UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER
REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
| Investment Company Act file number: | 811-07420 | |
| Exact name of registrant as specified in charter: | Delaware Investments® Minnesota | |
| Municipal Income Fund II, Inc. | ||
| Address of principal executive offices: | 2005 Market Street | |
| Philadelphia, PA 19103 | ||
| Name and address of agent for service: | David F. Connor, Esq. | |
| 2005 Market Street | ||
| Philadelphia, PA 19103 | ||
| Registrant’s telephone number, including area code: | (800) 523-1918 | |
| Date of fiscal year end: | March 31 | |
| Date of reporting period: | September 30, 2016 |
Item 1. Reports to Stockholders
Table of Contents
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Delaware Investments® Closed-End Municipal Bond Funds
Semiannual report
September 30, 2016
|
| The figures in the semiannual report for Delaware Investments Closed-End Municipal Bond Funds represent past results, which are not a guarantee of future results. A rise or fall in interest rates can have a significant impact on bond prices. Funds that invest in bonds can lose their value as interest rates rise.
Closed-end funds
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Delaware Management Holdings, Inc. and its subsidiaries (collectively known by the marketing name of Delaware Investments) are wholly owned subsidiaries of Macquarie Group Limited, a global provider of banking, financial, advisory, investment, and funds management services. For more information, including press releases, please visit delawareinvestments.com/closed-end.
Unless otherwise noted, views expressed herein are current as of Sept. 30, 2016, and subject to change for events occurring after such date.
The Funds are not FDIC insured and are not guaranteed. It is possible to lose the principal amount invested.
Mutual fund advisory services are provided by Delaware Management Company, a series of Delaware Management Business Trust, which is a registered investment advisor. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
Neither Delaware Investments nor its affiliates referred to in this document are authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of Macquarie Bank Limited (MBL), a subsidiary of Macquarie Group Limited and an affiliate of Delaware Investments. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise. The Funds are governed by U.S. laws and regulations.
©2016 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
Table of Contents
3
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Security type / sector / state allocations
As of September 30, 2016 (Unaudited)
Sector designations may be different than the sector designations presented in other Fund materials.
4
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5
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Delaware Investments® Colorado Municipal Income Fund, Inc.
September 30, 2016 (Unaudited)
6
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| (continues) | 7 |
Table of Contents
Schedules of investments
Delaware Investments® Colorado Municipal Income Fund, Inc.
8
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| 9 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
September 30, 2016 (Unaudited)
10
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| (continues) | 11 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
12
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| (continues) | 13 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
14
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| (continues) | 15 |
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Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
16
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Delaware Investments® National Municipal Income Fund
September 30, 2016 (Unaudited)
| (continues) | 17 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
18
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| (continues) | 19 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
20
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| (continues) | 21 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
22
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| (continues) | 23 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
24
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Statements of assets and liabilities
Delaware Investments® Closed-End Municipal Bond Funds
September 30, 2016 (Unaudited)
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund | |||||||||||||
| Assets: |
|||||||||||||||
| Investments, at value1 |
$ | 105,510,745 | $ | 246,942,700 | $ | 97,326,848 | |||||||||
| Short-term investments, at value2 |
100,000 | 2,650,000 | 650,000 | ||||||||||||
| Interest income receivable |
1,454,760 | 3,162,344 | 1,311,754 | ||||||||||||
| Receivables for securities sold |
— | 30,330 | — | ||||||||||||
| Prepaid rating agency fee |
1,750 | 1,000 | 5,417 | ||||||||||||
| Offering cost for preferred shareholders |
142,638 | 176,853 | 155,010 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total assets |
107,209,893 | 252,963,227 | 99,449,029 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Liabilities: |
|||||||||||||||
| Cash overdraft |
257,939 | 614,009 | 268,270 | ||||||||||||
| Liquidation value of preferred stock |
30,000,000 | 75,000,000 | 30,000,000 | ||||||||||||
| Payable for securities purchased |
— | 2,601,705 | — | ||||||||||||
| Investment management fees payable |
35,231 | 82,204 | 32,656 | ||||||||||||
| Other accrued expenses |
22,292 | 55,462 | 21,631 | ||||||||||||
| Directors’/Trustees’ fees and expenses payable |
196 | 445 | 176 | ||||||||||||
| Audit fees payable |
20,970 | 20,970 | 20,250 | ||||||||||||
| Legal fees payable to affiliates |
1,181 | 2,601 | 810 | ||||||||||||
| Accounting and administration expenses payable to affiliates |
413 | 964 | 383 | ||||||||||||
| Reports and statements to shareholders payable to affiliates |
29 | 67 | 27 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total liabilities |
30,338,251 | 78,378,427 | 30,344,203 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 76,871,642 | $ | 174,584,800 | $ | 69,104,826 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net Assets Applicable to Common Shareholders Consist of: |
|||||||||||||||
| Paid-in capital ($0.001 par value)3,4 |
$ | 66,918,121 | $ | 157,931,075 | $ | 60,617,476 | |||||||||
| Undistributed net investment income |
781,811 | 769,310 | 108,610 | ||||||||||||
| Accumulated net realized loss on investments |
(659,511 | ) | (1,086,197 | ) | (1,231,781 | ) | |||||||||
| Net unrealized appreciation of investments |
9,831,221 | 16,970,612 | 9,610,521 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 76,871,642 | $ | 174,584,800 | $ | 69,104,826 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net Asset Value per Common Share |
$ | 15.89 | $ | 15.17 | $ | 15.26 | |||||||||
|
|
|
|
|
|
|
||||||||||
| 1Investments, at cost |
95,679,524 | 229,972,088 | 87,716,327 | ||||||||||||
| 2Short-term investments, at cost |
100,000 | 2,650,000 | 650,000 | ||||||||||||
| 3Common shares outstanding |
4,837,100 | 11,504,975 | 4,528,443 | ||||||||||||
| 4Common shares authorized |
200 million | 200 million | unlimited | ||||||||||||
See accompanying notes, which are an integral part of the financial statements.
25
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Six months ended September 30, 2016 (Unaudited)
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund | |||||||||||||
| Investment Income: |
|||||||||||||||
| Interest |
$ | 2,241,247 | $ | 4,556,805 | $ | 2,073,142 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Expenses: |
|||||||||||||||
| Management fees |
214,990 | 502,202 | 199,163 | ||||||||||||
| Interest expense |
253,701 | 634,253 | 253,669 | ||||||||||||
| Rating agency fees |
27,462 | 23,839 | 23,462 | ||||||||||||
| Audit and tax fees |
24,082 | 27,227 | 20,250 | ||||||||||||
| Accounting and administration expenses |
17,364 | 39,865 | 20,151 | ||||||||||||
| Legal fees |
15,324 | 25,032 | 4,471 | ||||||||||||
| Dividend disbursing and transfer agent fees and expenses |
12,833 | 34,668 | 14,910 | ||||||||||||
| Reports and statements to shareholders |
10,828 | 26,416 | 10,752 | ||||||||||||
| Offering costs |
9,018 | 12,119 | 10,455 | ||||||||||||
| Stock exchange fees |
2,385 | 5,477 | 2,138 | ||||||||||||
| Directors’/Trustees’ fees and expenses |
1,755 | 3,993 | 1,566 | ||||||||||||
| Custodian fees |
1,714 | 4,034 | 1,755 | ||||||||||||
| Registration fees |
398 | 488 | 398 | ||||||||||||
| Other |
6,203 | 11,596 | 10,062 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total operating expenses |
598,057 | 1,351,209 | 573,202 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Investment Income |
1,643,190 | 3,205,596 | 1,499,940 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Realized and Unrealized Gain (Loss): |
|||||||||||||||
| Net realized gain on investments |
484,641 | 284,334 | 154,470 | ||||||||||||
| Net change in unrealized appreciation (depreciation) of investments |
713,976 | 1,542,535 | 1,050,119 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Realized and Unrealized Gain |
1,198,617 | 1,826,869 | 1,204,589 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Increase in Net Assets Resulting from Operations |
$ | 2,841,807 | $ | 5,032,465 | $ | 2,704,529 | |||||||||
|
|
|
|
|
|
|
||||||||||
See accompanying notes, which are an integral part of the financial statements.
