments Florida Insured Municipal Income Fund to invest 80% of its net assets in insured, AAA-rated municipal bonds issued by the State of Florida. |
Delaware Investments Florida Insured Municipal Income Fund only
| Common Shareholders | | Preferred Shareholders |
| Affirmative | | Against | | Abstained | | Broker Non-votes | | Affirmative | | Against | | Abstained |
| 1,325,276 | | 193,989 | | 33,988 | | 414,068 | | 296 | | 103 | | 0 |
(continues) 29
Other Fund information (unaudited)
Delaware Investments Closed-End Municipal Bond Funds
Board Consideration of Delaware Investments Closed-End Municipal Bond Funds Investment Advisory Agreement
At a meeting held on May 16-17, 2007 (Annual Meeting), the Board of Trustees/Directors (Trustees), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreements for Delaware Investments Arizona Municipal Income Fund, Inc.; Delaware Investments Colorado Municipal Income Fund, Inc.; Delaware Investments Florida Insured Municipal Income Fund; and Delaware Investments Minnesota Municipal Income Fund II, Inc. (each a “Fund” and collectively the “Funds”). In making its decision, the Board considered information furnished throughout the year at regular Board meetings, including reports detailing Fund performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contracts. Information furnished specifically in connection with the renewal of the Investment Advisory Agreements with Delaware Management Company (DMC) included materials provided by DMC and its affiliates (Delaware Investments) concerning, among other things, the level of services provided to the Funds, the costs of such services to the Funds, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Meeting, the Board separately received and reviewed in mid-January 2007 independent historical and comparative reports prepared by Lipper Inc. (Lipper), an independent statistical compilation organization. The Lipper reports compared each Fund’s investment performance and expenses with those of other comparable mutual funds. The Board requested and received certain information regarding management’s policy with respect to advisory fee levels and its philosophy with respect to breakpoints; the structure of portfolio manager compensation; the investment manager’s profitability; and any constraints or limitations on the availability of securities in certain investment styles which might inhibit DMC’s ability to fully invest in accordance with Fund policies.
In considering information relating to the approval of each Fund’s advisory agreement, the independent Trustees received assistance and advice from and met separately with independent counsel. While attention was given to all information furnished, the following discusses under separate headings the primary factors taken into account by the Board in its contract renewal considerations.
Nature, Extent And Quality of Service. Consideration was given to the services provided by Delaware Investments to the Funds and their shareholders. In reviewing the nature, extent and quality of services, the Board emphasized reports furnished to it throughout the year at regular Board meetings covering matters such as the compliance of portfolio managers with the investment policies, strategies and restrictions for the Funds, the compliance of management personnel with the Code of Ethics adopted throughout the Delaware Investments® Family of Funds complex and the adherence to fair value pricing procedures as established by the Board. The Board noted that it was pleased with the current staffing of the Funds’ investment advisor and the emphasis placed on research in the investment process. Favorable consideration was given to DMC’s efforts to maintain, and in some instances increase, financial and human resources committed to fund matters. The Board was satisfied with the nature, extent and quality of the overall services provided by Delaware Investments.
Investment Performance. The Board considered the investment performance of DMC and the Funds. The Board placed significant emphasis on the investment performance of the Funds in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular weight was given to the Lipper reports furnished for the Annual Meeting. The Lipper reports prepared for each Fund showed the investment performance of its shares in comparison to a group of similar funds as selected by Lipper (Performance Universe). A fund with the highest performance ranked first, and a fund with the lowest ranked last. The highest/best performing 25% of funds in the Performance Universe make up the first quartile; the next 25% - the second quartile; the next 25% - the third quartile; and the lowest/worst performing 25% of funds in the Performance Universe make up the fourth quartile. Comparative annualized performance for each Fund was shown for the past one, three, five and 10 year periods ended December 31, 2006. The Board also considered comparative annualized performance for each Fund for the same periods ended October 31, 2006. The performance comparison presented below is based upon the December 31, 2006 information. The Board noted its objective that each Fund’s performance for the periods considered be at or above the median of its Performance Universe. The following paragraphs summarize the performance results for the Funds and the Board’s view of such performance.
Delaware Investments Arizona Municipal Income Fund, Inc. – The Performance Universe for the Fund consisted of the Fund and all leveraged closed–end other state municipal debt funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one, three and five year periods was in the fourth quartile of its Performance Universe. The report further showed that the Fund’s total return for the 10 year period was in the third quartile. The Board noted that the Fund’s performance results were not in line with the Board’s objective. In evaluating the Fund’s performance, the Board considered investment strategy changes implemented in late 2006. The Board was satisfied that management was taking effective action to enhance Fun performance and meet the Board’s performance objective.
