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 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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June 30, 2012
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Item 1. Schedule of Investments.
Schedule of Investments
(Unaudited)
Delaware Investments Minnesota
Municipal Income Fund II, Inc.
June 30, 2012
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Principal
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Amount
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Value
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Municipal Bonds 141.55%
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Corporate-Backed Revenue Bonds 11.70%
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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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5,514,300
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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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3,483,370
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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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1,020,940
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Tobacco Securitization Authority Revenue (Tobacco Settlement)
Series B
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5.25% 3/1/26
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2,000,000
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2,255,060
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5.25% 3/1/31
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7,400,000
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8,163,606
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20,437,276
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Education Revenue Bonds 16.30%
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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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1,537,170
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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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1,259,899
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Series
6-T 5.00% 1/1/28
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1,000,000
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1,113,960
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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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2,028,360
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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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315,285
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5.125%
3/1/36
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275,000
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286,481
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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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1,425,144
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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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1,078,560
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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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2,421,585
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Series
7-A 5.00% 10/1/39
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1,000,000
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1,098,350
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Minnesota State Colleges & Universities Series A 4.00%
10/1/17
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1,190,000
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1,365,085
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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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805,365
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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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1,340,203
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5.00% 12/1/28
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1,880,000
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2,260,963
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5.00% 12/1/29
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2,265,000
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2,711,409
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5.00% 12/1/31
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1,000,000
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1,185,170
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5.00% 12/1/36
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3,000,000
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3,477,210
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5.25% 4/1/29
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1,000,000
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1,166,880
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Series C 5.00%
12/1/19
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1,290,000
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1,593,150
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28,470,229
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Electric Revenue Bonds 6.58%
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Central Minnesota Municipal Power Agency
Revenue
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(Brookings Southeast Twin Cities Transportation) 5.00% 1/1/32
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1,130,000
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1,264,606
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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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268,260
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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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2,044,571
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5.25%
10/1/19
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1,610,000
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1,755,399
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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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1,118,600
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Western Minnesota Municipal Power Agency
Supply Revenue Series A 5.00% 1/1/30 (NATL-RE)
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5,000,000
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5,042,650
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11,494,086
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Healthcare Revenue Bonds
36.50%
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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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1,261,164
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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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894,855
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5.00%
11/1/41
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1,600,000
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1,703,424
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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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1,033,270
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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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2,030,920
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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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1,139,556
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Minneapolis Health Care System Revenue
(Fairview Health Services)
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Series
A 6.625% 11/15/28
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850,000
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1,011,585
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Series
B 6.50% 11/15/38 (ASSURED GTY)
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2,295,000
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2,713,447
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Series
D 5.00% 11/15/34 (AMBAC)
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2,000,000
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2,057,100
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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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1,025,420
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Minnesota Agricultural & Economic
Development Board Revenue Un-Refunded Balance Series A
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5.75%
11/15/26 (NATL-RE)
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100,000
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100,145
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6.375%
11/15/29
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195,000
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195,365
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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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1,354,493
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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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8,861,829
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Series C 4.50% 11/15/38
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2,000,000
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2,398,700
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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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1,586,598
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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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1,639,200
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Series A 5.125% 5/1/30
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4,425,000
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4,826,878
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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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3,200,000
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3,548,480
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Series C 5.50%
7/1/23
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1,000,000
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1,118,390
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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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1,609,204
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Series A-1 5.25% 11/15/29
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1,395,000
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1,539,871
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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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538,515
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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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2,711,799
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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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2,888,054
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6.00% 11/15/35
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2,500,000
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2,586,075
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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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2,062,500
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(Regions Hospital Project) 5.30% 5/15/28
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1,000,000
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1,000,820
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(Senior Carondelet Village Project) Series A 6.00% 8/1/42
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770,000
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|
807,176
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Washington County
Housing & Redevelopment Authority Revenue
|
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|
(Birchwood
& Woodbury Projects) Series A 5.625% 6/1/37
|
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1,500,000
|
|
1,506,960
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Wayzata Senior Housing Revenue
(Folkestone Senior Living Community) Series A
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5.50% 11/1/32
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420,000
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423,179
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5.75% 11/1/39
|
|
945,000
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|
963,267
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6.00% 5/1/47
|
|
1,475,000
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|
1,519,707
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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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|
472,356
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4.75%
7/1/27
|
|
785,000
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|
796,492
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5.00%
7/1/23
|
|
1,010,000
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|
1,058,672
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5.00%
7/1/34
|
|
750,000
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|
766,088
|
|
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|
|
63,751,554
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Housing Revenue Bonds
6.78%
|
|
|
|
|
Minneapolis Multifamily Housing
Revenue
|
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|
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|
(Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) (LOC-U.S. Bank
N.A.)
