UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT
INVESTMENT COMPANIES
| Investment Company Act file number: | 811-07810 | |
| Exact name of registrant as specified in charter: | Delaware Investments® Colorado Municipal | |
| Income Fund, Inc. | ||
| Address of principal executive offices: | 2005 Market Street | |
| Philadelphia, PA 19103 | ||
| Name and address of agent for service: | David F. Connor, Esq. | |
| 2005 Market Street | ||
| Philadelphia, PA 19103 | ||
| Registrant’s telephone number, including area code: | (800) 523-1918 | |
| Date of fiscal year end: | March 31 | |
| Date of reporting period: | March 31, 2014 |
Item 1. Reports to Stockholders
Table of Contents
Delaware Investments® Closed-End Municipal
Bond Funds
Annual report
March 31, 2014
The figures in the annual report for Delaware Investments Closed-End Municipal Bond Funds represent past results, which are not
a guarantee of future results. A rise or fall in interest rates can have a significant impact on bond prices. Funds that invest in
bonds can lose their value as interest rates rise.
Closed-end funds
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Delaware Management Holdings, Inc. and its subsidiaries (collectively known by the marketing name of Delaware Investments) are wholly owned subsidiaries of Macquarie Group Limited, a global provider of banking, financial, advisory, investment and funds management services. For more information, including press releases, please visit delawareinvestments.com.
Unless otherwise noted, views expressed herein are current as of March 31, 2014, and subject to change. Information is as of the date indicated and subject to change.
Funds are not FDIC insured and are not guaranteed. It is possible to lose the principal amount invested.
Mutual fund advisory services are provided by Delaware Management Company, a series of Delaware Management Business Trust, which is a registered investment advisor. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
Investments in Delaware Investments Closed-End Municipal Bond Funds are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46 008 583 542 and its holding companies, including their subsidiaries or related companies (Macquarie Group), and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the Funds, the repayment of capital from the Funds, or any particular rate of return.
© 2014 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
April 8, 2014
| (continues) | 1 |
Table of Contents
Portfolio management review
Delaware Investments® Closed-End Municipal Bond Funds
2
Table of Contents
3
Table of Contents
Security type / Sector / State allocations
As of March 31, 2014 (Unaudited)
Sector designations may be different than the sector designations presented in other Fund materials.
4
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Delaware Investments®
National Municipal Income Fund
5
Table of Contents
Delaware Investments® Colorado Municipal Income Fund, Inc.
March 31, 2014
6
Table of Contents
| (continues) | 7 |
Table of Contents
Schedules of investments
Delaware Investments® Colorado Municipal Income Fund, Inc.
8
Table of Contents
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
March 31, 2014
| (continues) | 9 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
10
Table of Contents
| (continues) | 11 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
12
Table of Contents
| (continues) | 13 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
March 31, 2014
14
Table of Contents
| (continues) | 15 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
16
Table of Contents
| (continues) | 17 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
18
Table of Contents
| (continues) | 19 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
20
Table of Contents
21
Table of Contents
Statements of assets and liabilities
Delaware Investments® Closed-End Municipal Bond Funds
March 31, 2014
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund |
||||||||||
| Assets: |
||||||||||||
| Investments, at value1 |
$ | 98,145,214 | $ | 236,766,517 | $ | 91,373,887 | ||||||
| Short-term investments, at value2 |
— | — | 500,000 | |||||||||
| Cash |
151,409 | — | 282,363 | |||||||||
| Interest income receivable |
1,409,975 | 3,525,021 | 1,334,462 | |||||||||
| Offering cost for preferred shareholders |
149,125 | 266,811 | 211,878 | |||||||||
| Receivables for securities sold |
— | 73,001 | 10,148 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total assets |
99,855,723 | 240,631,350 | 93,712,738 | |||||||||
|
|
|
|
|
|
|
|||||||
| Liabilities: |
||||||||||||
| Cash overdraft |
— | 868,916 | — | |||||||||
| Liquidation value of preferred stock |
30,000,000 | 75,000,000 | 30,000,000 | |||||||||
| Payable for securities purchased |
— | — | 1,107,900 | |||||||||
| Investment management fees payable |
33,801 | 81,336 | 31,364 | |||||||||
| Audit fees payable |
33,535 | 33,535 | 33,535 | |||||||||
| Other accrued expenses |
5,021 | 42,788 | 9,447 | |||||||||
| Other affiliates payable |
2,628 | 5,550 | 4,249 | |||||||||
| Trustees’ fees and expenses payable |
195 | 465 | 176 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total liabilities |
30,075,180 | 76,032,590 | 31,186,671 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 69,780,543 | $ | 164,598,760 | $ | 62,526,067 | ||||||
|
|
|
|
|
|
|
|||||||
| Net Assets Applicable to Common Shareholders Consist of: |
||||||||||||
| Paid-in capital ($0.001 par value)3,4 |
$ | 66,918,121 | $ | 157,931,075 | $ | 60,617,476 | ||||||
| Undistributed (distributions in excess of) net investment income |
854,468 | 1,435,077 | 785,029 | |||||||||
| Accumulated net realized loss on investments |
(1,784,722 | ) | (1,732,997 | ) | (2,417,821 | ) | ||||||
| Net unrealized appreciation of investments |
3,792,676 | 6,965,605 | 3,541,383 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 69,780,543 | $ | 164,598,760 | $ | 62,526,067 | ||||||
|
|
|
|
|
|
|
|||||||
| Net Asset Value per Common Share |
$ | 14.43 | $ | 14.31 | $ | 13.81 | ||||||
|
|
|
|
|
|
|
|||||||
| 1Investments, at cost |
94,352,538 | 229,800,912 | 87,832,503 | |||||||||
| 2Short-term investments, at cost |
— | — | 500,000 | |||||||||
| 3Common shares outstanding |
4,837,100 | 11,504,975 | 4,528,443 | |||||||||
| 4Common shares authorized |
200 million | 200 million | unlimited | |||||||||
See accompanying notes, which are an integral part of the financial statements.