26
Table of Contents
Statements of changes in net assets
Delaware Investments® Closed-End Municipal Bond Funds
| Delaware Investments Colorado Municipal Income Fund, Inc. |
||||||||
| Six months ended 9/30/16 (Unaudited) |
Year ended 3/31/16 |
|||||||
| Increase in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 1,643,190 | $ | 3,408,420 | ||||
| Net realized gain |
484,641 | 351,677 | ||||||
| Net change in unrealized appreciation (depreciation) |
713,976 | 243,591 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
2,841,807 | 4,003,688 | ||||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(1,741,356 | ) | (3,458,527 | ) | ||||
|
|
|
|
|
|||||
| (1,741,356 | ) | (3,458,527 | ) | |||||
|
|
|
|
|
|||||
| Net Increase in Net Assets Applicable to Common Shareholders |
1,100,451 | 545,161 | ||||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of period |
75,771,191 | 75,226,030 | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 76,871,642 | $ | 75,771,191 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 781,811 | $ | 879,977 | ||||
|
|
|
|
|
|||||
| Delaware Investments Minnesota Municipal Income Fund II, Inc. |
||||||||
| Six months ended 9/30/16 (Unaudited) |
Year ended 3/31/16 |
|||||||
| Increase in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 3,205,596 | $ | 7,241,038 | ||||
| Net realized gain |
284,334 | 350,327 | ||||||
| Net change in unrealized appreciation (depreciation) |
1,542,535 | 495,650 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
5,032,465 | 8,087,015 | ||||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(3,566,542 | ) | (7,248,134 | ) | ||||
|
|
|
|
|
|||||
| (3,566,542 | ) | (7,248,134 | ) | |||||
|
|
|
|
|
|||||
| Net Increase in Net Assets Applicable to Common Shareholders |
1,465,923 | 838,881 | ||||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of period |
173,118,877 | 172,279,996 | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 174,584,800 | $ | 173,118,877 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 769,310 | $ | 1,130,256 | ||||
|
|
|
|
|
|||||
27
Table of Contents
Statements of changes in net assets
Delaware Investments® Closed-End Municipal Bond Funds
| Delaware Investments National Municipal Income Fund |
||||||||
| Six months ended 9/30/16 (Unaudited) |
Year ended 3/31/16 |
|||||||
| Increase in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 1,499,940 | $ | 3,150,504 | ||||
| Net realized gain |
154,470 | 398,496 | ||||||
| Net change in unrealized appreciation (depreciation) |
1,050,119 | 96,636 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
2,704,529 | 3,645,636 | ||||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(1,607,597 | ) | (3,441,617 | ) | ||||
|
|
|
|
|
|||||
| (1,607,597 | ) | (3,441,617 | ) | |||||
|
|
|
|
|
|||||
| Net Increase in Net Assets Applicable to Common Shareholders |
1,096,932 | 204,019 | ||||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of period |
68,007,894 | 67,803,875 | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 69,104,826 | $ | 68,007,894 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 108,610 | $ | 216,267 | ||||
|
|
|
|
|
|||||
See accompanying notes, which are an integral part of the financial statements.
28
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Six months ended September 30, 2016 (Unaudited)
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund | |||||||||||||
| Net Cash Provided by (Used for) Operating Activities: |
|||||||||||||||
| Net increase in net assets resulting from operations |
$ | 2,841,807 | $ | 5,032,465 | $ | 2,704,529 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Adjustments to reconcile net increase in net assets from operations to cash provided by (used for) operating activities: |
|||||||||||||||
| Amortization of premium and accretion of discount on investments |
178,432 | 1,065,516 | 245,503 | ||||||||||||
| Purchase of investment securities |
(4,183,506 | ) | (16,537,149 | ) | (8,971,038 | ) | |||||||||
| Proceeds from disposition of investment securities |
5,023,491 | 15,054,343 | 8,269,077 | ||||||||||||
| Purchase of short-term investment securities, net |
(100,000 | ) | (2,650,000 | ) | 350,000 | ||||||||||
| Net realized gain on investments |
(484,641 | ) | (284,334 | ) | (154,470 | ) | |||||||||
| Net change in net unrealized appreciation (depreciation) of investments |
(713,976 | ) | (1,542,535 | ) | (1,050,119 | ) | |||||||||
| Increase in receivable for securities sold |
— | (15,165 | ) | — | |||||||||||
| Decrease in interest receivable |
17,129 | 146,835 | 18,970 | ||||||||||||
| Decrease in other accrued expenses receivable |
2,818 | — | — | ||||||||||||
| Decrease in offering costs for preferred shareholders |
(6,826 | ) | (2,767 | ) | (5,597 | ) | |||||||||
| Increase (decrease) in payable for securities purchased |
(1,113,180 | ) | 2,601,705 | (179,133 | ) | ||||||||||
| Decrease in investment management fees payable |
(403 | ) | (1,498 | ) | (367 | ) | |||||||||
| Decrease in Trustees’ fees and expenses payable |
(528 | ) | (1,214 | ) | (472 | ) | |||||||||
| Decrease in audit fees payable |
(19,530 | ) | (19,530 | ) | (20,250 | ) | |||||||||
| Decrease in other affiliates payable |
(1,051 | ) | (710 | ) | (1,333 | ) | |||||||||
| Increase in other accrued expenses |
20,542 | 22,164 | 5,328 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total adjustments |
(1,381,229 | ) | (2,164,339 | ) | (1,493,901 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net cash provided by operating activities |
1,460,578 | 2,868,126 | 1,210,628 | ||||||||||||
|
|
|
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|
|
|
||||||||||
| Cash Flows Used for Financing Activities: |
|||||||||||||||
| Cash dividends and distributions paid to common shareholders |
(1,741,356 | ) | (3,566,542 | ) | (1,607,597 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net cash used for financing activities |
(1,741,356 | ) | (3,566,542 | ) | (1,607,597 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net increase (decrease) in cash |
(280,778 | ) | (698,416 | ) | (396,969 | ) | |||||||||
| Cash at beginning of period |
22,839 | 84,407 | 128,699 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Cash at end of period |
$ | (257,939 | ) | $ | (614,009 | ) | $ | (268,270 | ) | ||||||
|
|
|
|
|
|
|
||||||||||
| Cash paid for interest on leverage |
$ | 253,701 | $ | 634,253 | $ | 253,669 | |||||||||
|
|
|
|
|
|
|
||||||||||
See accompanying notes, which are an integral part of the financial statements.