|
|
845,000
|
|
847,324
|
(Olson Townhomes Project) 6.00% 12/1/19 (AMT)
|
|
655,000
|
|
655,144
|
(Seward Towers Project) 5.00% 5/20/36 (GNMA)
|
|
2,000,000
|
|
2,059,259
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(Sumner Housing Project) Series A 5.15% 2/20/45 (GNMA) (AMT)
|
|
2,000,000
|
|
2,021,940
|
Minnesota State
Housing Finance Agency Revenue
|
|
|
|
|
(Mortgage
Backed Securities Program) 4.40% 7/1/32 (GNMA) (FNMA) (FHLMC)
|
|
1,495,000
|
|
1,524,990
|
(Rental
Housing) Series A 5.00% 2/1/35 (AMT)
|
|
1,000,000
|
|
1,008,340
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(Residential
Housing)
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|
|
|
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Series D 4.75% 7/1/32 (AMT)
|
|
915,000
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|
936,255
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Series I 5.15%
7/1/38 (AMT)
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|
635,000
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|
651,250
|
Series L 5.10%
7/1/38 (AMT)
|
|
1,345,000
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|
1,385,592
|
Washington County Housing &
Redevelopment Authority Revenue (Woodland Park Apartments
Project)
|
|
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4.70% 10/1/32
|
|
750,000
|
|
752,258
|
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|
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|
11,842,352
|
Lease Revenue
Bonds 8.85%
|
|
|
|
|
Andover Economic
Development Authority Public Facilities Lease Revenue
|
|
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|
|
(Andover
Community Center)
|
|
|
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5.125%
2/1/24
|
|
205,000
|
|
218,255
|
5.20%
2/1/29
|
|
410,000
|
|
436,994
|
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
|
|
2,429,743
|
5.25% 12/1/27
|
|
2,800,000
|
|
2,827,496
|
(Robert Street Office Building Project) Series 3-11 5.00%
12/1/27
|
|
2,000,000
|
|
2,079,100
|
University of
Minnesota Special Purpose Revenue (State Supported Biomed Science
Research)
|
|
|
|
|
5.00%
8/1/35
|
|
1,040,000
|
|
1,176,022
|
5.00%
8/1/36
|
|
4,000,000
|
|
4,579,120
|
Virginia Housing & Redevelopment
Authority Health Care Facility Lease Revenue
|
|
|
|
|
5.25% 10/1/25
|
|
680,000
|
|
703,079
|
5.375% 10/1/30
|
|
965,000
|
|
1,007,914
|
|
|
|
|
15,457,723
|
Local General Obligation Bonds
10.06%
|
|
|
|
|
City of Willmar (Rice
Memorial Hospital Project) Series A 4.00% 2/1/32
|
|
2,940,000
|
|
3,089,381
|
County of Olmsted
Series A 3.50% 2/1/27
|
|
765,000
|
|
811,336
|
Dakota County
Community Development Agency (Senior Housing Facilities) Series A 5.00%
1/1/23
|
|
1,100,000
|
|
1,192,202
|
Hopkins Independent
School District #270 Series A 5.00% 2/1/28
|
|
1,000,000
|
|
1,182,390
|
Minneapolis Special
School District #1 5.00% 2/1/19 (AGM)
|
|
1,175,000
|
|
1,204,152
|
Morris Independent
School District #769 5.00% 2/1/28 (NATL-RE)
|
|
3,750,000
|
|
3,843,037
|
Rocori Independent
School District #750 (School Building) Series B
|
|
|
|
|
5.00%
2/1/22
|
|
1,010,000
|
|
1,194,588
|
5.00%
2/1/24
|
|
1,075,000
|
|
1,248,000
|
5.00%
2/1/25
|
|
1,115,000
|
|
1,287,156
|
5.00%
2/1/26
|
|
1,155,000
|
|
1,325,155
|
Washington County Housing &
Redevelopment Authority Series B
|
|
|
|
|
|
|
5.50%
2/1/22 (NATL-RE)
|
|
525,000
|
|
|
526,806
|
|
5.50%
2/1/32 (NATL-RE)
|
|
655,000
|
|
|
656,107
|
|
|
|
|
|
|
17,560,310
|
|
§
Pre-Refunded/Escrowed to Maturity Bonds 20.13%
|
|
|
|
|
|
|
Bemidji Health Care Facilities Revenue (North Country Health
Services) 5.00% 9/1/24-12 (RADIAN)
|
|
1,500,000
|
|
|
1,512,045
|
|
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
|
|
|
10,353,847
|
|
Minneapolis-St. Paul Metropolitan Airports Commission Revenue
Series A 5.00% 1/1/22-13 (NATL-RE)
|
|
600,000
|
|
|
614,592
|
|
Southern Minnesota Municipal Power Agency
Supply Revenue Refunding Series A 5.75% 1/1/18-13
|
|
3,715,000
|
|
|
3,999,718
|
|
St.