Delaware Investments Colorado Municipal Income Fund, Inc. – The Performance Universe for the Fund consisted of the Fund and all leveraged closed–end other state municipal debt funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one and three year periods was in the fourth quartile of its Performance Universe. The report further showed that the Fund’s total return for the five and 10 year periods was in the third quartile and first quartile, respectively. The Board noted that the Fund’s performance results were not in line with the Board’s objective. In evaluating the Fund’s performance, the Board considered investment strategy changes implemented in late 2006. The Board was satisfied that management was taking effective action to enhance Fund performance and meet the Board’s performance objective.
30
Board Consideration of Delaware Investments Closed-End Municipal Bond Funds
Investment Advisory Agreement (continued)
Delaware Investments Florida Insured Municipal Income Fund – The Performance Universe for the Fund consisted of the Fund and all leveraged closed–end Florida municipal debt funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one year period was in the third quartile of its Performance Universe. The report further showed that the Fund’s total return for the three and five year periods was in the fourth quartile and the Fund’s total return for the 10 year period was in the first quartile. The Board noted that the Fund’s performance results were not in line with the Board’s objective. The Board also noted that the Performance Universe is not comprised solely of insured funds. Many of the funds (even certain of the insured funds) in the Performance Universe can maintain exposure to BBB rated bonds, which have significantly outperformed the AAA rated bonds that the Fund invests in. Based upon the Fund’s investment restrictions and the composition of the Performance Universes, the Board was satisfied with the Fund’s performance results.
Delaware Investments Minnesota Municipal Income Fund II, Inc. – The Performance Universe for the Fund consisted of the Fund and all leveraged closed–end other state municipal debt funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one and five year periods was in the third quartile of its Performance Universe. The report further showed that the Fund’s total return for the three and 10 year periods was in the second quartile and first quartile, respectively. The Board noted that the Fund’s performance results were mixed, but on an overall basis, tended toward median, which was acceptable.
Comparative Expenses. The Board considered expense comparison data for the Delaware Investments® Family of Funds as of October 31, 2006. Management provided the Board with information on pricing levels and fee structures for the Funds. The Board focused particularly on the comparative analysis of the management fees and total expense ratios of each Fund and the effective management fees and expense ratios of a group of similar leveraged closed-end funds as selected by Lipper (Expense Group). In reviewing comparative costs, each Fund’s contractual management fee and the actual management fee incurred by the Fund were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Fund) and actual management fees (as reported by each fund) of other funds within the Expense Group, taking into account any applicable breakpoints and fee waivers. Each Fund’s total expenses were also compared with those of its Expense Group. The Board also considered fees paid to Delaware Investments for non-management services. The Board noted its objective to limit each Fund’s total expense ratio to an acceptable range as compared to the median of the Expense Group. The following paragraphs summarize the expense results for the Funds and the Board’s view of such expenses.
Delaware Investments Arizona Municipal Income Fund, Inc. – The expense comparisons for the Fund showed that its actual management fee and total expenses were in the quartile with the lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Fund in comparison to its Expense Group as shown in the Lipper report.
Delaware Investments Colorado Municipal Income Fund, Inc. – The expense comparisons for the Fund showed that its management fee was in the quartile with the lowest expenses of its Expense Group and its total expenses were in the quartile with the lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Fund in comparison to its Expense Group as shown in the Lipper report.
Delaware Investments Florida Insured Municipal Income Fund – The expense comparisons for the Fund showed that its management fee and total expenses were in the quartile with the lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Fund in comparison to its Expense Group as shown in the Lipper report.
Delaware Investments Minnesota Municipal Income Fund II, Inc. – The expense comparisons for the Fund showed that its management fee and total expenses were in the quartile with the lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Fund in comparison to its Expense Group as shown in the Lipper report.
Management Profitability. The Board considered the level of profits, if any, realized by Delaware Investments in connection with the operation of the Funds. In this respect, the Board reviewed the Investment Management Profitability Analysis that addressed the overall profitability of Delaware Investments’ business in providing management and other services to each of the individual funds and the Delaware Investments Family of Funds as a whole. Specific attention was given to the methodology followed in allocating costs for the purpose of determining profitability. Management stated that the level of profits of Delaware Investments, to a certain extent, reflected operational cost savings and efficiencies initiated by Delaware Investments. The Board considered Delaware Investments’ efforts to improve services provided to fund shareholders and to meet additional regulatory and compliance requirements resulting from recent Securities and Exchange Commission initiatives. The Board also considered the extent to which Delaware Investments might derive ancillary benefits from fund operations, including the potential for procuring additional business as a result of the prestige and visibility associated with its role as service provider to the Delaware Investments Family of Funds and the benefits from allocation of fund brokerage to improve trading efficiencies. The Board found that the level of management fees was reasonable in light of the services rendered and the profitability of Delaware Investments.