29
Table of Contents
Delaware Investments® Colorado Municipal Income Fund, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Six months ended 9/30/161 |
Year ended | |||||||||||||||||||||||||||||
| (Unaudited) | 3/31/16 | 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | |||||||||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.660 | $ | 15.550 | $ | 14.430 | $ | 15.370 | $ | 15.010 | $ | 13.370 | ||||||||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||||||||||
| Net investment income2 |
0.340 | 0.705 | 0.706 | 0.700 | 0.733 | 0.638 | ||||||||||||||||||||||||
| Net realized and unrealized gain (loss) |
0.250 | 0.120 | 1.104 | (0.935 | ) | 0.416 | 1.582 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total from investment operations |
0.590 | 0.825 | 1.810 | (0.235 | ) | 1.149 | 2.220 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||||||||||
| Net investment income |
(0.360 | ) | (0.715 | ) | (0.690 | ) | (0.690 | ) | (0.690 | ) | (0.580 | ) | ||||||||||||||||||
| Net realized gain |
— | — | — | (0.015 | ) | (0.099 | ) | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total dividends and distributions |
(0.360 | ) | (0.715 | ) | (0.690 | ) | (0.705 | ) | (0.789 | ) | (0.580 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net asset value, end of period |
$ | 15.890 | $ | 15.660 | $ | 15.550 | $ | 14.430 | $ | 15.370 | $ | 15.010 | ||||||||||||||||||
|
|
|
|
|
|
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|
|
|
|
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|
|||||||||||||||||||
| Market value, end of period |
$ | 15.300 | $ | 15.070 | $ | 14.350 | $ | 13.330 | $ | 14.840 | $ | 14.600 | ||||||||||||||||||
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|
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|
|
|
|||||||||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||||||||||
| Market value |
3.89% | 10.38% | 13.01% | (5.25% | ) | 6.92% | 22.41% | |||||||||||||||||||||||
| Net asset value |
3.84% | 5.85% | 13.12% | (0.97% | ) | 7.71% | 17.19% | |||||||||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 76,872 | $ | 75,771 | $ | 75,226 | $ | 69,781 | $ | 74,349 | $ | 72,613 | ||||||||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4 |
1.55% | 1.52% | 1.43% | 1.49% | 1.44% | 0.95% | ||||||||||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders5 |
4.24% | 4.59% | 4.65% | 4.90% | 4.72% | 4.46% | ||||||||||||||||||||||||
| Portfolio turnover |
5% | 13% | 14% | 26% | 8% | 64% | ||||||||||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||||||||||
| Value of preferred shares outstanding
(000 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | ||||||||||||||||||
| Net asset coverage per share of preferred shares, end of period6 |
$ | 356,239 | $ | 352,571 | $ | 350,753 | $ | 332,602 | $ | 347,829 | $ | 342,045 | ||||||||||||||||||
| Liquidation value per share of preferred shares6
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
| ||||||||||||
| 1 | Ratios have been annualized and total return and portfolio turnover have not been annualized. |
| 2 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.052, $0.079, $0.077, $0.078, $0.079, and $0.031 per share for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012, respectively, and from realized capital gains of $0.002, $0.006, and $0.000 per share for the years ended March 31, 2014, 2013, and 2012, respectively. |
| 3 | 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. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 0.89%, 1.01%, 0.92%, 0.94%, 0.89%, and 0.73%, respectively. |
| 5 | The ratio of net investment income excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013 and 2012 were 4.90%, 5.11%, 5.16%, 5.45%, 5.27%, and 4.68%, respectively. |
| 6 | In November 2011, the Fund issued a series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share (Series 2016 Shares). The Series 2016 Shares were redeemed on Feb. 2, 2016 and replaced with Series 2021 Shares, which are the same amount and value as the Fund’s Series 2016 Shares. |
See accompanying notes, which are an integral part of the financial statements.
30
Table of Contents
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Six months ended 9/30/161 |
Year ended | |||||||||||||||||||||||||||||
| (Unaudited) | 3/31/16 | 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | |||||||||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.050 | $ | 14.970 | $ | 14.310 | $ | 15.270 | $ | 14.940 | $ | 13.700 | ||||||||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||||||||||
| Net investment income2 |
0.279 | 0.629 | 0.641 | 0.648 | 0.715 | 0.640 | ||||||||||||||||||||||||
| Net realized and unrealized gain (loss) |
0.151 | 0.081 | 0.689 | (0.802 | ) | 0.345 | 1.180 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total from investment operations |
0.430 | 0.710 | 1.330 | (0.154 | ) | 1.060 | 1.820 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||||||||||
| Net investment income |
(0.310 | ) | (0.630 | ) | (0.670 | ) | (0.690 | ) | (0.690 | ) | (0.580 | ) | ||||||||||||||||||
| Net realized gain |
— | — | — | (0.116 | ) | (0.040 | ) | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total dividends and distributions |
(0.310 | ) | (0.630 | ) | (0.670 | ) | (0.806 | ) | (0.730 | ) | (0.580 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net asset value, end of period |
$ | 15.170 | $ | 15.050 | $ | 14.970 | $ | 14.310 | $ | 15.270 | $ | 14.940 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Market value, end of period |
$ | 14.980 | $ | 14.700 | $ | 13.850 | $ | 13.340 | $ | 15.630 | $ | 14.230 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||||||||||
| Market value |
4.02% | 11.17% | 8.97% | (9.26% | ) | 15.18% | 17.95% | |||||||||||||||||||||||
| Net asset value |
2.89% | 5.30% | 9.80% | (0.36% | ) | 7.18% | 13.90% | |||||||||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 174,585 | $ | 173,119 | $ | 172,280 | $ | 164,599 | $ | 175,629 | $ | 171,835 | ||||||||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4 |
1.54% | 1.46% | 1.40% | 1.51% | 1.40% | 0.93% | ||||||||||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders5 |
3.64% | 4.24% | 4.33% | 4.54% | 4.65% | 4.44% | ||||||||||||||||||||||||
| Portfolio turnover |
9% | 16% | 10% | 17% | 24% | 44% | ||||||||||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)6 |
$ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | ||||||||||||||||||
| Net asset coverage per share of preferred shares, end of period6 |
$ | 332,780 | $ | 330,825 | $ | 329,707 | $ | 319,465 | $ | 334,172 | $ | 329,113 | ||||||||||||||||||
| Liquidation value per share of preferred shares6
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
| ||||||||||||
| 1 | Ratios have been annualized and total return and portfolio turnover have not been annualized. |
| 2 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.055, $0.083, $0.081, $0.076, $0.084, and $0.033 per share for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012, respectively, and from realized capital gains of $0.014, $0.005, and $0.000 per share for the years ended March 31, 2014, 2013, and 2012, respectively. |
| 3 | 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. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 0.82%, 0.90%, 0.85%, 0.88%, 0.82%, and 0.70%, respectively. |
| 5 | The ratio of net investment income excluding interest expense to average net assets for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 4.36%, 4.80%, 4.88%, 5.17%, 5.23%, and 4.67%, respectively. |
| 6 | In November 2011, the Fund issued a series of 750 variable rate preferred shares, with a liquidation preference of $100,000 per share (Series 2016 Shares). The Series 2016 Shares were redeemed on Feb. 2, 2016 and replaced with Series 2021 Shares, which are the same amount and value as the Fund’s Series 2016 Shares. |
See accompanying notes, which are an integral part of the financial statements.
