UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO
HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file
number:
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811-07420
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Exact name of registrant as specified in
charter:
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Delaware Investments
®
Minnesota
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Municipal Income Fund II, Inc.
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Address of principal executive
offices:
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2005 Market Street
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Philadelphia, PA 19103
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Name and address of agent for
service:
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David F. Connor, Esq.
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2005 Market Street
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Philadelphia, PA 19103
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Registrants telephone number, including
area code:
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(800) 523-1918
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Date of fiscal year end:
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March 31
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Date of reporting period:
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December 31, 2012
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Item 1. Schedule of Investments.
Schedule of Investments
(Unaudited)
Delaware Investments Minnesota
Municipal Income Fund II, Inc.
December 31, 2012
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Principal
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Amount
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Value
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Municipal Bonds 140.19%
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Corporate-Backed
Revenue Bonds 7.34%
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Cloquet Pollution
Control Revenue (Potlatch Project) 5.90% 10/1/26
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$
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5,500,000
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$
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5,520,515
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Laurentian Energy Authority
Cogeneration Revenue Series A 5.00% 12/1/21
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3,325,000
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3,268,575
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Sartell Environmental
Improvement Revenue (International Paper) Series A 5.20% 6/1/27
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1,000,000
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1,010,800
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St. Paul Port Authority Revenue (Gerdau
St. Paul Steel Mill Project) Series 7 4.50% 10/1/37 (AMT)
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3,155,000
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3,192,103
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12,991,993
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Education Revenue
Bonds 16.91%
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Bayton Township Lease
Revenue (St. Croix Preparatory Academy) 5.75% 8/1/42
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300,000
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302,688
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Minnesota Higher Education Facilities
Authority Revenue
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(Augsburg College) Series 6-J1 5.00% 5/1/28
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1,500,000
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1,541,955
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(Carleton College)
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Series D 5.00% 3/1/30
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1,120,000
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1,296,736
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Series 6-T 5.00% 1/1/28
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1,000,000
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1,141,810
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(College of St. Benedict)
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Series 5-W 5.00% 3/1/20
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2,000,000
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2,007,740
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Series 7-M
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5.00% 3/1/31
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300,000
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320,541
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5.125% 3/1/36
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275,000
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292,248
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(Macalester College) Series 7-S 4.00% 5/1/43
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1,250,000
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1,315,575
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(St. Catherine University) Series 7-Q 5.00% 10/1/32
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700,000
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793,177
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(St. Mary's University) Series 5-U 4.80% 10/1/23
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1,400,000
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1,417,332
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(St. Scholastic College) Series H 5.25% 12/1/35
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1,000,000
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1,103,100
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(University of St. Thomas)
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Series 6-X 5.00% 4/1/29
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2,250,000
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2,514,195
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Series 7-A 5.00% 10/1/39
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1,000,000
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1,118,430
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St. Paul Housing
& Redevelopment Authority Charter School Lease Revenue
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(Nova Classical Academy)
Series A 6.375% 9/1/31
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750,000
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837,113
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University of Minnesota
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Series A
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5.00% 12/1/27
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1,110,000
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1,360,982
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5.00% 12/1/28
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1,880,000
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2,298,093
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5.00% 12/1/29
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2,265,000
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2,752,383
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5.00% 12/1/31
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1,000,000
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1,204,450
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5.00% 12/1/36
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3,000,000
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3,534,359
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5.25% 4/1/29
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1,000,000
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1,178,120
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Series C 5.00% 12/1/19
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1,290,000
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1,593,473
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29,924,500
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Electric Revenue
Bonds 6.46%
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Central Minnesota
Municipal Power Agency Revenue (Brookings Southeast Twin Cities
Transportation)
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5.00% 1/1/32
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1,130,000
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1,304,687
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Chaska Electric Revenue (Generating
Facilities) Series A 5.25% 10/1/25
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250,000
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277,210
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Minnesota Municipal
Power Agency Electric Revenue Series A
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5.00% 10/1/34
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1,900,000
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2,014,285
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5.25% 10/1/19
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1,610,000
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1,727,272
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Southern Minnesota Municipal Power
Agency Supply Revenue Series A 5.25% 1/1/30
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1,000,000
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1,136,520
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Western Minnesota
Municipal Power Agency Supply Revenue Series A
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5.00% 1/1/25
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3,000,000
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3,742,710
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5.00% 1/1/26
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1,000,000
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1,237,460
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11,440,144
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Healthcare Revenue Bonds
39.06%
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Anoka Health Care Facility Revenue
