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: | March 31, 2015 |
Item 1. Reports to Stockholders
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Annual report
March 31, 2015
The figures in the annual 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.
Unless otherwise noted, views expressed herein are current as of March 31, 2015, and subject to change for events occurring after such date. Information is as of the date indicated and subject to change.
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.
Investments in Delaware Investments® Closed-End Municipal Bond Funds are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46 008 583 542 and its holding companies, including their subsidiaries or related companies (Macquarie Group), and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the Funds, the repayment of capital from the Funds, or any particular rate of return.
© 2015 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
April 7, 2015
| (continues) | 1 |
Table of Contents
Portfolio management review
Delaware Investments® Closed-End Municipal Bond Funds
2
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3
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Security type / sector / state allocations
As of March 31, 2015 (Unaudited)
Sector designations may be different than the sector designations presented in other Fund materials.
4
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Delaware Investments®
National Municipal Income Fund
5
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Delaware Investments® Colorado Municipal Income Fund, Inc.
March 31, 2015
6
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| (continues) | 7 |
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Schedules of investments
Delaware Investments® Colorado Municipal Income Fund, Inc.
8
Table of Contents
| 9 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
March 31, 2015
10
Table of Contents
| (continues) | 11 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
12
Table of Contents
| (continues) | 13 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
14
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| 15 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
March 31, 2015
16
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| (continues) | 17 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
18
Table of Contents
| (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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| 23 |
Table of Contents
Statements of assets and liabilities
Delaware Investments® Closed-End Municipal Bond Funds
March 31, 2015
| 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 |
$ | 103,721,521 | $ | 244,458,578 | $ | 95,908,653 | ||||||
| Short-term investments, at value2 |
400,000 | — | 500,000 | |||||||||
| Cash |
1,487,762 | — | — | |||||||||
| Interest income receivable |
1,365,164 | 3,564,048 | 1,349,444 | |||||||||
| Receivables for securities sold |
— | — | 5,074 | |||||||||
| Offering cost for preferred shareholders |
92,368 | 165,260 | 140,203 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total assets |
107,066,815 | 248,187,886 | 97,903,374 | |||||||||
|
|
|
|
|
|
|
|||||||
| Liabilities: |
||||||||||||
| Cash overdraft |
— | 742,208 | 9,142 | |||||||||
| Liquidation value of preferred stock |
30,000,000 | 75,000,000 | 30,000,000 | |||||||||
| Payable for securities purchased |
1,764,767 | — | — | |||||||||
| Audit fees payable |
37,314 | 37,582 | 37,314 | |||||||||
| Investment management fees payable |
35,639 | 83,776 | 33,121 | |||||||||
| Other affiliates payable |
2,104 | 4,756 | 2,503 | |||||||||
| Other accrued expenses |
769 | 39,127 | 17,246 | |||||||||
| Directors’/Trustees’ fees and expenses payable |
192 | 441 | 173 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total liabilities |
31,840,785 | 75,907,890 | 30,099,499 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 75,226,030 | $ | 172,279,996 | $ | 67,803,875 | ||||||
|
|
|
|
|
|
|
|||||||
| 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 |
929,143 | 1,085,104 | 512,431 | |||||||||
| Accumulated net realized loss on investments |
(1,494,888 | ) | (1,668,610 | ) | (1,789,798 | ) | ||||||
| Net unrealized appreciation of investments |
8,873,654 | 14,932,427 | 8,463,766 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 75,226,030 | $ | 172,279,996 | $ | 67,803,875 | ||||||
|
|
|
|
|
|
|
|||||||
| Net Asset Value per Common Share |
$ | 15.55 | $ | 14.97 | $ | 14.97 | ||||||
|
|
|
|
|
|
|
|||||||
| 1Investments, at cost |
94,847,867 | 229,526,151 | 87,444,887 | |||||||||
| 2Short-term investments, at cost |
400,000 | — | 500,000 | |||||||||
| 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.
24
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Year ended March 31, 2015
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund |
||||||||||
| Investment Income: |
||||||||||||
| Interest |
$ | 4,468,215 | $ | 9,761,537 | $ | 4,275,137 | ||||||
|
|
|
|
|
|
|
|||||||
| Expenses: |
||||||||||||
| Management fees |
413,636 | 980,995 | 384,433 | |||||||||
| Interest expense |
374,129 | 935,323 | 374,129 | |||||||||
| Rating agency fees |
51,165 | 43,778 | 45,372 | |||||||||
| Audit and tax |
45,137 | 52,303 | 40,775 | |||||||||
| Offering costs |
40,176 | 84,939 | 55,053 | |||||||||
| Accounting and administration expenses |
33,865 | 80,325 | 31,474 | |||||||||
| Dividend disbursing and transfer agent fees and expenses |
29,708 | 68,085 | 32,255 | |||||||||
| Reports and statements to shareholders |
23,401 | 43,303 | 28,316 | |||||||||
| Legal fees |
21,658 | 59,905 | 38,116 | |||||||||
| Custodian fees |
3,685 | 8,333 | 3,261 | |||||||||
| Directors’/Trustees’ fees and expenses |
3,358 | 7,757 | 2,993 | |||||||||
| Stock exchange fees |
1,190 | 2,737 | 1,073 | |||||||||
| Registration fees |
1,148 | 1,708 | 1,148 | |||||||||
| Other |
10,300 | 21,152 | 16,878 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
1,052,556 | 2,390,643 | 1,055,276 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Investment Income |
3,415,659 | 7,370,894 | 3,219,861 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Realized and Unrealized Gain: |
||||||||||||
| Net realized gain on investments |
286,449 | 51,853 | 622,465 | |||||||||
| Net change in unrealized appreciation (depreciation) of investments |
5,080,978 | 7,966,822 | 4,922,383 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Realized and Unrealized Gain |
5,367,427 | 8,018,675 | 5,544,848 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Increase in Net Assets Resulting from Operations |
$ | 8,783,086 | $ | 15,389,569 | $ | 8,764,709 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes, which are an integral part of the financial statements.