| (continues) | 31 |
Table of Contents
Financial highlights
Delaware Investments® National Municipal Income Fund
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Six months ended 9/30/161 |
Year ended | |||||||||||||||||||||||||||||
| (Unaudited) | 3/31/16 | 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | |||||||||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.020 | $ | 14.970 | $ | 13.810 | $ | 14.990 | $ | 14.020 | $ | 12.620 | ||||||||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||||||||||
| Net investment income2 |
0.331 | 0.696 | 0.711 | 0.710 | 0.722 | 0.531 | ||||||||||||||||||||||||
| Net realized and unrealized gain (loss) |
0.264 | 0.114 | 1.219 | (1.180 | ) | 0.858 | 1.409 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total from investment operations |
0.595 | 0.810 | 1.930 | (0.470 | ) | 1.580 | 1.940 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||||||||||
| Net investment income |
(0.355 | ) | (0.760 | ) | (0.770 | ) | (0.710 | ) | (0.610 | ) | (0.540 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total dividends and distributions |
(0.355 | ) | (0.760 | ) | (0.770 | ) | (0.710 | ) | (0.610 | ) | (0.540 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net asset value, end of period |
$ | 15.260 | $ | 15.020 | $ | 14.970 | $ | 13.810 | $ | 14.990 | $ | 14.020 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Market value, end of period |
$ | 14.070 | $ | 13.800 | $ | 13.140 | $ | 12.350 | $ | 14.480 | $ | 13.240 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||||||||||
| Market value |
4.51% | 11.32% | 12.87% | (9.65% | ) | 14.12% | 13.19% | |||||||||||||||||||||||
| Net asset value |
4.14% | 6.35% | 14.99% | (2.41% | ) | 11.56% | 15.87% | |||||||||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 69,105 | $ | 68,008 | $ | 67,804 | $ | 62,526 | $ | 67,876 | $ | 63,487 | ||||||||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4 |
1.65% | 1.70% | 1.60% | 1.58% | 1.56% | 1.02% | ||||||||||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders5 |
4.32% | 4.72% | 4.86% | 5.17% | 4.86% | 3.96% | ||||||||||||||||||||||||
| Portfolio turnover |
12% | 25% | 38% | 40% | 42% | 101% | ||||||||||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)6 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | ||||||||||||||||||
| Net asset coverage per share of preferred shares, end of period6 |
$ | 330,349 | $ | 326,693 | $ | 326,013 | $ | 308,420 | $ | 326,254 | $ | 311,625 | ||||||||||||||||||
| Liquidation value per share of preferred shares6
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
| ||||||||||||
| 1 | Ratios have been annualized and total return and portfolio turnover have not been annualized. |
| 2 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.056, $0.084, $0.083, $0.085, $0.090, and $0.004 per share for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012, respectively. |
| 3 | 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. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 0.92%, 1.13%, 1.03%, 0.96%, 0.96%, and 0.99%, respectively. |
| 5 | The ratio of net investment income excluding interest expense to average net assets for the six months ended Sept. 30, 2016 and years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 5.05%, 5.29%, 5.44%, 5.79%, 5.46%, and 3.99%, respectively. |
| 6 | In March 2012, the Fund issued a series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share (Series 2017 Shares). The Series 2017 Shares were redeemed on Feb. 2, 2016 and replaced with Series 2021 Shares, which are the same amount and value as the Fund’s Series 2017 Shares. |
See accompanying notes, which are an integral part of the financial statements.
32
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
September 30, 2016 (Unaudited)
Delaware Investments Colorado Municipal Income Fund, Inc. (Colorado Municipal Fund) and Delaware Investments Minnesota Municipal Income Fund II, Inc. (Minnesota Municipal Fund II) are organized as Minnesota corporations and Delaware Investments National Municipal Income Fund (National Municipal Fund) is organized as a Massachusetts business trust (each referred to as a Fund and collectively as the Funds). Colorado Municipal Fund, Minnesota Municipal Fund II, and National Municipal Fund are considered diversified closed-end management investment companies under the Investment Company Act of 1940, as amended. The Funds’ shares trade on the New York Stock Exchange MKT, the successor to the American Stock Exchange.
The investment objective of each of the Colorado Municipal Fund and Minnesota Municipal Fund II is to provide current income exempt from federal income tax and from state personal income tax, if any, consistent with the preservation of capital. The investment objective of the National Municipal Fund is to provide current income exempt from federal income tax, consistent with the preservation of capital. Each of Colorado Municipal Fund and Minnesota Municipal Fund II seeks to achieve its investment objective by investing substantially all of its net assets in investment grade, tax-exempt municipal obligations of its respective state at the time of investment. The National Municipal Fund seeks to achieve its investment objective by investing at least 80% of its net assets in securities the income from which is exempt from federal income tax.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Funds.
Security Valuation — Debt securities are valued based upon valuations provided by an independent pricing service or broker and reviewed by management. To the extent current market prices are not available, the pricing service may take into account developments related to the specific security, as well as transactions in comparable securities. Valuations for fixed income securities utilize matrix systems, which reflect such factors as security prices, yields, maturities, and ratings, and are supplemented by dealer and exchange quotations. Generally, 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 each Fund’s Board of Directors/Trustees (each a Board, or collectively, the Boards). In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures or suspension of trading in a security.
Federal Income Taxes — No provision for federal income taxes has been made as each Fund intends to continue to qualify for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and make the requisite distributions to shareholders. The Funds evaluate tax positions taken or expected to be taken in the course of preparing each Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. Management has analyzed each Fund’s tax positions taken for all open federal income tax years (March 31, 2013–March 31, 2016), and has concluded that no provision for federal income tax is required in any Fund’s financial statements.
Cash and Cash Equivalents — Cash and cash equivalents include deposits held at financial institutions, which are available for the Fund’s use with no restrictions, with original maturities of 90 days or less.
Use of Estimates — Each Fund is an investment company, whose financial statements are prepared in conformity with U.S. GAAP. Therefore, each Fund follows the accounting and reporting guidelines for investment companies. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other — Expenses directly attributable to each Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments Family of Funds are generally allocated among such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are accreted or amortized to interest income, respectively, over the lives of the respective securities using the effective interest method. Each Fund declares and pays dividends from net investment income monthly and distributions from net realized gain on investments, if any, annually. Each Fund may distribute more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
| (continues) | 33 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
1. Significant Accounting Policies (continued)
Each Fund may receive earnings credits from its custodian when positive cash balances are maintained, which may be used to offset custody fees. There were no such earnings credits for the six months ended Sept. 30, 2016.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its respective investment management agreement, each Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee of 0.40% which is calculated based on each Fund’s adjusted average daily net assets.
Delaware Investments Fund Services Company (DIFSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to each Fund. For these services, DIFSC’s fees are calculated based on the aggregate daily net assets of the Delaware Investments Family of Funds at the following annual rate: 0.0050% of the first $30 billion; 0.0045% of the next $10 billion; 0.0040% of the next $10 billion; and 0.0025% of aggregate average daily net assets in excess of $50 billion. The fees payable to DIFSC under the service agreement described above are allocated among all funds in the Delaware Investments Family of Funds on a relative net asset value basis. These amounts are included on the “Statements of operations” under “Accounting and administration expenses.” For the six months ended Sept. 30, 2016, each Fund was charged for these services as follows:
|
Colorado |
Minnesota Fund II |
National | ||
| $2,532 | $5,914 | $2,345 | ||
As provided in the investment management agreement, each Fund bears a portion of the cost of certain resources shared with DMC, including the cost of internal personnel of DMC and/or its affiliates that provide legal, tax, and regulatory reporting services to each Fund. These amounts are included on the “Statements of operations” under “Legal fees.” For the six months ended Sept. 30, 2016, each Fund was charged for internal legal, tax, and regulatory reporting services provided by DMC and/or its affiliates’ employees as follows:
|
Colorado |
Minnesota Fund II |
National | ||
| $9,283 | $20,582 | $6,605 | ||
Directors’/Trustees’ fees include expenses accrued by each Fund for each Director’s/Trustee’s retainer and meeting fees. Certain officers of DMC and DSC are officers and/or Directors/Trustees of the Trust. These officers and Directors/Trustees are paid no compensation by the Funds.