(Homestead Anoka Income Project) Series A 7.00% 11/1/46
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1,200,000
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1,296,732
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Center City Health
Care Facilities Revenue (Hazelden Foundation Project)
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4.75% 11/1/31
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850,000
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904,732
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5.00% 11/1/41
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1,600,000
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1,735,056
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Duluth Economic Development Authority
Revenue (St. Luke's Hospital Authority Obligation Group)
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5.75% 6/15/32
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200,000
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210,724
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6.00% 6/15/39
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800,000
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852,224
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Fergus Falls Health
Care Facilities Revenue (Lake Region Healthcare) 5.00% 8/1/30
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1,000,000
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1,049,800
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Glencoe Health Care Facilities Revenue
(Glencoe Regional Health Services Project) 5.00% 4/1/25
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2,000,000
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2,025,120
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Maple Grove Health
Care System Revenue (Maple Grove Hospital) 5.25% 5/1/37
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1,100,000
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1,151,249
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Minneapolis Health Care System Revenue
(Fairview Health Services)
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Series A 6.375% 11/15/23
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605,000
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728,723
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Series A 6.625% 11/15/28
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1,040,000
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1,248,062
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Series B 6.50% 11/15/38 (ASSURED GTY)
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2,295,000
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2,805,316
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Series D 5.00% 11/15/34 (AMBAC)
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2,000,000
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2,065,460
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Minneapolis Revenue
(National Marrow Donor Program Project) 4.875% 8/1/25
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1,000,000
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1,040,470
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Minnesota Agricultural & Economic
Development Board Revenue Un-Refunded Balance Series A
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5.75% 11/15/26 (NATLE-RE)
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100,000
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100,181
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6.375% 11/15/29
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195,000
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195,722
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Rochester Health Care
& Housing Revenue (Samaritan Bethany) Series A 7.375%
12/1/41
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1,220,000
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1,375,221
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Rochester Health Care Facilities
Revenue (Mayo Clinic)
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4.00% 11/15/41
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8,780,000
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9,231,906
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Series A 4.00% 11/15/30
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1,240,000
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1,433,242
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Series C 4.50% 11/15/38
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1,000,000
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1,223,040
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Sartell Health Care
Facility Revenue (Country Manor Campus Project) 5.25% 9/1/30
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1,000,000
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1,024,690
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Shakopee Health Care Facilities Revenue
(St. Francis Regional Medical Center) 5.25% 9/1/34
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1,560,000
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1,588,408
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St. Cloud Health Care
Revenue (Centracare Health System Project)
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5.50% 5/1/39 (ASSURED
GTY)
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1,500,000
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1,670,100
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Series A 5.125%
5/1/30
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4,425,000
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4,927,192
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St. Louis Park Health Care Facilities
Revenue (Park Nicollet Health Services)
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5.75% 7/1/39
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3,315,000
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3,746,314
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Series C 5.50% 7/1/23
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1,000,000
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1,124,540
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St. Paul Housing
& Redevelopment Authority Health Care Revenue
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(Allina Health
System)
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Series A 5.00% 11/15/18
(NATL-RE)
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1,380,000
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1,606,872
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Series A-1 5.25%
11/15/29
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1,395,000
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1,568,468
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(Childrens Health Care
Facilities) Series A1 5.00% 8/15/34 (AGM)
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500,000
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552,065
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(Episcopal Homes
Project) Series A 4.75% 11/1/31
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740,000
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745,254
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(Franciscan Health
Elderly Project) 5.40% 11/20/42 (GNMA) (FHA)
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2,700,000
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2,703,321
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(Health East
Project)
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6.00% 11/15/30
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2,775,000
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2,927,125
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6.00% 11/15/35
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2,500,000
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2,623,175
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(Health Partners
Obligation Group Project) 5.25% 5/15/36
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2,000,000
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2,094,980
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(Regions Hospital
Project) 5.30% 5/15/28
|
1,000,000
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1,001,210
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(Senior Carondelet
Village Project) Series A 6.00% 8/1/42
|
770,000
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|
822,414
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Washington County Housing &
Redevelopment Authority Revenue
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(Birchwood & Woodbury Projects) Series A 5.625% 6/1/37
|
1,500,000
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|
1,535,175
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Wayzata Senior
Housing Revenue (Folkestone Senior Living Community) Series A
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5.50% 11/1/32
|
420,000
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|
437,333
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5.75% 11/1/39
|
945,000
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|
994,064
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6.00% 5/1/47
|
1,475,000
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|
1,566,140
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Winona Health Care Facilities Revenue
(Winona Health Obligated Group)
|
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4.65% 7/1/26
|
465,000
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|
489,268
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4.75% 7/1/27
|
785,000
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|
826,205
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5.00% 7/1/34
|
750,000
|
|
789,503
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5.00% 7/1/23
|
1,010,000
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|
1,098,436
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69,135,232
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Housing Revenue
Bonds 6.23%
|
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|
Minneapolis
Multifamily Housing Revenue
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(Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) (LOC-U.S. Bank
N.A.)