22
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Year Ended March 31, 2014
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund |
||||||||||
| Investment Income: |
||||||||||||
| Interest |
$ | 4,427,948 | $ | 9,938,070 | $ | 4,193,287 | ||||||
|
|
|
|
|
|
|
|||||||
| Expenses: |
||||||||||||
| Management fees |
396,814 | 956,949 | 368,434 | |||||||||
| Interest expense |
386,456 | 1,039,124 | 384,060 | |||||||||
| Rating agency fees |
48,749 | 42,361 | 24,045 | |||||||||
| Offering costs |
40,176 | 84,939 | 55,053 | |||||||||
| Audit and tax |
38,375 | 49,334 | 33,535 | |||||||||
| Accounting and administration expenses |
37,260 | 89,856 | 34,596 | |||||||||
| Dividend disbursing and transfer agent fees and expenses |
30,760 | 68,538 | 31,384 | |||||||||
| Legal fees |
22,247 | 66,182 | 19,295 | |||||||||
| Reports and statements to shareholders |
17,231 | 43,007 | 4,646 | |||||||||
| Stock exchange fees |
4,700 | 10,944 | — | |||||||||
| Trustee’s fees and expenses |
3,576 | 8,558 | 3,242 | |||||||||
| Custodian fees |
1,551 | 4,077 | 2,240 | |||||||||
| Registration fees |
778 | 778 | 778 | |||||||||
| Other |
10,911 | 21,515 | 18,218 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
1,039,584 | 2,486,162 | 979,526 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Investment Income |
3,388,364 | 7,451,908 | 3,213,761 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Realized and Unrealized Loss: |
||||||||||||
| Net realized loss on investments |
(1,803,532 | ) | (1,865,333 | ) | (2,041,010 | ) | ||||||
| Net change in unrealized appreciation (depreciation) of investments |
(2,742,772 | ) | (7,344,025 | ) | (3,307,566 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net Realized and Unrealized Loss |
(4,546,304 | ) | (9,209,358 | ) | (5,348,576 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net Decrease in Net Assets Resulting from Operations |
$ | (1,157,940 | ) | $ | (1,757,450 | ) | $ | (2,134,815 | ) | |||
|
|
|
|
|
|
|
|||||||
See accompanying notes, which are an integral part of the financial statements.
23
Table of Contents
Statements of changes in net assets
Delaware Investments® Closed-End Municipal Bond Funds
| Delaware Investments Colorado Municipal Income Fund, Inc. |
||||||||
| Year ended | ||||||||
| 3/31/14 | 3/31/13 (As Restated) |
|||||||
| Increase (Decrease) in Net Assets from Operations: |
||||||||
| Net investment income1 |
$ | 3,388,364 | $ | 3,546,421 | ||||
| Net realized gain (loss) |
(1,803,532 | ) | 89,037 | |||||
| Net change in unrealized appreciation (depreciation) |
(2,742,772 | ) | 1,916,263 | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
(1,157,940 | ) | 5,551,721 | |||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(3,337,599 | ) | (3,337,599 | ) | ||||
| Net realized gain |
(72,556 | ) | (478,873 | ) | ||||
|
|
|
|
|
|||||
| (3,410,155 | ) | (3,816,472 | ) | |||||
|
|
|
|
|
|||||
| Net Increase (Decrease) in Net Assets Applicable to Common Shareholders |
(4,568,095 | ) | 1,735,249 | |||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of year |
74,348,638 | 72,613,389 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 69,780,543 | $ | 74,348,638 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 854,468 | $ | 800,128 | ||||
|
|
|
|
|
|||||
| Delaware Investments Minnesota Municipal Income Fund II, Inc. |
||||||||
| Year ended | ||||||||
| 3/31/14 | 3/31/13 (As Restated) |
|||||||
| Increase (Decrease) in Net Assets from Operations: |
||||||||
| Net investment income2 |
$ | 7,451,908 | $ | 8,222,244 | ||||
| Net realized gain (loss) |
(1,865,333 | ) | 2,208,718 | |||||
| Net change in unrealized appreciation (depreciation) |
(7,344,025 | ) | 1,762,327 | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
(1,757,450 | ) | 12,193,289 | |||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(7,938,433 | ) | (7,938,433 | ) | ||||
| Net realized gain |
(1,334,577 | ) | (460,199 | ) | ||||
|
|
|
|
|
|||||
| (9,273,010 | ) | (8,398,632 | ) | |||||
|
|
|
|
|
|||||
| Net Increase (Decrease) in Net Assets Applicable to Common Shareholders |
(11,030,460 | ) | 3,794,657 | |||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of year |
175,629,220 | 171,834,563 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 164,598,760 | $ | 175,629,220 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 1,435,077 | $ | 1,759,475 | ||||
|
|
|
|
|
|||||
24
Table of Contents
| Delaware Investments National Municipal Income Fund |
||||||||
| Year ended | ||||||||
| 3/31/14 | 3/31/13 (As Restated) |
|||||||
| Increase (Decrease) in Net Assets from Operations: |
||||||||
| Net investment income3 |
$ | 3,213,761 | $ | 3,271,838 | ||||
| Net realized gain (loss) |
(2,041,010 | ) | 1,281,216 | |||||
| Net change in unrealized appreciation (depreciation) |
(3,307,566 | ) | 2,597,893 | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
(2,134,815 | ) | 7,150,947 | |||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(3,215,195 | ) | (2,762,350 | ) | ||||
|
|
|
|
|
|||||
| (3,215,195 | ) | (2,762,350 | ) | |||||
|
|
|
|
|
|||||
| Net Increase (Decrease) in Net Assets Applicable to Common Shareholders |
(5,350,010 | ) | 4,388,597 | |||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of year |
67,876,077 | 63,487,480 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 62,526,067 | $ | 67,876,077 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 785,029 | $ | 792,940 | ||||
|
|
|
|
|
|||||
1Net investment income includes amounts that should have been classified as interest expense rather than dividends paid to preferred shareholders from net investment income of $383,862 and from realized capital gains of $27,664 for the year ended March 31, 2013. Such amounts are restated and classified as interest expense. See Note 9 in “Notes to financial statements.”
2Net investment income includes amounts that should have been classified as interest expense rather than dividends paid to preferred shareholders from net investment income of $966,323 and from realized capital gains of $59,112 for the year ended March 31, 2013. Such amounts are restated and classified as interest expense. See Note 9 in “Notes to financial statements.”