Economies of Scale. As closed-end funds, the Funds do not issue shares on a continuous basis. Fund assets increase only to the extent that the value of the underlying securities in each Fund increase. Accordingly, the Board determined that the Funds were not likely to experience significant economies of scale due to asset growth and, therefore, a fee schedule with breakpoints to pass the benefit of such economies of scale on to shareholders was not likely to provide the intended effect.
31
About the organization
This semiannual report is for the information of Delaware Investments Closed-End Municipal Bond Funds shareholders. The return and principal value of an investment in each Fund will fluctuate so that shares, when resold, may be worth more or less than their original cost. Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that the Funds may, from time-to-time, purchase shares of their common stock on the open market at market prices.
Board of trustees Patrick P. Coyne
Chairman, President,
and Chief Executive Officer
Delaware Investments® Family of Funds
Philadelphia, PA Thomas L. Bennett
Private Investor
Rosemont, PA John A. Fry
President
Franklin & Marshall College
Lancaster, PA Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA Ann R. Leven
Consultant
ARL Associates
New York, NY Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ | | Affiliated officers David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA Daniel V. Geatens
Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA David P. O’Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA Richard Salus
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA Each Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. Each Fund’s Forms N-Q, as well as a description of the policies and procedures that each Fund uses to determine how to vote proxies (if any) relating to portfolio securities are available without charge (i) upon request, by calling 800 523-1918; and (ii) on the Commission’s Web site at http://www.sec.gov. In addition, a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities and each Fund’s Schedule of Investments are available without charge on the Fund’s Web site at http://www.delawareinvestments.com. Each Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C.; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330. Information (if any) regarding how each Fund voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through each Fund’s Web site at http://www.delawareinvestments.com; and (ii) on the Commission’s Web site at http://www.sec.gov. | | Contact information Investment manager
Delaware Management Company
Philadelphia, PA Principal office of the Funds
2005 Market Street
Philadelphia, PA 19103-7057 Independent registered public
accounting firm
Ernst & Young LLP
2001 Market Street
Philadelphia, PA 19103 Registrar and stock transfer
agent
Mellon Investor Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
800 851-9677 For securities dealers
and financial institutions
representatives
800 362-7500 Web site
www.delawareinvestments.com Delaware Investments is the marketing
name of Delaware Management Holdings,
Inc. and its subsidiaries. Number of recordholders as of
Sept. 30, 2007: |
| | |
| Arizona Municipal Income Fund | 67 |
| Colorado Insured Municipal | |
| Income Fund | 150 |
| Florida Insured Municipal | |
| Income Fund | 126 |
| Minnesota Municipal Income | |
| Fund II | 668 |
32
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Register for Account Access today! Please visit us at www.delawareinvestments.com, select Individual Investors, and click Account Access.
Please call our Shareholder Service Center at 800 523-1918 Monday through Friday from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any questions.
| (2429) | Printed in the USA |
| SA-CEMUNI [9/07] CGI 11/07 | MF-07-10-347 PO12384 |
Item 2. Code of Ethics
Not applicable.
Item 3. Audit Committee Financial Expert
Not applicable.
Item 4. Principal Accountant Fees and Services
Not applicable.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable to Form N-CSRs filed after fiscal years ending on or after December 31, 2005.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of the filing of this report and have concluded that they are effective in providing reasonable assurance that the information required to be disclosed by the registrant in its reports or statements filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There were no significant changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by the report to stockholders included herein (i.e., the registrant’s second fiscal quarter) that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
| (a) | | (1) Code of Ethics |
| | |
| | Not applicable. |
| | |
| | (2) Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are attached hereto as Exhibit 99.CERT. |
| | |
| | (3) Written solicitations to purchase securities pursuant to Rule 23c-1 under the Securities Exchange Act of 1934. |
| | |
| | Not applicable. |
| | |
| (b) | | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are furnished herewith as Exhibit 99.906CERT. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
Name of Registrant:
Delaware Investments Minnesota Municipal Income Fund II, Inc.
| PATRICK P. COYNE |
| By: Patrick P. Coyne |
| Title: Chief Executive Officer |
| Date: December 7, 2007 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| PATRICK P. COYNE |
| By: Patrick P. Coyne |
| Title: Chief Executive Officer |
| Date: December 7, 2007 |
| RICHARD SALUS |
| By: Richard Salus |
| Title: Chief Financial Officer |
| Date: December 7, 2007 |