25
Table of Contents
Statements of changes in net assets
Delaware Investments® Closed-End Municipal Bond Funds
| Delaware Investments Colorado Municipal Income Fund, Inc. |
||||||||
| Year ended | ||||||||
| 3/31/15 | 3/31/14 | |||||||
| Increase (Decrease) in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 3,415,659 | $ | 3,388,364 | ||||
| Net realized gain (loss) |
286,449 | (1,803,532 | ) | |||||
| Net change in unrealized appreciation (depreciation) |
5,080,978 | (2,742,772 | ) | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
8,783,086 | (1,157,940 | ) | |||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(3,337,599 | ) | (3,337,599 | ) | ||||
| Net realized gain |
— | (72,556 | ) | |||||
|
|
|
|
|
|||||
| (3,337,599 | ) | (3,410,155 | ) | |||||
|
|
|
|
|
|||||
| Net Increase (Decrease) in Net Assets Applicable to Common Shareholders |
5,445,487 | (4,568,095 | ) | |||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of year |
69,780,543 | 74,348,638 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 75,226,030 | $ | 69,780,543 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 929,143 | $ | 854,468 | ||||
|
|
|
|
|
|||||
| Delaware Investments Minnesota Municipal Income Fund II, Inc. |
||||||||
| Year ended | ||||||||
| 3/31/15 | 3/31/14 | |||||||
| Increase (Decrease) in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 7,370,894 | $ | 7,451,908 | ||||
| Net realized gain (loss) |
51,853 | (1,865,333 | ) | |||||
| Net change in unrealized appreciation (depreciation) |
7,966,822 | (7,344,025 | ) | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
15,389,569 | (1,757,450 | ) | |||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(7,708,333 | ) | (7,938,433 | ) | ||||
| Net realized gain |
— | (1,334,577 | ) | |||||
|
|
|
|
|
|||||
| (7,708,333 | ) | (9,273,010 | ) | |||||
|
|
|
|
|
|||||
| Net Increase (Decrease) in Net Assets Applicable to Common Shareholders |
7,681,236 | (11,030,460 | ) | |||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of year |
164,598,760 | 175,629,220 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 172,279,996 | $ | 164,598,760 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 1,085,104 | $ | 1,435,077 | ||||
|
|
|
|
|
|||||
26
Table of Contents
| Delaware Investments National Municipal Income Fund |
||||||||
| Year ended | ||||||||
| 3/31/15 | 3/31/14 | |||||||
| Increase (Decrease) in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 3,219,861 | $ | 3,213,761 | ||||
| Net realized gain (loss) |
622,465 | (2,041,010 | ) | |||||
| Net change in unrealized appreciation (depreciation) |
4,922,383 | (3,307,566 | ) | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
8,764,709 | (2,134,815 | ) | |||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(3,486,901 | ) | (3,215,195 | ) | ||||
|
|
|
|
|
|||||
| (3,486,901 | ) | (3,215,195 | ) | |||||
|
|
|
|
|
|||||
| Net Increase (Decrease) in Net Assets Applicable to Common Shareholders |
5,277,808 | (5,350,010 | ) | |||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of year |
62,526,067 | 67,876,077 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 67,803,875 | $ | 62,526,067 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 512,431 | $ | 785,029 | ||||
|
|
|
|
|
|||||
See accompanying notes, which are an integral part of the financial statements.
27
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Year ended March 31, 2015
| 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 |
$ | 8,783,086 | $ | 15,389,569 | $ | 8,764,709 | ||||||
|
|
|
|
|
|
|
|||||||
| 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 |
336,825 | 1,743,703 | 437,144 | |||||||||
| Amortization of offering costs for preferred shareholders |
56,757 | 101,551 | 71,675 | |||||||||
| Purchase of investment securities |
(10,553,160 | ) | (18,970,122 | ) | (24,900,777 | ) | ||||||
| Proceeds from disposition of investment securities |
10,007,455 | 17,553,033 | 25,473,714 | |||||||||
| (Purchase of) proceeds from short-term investment securities, net |
(400,000 | ) | — | — | ||||||||
| Net realized gain on investments |
(286,449 | ) | (51,853 | ) | (622,465 | ) | ||||||
| Net change in net unrealized appreciation (depreciation) of investments |
(5,080,978 | ) | (7,966,822 | ) | (4,922,383 | ) | ||||||
| Decrease in receivable for securities sold |
— | 73,001 | 5,074 | |||||||||
| Increase (decrease) in interest receivable |
44,811 | (39,027 | ) | (14,981 | ) | |||||||
| Increase (decrease) in payable for securities purchased |
1,764,767 | — | (1,107,900 | ) | ||||||||
| Increase in investment management fees payable |
1,838 | 2,440 | 1,757 | |||||||||
| Decrease in Directors’/Trustees’ fees and expenses payable |
(3 | ) | (24 | ) | (3 | ) | ||||||
| Increase in audit fees payable |
3,779 | 4,047 | 3,779 | |||||||||
| Decrease in other affiliates payable |
(524 | ) | (794 | ) | (1,746 | ) | ||||||
| Increase (decrease) in other accrued expenses |
(4,252 | ) | (3,661 | ) | 7,799 | |||||||
|
|
|
|
|
|
|
|||||||
| Total adjustments |
(4,109,134 | ) | (7,554,528 | ) | (5,569,313 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
4,673,952 | 7,835,041 | 3,195,396 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash Flows Used for Financing Activities: |
||||||||||||
| Cash dividends and distributions paid to common shareholders |
(3,337,599 | ) | (7,708,333 | ) | (3,486,901 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash used for financing activities |
(3,337,599 | ) | (7,708,333 | ) | (3,486,901 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net increase (decrease) in cash |
1,336,353 | 126,708 | (291,505 | ) | ||||||||
| Cash at beginning of year |
151,409 | (868,916 | ) | 282,363 | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash at end of year |
$ | 1,487,762 | $ | (742,208 | ) | $ | (9,142 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Cash paid for interest on leverage |
$ | 374,129 | $ | 935,323 | $ | 374,129 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes, which are an integral part of the financial statements.