3Net investment income includes amounts that should have been classified as interest expense rather than dividends paid to preferred shareholders from net investment income of $406,627 for the year ended March 31, 2013. Such amounts are restated and classified as interest expense. See Note 9 in “Notes to financial statements.”
See accompanying notes, which are an integral part of the financial statements.
25
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Year Ended March 31, 2014
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund |
||||||||||
| Net Cash Provided by (Used for) Operating Activities: |
||||||||||||
| Net decrease in net assets resulting from operations |
$ | (1,157,940 | ) | $ | (1,757,450 | ) | $ | (2,134,815 | ) | |||
|
|
|
|
|
|
|
|||||||
| Adjustments to reconcile net increase in net assets from operations to cash provided by (used for) operating activities: |
||||||||||||
| Amortization of premium and accretion of discount on investments |
340,659 | 1,547,660 | 444,998 | |||||||||
| Amortization of offering costs for preferred shareholders |
56,758 | 101,550 | 71,675 | |||||||||
| Purchase of investment securities |
(25,951,101 | ) | (41,604,647 | ) | (37,052,440 | ) | ||||||
| Proceeds from disposition of investment securities |
25,550,962 | 40,513,073 | 37,362,513 | |||||||||
| (Purchase of) proceeds from short-term investment securities, net |
200,000 | — | (500,000 | ) | ||||||||
| Net realized loss on investments |
1,803,532 | 1,865,333 | 2,041,010 | |||||||||
| Net change in net unrealized appreciation (depreciation) of investments |
2,742,772 | 7,344,025 | 3,307,566 | |||||||||
| Increase (decrease) in receivable for securities sold |
— | (67,946 | ) | 5,073 | ||||||||
| Increase in interest receivable |
(43,158 | ) | (14,407 | ) | (73,662 | ) | ||||||
| Decrease in payable for securities purchased |
— | — | (33,350 | ) | ||||||||
| Decrease in interest payable |
(33,394 | ) | (83,486 | ) | (33,394 | ) | ||||||
| Decrease in investment management fees payable |
(1,762 | ) | (3,877 | ) | (1,927 | ) | ||||||
| Decrease in Trustees’ fees and expenses payable |
(14 | ) | (26 | ) | (15 | ) | ||||||
| Increase in audit fees payable |
33,535 | 33,535 | 33,535 | |||||||||
| Increase in other affiliates payable |
1,300 | 2,748 | 3,158 | |||||||||
| Increase (decrease) in other accrued expenses |
(9,233 | ) | 3,973 | (13,967 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total adjustments |
4,690,856 | 9,637,508 | 5,560,773 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
3,532,916 | 7,880,058 | 3,425,958 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash Flows Used for Financing Activities: |
||||||||||||
| Cash dividends and distributions paid to common shareholders |
(3,410,155 | ) | (9,273,010 | ) | (3,215,195 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash used for financing activities |
(3,410,155 | ) | (9,273,010 | ) | (3,215,195 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net increase (decrease) in cash |
122,761 | (1,392,952 | ) | 210,763 | ||||||||
| Cash at beginning of period |
28,648 | 524,036 | 71,600 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash at end of period |
$ | 151,409 | $ | (868,916 | ) | $ | 282,363 | |||||
|
|
|
|
|
|
|
|||||||
| Cash paid for interest on leverage |
$ | 419,850 | $ | 1,122,610 | $ | 417,454 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes, which are an integral part of the financial statements.
26
Table of Contents
Delaware Investments® Colorado Municipal Income Fund, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Year ended | ||||||||||||||||||||||
| 3/31/14 | 3/31/13 (As Restated) |
3/31/12 (As Restated) |
3/31/11 | 3/31/10 | ||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.370 | $ | 15.010 | $ | 13.370 | $ | 13.990 | $ | 13.220 | ||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||
| Net investment income1,2 |
0.700 | 0.733 | 0.638 | 0.601 | 0.607 | |||||||||||||||||
| Net realized and unrealized gain (loss) |
(0.935 | ) | 0.416 | 1.582 | (0.651 | ) | 0.733 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from investment operations |
(0.235 | ) | 1.149 | 2.220 | (0.050 | ) | 1.340 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||
| Net investment income |
(0.690 | ) | (0.690 | ) | (0.580 | ) | (0.570 | ) | (0.570 | ) | ||||||||||||
| Net realized gain |
(0.015 | ) | (0.099 | ) | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total dividends and distributions |
(0.705 | ) | (0.789 | ) | (0.580 | ) | (0.570 | ) | (0.570 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net asset value, end of period |
$ | 14.430 | $ | 15.370 | $ | 15.010 | $ | 13.370 | $ | 13.990 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market value, end of period |
$ | 13.330 | $ | 14.840 | $ | 14.600 | $ | 12.450 | $ | 13.390 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||
| Market value |
(5.25% | ) | 6.92% | 22.41% | (3.00% | ) | 24.49% | |||||||||||||||
| Net asset value |
(0.97% | ) | 7.71% | 17.19% | (0.30% | ) | 10.55% | |||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 69,781 | $ | 74,349 | $ | 72,613 | $ | 64,689 | $ | 67,651 | ||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4,5 |
1.49% | 1.44% | 0.95% | 0.56% | 0.56% | |||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders6,7 |
4.90% | 4.72% | 4.46% | 4.31% | 4.41% | |||||||||||||||||
| Portfolio turnover |
26% | 8% | 64% | 10% | 20% | |||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)8 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | — | $ | — | ||||||||||||
| Net asset coverage per share of preferred shares, end of period8 |
$ | 332,602 | $ | 347,829 | $ | 342,045 | $ | — | $ | — | ||||||||||||
| Liquidation value per share of preferred shares8 |
$ | 100,000 | $ | 100,0009 | $ | 100,0009 | $ | — | $ | — | ||||||||||||
| 1 | Net investment income includes dividends paid to preferred shareholders from net investment income of $0.078 per share and from realized capital gains of $0.002 per share for the year ended March 31, 2014. |
| 2 | Net investment income includes amounts that should have been classified as interest expense rather than dividends paid to preferred shareholders from net investment income of $0.079 and $0.031 per share and from realized capital gains of $0.006 and $0.000 per share for the years ended March 31, 2013 and 2012, respectively. Such amounts are restated and classified as interest expense. See Note 9 in “Notes to financial statements.” |
| 3 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the years ended March 31, 2014, 2013 and 2012 were 0.94%, 0.89% and 0.73%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 5 | The ratio of expenses to average net assets applicable to common shareholders has been restated for the years ended March 31, 2013 and 2012 to include interest expense of 0.55% and 0.22%, respectively. |
| 6 | The ratio of net investment income to average net assets applicable to common shareholders has been restated for the years ended March 31, 2013 and 2012 to include interest expense of 0.55% and 0.22%, respectively. |
| 7 | The ratio of net investment income excluding interest expense for the years ended March 31, 2014, 2013 and 2012 were 5.45%, 5.27% and 4.68%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 8 | In November 2011, the Fund issued a new series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share. |
| 9 | Excluding any accumulated but unpaid dividends. |
See accompanying notes, which are an integral part of the financial statements.