Cross trades for the six months ended Sept. 30, 2016, were executed by the Funds pursuant to procedures adopted by the Boards designed to ensure compliance with Rule 17a-7 under the 1940 Act. Cross trading is the buying or selling of portfolio securities between funds of investment companies, or between a fund of an investment company and another entity, that are or could be considered affiliates by virtue of having a common investment advisor (or affiliated investment advisors), common directors/trustees and/or common officers. At their regularly scheduled meetings, the Boards review such transactions for compliance with the procedures adopted by the Boards. Pursuant to these procedures, for the six months ended Sept. 30, 2016, the Funds engaged in securities purchases and securities sales, which did not result in any net realized gains (losses) as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||||||||||||
| Purchases |
$ | 1,000,139 | $ | 3,850,355 | $ | 1,750,148 | |||||||||
| Sales |
1,100,183 | 4,150,791 | 1,800,441 | ||||||||||||
| Net realized gain |
— | — | — | ||||||||||||
34
Table of Contents
3. Investments
For the six months ended Sept. 30, 2016, each Fund made purchases and sales of investment securities other than short-term investments as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||||||||||||
| Purchases |
$ | 4,183,506 | $ | 16,537,149 | $ | 8,971,038 | |||||||||
| Sales |
5,023,491 | 15,054,343 | 8,269,077 | ||||||||||||
At Sept. 30, 2016, the cost of investments for federal income tax purposes has been estimated since final tax characteristics cannot be determined until fiscal year end. At Sept. 30, 2016, the cost of investments and unrealized appreciation (depreciation) for each Fund were as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||||||||||||
| Cost of investments |
$ | 65,769,876 | $ | 232,651,151 | $ | 88,349,413 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Aggregate unrealized appreciation of investments |
$ | 9,849,472 | $ | 17,165,315 | $ | 9,805,670 | |||||||||
| Aggregate unrealized depreciation of investments |
(8,603 | ) | (223,766 | ) | (178,235 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net unrealized appreciation of investments |
$ | 9,840,869 | $ | 16,941,549 | $ | 9,627,435 | |||||||||
|
|
|
|
|
|
|
||||||||||
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carryforwards remaining at March 31, 2016, if not utilized in future years, will expire as follows:
| Year of Expiration |
Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||
| 2018 |
$— | $— | $407,888 |
On Dec. 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Funds are permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
Losses that will be carried forward under the Act are as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Loss carryforward character: |
||||||||||||
| Short-term |
$ | 990,319 | $798,305 | $ | 975,123 | |||||||
| Long-term |
163,249 | 618,200 | — | |||||||||
U.S. GAAP defines fair value as the price that each Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. A three-level hierarchy for fair value measurements has been established based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity.
| (continues) | 35 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
3. Investments (continued)
Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best information available under the circumstances. Each Fund’s investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-level hierarchy of inputs is summarized below.
| Level 1 – | Inputs are quoted prices in active markets for identical investments. (Examples: equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) | |
| Level 2 – | Other observable inputs, including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates) or other market-corroborated inputs. (Examples: debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) | |
| Level 3 – | Significant unobservable inputs, including each Fund’s own assumptions used to determine the fair value of investments. (Examples: broker-quoted securities, fair valued securities) | |
Level 3 investments are valued using significant unobservable inputs. Each Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity, and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following tables summarize the valuation of each Fund’s investments by fair value hierarchy levels as of Sept. 30, 2016:
| Colorado Municipal Fund | |||||
| Securities |
Level 2 | ||||
| Municipal Bonds |
$ | 105,510,745 | |||
| Short-Term Investments |
100,000 | ||||
|
|
|
||||
| Total Value of Securities |
$ | 105,610,745 | |||
|
|
|
||||
| Minnesota | |||||
| Municipal Fund II | |||||
| Securities |
Level 2 | ||||
| Municipal Bonds |
$ | 246,942,700 | |||
| Short-Term Investments |
2,650,000 | ||||
|
|
|
||||
| Total Value of Securities |
$ | 249,592,700 | |||
|
|
|
||||
| National Municipal Fund | |||||
| Securities |
Level 2 | ||||
| Municipal Bonds |
$ | 97,326,848 | |||
| Short-Term Investments |
650,000 | ||||
|
|
|
||||
| Total Value of Securities |
$ | 97,976,848 | |||
|
|
|
||||
During the six months ended Sept. 30, 2016, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a material impact to the Funds. The Funds’ policy is to recognize transfers between levels at the beginning of the reporting period.
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4. Capital Stock
Pursuant to their articles of incorporation, Colorado Municipal Fund and Minnesota Municipal Fund II each have 200 million shares of $0.01 par value common shares authorized. National Municipal Fund has been authorized to issue an unlimited amount of $0.01 par value common shares. Shares issuable under each Fund’s dividend reinvestment plan are purchased by each Fund’s transfer agent, Computershare, Inc., in the open market.
On Jan. 22, 2016, Colorado Municipal Fund, Minnesota Municipal Fund II, and National Municipal Fund successfully issued $30,000,000, $75,000,000 and $30,000,000, respectively, of Variable Rate MuniFund Term Preferred (“VMTP”) Shares with a $100,000 liquidation value per share in a privately negotiated offering. The net proceeds from each offering were used to redeem the Series 2016 (in the case of Colorado Municipal Fund and Minnesota Municipal Fund II) and Series 2017 (in the case of National Municipal Fund) VMTP Shares previously outstanding. The VMTP Shares were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. Each Fund’s Series 2016 and Series 2017 VMTP Shares were the same amount and value as the respective Fund’s Series 2021 VMTP Shares.
Each of the Funds is obligated to redeem their VMTP Shares on Feb. 1, 2021, unless earlier redeemed or repurchased by a Fund. VMTP Shares are subject to optional and mandatory redemption in certain circumstances. VMTP Shares are redeemable at par. A Fund may be obligated to redeem certain of the VMTP Shares if the Fund fails to maintain certain asset coverage and leverage ratio requirements and such failures are not cured by the applicable cure date. The redemption price per share is equal to the sum of the liquidation value per share plus any accumulated but unpaid dividends. Dividends on the VMTP Shares are set weekly, subject to adjustments in certain circumstances.
The weighted average dividend rates for the six months ended Sept. 30, 2016 were as follows:
| Colorado |
Minnesota |
National | ||
| 0.8% | 0.8% | 0.8% |
The Funds use leverage because their managers believe that, over time, leveraging may provide opportunities for additional income and total return for common shareholders. However, the use of leverage also can expose common shareholders to additional volatility. For example, as the prices of securities held by a Fund decline, the negative impact of these valuation changes on common share net asset value and common shareholder total return is magnified by the use of leverage; accordingly, the use of structural leverage may hurt a Fund’s overall performance.
Leverage may also cause the Funds to incur certain costs. In the event that a Fund is unable to meet certain criteria (including, but not limited to, maintaining certain ratings with Fitch Ratings and Moody’s Investors Service (Moody’s), funding dividend payments, or funding redemptions), that Fund will pay additional fees with respect to the leverage.
For financial reporting purposes, the VMTP Shares are considered debt of the issuer; therefore, the liquidation value which approximates fair value of the VMTP Shares is recorded as a liability in the statements of assets and liabilities. Dividends accrued and paid on the VMTP Shares are included as a component of interest expense in the statements of operations. The VMTP Shares are treated as equity for legal and tax purposes. Dividends paid to holders of the VMTP Shares are generally classified as tax-exempt income for tax-reporting purposes.
Offering costs for VMTP Shares are recorded as a deferred charge and amortized over the 5-year life of the VMTP Shares. These are presented as “Offering cost for preferred shareholders” on the “Statements of assets and liabilities” and “Offering costs” on the “Statements of operations.”