|
835,000
|
|
837,639
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(Olson Townhomes
Project) 6.00% 12/1/19 (AMT)
|
600,000
|
|
600,258
|
(Seward Towers Project)
5.00% 5/20/36 (GNMA)
|
2,000,000
|
|
2,051,139
|
(Sumner
Housing Project) Series A 5.15% 2/20/45 (GNMA) (AMT)
|
2,000,000
|
|
2,016,700
|
Minnesota State
Housing Finance Agency Revenue (Mortgage Backed Securities
Program)
|
|
|
|
4.40% 7/1/32
(GNMA) (FNMA) (FHLMC)
|
1,465,000
|
|
1,574,597
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(Rental
Housing) Series A 5.00% 2/1/35 (AMT)
|
1,000,000
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|
1,006,510
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(Residential
Housing)
|
|
|
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Series D 4.75% 7/1/32 (AMT)
|
880,000
|
|
907,887
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Series I 5.15%
7/1/38 (AMT)
|
625,000
|
|
645,400
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Series L 5.10%
7/1/38 (AMT)
|
1,330,000
|
|
1,384,331
|
|
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|
11,024,461
|
Lease Revenue Bonds
14.99%
|
|
|
|
Andover Economic Development Authority
Public Facilities Lease Revenue (Andover Community Center)
|
|
|
|
5.125% 2/1/24
|
205,000
|
|
214,092
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5.20% 2/1/29
|
410,000
|
|
428,516
|
St. Paul Port
Authority Lease Revenue
|
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(Cedar Street
Office Building Project)
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5.00%
12/1/22
|
2,385,000
|
|
2,394,063
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5.25%
12/1/27
|
2,800,000
|
|
2,808,904
|
(Robert Street
Office Building Project) Series 3-11 5.00% 12/1/27
|
2,000,000
|
|
2,066,380
|
State of Minnesota General Fund Revenue
Appropriations Series B
|
|
|
|
4.00% 3/1/26
|
3,720,000
|
|
4,178,713
|
5.00% 3/1/27
|
2,160,000
|
|
2,616,214
|
5.00% 3/1/29
|
3,525,000
|
|
4,250,832
|
University of
Minnesota Special Purpose Revenue (State Supported Biomed Science
Research)
|
|
|
|
5.00%
8/1/35
|
1,040,000
|
|
1,195,709
|
5.00%
8/1/36
|
4,000,000
|
|
4,662,239
|
Virginia Housing & Redevelopment
Authority Health Care Facility Lease Revenue
|
|
|
|
5.25% 10/1/25
|
680,000
|
|
706,017
|
5.375% 10/1/30
|
965,000
|
|
1,012,382
|
|
|
|
26,534,061
|
Local General
Obligation Bonds 10.23%
|
|
|
|
City of Willmar (Rice
Memorial Hospital Project) Series A 4.00% 2/1/32
|
2,940,000
|
|
3,188,048
|
Dakota County Community Development
Agency (Senior Housing Facilities) Series A 5.00% 1/1/23
|
1,100,000
|
|
1,190,222
|
Hopkins Independent
School District #270 Series A 5.00% 2/1/28
|
1,000,000
|
|
1,202,600
|
Minneapolis Special School District #1
5.00% 2/1/19 (AGM)
|
1,175,000
|
|
1,179,136
|
Morris Independent
School District #769 5.00% 2/1/28 (NATL-RE)
|
3,750,000
|
|
3,763,199
|
Rocori Independent School District #750
(School Building) Series B
|
|
|
|
5.00% 2/1/22
|
1,010,000
|
|
1,195,173
|
5.00% 2/1/24
|
1,075,000
|
|
1,268,016
|
5.00% 2/1/25
|
1,115,000
|
|
1,310,995
|
5.00% 2/1/26
|
1,155,000
|
|
1,358,026
|
Thief River Falls
Independent School District #564 (School Building) Series A 4.00%
2/1/32
|
1,160,000
|
|
1,278,274
|
Washington County Housing &
Redevelopment Authority Series B
|
|
|
|
5.50% 2/1/22 (NATL-RE)
|
525,000
