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: | September 30, 2016 |
Item 1. Reports to Stockholders
Table of Contents
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Delaware Investments® Closed-End Municipal Bond Funds
Semiannual report
September 30, 2016
|
| The figures in the semiannual report for Delaware Investments Closed-End Municipal Bond Funds represent past results, which are not a guarantee of future results. A rise or fall in interest rates can have a significant impact on bond prices. Funds that invest in bonds can lose their value as interest rates rise.
Closed-end funds
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Delaware Management Holdings, Inc. and its subsidiaries (collectively known by the marketing name of Delaware Investments) are wholly owned subsidiaries of Macquarie Group Limited, a global provider of banking, financial, advisory, investment, and funds management services. For more information, including press releases, please visit delawareinvestments.com/closed-end.
Unless otherwise noted, views expressed herein are current as of Sept. 30, 2016, and subject to change for events occurring after such date.
The Funds are not FDIC insured and are not guaranteed. It is possible to lose the principal amount invested.
Mutual fund advisory services are provided by Delaware Management Company, a series of Delaware Management Business Trust, which is a registered investment advisor. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
Neither Delaware Investments nor its affiliates referred to in this document are authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of Macquarie Bank Limited (MBL), a subsidiary of Macquarie Group Limited and an affiliate of Delaware Investments. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise. The Funds are governed by U.S. laws and regulations.
©2016 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
Table of Contents
3
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Security type / sector / state allocations
As of September 30, 2016 (Unaudited)
Sector designations may be different than the sector designations presented in other Fund materials.
4
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5
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Delaware Investments® Colorado Municipal Income Fund, Inc.
September 30, 2016 (Unaudited)
6
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| (continues) | 7 |
Table of Contents
Schedules of investments
Delaware Investments® Colorado Municipal Income Fund, Inc.
8
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| 9 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
September 30, 2016 (Unaudited)
10
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| (continues) | 11 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
12
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| (continues) | 13 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
14
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| (continues) | 15 |
Table of Contents
Schedules of investments
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
16
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Delaware Investments® National Municipal Income Fund
September 30, 2016 (Unaudited)
| (continues) | 17 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
18
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| (continues) | 19 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
20
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| (continues) | 21 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
22
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| (continues) | 23 |
Table of Contents
Schedules of investments
Delaware Investments® National Municipal Income Fund
24
Table of Contents
Statements of assets and liabilities
Delaware Investments® Closed-End Municipal Bond Funds
September 30, 2016 (Unaudited)
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund | |||||||||||||
| Assets: |
|||||||||||||||
| Investments, at value1 |
$ | 105,510,745 | $ | 246,942,700 | $ | 97,326,848 | |||||||||
| Short-term investments, at value2 |
100,000 | 2,650,000 | 650,000 | ||||||||||||
| Interest income receivable |
1,454,760 | 3,162,344 | 1,311,754 | ||||||||||||
| Receivables for securities sold |
— | 30,330 | — | ||||||||||||
| Prepaid rating agency fee |
1,750 | 1,000 | 5,417 | ||||||||||||
| Offering cost for preferred shareholders |
142,638 | 176,853 | 155,010 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total assets |
107,209,893 | 252,963,227 | 99,449,029 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Liabilities: |
|||||||||||||||
| Cash overdraft |
257,939 | 614,009 | 268,270 | ||||||||||||
| Liquidation value of preferred stock |
30,000,000 | 75,000,000 | 30,000,000 | ||||||||||||
| Payable for securities purchased |
— | 2,601,705 | — | ||||||||||||
| Investment management fees payable |
35,231 | 82,204 | 32,656 | ||||||||||||
| Other accrued expenses |
22,292 | 55,462 | 21,631 | ||||||||||||
| Directors’/Trustees’ fees and expenses payable |
196 | 445 | 176 | ||||||||||||
| Audit fees payable |
20,970 | 20,970 | 20,250 | ||||||||||||
| Legal fees payable to affiliates |
1,181 | 2,601 | 810 | ||||||||||||
| Accounting and administration expenses payable to affiliates |
413 | 964 | 383 | ||||||||||||
| Reports and statements to shareholders payable to affiliates |
29 | 67 | 27 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total liabilities |
30,338,251 | 78,378,427 | 30,344,203 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 76,871,642 | $ | 174,584,800 | $ | 69,104,826 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net Assets Applicable to Common Shareholders Consist of: |
|||||||||||||||
| Paid-in capital ($0.001 par value)3,4 |
$ | 66,918,121 | $ | 157,931,075 | $ | 60,617,476 | |||||||||
| Undistributed net investment income |
781,811 | 769,310 | 108,610 | ||||||||||||
| Accumulated net realized loss on investments |
(659,511 | ) | (1,086,197 | ) | (1,231,781 | ) | |||||||||
| Net unrealized appreciation of investments |
9,831,221 | 16,970,612 | 9,610,521 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total Net Assets Applicable to Common Shareholders |
$ | 76,871,642 | $ | 174,584,800 | $ | 69,104,826 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net Asset Value per Common Share |
$ | 15.89 | $ | 15.17 | $ | 15.26 | |||||||||
|
|
|
|
|
|
|
||||||||||
| 1Investments, at cost |
95,679,524 | 229,972,088 | 87,716,327 | ||||||||||||
| 2Short-term investments, at cost |
100,000 | 2,650,000 | 650,000 | ||||||||||||
| 3Common shares outstanding |
4,837,100 | 11,504,975 | 4,528,443 | ||||||||||||
| 4Common shares authorized |
200 million | 200 million | unlimited | ||||||||||||
See accompanying notes, which are an integral part of the financial statements.