28
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:
| Year ended | ||||||||||||||||||||||
| 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | 3/31/11 | ||||||||||||||||||
| Net asset value, beginning of period |
$ | 14.430 | $ | 15.370 | $ | 15.010 | $ | 13.370 | $ | 13.990 | ||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||
| Net investment income1 |
0.706 | 0.700 | 0.733 | 0.638 | 0.601 | |||||||||||||||||
| Net realized and unrealized gain (loss) |
1.104 | (0.935 | ) | 0.416 | 1.582 | (0.651 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from investment operations |
1.810 | (0.235 | ) | 1.149 | 2.220 | (0.050 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||
| Net investment income |
(0.690 | ) | (0.690 | ) | (0.690 | ) | (0.580 | ) | (0.570 | ) | ||||||||||||
| Net realized gain |
— | (0.015 | ) | (0.099 | ) | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total dividends and distributions |
(0.690 | ) | (0.705 | ) | (0.789 | ) | (0.580 | ) | (0.570 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net asset value, end of period |
$ | 15.550 | $ | 14.430 | $ | 15.370 | $ | 15.010 | $ | 13.370 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market value, end of period |
$ | 14.350 | $ | 13.330 | $ | 14.840 | $ | 14.600 | $ | 12.450 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investment return based on:2 |
||||||||||||||||||||||
| Market value |
13.01% | (5.25% | ) | 6.92% | 22.41% | (3.00% | ) | |||||||||||||||
| Net asset value |
13.12% | (0.97% | ) | 7.71% | 17.19% | (0.30% | ) | |||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 75,226 | $ | 69,781 | $ | 74,349 | $ | 72,613 | $ | 64,689 | ||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders3 |
1.43% | 1.49% | 1.44% | 0.95% | 0.56% | |||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders4 |
4.65% | 4.90% | 4.72% | 4.46% | 4.31% | |||||||||||||||||
| Portfolio turnover |
14% | 26% | 8% | 64% | 10% | |||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)5 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | — | ||||||||||||
| Net asset coverage per share of preferred shares, end of period5 |
$ | 350,753 | $ | 332,602 | $ | 347,829 | $ | 342,045 | $ | — | ||||||||||||
| Liquidation value per share of preferred shares5 |
$ | 100,000 | $ | 100,000 | $ | 100,0006 | $ | 100,000 | 6 | $ | — | |||||||||||
| 1 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.077, $0.078, $0.079,and $0.031 per share for the years ended March 31,2015, 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. |
| 2 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 3 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the years ended March 31, 2015, 2014, 2013 and 2012 were 0.92%, 0.94%, 0.89% and 0.73%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 4 | The ratio of net investment income excluding interest expense for the years ended March 31, 2015, 2014, 2013 and 2012 were 5.16%, 5.45%, 5.27% and 4.68%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 5 | In November 2011, the Fund issued a new series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share. |
| 6 | Excluding any accumulated but unpaid dividends. |
See accompanying notes, which are an integral part of the financial statements.
(continues) 29
Table of Contents
Financial highlights
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Year ended | ||||||||||||||||||||||
| 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | 3/31/11 | ||||||||||||||||||
| Net asset value, beginning of period |
$ | 14.310 | $ | 15.270 | $ | 14.940 | $ | 13.700 | $ | 14.060 | ||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||
| Net investment income1 |
0.641 | 0.648 | 0.715 | 0.640 | 0.612 | |||||||||||||||||
| Net realized and unrealized gain (loss) |
0.689 | (0.802 | ) | 0.345 | 1.180 | (0.402 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from investment operations |
1.330 | (0.154 | ) | 1.060 | 1.820 | 0.210 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||
| Net investment income |
(0.670 | ) | (0.690 | ) | (0.690 | ) | (0.580 | ) | (0.570 | ) | ||||||||||||
| Net realized gain |
— | (0.116 | ) | (0.040 | ) | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total dividends and distributions |
(0.670 | ) | (0.806 | ) | (0.730 | ) | (0.580 | ) | (0.570 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net asset value, end of period |
$ | 14.970 | $ | 14.310 | $ | 15.270 | $ | 14.940 | $ | 13.700 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market value, end of period |
$ | 13.850 | $ | 13.340 | $ | 15.630 | $ | 14.230 | $ | 12.600 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investment return based on:2 |
||||||||||||||||||||||
| Market value |
8.97% | (9.26% | ) | 15.18% | 17.95% | 3.32% | ||||||||||||||||
| Net asset value |
9.80% | (0.36% | ) | 7.18% | 13.90% | 1.80% | ||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 172,280 | $ | 164,599 | $ | 175,629 | $ | 171,835 | $ | 157,655 | ||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders3 |
1.40% | 1.51% | 1.40% | 0.93% | 0.56% | |||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders4 |
4.33% | 4.54% | 4.65% | 4.44% | 4.35% | |||||||||||||||||
| Portfolio turnover |
10% | 17% | 24% | 44% | 9% | |||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)5 |
$ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | $ | — | ||||||||||||
| Net asset coverage per share of preferred shares, end of period5 |
$ | 329,707 | $ | 319,465 | $ | 334,172 | $ | 329,113 | $ | — | ||||||||||||
| Liquidation value per share of preferred shares5 |
$ | 100,000 | $ | 100,000 | $ | 100,0006 | $ | 100,000 | 6 | $ | — | |||||||||||
| 1 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.081, $0.076, $0.084, and $0.033 per share for the years ended March 31, 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. |
| 2 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 3 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the years ended March 31, 2015, 2014, 2013 and 2012 were 0.85%, 0.88%, 0.82% and 0.70%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 4 | The ratio of net investment income excluding interest expense to average net assets for the years ended March 31, 2015, 2014, 2013 and 2012 were 4.88%, 5.17%, 5.23% and 4.67%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 5 | In November 2011, the Fund issued a new series of 750 variable rate preferred shares, with a liquidation preference of $100,000 per share. |
| 6 | Excluding any accumulated but unpaid dividends. |
See accompanying notes, which are an integral part of the financial statements.
30
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:
| Year ended | ||||||||||||||||||||||
| 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | 3/31/11 | ||||||||||||||||||
| Net asset value, beginning of period |
$ | 13.810 | $ | 14.990 | $ | 14.020 | $ | 12.620 | $ | 13.070 | ||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||
| Net investment income1 |
0.711 | 0.710 | 0.722 | 0.531 | 0.610 | |||||||||||||||||
| Net realized and unrealized gain (loss) |
1.219 | (1.180 | ) | 0.858 | 1.409 | (0.532 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from investment operations |
1.930 | (0.470 | ) | 1.580 | 1.940 | 0.078 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||
| Net investment income |
(0.770 | ) | (0.710 | ) | (0.610 | ) | (0.540 | ) | (0.528 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total dividends and distributions |
(0.770 | ) | (0.710 | ) | (0.610 | ) | (0.540 | ) | (0.528 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net asset value, end of period |
$ | 14.970 | $ | 13.810 | $ | 14.990 | $ | 14.020 | $ | 12.620 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market value, end of period |
$ | 13.140 | $ | 12.350 | $ | 14.480 | $ | 13.240 | $ | 12.200 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investment return based on:2 |
||||||||||||||||||||||
| Market value |
12.87% | (9.65% | ) | 14.12% | 13.19% | 4.78% | ||||||||||||||||
| Net asset value |
14.99% | (2.41% | ) | 11.56% | 15.87% | 0.67% | ||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 67,804 | $ | 62,526 | $ | 67,876 | $ | 63,487 | $ | 30,559 | ||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders3 |
1.60% | 1.58% | 1.56% | 1.02% | 0.65% | |||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders4 |
4.86% | 5.17% | 4.86% | 3.96% | 4.64% | |||||||||||||||||
| Portfolio turnover |
38% | 40% | 42% | 101% | 50% | |||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)5 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | — | ||||||||||||
| Net asset coverage per share of preferred shares, end of period5 |
$ | 326,013 | $ | 308,420 | $ | 326,254 | $ | 311,625 | $ | — | ||||||||||||
| Liquidation value per share of preferred shares5 |
$ | 100,000 | $ | 100,000 | $ | 100,0006 | $ | 100,000 | 6 | $ | — | |||||||||||
| 1 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.083, $0.085, $0.090, and $0.004 per share for the years ended March 31, 2015, 2014, 2013, and 2012, respectively. |
| 2 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 3 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the years ended March 31, 2015, 2014, 2013 and 2012 were 1.03%, 0.96%, 0.96% and 0.99%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 4 | The ratio of net investment income excluding interest expense to average net assets for the years ended March 31, 2015, 2014, 2013 and 2012 were 5.44%, 5.79%, 5.46% and 3.99%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 5 | In March 2012, the Fund issued a new series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share. |
| 6 | Excluding any accumulated but unpaid dividends. |
See accompanying notes, which are an integral part of the financial statements.