|
|
526,901
|
5.50% 2/1/32 (NATL-RE)
|
655,000
|
|
657,109
|
|
|
|
18,117,699
|
§
Pre-Refunded/Escrowed to
Maturity Bonds 17.99%
|
|
|
|
Dakota-Washington
Counties Housing & Redevelopment Authority Revenue
|
|
|
|
(Bloomington
Single Family Residential Mortgage) Series B 8.375% 9/1/21 (GNMA) (FHA)
(VA) (AMT)
|
7,055,000
|
|
10,374,941
|
Southern Minnesota Municipal Power
Agency Supply Revenue Refunding Series A 5.75% 1/1/18-13
|
3,350,000
|
|
3,563,496
|
St. Paul Housing
& Redevelopment Authority Sales Tax (Civic Center Project)
|
|
|
|
5.55% 11/1/23
(NATL-RE) (IBC)
|
4,200,000
|
|
4,742,556
|
5.55%
11/1/23
|
2,300,000
|
|
2,597,114
|
University of Minnesota Hospital &
Clinics 6.75% 12/1/16
|
2,580,000
|
|
3,054,591
|
University of
Minnesota Series A
|
|
|
|
5.50%
7/1/21
|
4,000,000
|
|
5,024,600
|
5.75%
7/1/18
|
2,000,000
|
|
2,484,740
|
|
|
|
31,842,038
|
Special Tax Revenue Bonds
7.57%
|
|
|
|
Guam Government Business Privilege Tax
Revenue Series A 5.25% 1/1/36
|
150,000
|
|
169,437
|
Hennepin County Sales
Tax Revenue (Second Lien-Ballpark Project) Series B 4.75%
12/15/27
|
1,905,000
|
|
2,148,764
|
Minneapolis Community Planning &
Economic Development Department
|
|
|
|
|
|
(Limited Tax Supported
Common Bond Fund)
|
|
|
|
|
|
6.25% 12/1/30
|
1,000,000
|
|
|
1,234,230
|
|
Series 1 5.50% 12/1/24
(AMT)
|
1,000,000
|
|
|
1,041,620
|
|
Series 5 5.70%
12/1/27
|
375,000
|
|
|
380,595
|
|
Minnesota Public Safety Radio 5.00%
6/1/23
|
2,845,000
|
|
|
3,399,861
|
|
Puerto Rico Sales Tax
Financing Revenue First
|
|
|
|
|
|
^(Capital Appreciation)
Series A
|
|
|
|
|
|
5.73% 8/1/44
(NATL-RE)
|
8,485,000
|
|
|
1,407,407
|
|
5.82% 8/1/45
(NATL-RE)
|
8,690,000
|
|
|
1,349,209
|
|
First Subordinate Series
A 5.75% 8/1/37
|
1,200,000
|
|
|
1,270,236
|
|
St. Paul Port Authority (Brownsfields
Redevelopment Tax) Series 2 5.00% 3/1/37
|
895,000
|
|
|
992,680
|
|
|
|
|
|
13,394,039
|
|
State &
Territory General Obligation Bonds 9.22%
|
|
|
|
|
|
Minnesota State
Refunding (State Various Purpose) Series D 5.00% 8/1/24
|
2,700,000
|
|
|
3,337,875
|
|
Minnesota State (State Trunk Highway)
Series B
|
|
|
|
|
|
5.00% 10/1/22
|
5,500,000
|
|
|
6,946,775
|
|
5.00% 10/1/29
|
3,715,000
|
|
|
4,510,679
|
|
Puerto Rico
Commonwealth Public Improvement Series A 5.75% 7/1/41
|
1,500,000
|
|
|
1,521,630
|
|
|
|
|
|
16,316,959
|
|
Transportation Revenue Bonds
2.58%
|
|
|
|
|
|
Minneapolis - St. Paul Metropolitan
Airports Commission Revenue
|
|
|
|
|
|
Series A 5.00% 1/1/35 (AMBAC)
|
2,000,000
|
|
|
2,110,000
|
|
Series B 5.00% 1/1/26
|
540,000
|
|
|
636,050
|
|
Series B 5.00% 1/1/27
|
1,190,000
|
|
|
1,395,454
|
|
St. Paul Port
Authority Revenue (Amherst H Wilder Foundation) Series 3 5.00%
12/1/36
|
380,000
|
|
|
429,905
|
|
|
|
|
|
4,571,409
|
|
Water & Sewer Revenue Bonds
1.61%
|
|
|
|
|
|
Metropolitan Council Wastewater Series
B 4.00% 9/1/27
|
1,145,000
|
|
|
1,288,297
|
|
St. Paul Sewer
Revenue Series D 5.00% 12/1/21
|
1,325,000
|
|
|
1,564,017
|
|
|
|
|
|
2,852,314
|
|
Total Municipal Bonds (cost
$232,285,782)
|
|
|
|
248,144,849
|
|
|
Total Value of Securities
140.19%
|
|
|
|
|
|
(cost
$232,285,782)
|
|
|
|
248,144,849
|
|
Liquidation Value of
Preferred Stock (42.37%)
|
|
|
|
(75,000,000
|
)
|
Receivables and Other Assets Net of Liabilities
2.18%
|
|
|
|
3,865,236
|
|
Net Assets