Paul Housing & Redevelopment Authority Sales Tax (Civic Center
Project)
|
|
|
|
|
|
|
5.55% 11/1/23
|
|
2,300,000
|
|
|
2,624,323
|
|
5.55% 11/1/23 (NATL-RE)
(IBC)
|
|
4,200,000
|
|
|
4,792,242
|
|
University of Minnesota Hospital &
Clinics 6.75% 12/1/16
|
|
2,580,000
|
|
|
3,119,504
|
|
University of Minnesota Series A
|
|
|
|
|
|
|
5.50% 7/1/21
|
|
4,000,000
|
|
|
4,999,640
|
|
5.75% 7/1/18
|
|
2,500,000
|
|
|
3,139,050
|
|
|
|
|
|
|
35,154,961
|
|
Special Tax Revenue Bonds 9.96%
|
|
|
|
|
|
|
Guam Government Business Privilege Tax
Revenue Series A 5.25% 1/1/36
|
|
1,360,000
|
|
|
1,491,634
|
|
Hennepin County Sales Tax Revenue (Second Lien-Ballpark Project)
Series B 4.75% 12/15/27
|
|
1,905,000
|
|
|
2,103,558
|
|
Minneapolis Community Planning &
Economic Development Department
|
|
|
|
|
|
|
(Limited Tax Supported Common Bond Fund)
|
|
|
|
|
|
|
6.25%
12/1/30
|
|
1,000,000
|
|
|
1,163,000
|
|
Series
1 5.50% 12/1/24 (AMT)
|
|
1,000,000
|
|
|
1,045,270
|
|
Series
1 6.75% 12/1/25 (AMT)
|
|
865,000
|
|
|
874,273
|
|
Series
5 5.70% 12/1/27
|
|
375,000
|
|
|
380,254
|
|
Minnesota Public Safety Radio 5.00% 6/1/23
|
|
2,845,000
|
|
|
3,335,108
|
|
Puerto Rico Sales Tax Financing
Revenue
|
|
|
|
|
|
|
^(Capital Appreciation) Series A
|
|
|
|
|
|
|
5.73%
8/1/44 (NATL-RE)
|
|
8,485,000
|
|
|
1,357,685
|
|
5.82%
8/1/45 (NATL-RE)
|
|
8,690,000
|
|
|
1,305,325
|
|
First
Subordinate
|
|
|
|
|
|
|
Series
A-1 5.00% 8/1/43
|
|
2,000,000
|
|
|
2,050,580
|
|
Series
A 5.75% 8/1/37
|
|
1,200,000
|
|
|
1,319,532
|
|
St.
Paul Port Authority (Brownsfields Redevelopment Tax) Series 2 5.00%
3/1/37
|
|
895,000
|
|
|
974,906
|
|
|
|
|
|
|
17,401,125
|
|
State & Territory General Obligation Bonds
10.89%
|
|
|
|
|
|
|
Minnesota State Refunding (State Various
Purpose) Series D 5.00% 8/1/24
|
|
2,700,000
|
|
|
3,274,290
|
|
Minnesota State (State Trunk Highway) Series B
|
|
|
|
|
|
|
5.00% 10/1/22
|
|
6,500,000
|
|
|
8,213,985
|
|
5.00% 10/1/29
|
|
3,715,000
|
|
|
4,459,337
|
|
Puerto Rico Commonwealth Public Improvement
Series A
|
|
|
|
|
|
|
5.00%
7/1/41
|
|
1,500,000
|
|
|
1,483,005
|
|
5.75%
7/1/41
|
|
1,500,000
|
|
|
1,593,615
|
|
|
|
|
|
|
19,024,232
|
|
Transportation Revenue Bonds
2.19%
|
|
|
|
|
|
|
Minneapolis - St. Paul Metropolitan Airports Commission Revenue
Series A
|
|
|
|
|
|
|
5.00% 1/1/28
(NATL-RE)
|
|
1,335,000
|
|
|
1,344,305
|
|
5.00% 1/1/35 (AMBAC)
|
|
2,000,000
|
|
|
2,059,500
|
|
St. Paul Port Authority Revenue (Amherst H.