31
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
March 31, 2015
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, 2012–March 31, 2015), and has concluded that no provision for federal income tax is required in any Fund’s financial statements.
Use of Estimates — Each Fund is an investment company under 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.
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 year ended March 31, 2015.
32
Table of Contents
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.
Effective Nov. 1, 2014, Delaware Investments Fund Services Company (DIFSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to each Fund. Prior to this time, Delaware Service Company, Inc. (DSC), an affiliate of DMC, provided fund accounting and financial administration oversight services to each Fund under a substantially identical agreement with an identical fee schedule. 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 year ended March 31, 2015, each Fund was charged for these services as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | ||
| $4,927 | $11,685 | $4,579 |
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 year ended March 31, 2015, each Fund was charged for internal legal, tax, and regulatory reporting services provided by DMC and/or its affiliates’ employees as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | ||
| $12,188 | $27,905 | $12,257 |
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.
3. Investments
For the year ended March 31, 2015, 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 |
$ | 10,553,160 | $ | 18,970,122 | $ | 24,900,777 | ||||||
| Sales |
10,007,455 | 17,553,033 | 25,473,714 | |||||||||
At March 31, 2015, the cost of investments and unrealized appreciation (depreciation) for federal income tax purposes for each Fund were as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Cost of investments |
$ | 95,236,981 | $ | 229,393,313 | $ | 87,948,616 | ||||||
|
|
|
|
|
|
|
|||||||
| Aggregate unrealized appreciation |
$ | 8,893,713 | $ | 15,160,644 | $ | 8,491,238 | ||||||
| Aggregate unrealized depreciation |
(9,173 | ) | (95,379 | ) | (31,201 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net unrealized appreciation |
$ | 8,884,540 | $ | 15,065,265 | $ | 8,460,037 | ||||||
|
|
|
|
|
|
|
|||||||
| (continues) | 33 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
3. Investments (continued)
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. 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 March 31, 2015:
| Colorado Municipal Fund | ||||
| Level 2 | ||||
| Municipal Bonds |
$ | 103,721,521 | ||
| Short-Term Investments |
400,000 | |||
|
|
|
|||
| Total |
$ | 104,121,521 | ||
|
|
|
|||
| Minnesota Municipal Fund II | ||||
| Level 2 | ||||
| Municipal Bonds |
$ | 244,458,578 | ||
|
|
|
|||
| National Municipal Fund | ||||
| Level 2 | ||||
| Municipal Bonds |
$ | 95,908,653 | ||
| Short-Term Investments |
500,000 | |||
|
|
|
|||
| Total |
$ | 96,408,653 | ||
|
|
|
|||
During the year ended March 31, 2015, 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.
34
Table of Contents
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Additionally, distributions from net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. The tax character of dividends and distributions paid during the years ended March 31, 2015 and 2014 was as follows:
Year ended March 31, 2015
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Ordinary income |
$ | — | $ | 8,847 | $ | 7,035 | ||||||
| Tax-exempt income |
3,711,728 | 8,634,809 | 3,853,995 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 3,711,728 | $ | 8,643,656 | $ | 3,861,030 | ||||||
|
|
|
|
|
|
|
|||||||
Year ended March 31, 2014
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Ordinary income |
$ | 577 | $ | 528,328 | $ | 2,086 | ||||||
| Tax-exempt income |
3,743,695 | 8,850,700 | 3,597,169 | |||||||||
| Long-term capital gains |
52,339 | 933,106 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 3,796,611 | $ | 10,312,134 | $ | 3,599,255 | ||||||
|
|
|
|
|
|
|
|||||||
5. Components of Net Assets on a Tax Basis
As of March 31, 2015, the components of net assets on a tax basis were as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Shares of beneficial interest |
$ | 66,918,121 | $ | 157,931,075 | $ | 60,617,476 | ||||||
| Undistributed tax-exempt income |
929,143 | 1,085,104 | 512,431 | |||||||||
| Capital loss carryforwards |
(1,505,774 | ) | (1,801,448 | ) | (1,786,069 | ) | ||||||
| Unrealized appreciation |
8,884,540 | 15,065,265 | 8,460,037 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net assets |
$ | 75,226,030 | $ | 172,279,996 | $ | 67,803,875 | ||||||
|
|
|
|
|
|
|
|||||||
The differences between book basis and tax basis components of net assets are primarily attributable to tax treatment of market discount on debt instruments and tax deferral of wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to tax treatment of market discount on debt instruments. Results of operations and net assets were not affected by these reclassifications. For the year ended March 31, 2015, the Funds recorded the following reclassifications.
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Undistributed net investment income |
$ | (3,385 | ) | $ | (12,534 | ) | $ | (5,558 | ) | |||
| Accumulated net realized loss |
3,385 | 12,534 | 5,558 | |||||||||
| (continues) | 35 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
5. Components of Net Assets on a Tax Basis (continued)
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. In 2014, the Funds utilized capital loss carryforwards as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | ||
| $286,849 | $56,418 | $630,529 |
Capital loss carryforwards remaining at March 31, 2015, 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:
| Loss carryforward character | ||||||||
| Short-term | Long-term | |||||||
| Colorado Municipal Fund |
$ | (163,249 | ) | $ | (1,342,525 | ) | ||
| Minnesota Municipal Fund II |
(798,305 | ) | (1,003,143 | ) | ||||
| National Municipal Fund |
$ | (1,262,745 | ) | $ | (115,436 | ) | ||
6. 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. The Funds did not repurchase any shares under the Share Repurchase Program during the year ended March 31, 2015. Shares issuable under each Fund’s dividend reinvestment plan are purchased by each Fund’s transfer agent, Computershare, Inc., in the open market.