5. Geographic, Credit, and Market Risk
The Funds concentrate their investments in securities issued by municipalities. Because each of the Colorado Municipal Fund and the Minnesota Municipal Fund II invests substantially all of its net assets in municipal obligations of its respective state at the time of investment, events in that state may have a significant impact on the performance and investments of the Colorado Municipal Fund and the Minnesota Municipal Fund II. These events may include economic or political policy changes, tax base erosion, state constitutional limits on tax increases, budget deficits and other financial difficulties, changes in the credit ratings assigned to the state’s municipal issuers, the effects of natural or human-made disasters, or other economic, legislative, or political or social issues. Any downgrade to the credit rating of the securities issued by the U.S. government may result in a downgrade of securities issued by the states or U.S. territories. The National Municipal Fund will be subject to these risks as well but to a lesser extent because it invests at least 80% of its net assets in securities, the income from which is exempt from federal income tax and is not limited to investing substantially all of its assets in municipal obligations of a single state. From time to time and consistent with its investment policies, the National Municipal Fund may invest a considerable portion of its assets in certain municipalities. As
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Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
5. Geographic, Credit, and Market Risk (continued)
of Sept. 30, 2016, the National Municipal Fund has invested 19.17%, 18.73%, 14.29%, 11.63%, and 10.63% (each as a percentage of net assets) in securities issued by the State of New York, the State of California, the Commonwealth of Pennsylvania, the State of Texas, and the State of Arizona, respectively. These investments could make the National Municipal Fund more sensitive to economic conditions in those states than other more geographically diversified national municipal income funds.
Each Fund may invest a percentage of assets in obligations of governments of U.S. territories, commonwealths, and possessions such as Puerto Rico, the U.S. Virgin Islands, or Guam. To the extent a Fund invests in such obligations, that Fund may be adversely affected by local political and economic conditions and developments within these U.S. territories, commonwealths, and possessions.
From time to time, a fund may invest in industrial development bonds (IDBs) or pollution control revenue (PCR) bonds that are issued by a conduit authority on behalf of a corporation that is either foreign owned or has international affiliates or operations. While the bonds may be issued to finance a facility located in the United States, the bonds may be secured by a payment obligation or guaranty of the corporation. To the extent the Fund invests in such securities, that Fund may be exposed to risks associated with international investments. The risk of international investments not ordinarily associated with U.S. investments includes fluctuation in currency values, differences in accounting principles, and/or economic or political instability in other nations.
Many municipalities insure repayment for their obligations. Although bond insurance may reduce the risk of loss due to default by an issuer, such bonds remain subject to the risk that market value may fluctuate for other reasons, and there is no assurance that the insurance company will meet its obligations. A real or perceived decline in creditworthiness of a bond insurer can have an adverse impact on the value of insured bonds held in each Fund. At Sept. 30, 2016, the percentages of each Fund’s net assets insured by insurers are listed below and these securities have been identified on the “Schedules of investments.”
| Delaware Investments Colorado Municipal Income Fund |
Delaware Investments National Municipal Income Fund |
Delaware Investments Minnesota Municipal Income Fund II | |||||||||||||
| Assured Guaranty Corporation |
1.57 | % | 2.42 | % | — | ||||||||||
| Assured Guaranty Municipal Corporation |
7.09 | % | 1.29 | % | — | ||||||||||
| AMBAC Assurance Corporation |
2.69 | % | — | 0.75 | % | ||||||||||
| Syncora Guarantee |
5.99 | % | — | — | |||||||||||
| Total |
17.34 | % | 3.71 | % | 0.75 | % | |||||||||
Each Fund invests a portion of its assets in high yield fixed income securities, which are securities rated BB or lower by Standard & Poor’s (S&P) and/or Ba or lower by Moody’s, or similarly rated by another nationally recognized statistical rating organization. Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
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 from the issuance of the refunding issue is known as a “current refunding.” “Advance refunded bonds” are bonds in which the refunded bond issue remains outstanding for more than 90 days following the issuance of the refunding issue. In an advance refunding, the issuer will use the proceeds of a new bond issue to purchase high-grade interest-bearing debt securities which are then deposited in an irrevocable escrow account held by an escrow agent to secure all future payments of principal and interest and bond premium of the advance refunded bond. Bonds are “escrowed to maturity” when the proceeds of the refunding issue are deposited in an escrow account for investment sufficient to pay all of the principal and interest on the original interest payment and maturity dates.
Bonds are considered “pre-refunded” when the refunding issue’s proceeds are escrowed only until a permitted call date or dates on the refunded issue with the refunded issue being redeemed at the time, including any required premium. Bonds become “defeased” when the rights and interests of the bondholders and of their lien on the pledged revenues or other security under the terms of the bond contract are substituted with an alternative source of revenues (the escrow securities) sufficient to meet payments of principal and interest to maturity or to the first call dates. Escrowed secured bonds will often receive a rating of AAA from Moody’s, S&P, and/or Fitch Ratings due to the strong credit quality of the escrow securities and the irrevocable nature of the escrow deposit agreement.
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To the extent that the Funds invest in securities with longer duration, they may be more sensitive to fluctuation of interest rates.
Each Fund invests in certain obligations that may have liquidity protection designed to ensure that the receipt of payments due on the underlying security is timely. Such protection may be provided through guarantees, insurance policies, or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction, or through a combination of such approaches. The Funds will not pay any additional fees for such credit support, although the existence of credit support may increase the price of a security.
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 promulgated under the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair each Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Boards have delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of each Fund’s limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to each Fund’s 15% limit on investments in illiquid securities. Rule 144A and illiquid securities held by each Fund have been identified on the “Schedules of investments.”
When monitoring compliance with the Funds’ illiquid limit, certain holdings that are common to multiple clients of the investment manager may be aggregated and considered illiquid in the aggregate solely for monitoring purposes. For purposes of determining illiquidity for financial reporting purposes, only the holdings of each Fund will be considered.
6. Contractual Obligations
Each Fund enters into contracts in the normal course of business that contain a variety of indemnifications. Each Fund’s maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts. Management has reviewed each Fund’s existing contracts and expects the risk of loss to be remote.
7. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to Sept. 30, 2016 that would require recognition or disclosure in the Funds’ financial statements.
| (continues) | 39 |
Table of Contents
(Unaudited)
Delaware Investments® Closed-End Municipal Bond Funds
Proxy Results
At the annual meeting on Aug. 17, 2016, the shareholders of the Funds voted to elect a Board of Directors. A quorum was present and the votes passed with a majority of those shares. All shareholders of each Fund vote together with respect to the election of each Director with one exception. The holders of preferred shares of the Funds that have issued one or more classes of preferred shares have the exclusive right to separately elect two Directors, Ms. Landreth and Ms. Yeomans.