Wilder Foundation) Series 3 5.00% 12/1/36
|
|
380,000
|
|
|
415,602
|
|
|
|
|
|
|
3,819,407
|
|
Water & Sewer Revenue Bonds
1.61%
|
|
|
|
|
|
|
Metropolitan Council Minnesota Wastewater Series B 4.00%
9/1/27
|
|
1,145,000
|
|
|
1,248,691
|
|
St. Paul Sewer Revenue Series D 5.00%
12/1/21
|
|
1,325,000
|
|
|
1,566,640
|
|
|
|
|
|
|
2,815,331
|
|
Total Municipal Bonds (cost
$232,317,492)
|
|
|
|
|
247,228,586
|
|
|
|
|
|
|
|
|
Short-Term Investments 0.60%
|
|
|
|
|
|
|
¤Variable Rate Demand Notes
0.60%
|
|
|
|
|
|
|
Brooklyn Center Revenue (Brookdale II
Project) 0.17% 12/1/14 (LOC-U.S. Bank N.A.)
|
|
100,000
|
|
|
100,000
|
|
Minneapolis & St. Paul Housing &
Redevelopment Authority Health Care
|
|
|
|
|
|
|
(Allina
Health) Series C2 0.15% 11/15/34 (LOC-Wells Fargo Bank N.A.)
|
|
950,000
|
|
|
950,000
|
|
Total Short-Term Investments (cost
$1,050,000)
|
|
|
|
|
1,050,000
|
|
|
Total Value of Securities
142.15%
|
|
|
|
|
|
|
(cost
$233,367,492)
|
|
|
|
|
248,278,586
|
|
Liquidation Value of
Preferred Stock (42.94%)
|
|
|
|
|
(75,000,000
|
)
|
Receivables and Other Assets Net of
Liabilities 0.79%
|
|
|
|
|
1,378,979
|
|
Net Assets Applicable to 11,504,975 Shares Outstanding
100.00%
|
|
|
|
$
|
174,657,565
|
|
Variable rate security. The rate shown is the rate as of June 30, 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.
¤Tax-exempt obligations that contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period (generally up to 30 days) prior to specified dates either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with respect
to such instrument.
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
RADIAN Insured by
Radian Asset Assurance
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.
Short-term debt securities are valued using the evaluated mean. 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 Funds 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 on federal income tax returns for all open tax years (March
31, 2009 March 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 a Fund are charged directly to that
Fund. Other expenses common to various funds within the Delaware
Investments
®
Family of Funds are
generally allocated amongst 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
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 ex-dividend date.
2. Investments
At June 30, 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 June 30, 2012, the cost of investments and
unrealized appreciation (depreciation) for the Fund were as follows:
Cost of
investments
|
$
|
233,367,492
|
|
Aggregate unrealized
appreciation
|
$
|
14,972,062
|
|
Aggregate unrealized
depreciation
|
|
(60,968
|
)
|
Net unrealized appreciation
|
$
|
14,911,094
|
|
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 are generally effective for taxable years beginning after
the date of enactment. Under the Act, the Fund will be 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, 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 Funds own assumptions used to determine the
fair value of investments) (e.g., broker- quoted securities, fair valued
securities)
The following table summarizes the
valuation of the Funds investments by fair value hierarchy levels as of June
30, 2012:
|
Level 2
|
Municipal
Bonds
|
$
|
247,228,586
|
Short-Term Investments
|
|
1,050,000
|
Total
|
$
|
248,278,586
|
There were no unobservable inputs used
to value investments at the beginning or end of the period.
A reconciliation of Level 3 investments
is presented when the Fund had a significant amount of Level 3 investments at
the beginning, interim or end of period in relation to net assets.
During the period ended June 30, 2012,
there were no transfers between Level 1 investments, Level 2 investments or
Level 3 investments that had a material impact to the Fund. The Funds policy is
to recognize transfers between levels at the beginning of the reporting period.
In May 2011, the Financial Accounting
Standards Board (FASB) issued ASU No. 2011-04 modifying Topic 820, Fair Value
Measurements and Disclosures. ASU No. 2011-04 requires reporting entities to
disclose : i) the amounts of any transfers between Level 1 and Level 2, and the
reasons for the transfers, and ii) for Level 3 fair value measurements: (a)
quantitative information about significant unobservable inputs used, (b) a
description of the valuation processes used by the reporting entity and (c) a
narrative description of the sensitivity of the fair value measurement to
changes in unobservable inputs if a change in those inputs might result in a
significantly higher or lower fair value measurement. The effective date of ASU
No. 2011-04 is for interim and annual periods beginning after December 15, 2011.
Management is currently evaluating the implications of this guidance and the
impact it will have on the financial statement amounts and footnote disclosures,
if any.
3. Preferred
Stock
On November 15, 2011, Delaware
Investments Minnesota Municipal Income Fund II, Inc. (VMM) 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 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 (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 Investor Service, 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 Minnesota municipalities. The value of these investments
may be adversely affected by new legislation within the state, regional or local
and national economic conditions and differing levels of supply and demand for
municipal bonds. 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 the Fund. At
June 30, 2012, 15% of the Funds net assets were insured by bond insurers. These
securities have been identified in the schedule of investments.
The Fund may invest 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 Investors
Service, Inc. (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 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 (DMC), a series of Delaware
Management Business Trust, the day-to-day functions of determining whether
individual securities are liquid for purposes of each Funds 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 June 30, 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
other material events or transactions occurred subsequent to June 30, 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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