Applicable to 11,504,975 Shares Outstanding 100.00%
|
|
|
$
|
177,010,085
|
|
Variable rate
security. The rate shown is the rate as of December 31, 2012.
Interest rates reset periodically.
§Pre-refunded bonds. Municipal bonds that are
generally backed or secured by U.S. Treasury bonds. For pre-refunded bonds, the
stated maturity is followed by the year in which the bond is pre-refunded. See
Note 4 in "Notes."
^Zero coupon security. The rate shown is the yield at the
time of purchase.
See Note 3 in Notes.
Summary of Abbreviations:
AGM Insured by Assured Guaranty
Municipal Corporation
AMBAC Insured by AMBAC Assurance Corporation
AMT
Subject to Alternative Minimum Tax
ASSURED GTY Insured by Assured Guaranty
Corporation
FHA Federal Housing Administration
FHLMC Federal Home Loan
Mortgage Corporation collateral
FNMA Federal National Mortgage Association
collateral
GNMA Government National Mortgage Association collateral
IBC
Insured Bond Certificate
LOC Letter of Credit
NATL-RE Insured by National Public
Finance Guarantee Corporation
VA Veterans Administration collateral
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 Delaware Investments Minnesota Municipal Income
Fund II, Inc. (Fund). This report covers the period of time since the Funds
last fiscal year end.
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 the Funds Board of Directors (Board). 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 the
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 Fund
evaluates tax positions taken or expected to be taken in the course of preparing
the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold are recorded
as a tax benefit or expense in the current year. Management has analyzed the
Funds tax positions taken for all open federal income tax years (March 31,
2009March 31, 2012), and has concluded that no provision for federal income tax
is required in the Funds financial statements.
Use of Estimates
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 the 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 amortized to
interest income over the lives of the respective securities using the effective
interest method. The Fund declares and pays dividends from net investment income
monthly and distributions from net realized gain on investments, if any,
annually. The Fund may distribute income dividends and capital gains more
frequently, if necessary for tax purposes. Dividends and distributions, if any,
are recorded on the ex-dividend date.
2. Investments
At December 31, 2012, the cost of investments for federal
income tax purposes has been estimated since final tax characteristics cannot be
determined until fiscal year end. At December 31, 2012, the cost of investments
and unrealized appreciation (depreciation) for the Fund were as follows:
Cost of
investments
|
$
|
232,285,782
|
|
Aggregate unrealized
appreciation
|
$
|
16,136,656
|
|
Aggregate unrealized
depreciation
|
|
(277,589
|
)
|
Net unrealized appreciation
|
$
|
15,859,067
|
|
For federal income tax purposes,
capital loss carryforwards may be carried forward and applied against future
capital gains. Capital loss carryforwards remaining at March 31, 2012, will
expire as follows: $257,166 expires in 2018.
On December 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 Fund is 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.