| (continues) | 27 |
Table of Contents
Financial highlights
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Year ended | ||||||||||||||||||||||
| 3/31/14 | 3/31/13 (As Restated) |
3/31/12 (As Restated) |
3/31/11 | 3/31/10 | ||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.270 | $ | 14.940 | $ | 13.700 | $ | 14.060 | $ | 13.140 | ||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||
| Net investment income1,2 |
0.648 | 0.715 | 0.640 | 0.612 | 0.602 | |||||||||||||||||
| Net realized and unrealized gain (loss) |
(0.802 | ) | 0.345 | 1.180 | (0.402 | ) | 0.888 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from investment operations |
(0.154 | ) | 1.060 | 1.820 | 0.210 | 1.490 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||
| Net investment income |
(0.690 | ) | (0.690 | ) | (0.580 | ) | (0.570 | ) | (0.570 | ) | ||||||||||||
| Net realized gain |
(0.116 | ) | (0.040 | ) | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total dividends and distributions |
(0.806 | ) | (0.730 | ) | (0.580 | ) | (0.570 | ) | (0.570 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net asset value, end of period |
$ | 14.310 | $ | 15.270 | $ | 14.940 | $ | 13.700 | $ | 14.060 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market value, end of period |
$ | 13.340 | $ | 15.630 | $ | 14.230 | $ | 12.600 | $ | 12.740 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||
| Market value |
(9.26% | ) | 15.18% | 17.95% | 3.32% | 18.58% | ||||||||||||||||
| Net asset value |
(0.36% | ) | 7.18% | 13.90% | 1.80% | 12.04% | ||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 164,599 | $ | 175,629 | $ | 171,835 | $ | 157,655 | $ | 161,723 | ||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4,5 |
1.51% | 1.40% | 0.93% | 0.56% | 0.56% | |||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders6,7 |
4.54% | 4.65% | 4.44% | 4.35% | 4.36% | |||||||||||||||||
| Portfolio turnover |
17% | 24% | 44% | 9% | 19% | |||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)8 |
$ | 75,000 | $ | 75,000 | $ | 75,000 | $ | — | $ | — | ||||||||||||
| Net asset coverage per share of preferred shares, end of period8 |
$ | 319,465 | $ | 334,172 | $ | 329,113 | $ | — | $ | — | ||||||||||||
| Liquidation value per share of preferred shares8 |
$ | 100,000 | $ | 100,0009 | $ | 100,0009 | $ | — | $ | — | ||||||||||||
| 1 | Net investment income includes dividends paid to preferred shareholders from net investment income of $0.076 per share and from realized capital gains of $0.014 per share for the year ended March 31, 2014. |
| 2 | Net investment income includes amounts that should have been classified as interest expense rather than dividends paid to preferred shareholders from net investment income of $0.084 and $0.033 per share and from realized capital gains of $0.005, and $0.000 per share for the years ended March 31, 2013 and 2012, respectively. Such amounts are restated and classified as interest expense. See Note 9 in “Notes to financial statements.” |
| 3 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the years ended March 31, 2014, 2013 and 2012 were 0.88%, 0.82% and 0.70%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 5 | The ratio of expenses to average net assets applicable to common shareholders has been restated for the years ended March 31, 2013 and 2012 to include interest expense of 0.58% and 0.23%, respectively. |
| 6 | The ratio of net investment income to average net assets applicable to common shareholders has been restated for the years ended March 31, 2013 and 2012 to include interest expense of 0.58% and 0.23%, respectively. |
| 7 | The ratio of net investment income excluding interest expense to average net assets for the years ended March 31, 2014, 2013 and 2012 were 5.17%, 5.23% and 4.67%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 8 | In November 2011, the Fund issued a new series of 750 variable rate preferred shares, with a liquidation preference of $100,000 per share. |
| 9 | Excluding any accumulated but unpaid dividends. |
See accompanying notes, which are an integral part of the financial statements.