On Nov. 15, 2011, Delaware Investments Colorado Municipal Income Fund, Inc. (VCF) and Delaware Investments Minnesota Municipal Income Fund II, Inc. (VMM), issued $30,000,000 and $75,000,000, respectively, of Series 2016 Variable Rate MuniFund Term Preferred (VMTP) Shares, with $100,000 liquidation value per share in a privately negotiated offering. On March 15, 2012, Delaware Investments National Municipal Income Fund (VFL) issued $30,000,000 Series 2017 VMTP Shares, with $100,000 liquidation value per share in a privately negotiated offering. Proceeds from the issuance of VMTP Shares, net of offering expenses, were invested in accordance with each Fund’s investment objective. The VMTP Shares were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933.
Colorado Municipal Fund and Minnesota Municipal Fund II are obligated to redeem their VMTP Shares on Dec. 1, 2016, unless earlier redeemed or repurchased by the Fund. National Municipal Fund is obligated to redeem its VMTP Shares on April 1, 2017, unless earlier redeemed or repurchased by the Fund. VMTP Shares are subject to optional and mandatory redemption in certain circumstances. The VMTP Shares were redeemable at the option of a Fund, subject to payment of a premium until Dec. 1, 2013 (with respect to Minnesota Municipal Fund II and Colorado Municipal Fund) and April 1, 2014 (with respect to National Municipal Fund), and at par thereafter. 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.
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The weighted average dividend rates for the year ended March 31, 2015 were as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | ||
| 1.2% | 1.2% | 1.2% |
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.
7. 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 invest 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 of March 31, 2015, the National Municipal Fund has invested 18.52%, 18.47%, 14.43%, 11.73% and 10.96% (each as a percentage of net assets) in securities issued by the State of California, the State of New York, the Commonwealth of Pennsylvania, the State of Arizona, and the State of Texas, 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.
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Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
7. Geographic, Credit, and Market Risk (continued)
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 March 31, 2015, 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.”
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | ||
| 26.02% | 4.98% | 1.68% |
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.
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. As of March 31, 2015, no securities have been determined to be illiquid under the Funds’ Liquidity Procedures. Rule 144A securities held by each Fund have been identified on the “Schedules of investments.”
8. 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.
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9. Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board issued guidance to improve the financial reporting of reverse repurchase agreements and other similar transactions. The guidance includes expanded disclosure requirements for entities that enter into reverse repurchase agreements and similar transactions accounted for as secured borrowings. The guidance is effective for financial statements with fiscal years beginning on or after Dec. 15, 2014 and interim periods within those fiscal years. Management has determined that this pronouncement has no impact to the Funds’ financial statements.
10. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to March 31, 2015 that would require recognition or disclosure in the Funds’ financial statements.
| 39 |
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registered public accounting firm
To the Board of Directors/Trustees and the Shareholders of
Delaware Investments® Colorado Municipal Income Fund, Inc. and,
Delaware Investments Minnesota Municipal Income Fund II, Inc.
Delaware Investments National Municipal Income Fund:
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations, of changes in net assets and of cash flows, and the financial highlights present fairly, in all material respects, the financial position of the Delaware Investments Colorado Municipal Income Fund, Inc., Delaware Investments Minnesota Municipal Income Fund II, Inc. and Delaware Investments National Municipal Income Fund (hereafter referred to as the “Funds”) at March 31, 2015, the results of each of their operations and each of their cash flows for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2015 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
May 19, 2015
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(Unaudited)
Delaware Investments® Closed-End Municipal Bond Funds
Tax Information (Unaudited)
The information set forth below is for each Fund’s fiscal year as required by federal income tax laws. Shareholders, however, must report distributions on a calendar year basis for income tax purposes, which may include distributions for portions of two fiscal years of a fund. Accordingly, the information needed by shareholders for income tax purposes will be sent to them in January of each year. Please consult your tax advisor for proper treatment of this information.
All disclosures are based on financial information available as of the date of this annual report and, accordingly are subject to change. For any and all items requiring reporting, it is the intention of each Fund to report the maximum amount permitted under the Internal Revenue Code and the regulations thereunder.
For the year ended March 31, 2015, each Fund reports distributions paid during the year as follows:
| (A) Ordinary Income Distributions (Tax Basis) |
(B) Tax-Exempt Income Distributions (Tax Basis) |
Total Distributions (Tax Basis) | ||||
| Colorado Municipal Fund |
0.00% | 100.00% | 100.00% | |||
| Minnesota Municipal Fund II |
0.10% | 99.90% | 100.00% | |||
| National Municipal Fund |
0.18% | 99.82% | 100.00% | |||
| (A) and (B) are based on a percentage of each Fund’s total distributions. | ||||||
| (continues) | 41 |
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Other Fund information
(Unaudited)
Delaware Investments® Closed-End Municipal Bond Funds
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 Research Analyst
Denise A. Franchetti is a senior 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.
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Board of trustees / directors and officers addendum
Delaware Investments® Family of Funds
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| Name, Address, and Birth Date |
Position(s) Held with Fund(s) |
Length of Time Served |
Principal Occupation(s) During the Past Five Years |
Number of Portfolios in Fund Complex Overseen by Trustee or Officer |
Other Directorships Held by Trustee or Officer | |||||
| Interested Trustee |
||||||||||
| Patrick P. Coyne1,4 2005 Market Street Philadelphia, PA 19103 April 1963 |
President, Chief Executive Officer, and Trustee |
Trustee since August 16, 2006 August 2006– |
Patrick P. Coyne has served in various executive capacities at different times at Delaware Investments.2 |
65 | Board of Governors Member Investment Company Institute (ICI) | |||||
| Independent Trustees | ||||||||||
| Thomas L. Bennett 2005 Market Street Philadelphia, PA 19103 October 1947 |
Chairman and Trustee | Trustee since March 2005 |
Private Investor (March 2004–Present) |
65 | Director Bryn Mawr Bank Corp. (2007–2011) | |||||
| Ann D. Borowiec 2005 Market Street Philadelphia, PA 19103 November 1958 |
Trustee | Since March 31, 2015 | Chief Executive Officer, Private Wealth Management (2011–2013) and Market Manager, New Jersey Private Bank (2005–2011) J.P. Morgan Chase & Co. |
65 | None | |||||
| Joseph W. Chow 2005 Market Street Philadelphia, PA 19103 January 1953 |
Trustee | Since January 2013 | Executive Vice President (Emerging Economies Strategies, Risk and Corporate Administration) State Street Corporation (July 2004–March 2011) |
65 | Director and Audit Committee Member — Hercules Technology Growth Capital, Inc. (2004–2014) | |||||
| John A. Fry 2005 Market Street Philadelphia, PA 19103 May 1960 |
Trustee | Since January 2001 | President Drexel University (August 2010–Present) |
65 | Director — Hershey Trust Company Drexel Morgan & Co. | |||||
| (continues) | 43 |