U.S. GAAP defines fair value as the
price that the 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 entitys own assumptions about the assumptions that
market participants would use in pricing the asset or liability developed based
on the best information available under the circumstances. The Funds
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 (e.g., 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) (e.g., 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 - inputs are significant unobservable inputs (including
the Fund's own assumptions used to determine the fair value of investments)
(e.g., broker-quoted securities, fair valued securities)
Level 3 investments are valued using
significant unobservable inputs. The 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 table summarizes the
valuation of the Fund's investments by fair value hierarchy levels as of
December 31, 2012:
|
Level 2
|
Municipal
Bonds
|
$
|
248,144,849
|
During the period ended December 31,
2012, there were no transfers between Level 1 investments, Level 2 investments
or Level 3 investments that had a significant impact to the Fund. The Funds
policy is to recognize transfers between levels at the beginning of the
reporting period.
3. Preferred Stock
On November 15, 2011, the Fund issued
$75,000,000 Series 2016 Variable Rate MuniFund Term Preferred (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 the Funds investment objective. The VMTP Shares
were offered to qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933.
The Fund is obligated to redeem its
VMTP Shares on December 1, 2016, unless earlier redeemed or repurchased by the
Fund. VMTP Shares are subject to optional and mandatory redemption in certain
circumstances. The VMTP Shares may be redeemed at the option of the Fund,
subject to payment of a premium until December 1, 2013, and at par thereafter.
The Fund may be obligated to redeem a certain number 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 (which are
treated as interest payments for financial reporting purposes) are set weekly.
The Fund uses leverage because its
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 funds overall performance.
Leverage may also cause the Fund to
incur certain costs. In the event that the Fund is unable to meet certain
criteria (including, but not limited to, maintaining certain ratings with Fitch
Ratings and Moodys Investors Service (Moodys), funding dividend payments or
funding redemptions), the Fund will pay additional fees with respect to the
leverage.
4. Credit and Market Risk
The Fund concentrates its investments in
securities issued by municipalities, mainly in Minnesota. The value of these
investments may be adversely affected by new legislation within the state,
regional or local economic conditions, and differing levels of supply and demand
for municipal bonds. Many municipalities insure repayment for their obligations.
Although bond insurance reduces the risk of loss due to default by an issuer,
such bonds remain subject to the risk that 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 the Fund. At December 31,
2012, 11% of the Fund's net assets were insured by bond insurers. These
securities have been identified in the schedule of investments.
The Fund invests a portion of its
assets in high yield fixed income securities, which are securities rated BB or
lower by Standard & Poors (S&P) and/or Ba or lower by Moodys, 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 Fund may invest in advanced
refunded bonds, escrow secured bonds or defeased bonds. Under current federal
tax laws and regulations, state and local government borrowers are permitted to
refinance outstanding bonds by issuing new bonds. The issuer refinances the
outstanding debt to either reduce interest costs or to remove or alter
restrictive covenants imposed by the bonds being refinanced. A refunding
transaction where the municipal securities are being refunded within 90 days
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 issues 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 and 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
Moodys, 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.
The Fund may invest up to 15% of its
net assets in illiquid securities, which may include securities with contractual
restrictions on resale, securities exempt from registration under Rule 144A of
the Securities Act of 1933, as amended, and other securities which may not be
readily marketable. The relative illiquidity of these securities may impair the
Fund from disposing of them in a timely manner and at a fair price when it is
necessary or desirable to do so. While maintaining oversight, the Funds Board
has delegated to Delaware Management Company, a series of Delaware Management
Business Trust, the day-to-day functions of determining whether individual
securities are liquid for purposes of the 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 the Funds 15% limit on
investments in illiquid securities. As of December 31, 2012, there were no Rule
144A securities and no securities have been determined to be illiquid under the
Funds Liquidity Procedures.
5. Subsequent
Events
Management has determined that no
material events or transactions occurred subsequent to December 31, 2012 that
would require recognition or disclosure in the Funds schedule of investments.
Item 2. Controls and Procedures.
The registrants principal executive
officer and principal financial officer have evaluated the registrants
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 registrants internal control over financial reporting that occurred during
the registrants last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the registrants internal control over
financial reporting.
Item 3. Exhibits.
File as exhibits as part of this
Form a separate certification for each principal executive officer and principal
financial officer of the registrant as required by Rule 30a-2(a) under the Act
(17 CFR 270.30a-2(a)), exactly as set forth below:
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