28
Table of Contents
Delaware Investments® National Municipal Income Fund, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Year ended | ||||||||||||||||||||||
| 3/31/14 | 3/31/13 (As Restated) |
3/31/12 (As Restated) |
3/31/11 | 3/31/10 | ||||||||||||||||||
| Net asset value, beginning of period |
$ | 14.990 | $ | 14.020 | $ | 12.620 | $ | 13.070 | $ | 11.960 | ||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||
| Net investment income1,2 |
0.710 | 0.722 | 0.531 | 0.610 | 0.571 | |||||||||||||||||
| Net realized and unrealized gain (loss) |
(1.180 | ) | 0.858 | 1.409 | (0.532 | ) | 1.049 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from investment operations |
(0.470 | ) | 1.580 | 1.940 | 0.078 | 1.620 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||
| Net investment income |
(0.710 | ) | (0.610 | ) | (0.540 | ) | (0.528 | ) | (0.510 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total dividends and distributions |
(0.710 | ) | (0.610 | ) | (0.540 | ) | (0.528 | ) | (0.510 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net asset value, end of period |
$ | 13.810 | $ | 14.990 | $ | 14.020 | $ | 12.620 | $ | 13.070 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market value, end of period |
$ | 12.350 | $ | 14.480 | $ | 13.240 | $ | 12.200 | $ | 12.140 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||
| Market value |
(9.65% | ) | 14.12% | 13.19% | 4.78% | 16.69% | ||||||||||||||||
| Net asset value |
(2.41% | ) | 11.56% | 15.87% | 0.67% | 13.97% | ||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 62,526 | $ | 67,876 | $ | 63,487 | $ | 30,559 | $ | 31,650 | ||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4,5 |
1.58% | 1.56% | 1.02% | 0.65% | 0.63% | |||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders6,7 |
5.17% | 4.86% | 3.96% | 4.64% | 4.48% | |||||||||||||||||
| Portfolio turnover |
40% | 42% | 101% | 50% | 69% | |||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)8 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | — | $ | — | ||||||||||||
| Net asset coverage per share of preferred shares, end of period8 |
$ | 308,420 | $ | 326,254 | $ | 311,625 | $ | — | $ | — | ||||||||||||
| Liquidation value per share of preferred shares8 |
$ | 100,000 | $ | 100,0009 | $ | 100,0009 | $ | — | $ | — | ||||||||||||
| 1 | Net investment income includes dividends paid to preferred shareholders from net investment income of $0.085 per share for the year ended March 31, 2014. |
| 2 | Net investment income includes amounts that should have been classified as interest expense rather than dividends paid to preferred shareholders from net investment income of $0.090 and $0.004 per share for the years ended March 31, 2013 and 2012, respectively. Such amounts are restated and classified as interest expense. See Note 9 in “Notes to financial statements.” |
| 3 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the years ended March 31, 2014, 2013 and 2012 were 0.96%, 0.96% and 0.99%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 5 | The ratio of expenses to average net assets applicable to common shareholders has been restated for the years ended March 31, 2013 and 2012 to include interest expense of 0.60% and 0.03%, respectively. |
| 6 | The ratio of net investment income to average net assets applicable to common shareholders has been restated for the years ended March 31, 2013 and 2012 to include interest expense of 0.60% and 0.03%, respectively. |
| 7 | The ratio of net investment income excluding interest expense to average net assets for the years ended March 31, 2014, 2013 and 2012 were 5.79%, 5.46% and 3.99%, respectively. There was no interest expense for the years ended March 31, 2011 and 2010. |
| 8 | In March 2012, the Fund issued a new series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share. |
| 9 | Excluding any accumulated but unpaid dividends. |
See accompanying notes, which are an integral part of the financial statements.
29
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
March 31, 2014
Delaware Investments Colorado Municipal Income Fund, Inc. (Colorado Municipal Fund) and Delaware Investments Minnesota Municipal Income Fund II, Inc. (Minnesota Municipal Fund II) are organized as Minnesota corporations and Delaware Investments National Municipal Income Fund (National Municipal Fund) is organized as a Massachusetts business trust (each referred to as a Fund and collectively as the Funds). Colorado Municipal Fund, Minnesota Municipal Fund II and National Municipal Fund are considered diversified closed-end management investment companies under the Investment Company Act of 1940, as amended. The Funds’ shares trade on the New York Stock Exchange MKT, the successor to the American Stock Exchange.
The investment objective of each of the Colorado Municipal Fund and Minnesota Municipal Fund II is to provide current income exempt from federal income tax and from state personal income tax, if any, consistent with the preservation of capital. The investment objective of the National Municipal Fund is to provide current income exempt from federal income tax, consistent with the preservation of capital. Each of Colorado Municipal Fund and Minnesota Municipal Fund II seek to achieve its investment objective by investing substantially all of its net assets in investment grade, tax-exempt municipal obligations of its respective state at the time of investment. The National Municipal Fund seeks to achieve its investment objective by investing at least 80% of its net assets in securities the income from which is exempt from federal income tax.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Funds.
Security Valuation — Debt securities are valued based upon valuations provided by an independent pricing service or broker and reviewed by management. To the extent current market prices are not available, the pricing service may take into account developments related to the specific security, as well as transactions in comparable securities. Valuations for fixed income securities utilize matrix systems, which reflect such factors as security prices, yields, maturities, and ratings, and are supplemented by dealer and exchange quotations. Generally, other securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of each Fund’s Board of Directors/Trustees (each a Board, or collectively, the Boards). In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures or suspension of trading in a security.
Federal Income Taxes — No provision for federal income taxes has been made as each Fund intends to continue to qualify for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and make the requisite distributions to shareholders. The Funds evaluate tax positions taken or expected to be taken in the course of preparing each Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. Management has analyzed each Fund’s tax positions taken for all open federal income tax years (March 31, 2011–March 31, 2014), and has concluded that no provision for federal income tax is required in each Fund’s 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 each Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments Family of Funds are generally allocated among such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are amortized to interest income over the lives of the respective securities using the effective interest method. Each Fund declares and pays dividends from net investment income monthly and distributions from net realized gain on investments, if any, annually. Each Fund may distribute more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
Each Fund may receive earnings credits from its custodian when positive cash balances are maintained, which are used to offset custody fees. There were no earnings credits for the year ended March 31, 2014.
30
Table of Contents
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its respective investment management agreement, each Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee of 0.40% which is calculated based on each Fund’s adjusted average daily net assets.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to each Fund. For these services, the Funds pay DSC fees based on the aggregate daily net assets of the Delaware Investments Family of Funds at the following annual rate: 0.0050% of the first $30 billion; 0.0045% of the next $10 billion; 0.0040% of the next $10 billion; and 0.0025% of aggregate average daily net assets in excess of $50 billion. The fees payable to DSC under the service agreement described above are allocated among all funds in the Delaware Investments Family of Funds on a relative net asset value basis. For the year ended March 31, 2014, each Fund was charged for these services as follows:
| Colorado |
Minnesota |
National | ||
| $4,796 | $11,567 | $4,453 |
As provided in the investment management agreement, each Fund bears a portion of the cost of certain resources shared with DMC, including the cost of internal personnel of DMC and/or its affiliates that provide legal, tax, and regulatory reporting services to the Fund. For the year ended March 31, 2014, each Fund was charged for internal legal, tax and regulatory reporting services provided by DMC and/or its affiliates’ employees as follows:
| Colorado |
Minnesota |
National | ||
| $10,432 | $29,251 | $10,930 |
Directors’/Trustees’ fees include expenses accrued by each Fund for each Director’s/Trustee’s retainer and meeting fees. Certain officers of DMC and DSC are officers and/or Directors/Trustees of the Trust. These officers and Directors/Trustees are paid no compensation by the Funds.