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Board of trustees / directors and officers addendum
Delaware Investments® Family of Funds
| Name, Address, and Birth Date |
Position(s) Held with Fund(s) |
Length of Time Served |
Principal Occupation(s) During the Past Five Years |
Number of Portfolios in Fund Complex Overseen by Trustee or Officer |
Other Directorships Held by Trustee or Officer | |||||
| Independent Trustees (continued) | ||||||||||
|
Lucinda S. Landreth |
Trustee | Since March 2005 | Private Investor (2004–Present) |
65 | None | |||||
|
Frances A. Sevilla-Sacasa |
Trustee | Since September 2011 | Chief Executive Officer — Banco Itaú International (April 2012–Present) |
65 | Trust Manager and Audit Committee Member — Camden Property Trust | |||||
|
Thomas K. Whitford |
Trustee | Since January 2013 | Vice Chairman (2010–April 2013) Chief Administrative Officer (2008–2010) and Executive Vice President and Chief Administrative Officer (2007–2009) — PNC Financial Services Group |
65 | Director — HSBC Finance Corporation and HSBC North America Holdings Inc. | |||||
|
Janet L. Yeomans |
Trustee | Since April 1999 | Vice President and Treasurer (January 2006–July 2012) Vice President — Mergers & Acquisitions (January 2003–January 2006), and Vice President and Treasurer (July 1995–January 2003) 3M Corporation |
65 | Director, Audit and Compliance Committee Chair, Investment Committee Member and Governance Committee Member Okabena Company | |||||
|
J. Richard Zecher |
Trustee | Since March 2005 | Founder Investor Analytics (Risk Management) (May 1999–Present) |
65 | Director and Compensation Committee Member Investor Analytics | |||||
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| Name, Address, and Birth Date |
Position(s) Held with Fund(s) |
Length of Time Served |
Principal Occupation(s) During the Past Five Years |
Number of Portfolios in Fund Complex Overseen by Trustee or Officer |
Other Directorships Held by Trustee or Officer | |||||
| Officers | ||||||||||
| David F. Connor 2005 Market Street Philadelphia, PA 19103 December 1963 |
Senior Vice President, Deputy General Counsel, and Secretary |
Senior Vice President, Deputy General Counsel since May 2013; Vice President, Deputy General Counsel September 2000– May 2013; Secretary since October 2005 |
David F. Connor has served as Deputy General Counsel of Delaware Investments since 2000. |
65 | None3 | |||||
| Daniel V. Geatens 2005 Market Street Philadelphia, PA 19103 October 1972 |
Vice President and Treasurer |
Treasurer since October 2007 |
Daniel V. Geatens has served in various capacities at different times at Delaware Investments. |
65 | None3 | |||||
| David P. O’Connor 4 2005 Market Street Philadelphia, PA 19103 February 1966 |
Executive Vice President, General Counsel and Chief Legal Officer |
Executive Vice President since February 2012; Senior Vice President October 2005– February 2012; General Counsel and Chief Legal Officer since October 2005 |
David P. O’Connor has served in various executive and legal capacities at different times at Delaware Investments. |
65 | None3 | |||||
| Richard Salus 2005 Market Street Philadelphia, PA 19103 October 1963 |
Senior Vice President and Chief Financial Officer |
Chief Financial Officer since November 2006 |
Richard Salus has served in various executive capacities at different times at Delaware Investments. |
65 | None3 | |||||
| 1 | Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s investment advisor. |
| 2 | Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s investment advisor. |
| 3 | David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor as the registrant. |
| 4 | Messrs. Coyne and O’Connor have retired from their positions with the Funds effective as of the close of business on May 23, 2015. |
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This annual report is for the information of Delaware Investments® Closed-End Municipal Bond Funds shareholders. 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.
46
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. A copy of the registrant’s Code of Business Ethics has been posted on the Delaware Investments Internet Web site at www.delawareinvestments.com. Any amendments to the Code of Business Ethics, and information on any waiver from its provisions granted by the registrant, will also be posted on this Web site within five business days of such amendment or waiver and will remain on the Web site for at least 12 months.
Item 3. Audit Committee Financial Expert
The registrant’s Board of Trustees/Directors has determined that certain members of the registrant’s Audit Committee are audit committee financial experts, as defined below. For purposes of this item, an “audit committee financial expert” is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and financial statements;
b. The ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial reporting; and
e. An understanding of audit committee functions.
An “audit committee financial expert” shall have acquired such attributes through:
a. Education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor or experience in one or more positions that involve the performance of similar functions;
b. Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor, or person performing similar functions;
c. Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or
d. Other relevant experience.
The registrant’s Board of Trustees/Directors has also determined that each member of the registrant’s Audit Committee is independent. In order to be “independent” for purposes of this item, the Audit Committee member may not: (i) other than in his or her capacity as a member of the Board of Trustees/Directors or any committee thereof, accept directly or indirectly any consulting, advisory or other compensatory fee from the issuer; or (ii) be an “interested person” of the registrant as defined in Section 2(a)(19) of the Investment Company Act of 1940.
The names of the audit committee financial experts on the registrant’s Audit Committee are set forth below:
Ann D. Borowiec
Joseph W.
Chow
Lucinda S. Landreth1
Frances A. Sevilla-Sacasa
Janet L.
Yeomans
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
The aggregate fees billed for services provided to the registrant by its independent auditors for the audit of the registrant’s annual financial statements and for services normally provided by the independent auditors in connection with statutory and regulatory filings or engagements were $33,100 for the fiscal year ended March 31, 2015.
The aggregate fees billed for services provided to the registrant by its independent auditors for the audit of the registrant’s annual financial statements and for services normally provided by the independent auditors in connection with statutory and regulatory filings or engagements were $29,535 for the fiscal year ended March 31, 2014.
____________________
1 The instructions to Form
N-CSR require disclosure on the relevant experience of persons who qualify as
audit committee financial experts based on “other relevant experience.” The
Board of Trustees/Directors has determined that Ms. Landreth qualifies as an
audit committee financial expert by virtue of her experience as a financial
analyst, her Chartered Financial Analyst (CFA) designation and her service as an
audit committee chairperson for a non-profit organization.
(b) Audit-related fees.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the registrant’s financial statements and not reported under paragraph (a) of this Item were $0 for the fiscal year ended March 31, 2015.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the financial statements of the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $612,000 for the registrant’s fiscal year ended March 31, 2015. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These audit-related services were as follows: year end audit procedures, reporting up, and subsidiary statutory audits.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the registrant’s financial statements and not reported under paragraph (a) of this Item were $0 for the fiscal year ended March 31, 2014.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the financial statements of the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $618,000 for the registrant’s fiscal year ended March 31, 2014. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These audit-related services were as follows: year end audit procedures, group reporting and subsidiary statutory audits.