The results of the voting at the meeting were as follows:
Delaware Investments Colorado Municipal Income Fund, Inc.
| Common shareholders | Preferred shareholders | |||||||||||||||||||
| Shares voted for |
Shares voted withheld authority |
Shares voted for |
Shares voted withheld authority | |||||||||||||||||
| Thomas L. Bennett |
4,270,994 | 99,867 | 300 | 0 | ||||||||||||||||
| Ann D. Borowiec |
4,241,933 | 128,928 | 300 | 0 | ||||||||||||||||
| Joseph W. Chow |
4,244,658 | 126,203 | 300 | 0 | ||||||||||||||||
| John A. Fry |
4,244,962 | 125,899 | 300 | 0 | ||||||||||||||||
| Shawn K. Lytle |
4,190,514 | 180,347 | 300 | 0 | ||||||||||||||||
| Frances A. Sevilla-Sacasa |
4,264,058 | 106,803 | 300 | 0 | ||||||||||||||||
| Thomas K. Whitford |
4,270,994 | 99,867 | 300 | 0 | ||||||||||||||||
| Lucinda S. Landreth |
300 | 0 | ||||||||||||||||||
| Janet L. Yeomans |
300 | 0 | ||||||||||||||||||
Delaware Investments Minnesota Municipal Income Fund II, Inc.
| Common shareholders | Preferred shareholders | |||||||||||||||||||
| Shares voted for |
Shares voted withheld authority |
Shares voted for |
Shares voted withheld authority | |||||||||||||||||
| Thomas L. Bennett |
9,671,704 | 179,290 | 750 | 0 | ||||||||||||||||
| Ann D. Borowiec |
9,698,474 | 152,520 | 750 | 0 | ||||||||||||||||
| Joseph W. Chow |
9,677,276 | 173,718 | 750 | 0 | ||||||||||||||||
| John A. Fry |
9,676,747 | 174,247 | 750 | 0 | ||||||||||||||||
| Shawn K. Lytle |
9,678,607 | 172,387 | 750 | 0 | ||||||||||||||||
| Frances A. Sevilla-Sacasa |
9,697,022 | 153,972 | 750 | 0 | ||||||||||||||||
| Thomas K. Whitford |
9,677,814 | 173,180 | 750 | 0 | ||||||||||||||||
| Lucinda S. Landreth |
750 | 0 | ||||||||||||||||||
| Janet L. Yeomans |
750 | 0 | ||||||||||||||||||
Delaware Investments National Municipal Income Fund
| Common shareholders | Preferred shareholders | |||||||||||||||||||
| Shares voted for |
Shares voted withheld authority |
Shares voted for |
Shares voted withheld authority | |||||||||||||||||
| Thomas L. Bennett |
4,068,226 | 119,124 | 300 | 0 | ||||||||||||||||
| Ann D. Borowiec |
4,079,194 | 108,156 | 300 | 0 | ||||||||||||||||
| Joseph W. Chow |
4,077,295 | 110,055 | 300 | 0 | ||||||||||||||||
| John A. Fry |
4,068,226 | 119,124 | 300 | 0 | ||||||||||||||||
| Shawn K. Lytle |
4,020,394 | 166,956 | 300 | 0 | ||||||||||||||||
| Frances A. Sevilla-Sacasa |
4,078,019 | 109,331 | 300 | 0 | ||||||||||||||||
| Thomas K. Whitford |
4,077,295 | 110,055 | 300 | 0 | ||||||||||||||||
| Lucinda S. Landreth |
300 | 0 | ||||||||||||||||||
| Janet L. Yeomans |
300 | 0 | ||||||||||||||||||
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Fund management
Joseph R. Baxter
Senior Vice President, Head of Municipal Bond Department, Senior Portfolio Manager
Joseph R. Baxter is the head of the municipal bond department and is responsible for setting the department’s investment strategy. He is also a co-portfolio manager of the firm’s municipal bond funds and several client accounts. Before joining Delaware Investments in 1999 as head municipal bond trader, he held investment positions with First Union, most recently as a municipal portfolio manager with the Evergreen Funds. Baxter received a bachelor’s degree in finance and marketing from La Salle University.
Stephen J. Czepiel
Senior Vice President, Senior Portfolio Manager
Stephen J. Czepiel is a member of the firm’s municipal fixed income portfolio management team with primary responsibility for portfolio construction and strategic asset allocation. He is a co-portfolio manager of the firm’s municipal bond funds and client accounts. He joined Delaware Investments in July 2004 as a senior bond trader. Previously, he was vice president at both Mesirow Financial and Loop Capital Markets. He began his career in the securities industry in 1982 as a municipal bond trader at Kidder Peabody and now has more than 20 years of experience in the municipal securities industry. Czepiel earned his bachelor’s degree in finance and economics from Duquesne University.
Denise A. Franchetti, CFA
Vice President, Portfolio Manager, Senior Municipal Research Analyst
Denise A. Franchetti is a senior municipal research analyst for the municipal bond department. Currently, she is responsible for following the airport, education, hotel, cogeneration, and cargo sectors for the group. In 2003, she was also named as portfolio manager on the tax-exempt closed-end funds in addition to her research duties. Prior to joining Delaware Investments in 1997 as a municipal bond analyst, she was a fixed income trader at Provident Mutual Life Insurance and an investment analyst at General Accident Insurance. Franchetti received her bachelor’s degree and an MBA from La Salle University. She is a member of the Financial Analysts of Philadelphia.
Gregory A. Gizzi
Senior Vice President, Senior Portfolio Manager
Gregory A. Gizzi is a member of the firm’s municipal fixed income portfolio management team. He is also a co-portfolio manager of the firm’s municipal bond funds and several client accounts. Before joining Delaware Investments in January 2008 as head of municipal bond trading, he spent six years as a vice president at Lehman Brothers for the firm’s tax-exempt institutional sales effort. Prior to that, he spent two years trading corporate bonds for UBS before joining Lehman Brothers in a sales capacity. Gizzi has more than 20 years of trading experience in the municipal securities industry, beginning at Kidder Peabody in 1984, where he started as a municipal bond trader and worked his way up to institutional block trading desk manager. He later worked in the same capacity at Dillon Read. Gizzi earned his bachelor’s degree in economics from Harvard University.
Board consideration of Delaware Investments Colorado Municipal Income Fund, Inc.; Delaware Investments Minnesota Municipal Income Fund II, Inc.; and Delaware Investments National Municipal Income Fund investment manager agreements
At a meeting held on Aug. 17–19, 2016 (the “Annual Meeting”), the Board of Trustees (the “Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreements for Delaware Investments Colorado Municipal Income Fund, Inc.; Delaware Investments Minnesota Municipal Income Fund II, Inc.; and Delaware Investments National Municipal Income Fund (each, a “Fund” and together, the “Funds”). In making its decision, the Board considered information furnished at regular quarterly 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 and sub-advisory contracts. Information furnished specifically in connection with the renewal of the Investment Management Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent, and quality of services provided to the Funds; the costs of such services to the Funds; economies of scale; and the investment manager’s financial condition and profitability. In addition, in connection with the Annual Meeting, reports were provided to the Trustees in May 2016 and included reports provided by Broadridge Financial Solutions (“Broadridge”). The Broadridge reports compared each Fund’s investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Broadridge reports with independent legal counsel to the Independent Trustees. In addition to the information noted above, the Board also requested and received information regarding DMC’s policy with respect to advisory
| (continues) | 41 |
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Other Fund information
(Unaudited)
Delaware Investments® Closed-End Municipal Bond Funds
Board consideration of Delaware Investments Colorado Municipal Income Fund, Inc.; Delaware Investments Minnesota Municipal Income Fund II, Inc.; and Delaware Investments National Municipal Income Fund investment manager agreements (continued)
fee levels and its breakpoint philosophy; the structure of portfolio manager compensation; comparative client fee information; and any constraints or limitations on the availability of securities for certain investment styles, which had in the past year inhibited, or which were likely in the future to inhibit, the investment manager’s ability to invest fully 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 legal counsel to the Independent Trustees. Although the Board gave attention to all information furnished, the following discussion identifies, under separate headings, the primary factors taken into account by the Board during its contract renewal considerations.
Nature, extent, and quality of service. The Board considered the services provided by DMC to the Funds and their shareholders. In reviewing the nature, extent, and quality of services, the Board considered reports furnished to it throughout the year, which covered matters such as the relative performance of the Funds; compliance of portfolio managers with the investment policies, strategies, and restrictions for the Funds; compliance by DMC (“Management”) personnel with the Code of Ethics adopted throughout the Delaware Investments® Family of Funds complex; and adherence to fair value pricing procedures as established by the Board. The Board was pleased with the current staffing of the Funds’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions during the past several years. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to Fund matters. The Board was satisfied with the nature, extent, and quality of the overall services provided by DMC.