3. Investments
For the year ended March 31, 2014, each Fund made purchases and sales of investment securities other than short-term investments as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Purchases |
$ | 25,951,101 | $ | 41,604,647 | $ | 37,052,440 | ||||||
| Sales |
25,550,962 | 40,513,073 | 37,362,513 | |||||||||
At March 31, 2014, the cost of investments and unrealized appreciation (depreciation) for federal income tax purposes for each Fund were as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Cost of Investments |
$ | 94,344,637 | $ | 229,676,043 | $ | 88,333,726 | ||||||
|
|
|
|
|
|
|
|||||||
| Aggregate unrealized appreciation |
$ | 4,287,252 | $ | 9,273,281 | $ | 4,003,535 | ||||||
| Aggregate unrealized depreciation |
(486,675 | ) | (2,182,807 | ) | (463,375 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net unrealized appreciation |
$ | 3,800,577 | $ | 7,090,474 | $ | 3,540,160 | ||||||
|
|
|
|
|
|
|
|||||||
| (continues) | 31 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
3. Investments (continued)
U.S. GAAP defines fair value as the price that each Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. A three-level hierarchy for fair value measurements has been established based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. Each Fund’s investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (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 each 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. Each Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following tables summarize the valuation of each Fund’s investments by fair value hierarchy levels as of March 31, 2014:
| Colorado Municipal Fund |
||||
| Level 2 | ||||
| Municipal Bonds |
$ | 98,145,214 | ||
|
|
|
|||
| Minnesota Municipal Fund II |
||||
| Level 2 | ||||
| Municipal Bonds |
$ | 236,766,517 | ||
|
|
|
|||
| National Municipal Fund |
||||
| Level 2 | ||||
| Municipal Bonds |
$ | 91,373,887 | ||
| Short-Term Investments |
500,000 | |||
|
|
|
|||
| Total |
$ | 91,873,887 | ||
|
|
|
|||
During the year ended March 31, 2014, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a material impact to the Funds. The Funds’ policy is to recognize transfers between levels at the beginning of the reporting period.
32
Table of Contents
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Additionally, distributions from net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. The tax character of dividends and distributions paid during the years ended March 31, 2014 and 2013 was as follows:
Year ended March 31, 2014
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Ordinary income |
$ | 577 | $ | 528,328 | $ | 2,086 | ||||||
| Tax-exempt income |
3,743,695 | 8,850,700 | 3,597,169 | |||||||||
| Long-term capital gains |
52,339 | 933,106 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 3,796,611 | $ | 10,312,134 | $ | 3,599,255 | ||||||
|
|
|
|
|
|
|
|||||||
Year ended March 31, 2013
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Ordinary income |
$ | 11,156 | $ | 345,149 | $ | 4,581 | ||||||
| Tax-exempt income |
3,337,599 | 7,938,433 | 2,757,769 | |||||||||
| Long-term capital gains |
467,717 | 115,050 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 3,816,472 | $ | 8,398,632 | $ | 2,762,350 | ||||||
|
|
|
|
|
|
|
|||||||
5. Components of Net Assets on a Tax Basis
As of March 31, 2014, the components of net assets on a tax basis were as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Shares of beneficial interest |
$ | 66,918,121 | $ | 157,931,075 | $ | 60,617,476 | ||||||
| Undistributed tax-exempt income |
854,468 | 1,435,077 | 785,029 | |||||||||
| Capital loss carryforwards |
(1,792,623 | ) | (1,857,866 | ) | (2,416,598 | ) | ||||||
| Unrealized appreciation (depreciation) |
3,800,577 | 7,090,474 | 3,540,160 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net assets |
$ | 69,780,543 | $ | 164,598,760 | $ | 62,526,067 | ||||||
|
|
|
|
|
|
|
|||||||
The differences between book basis and tax basis components of net assets are primarily attributable to tax treatment of market discount on debt instruments and tax deferral of wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to tax treatment of market discount on debt instruments and redesignation of dividends paid. Results of operations and net assets were not affected by these reclassifications. For the year ended March 31, 2014, the Funds recorded the following reclassifications.
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Undistributed net investment loss |
$ | (4,269 | ) | $ | (1,876 | ) | $ | (6,477 | ) | |||
| Accumulated net realized gain |
4,269 | 1,876 | 6,477 | |||||||||
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, 2014, if not utilized in future years, will expire as follows:
| (continues) | 33 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
5. Components of Net Assets on a Tax Basis (continued)
| Year of Expiration |
Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
|||||||||
| 2018 |
$ | — | $ | — | $ | 407,888 | ||||||
On Dec. 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Funds are permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
Losses that will be carried forward under the Act are as follows:
| Loss carryforward character | ||||||||
| Short-term | Long-term | |||||||
| Colorado Municipal Fund |
$ | 259,063 | $ | 1,533,560 | ||||
| Minnesota Municipal Fund II |
803,182 | 1,054,684 | ||||||
| National Municipal Fund |
1,516,439 | 492,271 | ||||||
6. Capital Stock
Pursuant to their articles of incorporation, Colorado Municipal Fund and Minnesota Municipal Fund II each have 200 million shares of $0.01 par value common shares authorized. National Municipal Fund has been authorized to issue an unlimited amount of $0.01 par value common shares. The Funds did not repurchase any shares under the Share Repurchase Program during the year ended March 31, 2014. Shares issuable under each Fund’s dividend reinvestment plan are purchased by each Fund’s transfer agent, Computershare, Inc., in the open market.
On Nov. 15, 2011, Delaware Investments Colorado Municipal Income Fund, Inc. (VCF) and Delaware Investments Minnesota Municipal Income Fund II, Inc. (VMM), issued $30,000,000 and $75,000,000, respectively, of Series 2016 Variable Rate MuniFund Term Preferred (VMTP) Shares, with $100,000 liquidation value per share in a privately negotiated offering. On March 15, 2012, Delaware Investments National Municipal Income Fund (National Municipal Fund) issued $30,000,000 Series 2017 VMTP Shares, with $100,000 liquidation value per share in a privately negotiated offering. Proceeds from the issuance of VMTP Shares, net of offering expenses, were invested in accordance with each Fund’s investment objective. The VMTP Shares were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933.