(c) Tax fees.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant were $4,214 for the fiscal year ended March 31, 2015. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were as follows: review of income tax returns and review of annual excise distribution calculations.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended March 31, 2015. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant were $4,000 for the fiscal year ended March 31, 2014. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were as follows: review of income tax returns and review of annual excise distribution calculations.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended March 31, 2014. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
(d) All other fees.
The aggregate fees billed for all services provided by the independent auditors to the registrant other than those set forth in paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended March 31, 2015.
The aggregate fees billed for all services other than those set forth in paragraphs (b) and (c) of this Item provided by the registrant’s independent auditors to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended March 31, 2015. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
The aggregate fees billed for all services provided by the independent auditors to the registrant other than those set forth in paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended March 31, 2014.
The aggregate fees billed for all services other than those set forth in paragraphs (b) and (c) of this Item provided by the registrant’s independent auditors to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended March 31, 2014. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
(e) The registrant’s Audit Committee has established pre-approval policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of Regulation S-X (the “Pre-Approval Policy”) with respect to services provided by the registrant’s independent auditors. Pursuant to the Pre-Approval Policy, the Audit Committee has pre-approved the services set forth in the table below with respect to the registrant up to the specified fee limits. Certain fee limits are based on aggregate fees to the registrant and other registrants within the Delaware Investments® Family of Funds.
| Service | Range of Fees |
|
Audit Services |
|
|
Statutory audits or financial audits for new Funds |
up to $40,000 per Fund |
|
Services associated with SEC registration statements (e.g., Form N-1A, Form N-14, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings (e.g., comfort letters for closed-end Fund offerings, consents), and assistance in responding to SEC comment letters |
up to $10,000 per Fund |
|
Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit-related services” rather than “audit services”) |
up to $25,000 in the aggregate |
|
Audit-Related Services |
|
|
Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and /or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit services” rather than “audit-related services”) |
up to $25,000 in the aggregate |
|
Tax Services |
|
|
U.S. federal, state and local and international tax planning and advice (e.g., consulting on statutory, regulatory or administrative developments, evaluation of Funds’ tax compliance function, etc.) |
up to $25,000 in the aggregate |
|
U.S. federal, state and local tax compliance (e.g., excise distribution reviews, etc.) |
up to $5,000 per Fund |
|
Review of federal, state, local and international income, franchise and other tax returns |
up to $5,000 per Fund |
Under the Pre-Approval Policy, the Audit Committee has also pre-approved the services set forth in the table below with respect to the registrant’s investment adviser and other entities controlling, controlled by or under common control with the investment adviser that provide ongoing services to the registrant (the “Control Affiliates”) up to the specified fee limit. This fee limit is based on aggregate fees to the investment adviser and its Control Affiliates.
| Service | Range of Fees |
|
Non-Audit Services |
|
|
Services associated with periodic reports and other documents filed with the SEC and assistance in responding to SEC comment letters |
up to $10,000 in the aggregate |
The Pre-Approval Policy requires the registrant’s independent auditors to report to the Audit Committee at each of its regular meetings regarding all services initiated since the last such report was rendered, including those services authorized by the Pre-Approval Policy.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant’s independent auditors for services rendered to the registrant and to its investment adviser and other service providers under common control with the adviser were $7,530,526 and $8,090,937 for the registrant’s fiscal years ended March 31, 2015 and March 31, 2014, respectively.
(h) In connection with its selection of the independent auditors, the registrant’s Audit Committee has considered the independent auditors’ provision of non-audit services to the registrant’s investment adviser and other service providers under common control with the adviser that were not required to be pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit Committee has determined that the independent auditors’ provision of these services is compatible with maintaining the auditors’ independence.
Item 5. Audit Committee of Listed Registrants
The registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the registrant’s Audit Committee are Ann D. Borowiec, Joseph W. Chow, Lucinda S. Landreth, Frances A. Sevilla-Sacasa and Janet L. Yeomans.
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
The registrant has formally delegated to its investment adviser (the “Adviser”) the responsibility for making all proxy voting decisions in relation to portfolio securities held by the registrant. If and when proxies need to be voted on behalf of the registrant, the Adviser will vote such proxies pursuant to its Proxy Voting Policies and Procedures (the “Procedures”). The Adviser has established a Proxy Voting Committee (the “Committee”) which is responsible for overseeing the Adviser’s proxy voting process for the registrant. One of the main responsibilities of the Committee is to review and approve the Procedures to ensure that the Procedures are designed to allow the Adviser to vote proxies in a manner consistent with the goal of voting in the best interests of the registrant.
In order to facilitate the actual process of voting proxies, the Adviser has contracted with Institutional Shareholder Services (“ISS”), which is a subsidiary of MSCI Inc., to analyze proxy statements on behalf of the registrant and other Adviser clients and vote proxies generally in accordance with the Procedures. The Committee is responsible for overseeing ISS’s proxy voting activities. If a proxy has been voted for the registrant, ISS will create a record of the vote. By no later than August 31 of each year, information (if any) regarding how the registrant voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the registrant’s website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov.
The Procedures contain a general guideline stating that recommendations of company management on an issue (particularly routine issues) should be given a fair amount of weight in determining how proxy issues should be voted. However, the Adviser will normally vote against management’s position when it runs counter to its specific Proxy Voting Guidelines (the “Guidelines”), and the Adviser will also vote against management’s recommendation when it believes that such position is not in the best interests of the registrant.
As stated above, the Procedures also list specific Guidelines on how to vote proxies on behalf of the registrant. Some examples of the Guidelines are as follows: (i) generally vote for shareholder proposals asking that a majority or more of directors be independent; (ii) generally vote against proposals to require a supermajority shareholder vote; (iii) votes on mergers and acquisitions should be considered on a case-by-case basis, determining whether the transaction enhances shareholder value; (iv) generally vote against proposals at companies with more than one class of common stock to increase the number of authorized shares of the class that has superior voting rights; (v) generally vote re-incorporation proposals on a case-by-case basis; (vi) votes with respect to equity-based compensation plans are generally determined on a case-by-case basis; and (vii) generally vote for proposals requesting reports on the level of greenhouse gas emissions from a company’s operations and products.
Because the registrant has delegated proxy voting to the Adviser, the registrant is not expected to encounter any conflict of interest issues regarding proxy voting and therefore does not have procedures regarding this matter. However, the Adviser does have a section in its Procedures that addresses the possibility of conflicts of interest. Most proxies that the Adviser receives on behalf of the registrant are voted by ISS in accordance with the Procedures. Because almost all of the registrant proxies are voted by ISS pursuant to the pre-determined Procedures, it normally will not be necessary for the Adviser to make an actual determination of how to vote a particular proxy, thereby largely eliminating conflicts of interest for the Adviser during the proxy voting process. In the very limited instances where the Adviser is considering voting a proxy contrary to ISS’s recommendation, the Committee will first assess the issue to see if there is any possible conflict of interest involving the Adviser or affiliated persons of the Adviser. If a member of the Committee has actual knowledge of a conflict of interest, the Committee will normally use another independent third party to do additional research on the particular proxy issue in order to make a recommendation to the Committee on how to vote the proxy in the best interests of the registrant. The Committee will then review the proxy voting materials and recommendation provided by ISS and the independent third party to determine how to vote the issue in a manner that the Committee believes is consistent with the Procedures and in the best interests of the registrant.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
The information in the annual report under “Other Fund information – Fund management” is incorporated by reference into this Item 8.