Investment performance. The Board placed significant emphasis on the investment performance of the Funds in view of the importance of investment performance to shareholders. Although the Board gave appropriate consideration to performance reports and discussions with portfolio managers at Board meetings throughout the year, the Board gave particular weight to the Broadridge reports furnished for the Annual Meeting. The Broadridge reports prepared for each Fund showed the investment performance of its shares in comparison to a group of similar funds as selected by Broadridge (the “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 1-, 3-, 5-, and 10-year periods, to the extent applicable, ended Jan. 31, 2016. The Board’s objective is that each Fund’s performance for the periods considered be at or above the median of its Performance Universe.
Delaware Investments Colorado Municipal Income Fund, Inc. — The Performance Universe for the Fund consisted of the Fund and all leveraged closed-end “other states” municipal debt funds as selected by Broadridge. The Broadridge report comparison showed that the Fund’s total return for the 1- and 3-year periods was in the second quartile of its Performance Universe. The report further showed that the Fund’s total return for the 5- and 10-year periods was in the third quartile and fourth quartile, respectively, of its Performance Universe. The Fund’s performance results were mixed but tended toward median, which was acceptable.
Delaware Investments Minnesota Municipal Income Fund II, Inc. — The Performance Universe for the Fund consisted of the Fund and all leveraged closed-end “other states” municipal debt funds as selected by Broadridge. The Broadridge report comparison showed that the Fund’s total return for the 1-, 5-, and 10-year periods was in the fourth quartile of its Performance Universe. The report further showed that the Fund’s total return for the 3-year period was in the third quartile of its Performance Universe. The Fund’s performance results were not in line with the Board’s objective. In evaluating the Fund’s performance, the Board considered the numerous investment and performance reports delivered by Management personnel to the Board’s Investments Committee. The Board was satisfied that Management was taking action to improve Fund performance and meet the Board’s performance objective.
Delaware Investments National Municipal Income Fund — The Performance Universe for the Fund consisted of the Fund and all leveraged closed-end general and insured municipal debt funds as selected by Broadridge. The Broadridge report comparison showed that the Fund’s total return for the 1-year period was in the third quartile of its Performance Universe. The report further showed that the Fund’s total return for the 3-, 5-, and 10-year periods was in fourth quartile of its Performance Universe. The Fund’s performance results were not in line with the Board’s objective. In evaluating the Fund’s performance, the Board considered the performance attribution included in the Meeting materials, as well as
42
Table of Contents
the numerous investment and performance reports delivered by Management personnel to the Board’s Investments Committee. The Board was satisfied that Management was taking action to improve Fund performance and meet the Board’s performance objective.
Comparative expenses. The Board considered expense comparison data for the Delaware Investments Family of Funds. Management provided the Board with information on pricing levels and fee structures for each Fund as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of each Fund versus effective management fees and expense ratios of a group of similar closed-end funds as selected by Broadridge (the “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) 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’s objective is to limit each Fund’s total expense ratio to be competitive with that of the Expense Group.
Delaware Investments Colorado Municipal Income Fund, Inc. — The expense comparisons for the Fund showed that its actual management fee and total expenses were both the lowest of its Expense Group. The Board was satisfied with the management fee and total expenses of the Fund in comparison to those of its Expense Group.
Delaware Investments Minnesota Municipal Income Fund II, Inc. — The expense comparisons for the Fund showed that its actual management fee and total expenses were both the lowest of its Expense Group. The Board was satisfied with the management fee and total expenses of the Fund in comparison to those of its Expense Group.
Delaware Investments National Municipal Income Fund — The expense comparisons for the Fund showed that its actual management fee was in the quartile with the lowest expenses of its Expense Group and its total expenses were in the quartile with the second highest expenses of its Expense Group. The Board gave favorable consideration to the Fund’s management fee, but noted that the Fund’s total expenses were not in line with the Board’s objective. In evaluating total expenses, the Board considered the limited number of funds in the Expense Group. The Board was satisfied with Management’s efforts to improve the Fund’s total expense ratio and to bring it in line with the Board’s objective.
Management profitability. The Board considered the level of profits, if any, realized by DMC 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 DMC’s 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 DMC, to a certain extent, reflects recent operational cost savings and efficiencies initiated by DMC. The Board considered DMC’s efforts to improve services provided to fund shareholders and to meet additional regulatory and compliance requirements resulting from recent industry-wide Securities and Exchange Commission initiatives. The Board also considered the extent to which DMC 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 management fees were reasonable in light of the services rendered and the profitability of DMC.
Economies of scale. As closed-end funds, the Funds do not issue shares on a continuous basis. Fund assets, therefore, increase primarily as a result of the increase in value of the underlying securities in the Fund. 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 economies of scale on to shareholders was not likely to provide the intended effect.
| (continues) | 43 |
Table of Contents
This semiannual report is for the information of Delaware Investments® Closed-End Municipal Bond Funds shareholders.
44
Item 2. Code of Ethics
Not applicable.
Item 3. Audit Committee Financial Expert
Not applicable.
Item 4. Principal Accountant Fees and Services
PwC has informed the Trust that it has identified an issue related to its independence under Rule 2-01(c)(1)(ii)(A) of Regulation S-X (referred to as the “Loan Rule”). The Loan Rule prohibits accounting firms, such as PwC, from being considered independent if they have certain financial relationships with their audit clients or certain affiliates of those clients. The Trust is required under various securities laws to have its financial statements audited by an independent accounting firm. PwC has informed the Trust that PwC has relationships with lenders who hold or own more than ten percent of the shares of certain funds within the Delaware Investments® Family of Funds. These relationships call into question PwC’s independence under the Loan Rule with respect to those funds, as well as all other funds in the complex. The SEC has granted no-action relief to another fund complex in circumstances that appear to be substantially similar to the Trust’s (see Fidelity Management & Research Company et al., No-Action Letter (June 20, 2016)). In addition, PwC has advised the Trust’s Audit Committee that PwC believes that under the facts and circumstances surrounding PwC’s lending relationships, its ability to exercise objective and impartial judgment in connection with its audit engagement with the Trust has not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. If in the future, however, the independence of PwC is called into question under the Loan Rule by circumstances that are not addressed in the SEC’s no-action letter, the Trust will need to take other action in order for the Trust’s filings with the SEC containing financial statements to be deemed compliant with applicable securities laws. Finally, the SEC has indicated that its no-action relief will expire 18 months from its issuance, after which PwC and the Delaware Investments Family of Funds will no longer be able rely on the letter unless its term is extended or made permanent by the SEC Staff.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Investments
(a) Included as part of report to shareholders filed under Item 1 of this Form N-CSR.
(b) Divestment of securities in accordance with Section 13(c) of the Investment Company Act of 1940.
Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment 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.
DELAWARE INVESTMENTS® MINNESOTA MUNICIPAL INCOME FUND II, INC.
| /s/ SHAWN K. LYTLE | ||
| By: | Shawn K. Lytle | |
| Title: | President and Chief Executive Officer | |
| Date: | December 5, 2016 | |
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.
| /s/ SHAWN K. LYTLE | ||
| By: | Shawn K. Lytle | |
| Title: | President and Chief Executive Officer | |
| Date: | December 5, 2016 | |
| /s/ RICHARD SALUS | ||
| By: | Richard Salus | |
| Title: | Chief Financial Officer | |
| Date: | December 5, 2016 | |