Colorado Municipal Fund and Minnesota Municipal Fund II are obligated to redeem their VMTP Shares on Dec. 1, 2016, unless earlier redeemed or repurchased by the Fund. National Municipal Fund is obligated to redeem its VMTP Shares on April 1, 2017, unless earlier redeemed or repurchased by the Fund. VMTP Shares are subject to optional and mandatory redemption in certain circumstances. The VMTP Shares were redeemable at the option of a Fund, subject to payment of a premium until Dec. 1, 2013 (with respect to Minnesota Municipal Fund II and Colorado Municipal Fund) and April 1, 2014 (with respect to National Municipal Fund), and at par thereafter. A Fund may be obligated to redeem certain of the VMTP Shares if the Fund fails to maintain certain asset coverage and leverage ratio requirements and such failures are not cured by the applicable cure date. The redemption price per share is equal to the sum of the liquidation value per share plus any accumulated but unpaid dividends. Dividends on the VMTP Shares are set weekly, subject to adjustments in certain circumstances. The weighted average dividend rates for the year ended March 31, 2014 were as follows:
| Colorado |
Minnesota |
National | ||
| 1.3% | 1.4% | 1.3% |
The Funds use leverage because their managers believe that, over time, leveraging may provide opportunities for additional income and total return for common shareholders. However, the use of leverage also can expose common shareholders to additional volatility. For example, as the prices of securities held by a Fund decline, the negative impact of these valuation changes on common share net asset value and common shareholder total return is magnified by the use of leverage; accordingly, the use of structural leverage may hurt a Fund’s overall performance.
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Leverage may also cause the Funds to incur certain costs. In the event that a Fund is unable to meet certain criteria (including, but not limited to, maintaining certain ratings with Fitch Ratings and Moody’s Investors Service, funding dividend payments or funding redemptions), that Fund will pay additional fees with respect to the leverage.
For financial reporting purposes, the VMTP Shares are considered debt of the issuer; therefore, the liquidation value which approximates fair value of the VMTP Shares is recorded as a liability in the statements of assets and liabilities. Dividends accrued and paid on the VMTP Shares are included as a component of interest expense in the statements of operations. The VMTP Shares are treated as equity for legal and tax purposes. Dividends paid to holders of the VMTP Shares are generally classified as tax-exempt income for tax-reporting purposes.
7. Geographic, Credit, and Market Risk
The Funds concentrate their investments in securities issued by municipalities. Because each of the Colorado Municipal Income Fund and the Minnesota Municipal Income Fund invest substantially all of its net assets in municipal obligations of its respective state at the time of investment, events in that state may have a significant impact on the performance and investments of the Colorado Municipal Income Fund and the Minnesota Municipal Fund. These events may include economic or political policy changes, tax base erosion, state constitutional limits on tax increases, budget deficits and other financial difficulties, changes in the credit ratings assigned to the state’s municipal issuers, the effects of natural or human-made disasters, or other economic, legislative or political or social issues. Any downgrade to the credit rating of the securities issued by the U.S. government may result in a downgrade of securities issued by the states or U.S. territories. The National Municipal Fund will be subject to these risks as well but to a lesser extent because it invests at least 80% of its net assets in securities, the income from which is exempt from federal income tax and is not limited to investing substantially all of its assets in municipal obligations of a single state. From time to time and consistent with its investment policies, the National Municipal Income Fund may invest a considerable portion of its assets in certain municipalities. As of March 31, 2014, the National Municipal Income Fund has invested 20.87%, 19.88%, and 14.89% (each as a percentage of fixed income investments) in securities issued by the State of California, the State of New York, and the State of Arizona, respectively. These investments could make the National Municipal Income Fund more sensitive to economic conditions in those states than other more geographically diversified national municipal income funds.
Each Fund may invest a percentage of assets in obligations of governments of U.S. territories, commonwealths and possessions such as Puerto Rico, the U.S. Virgin Islands or Guam. To the extent a Fund invests in such obligations, that Fund may be adversely affected by local political and economic conditions and developments within these U.S. territories, commonwealths and possessions. In the recent past, Puerto Rico has experienced volatile economic conditions. If the situation in Puerto Rico changes, the volatility, credit quality and performance of the Funds could be affected to the extent a Fund holds Puerto Rican securities.
Many municipalities insure repayment for their obligations. Although bond insurance may reduce the risk of loss due to default by an issuer, such bonds remain subject to the risk that market value may fluctuate for other reasons and there is no assurance that the insurance company will meet its obligations. A real or perceived decline in creditworthiness of a bond insurer can have an adverse impact on the value of insured bonds held in each Fund. At March 31, 2014, the percentages of each Fund’s net assets insured by insurers are listed below and these securities have been identified in the schedules of investments.
| Colorado |
Minnesota |
National | ||
| 25.03% | 7.11% | 2.78% |
Each Fund invests a portion of its assets in high yield fixed income securities, which are securities rated BB or lower by Standard & Poor’s (S&P) and/or Ba or lower by Moody’s Investors Service (Moody’s), or similarly rated by another nationally recognized statistical rating organization. Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
The Funds may invest in advanced refunded bonds, escrow secured bonds or defeased bonds. Under current federal tax laws and regulations, state and local government borrowers are permitted to refinance outstanding bonds by issuing new bonds. The issuer refinances the outstanding debt to either reduce interest costs or to remove or alter restrictive covenants imposed by the bonds being refinanced. A refunding transaction where the municipal securities are being refunded within 90 days from the issuance of the refunding issue is known as a “current refunding.” “Advance refunded bonds” are bonds in which the refunded bond issue remains outstanding for more than 90 days following the
| (continues) | 35 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
7. Geographic, Credit, and Market Risk (continued)
issuance of the refunding issue. In an advance refunding, the issuer will use the proceeds of a new bond issue to purchase high-grade interest-bearing debt securities which are then deposited in an irrevocable escrow account held by an escrow agent to secure all future payments of principal and interest and bond premium of the advance refunded bond. Bonds are “escrowed to maturity” when the proceeds of the refunding issue are deposited in an escrow account for investment sufficient to pay all of the principal and interest on the original interest payment and maturity dates.