The following chart lists certain information about types of other accounts for which each portfolio manager is primarily responsible as of March 31, 2015, unless otherwise noted. Any accounts managed in a personal capacity appear under “Other Accounts” along with the other accounts managed on a professional basis. The personal account information is current as of June 30, 2014.
| No. of Accounts with | Total Assets in Accounts | |||
| No. of | Total Assets | Performance- | with Performance- | |
| Accounts | Managed | Based Fees | Based Fees | |
| Joseph R. Baxter | ||||
| Registered Investment | 17 | $5.2 billion | 0 | $0 |
| Companies | ||||
| Other Pooled | 0 | $0 | 0 | $0 |
| Investment Vehicles | ||||
| Other Accounts | 42 | $3.1 billion | 0 | $0 |
| Stephen J. Czepiel | ||||
| Registered Investment | 17 | $5.2 billion | 0 | $0 |
| Companies | ||||
| Other Pooled | 0 | $0 | 0 | $0 |
| Investment Vehicles | ||||
| Other Accounts | 39 | $3.1 billion | 0 | $0 |
| Denise A. Franchetti | ||||
| Registered Investment | 3 | $450.3 million | 0 | $0 |
| Companies | ||||
| Other Pooled | 0 | $0 | 0 | $0 |
| Investment Vehicles | ||||
| Other Accounts | 5 | Under $1 million | 0 | $0 |
| Gregory A. Gizzi | ||||
| Registered Investment | 17 | $5.2 billion | 0 | $0 |
| Companies | ||||
| Other Pooled | 1 | $26.5 million | 0 | $0 |
| Investment Vehicles | ||||
| Other Accounts | 53 | $3.2 billion | 0 | $0 |
A portfolio manager’s management of personal accounts also may present certain conflicts of interest. While Delaware’s code of ethics is designed to address these potential conflicts, there is no guarantee that it will do so.
Base Salary - Each named portfolio manager receives a fixed base salary. Salaries are determined by a comparison to industry data prepared by third parties to ensure that portfolio manager salaries are in line with salaries paid at peer investment advisory firms.
Bonus - An objective component is added to the bonus for each manager that is reflective of account performance relative to an appropriate peer group or database. The following paragraph describes the structure of the non-guaranteed bonus.
Each portfolio manager is eligible to receive an annual cash bonus, which is based on quantitative and qualitative factors. There is one pool for bonus payments for the fixed income department. The pool is allotted based on subjective factors (50%) and objective factors (50%). The amount of the pool for bonus payments is determined by assets managed (including investment companies, insurance product-related accounts and other separate accounts), management fees and related expenses (including fund waiver expenses) for registered investment companies, pooled vehicles, and managed separate accounts. For investment companies, each manager is compensated according to the Fund’s Lipper or Morningstar peer group percentile ranking on a one, three-, and five-year basis, with longer-term performance more heavily weighted. For managed separate accounts the portfolio managers are compensated according to the composite percentile ranking against the eVestment Alliance,and Callan Associates databases (or similar sources of relative performance data) on a one-, three-, and five-year basis, with longer term performance more heavily weighted. There is no objective award for a fund that falls below the 50th percentile, but incentives reach maximum potential at the top 25th-30th percentile. There is a sliding scale for investment companies that are ranked above the 50th percentile. The remaining portion of the bonus is discretionary as determined by Delaware Investments and takes into account subjective factors.
For new and recently transitioned portfolio managers, the compensation may be weighted more heavily towards a portfolio manager’s actual contribution and ability to influence performance, rather than longer-term performance. Management intends to move the compensation structure towards longer-term performance for these portfolio managers over time.
Portfolio managers participate in retention programs, including the Delaware Investments Incentive Unit Plan, the Delaware Investments Notional Investment Plan, and the Macquarie Group Employee Retained Equity Plan, for alignment of interest purposes.
Delaware Investments Incentive Unit Plan - Portfolio managers may be awarded incentive unit awards (“Awards”) relating to the underlying shares of common stock of Delaware Management Holdings, Inc. issuable pursuant to the terms of the Delaware Investments Incentive Unit Plan (the “Plan”) adopted on November 30, 2010.
The Plan was adopted in order to: assist the Manager in attracting, retaining, and rewarding key employees of the company; enable such employees to acquire or increase an equity interest in the company in order to align the interest of such employees and the Manager; and provide such employees with incentives to expend their maximum efforts. Subject to the terms of the Plan and applicable award agreements, Awards typically vest in 25% increments on a four-year schedule, and shares of common stock underlying the Awards are issued after vesting. The fair market value of the shares of Delaware Management Holdings, Inc., is normally determined as of each March 31, June 30, September 30 and December 31 by an independent appraiser. Generally, a stockholder may put shares back to the company during the put period communicated in connection with the applicable valuation.
Delaware Investments Notional Investment Plan – A portion of a portfolio manager’s retained profit share may be notionally exposed to the return of a portfolio of Delaware Investments Family of Funds-managed funds pursuant to the terms of the Delaware Investments Notional Investment Plan. The retained amount will vest in three equal tranches in each of the first, second and third years following the date upon which the investment is made.
Macquarie Group Employee Retained Equity Plan – A portion of a portfolio manager’s retained profit share may be invested in the Macquarie Group Employee Retained Equity Plan (“MEREP”), which is used to deliver remuneration in the form of Macquarie Group Limited (“Macquarie”) equity. The main type of award currently being offered under the MEREP is units comprising a beneficial interest in a Macquarie share held in a trust for the employee, subject to the vesting and forfeiture provisions of the MEREP. Subject to vesting conditions, vesting and release of the shares occurs in equal tranches two, three, and four years after the date of investment.
Other Compensation - Portfolio managers may also participate in benefit plans and programs available generally to all employees.
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/ ROGER EARLY | |
| By: | Roger Early |
| Title: | Chief Executive Officer |
| Date: | June 4, 2015 |
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/ ROGER EARLY | |
| By: | Roger Early |
| Title: | Chief Executive Officer |
| Date: | June 4, 2015 |
| /s/ RICHARD SALUS | |
| By: | Richard Salus |
| Title: | Chief Financial Officer |
| Date: | June 4, 2015 |