Bonds are considered “pre-refunded” when the refunding issue’s proceeds are escrowed only until a permitted call date or dates on the refunded issue with the refunded issue being redeemed at the time, including any required premium. Bonds become “defeased” when the rights and interests of the bondholders and of their lien on the pledged revenues or other security under the terms of the bond contract are substituted with an alternative source of revenues (the escrow securities) sufficient to meet payments of principal and interest to maturity or to the first call dates. Escrowed secured bonds will often receive a rating of AAA from Moody’s, S&P, and/or Fitch Ratings due to the strong credit quality of the escrow securities and the irrevocable nature of the escrow deposit agreement.
Each Fund invests in certain obligations that may have liquidity protection to ensure that the receipt of payments due on the underlying security is timely. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. The Funds will not pay any additional fees for such credit support, although the existence of credit support may increase the price of a security.
Each Fund may invest up to 15% of its net assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A 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 each Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Boards have delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of each Fund’s limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to each Fund’s 15% limit on investments in illiquid securities. As of March 31, 2014, no securities have been determined to be illiquid under the Funds’ Liquidity Procedures. Rule 144A securities held by the Fund have been identified in the schedules of investments.
8. Contractual Obligations
Each Fund enters into contracts in the normal course of business that contain a variety of indemnifications. Each Fund’s maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts. Management has reviewed each Fund’s existing contracts and expects the risk of loss to be remote.
9. Restatement of Previously Issued Financial Statements
After the Funds issued their March 31, 2013 financial statements, Management determined that because the Funds’ VMTP Shares are treated as debt for accounting purposes, payment of the dividends to preferred shareholders should be classified as Interest Expense and a Statement of Cash Flows should be presented in accordance with ASC 230. Accordingly, the three Funds’ financial statements dated March 31, 2013 and March 31, 2012 understated interest expense. Additionally, the Funds’ prior year financial statements did not present a Statement of Cash Flows. The difference in treatment did not have an impact on net increase (decrease) in net assets resulting from operations, beginning and ending net assets, or total return included in the three Funds’ annual shareholder reports dated March 31, 2013 and March 31, 2012. Management has decided to restate the Funds’ impacted financial statements and financial highlights previously issued in connection with this report. Accordingly, the Funds are presenting a Statement of Cash Flows in the year ended March 31, 2013 and are restating the other impacted financial statements for the year ended March 31, 2013, as well as certain Financial Highlights information for the years ended March 31, 2013 and March 31, 2012. The following sets forth the line items affected by the restatements discussed above.
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| Colorado Municipal Fund | ||||||||||||||||
| Previously Reported | As Restated | Previously Reported | As Restated | |||||||||||||
| 2013 | 2013 | 2012 | 2012 | |||||||||||||
| Statement of operations: |
||||||||||||||||
| Interest expense |
$ | — | $ | 411,526 | $ | — | $ | 149,762 | ||||||||
| Total operating expenses |
669,116 | 1,080,642 | 504,316 | 654,078 | ||||||||||||
| Net investment income |
3,957,947 | 3,546,421 | 3,233,923 | 3,084,161 | ||||||||||||
| Dividends and distributions to preferred shareholders |
(411,526 | ) | — | (149,762 | ) | — | ||||||||||
| Net increase in net assets resulting from operations |
5,551,721 | 5,551,721 | 10,729,534 | 10,729,534 | ||||||||||||
| Previously Reported | As Restated | Previously Reported | As Restated | |||||||||||||
| 2013 | 2013 | 2012 | 2012 | |||||||||||||
| Statement of changes in net assets: |
||||||||||||||||
| Net investment income |
$ | 3,957,947 | $ | 3,546,421 | $ | 3,233,923 | $ | 3,084,161 | ||||||||
| Dividends and distributions to preferred shareholders |
(411,526 | ) | — | (149,762 | ) | — | ||||||||||
| Net increase in net assets resulting from operations |
5,551,721 | 5,551,721 | 10,729,534 | 10,729,534 | ||||||||||||
| 2013 | ||||
| Statement of cash flows |
||||
| Net Cash Provided by (Used for) Operating Activities: |
||||
| Net increase in net assets resulting from operations |
$ | 5,551,721 | ||
| Adjustments to reconcile net increase (decrease) in net assets from operations to cash provided by (used for) operating activities: |
||||
| Amortization of premium and accretion of discount on investments |
263,560 | |||
| Amortization of offering costs for preferred shareholders |
35,284 | |||
| Purchase of investment securities |
(8,066,552 | ) | ||
| Proceeds from disposition of investment securities |
7,836,556 | |||
| Purchase from short-term investment securities, net |
(200,000 | ) | ||
| Net realized gain on investments |
(89,011 | ) | ||
| Net change in net unrealized appreciation (depreciation) of investments |
(1,916,263 | ) | ||
| Decrease in receivable for securities sold |
578,544 | |||
| Increase in interest receivable |
(14,600 | ) | ||
| Decrease in distributions payable |
(278,134 | ) | ||
| Decrease in interest payable |
(883 | ) | ||
| Increase in investment management fees payable |
704 | |||
| Increase in Trustees’ fees and expenses payable |
15 | |||
| Increase in other affiliates payable |
559 | |||
| Decrease in other accrued expenses |
(15,584 | ) | ||
|
|
|
|||
| Total adjustments |
(1,865,805 | ) | ||
|
|
|
|||
| Net cash provided by operating activities |
3,685,916 | |||
|
|
|
|||
| Cash Flows Used for Financing Activities: |
||||
| Cash dividends and distributions paid to common shareholders |
(3,816,472 | ) | ||
|
|
|
|||
| Net cash used for financing activities |
(3,816,472 | ) | ||
|
|
|
|||
| Net decrease in cash |
(130,556 | ) | ||
| Cash at beginning of period |
159,204 | |||
|
|
|
|||
| Cash at end of period |
$ | 28,648 | ||
|
|
|
|||
| Cash paid for interest on leverage |
$ | 412,409 | ||
|
|
|
|||
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Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Fu