25
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Six months ended September 30, 2016 (Unaudited)
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund | |||||||||||||
| Investment Income: |
|||||||||||||||
| Interest |
$ | 2,241,247 | $ | 4,556,805 | $ | 2,073,142 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Expenses: |
|||||||||||||||
| Management fees |
214,990 | 502,202 | 199,163 | ||||||||||||
| Interest expense |
253,701 | 634,253 | 253,669 | ||||||||||||
| Rating agency fees |
27,462 | 23,839 | 23,462 | ||||||||||||
| Audit and tax fees |
24,082 | 27,227 | 20,250 | ||||||||||||
| Accounting and administration expenses |
17,364 | 39,865 | 20,151 | ||||||||||||
| Legal fees |
15,324 | 25,032 | 4,471 | ||||||||||||
| Dividend disbursing and transfer agent fees and expenses |
12,833 | 34,668 | 14,910 | ||||||||||||
| Reports and statements to shareholders |
10,828 | 26,416 | 10,752 | ||||||||||||
| Offering costs |
9,018 | 12,119 | 10,455 | ||||||||||||
| Stock exchange fees |
2,385 | 5,477 | 2,138 | ||||||||||||
| Directors’/Trustees’ fees and expenses |
1,755 | 3,993 | 1,566 | ||||||||||||
| Custodian fees |
1,714 | 4,034 | 1,755 | ||||||||||||
| Registration fees |
398 | 488 | 398 | ||||||||||||
| Other |
6,203 | 11,596 | 10,062 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total operating expenses |
598,057 | 1,351,209 | 573,202 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Investment Income |
1,643,190 | 3,205,596 | 1,499,940 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Realized and Unrealized Gain (Loss): |
|||||||||||||||
| Net realized gain on investments |
484,641 | 284,334 | 154,470 | ||||||||||||
| Net change in unrealized appreciation (depreciation) of investments |
713,976 | 1,542,535 | 1,050,119 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Realized and Unrealized Gain |
1,198,617 | 1,826,869 | 1,204,589 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Net Increase in Net Assets Resulting from Operations |
$ | 2,841,807 | $ | 5,032,465 | $ | 2,704,529 | |||||||||
|
|
|
|
|
|
|
||||||||||
See accompanying notes, which are an integral part of the financial statements.
26
Table of Contents
Statements of changes in net assets
Delaware Investments® Closed-End Municipal Bond Funds
| Delaware Investments Colorado Municipal Income Fund, Inc. |
||||||||
| Six months ended 9/30/16 (Unaudited) |
Year ended 3/31/16 |
|||||||
| Increase in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 1,643,190 | $ | 3,408,420 | ||||
| Net realized gain |
484,641 | 351,677 | ||||||
| Net change in unrealized appreciation (depreciation) |
713,976 | 243,591 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
2,841,807 | 4,003,688 | ||||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(1,741,356 | ) | (3,458,527 | ) | ||||
|
|
|
|
|
|||||
| (1,741,356 | ) | (3,458,527 | ) | |||||
|
|
|
|
|
|||||
| Net Increase in Net Assets Applicable to Common Shareholders |
1,100,451 | 545,161 | ||||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of period |
75,771,191 | 75,226,030 | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 76,871,642 | $ | 75,771,191 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 781,811 | $ | 879,977 | ||||
|
|
|
|
|
|||||
| Delaware Investments Minnesota Municipal Income Fund II, Inc. |
||||||||
| Six months ended 9/30/16 (Unaudited) |
Year ended 3/31/16 |
|||||||
| Increase in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 3,205,596 | $ | 7,241,038 | ||||
| Net realized gain |
284,334 | 350,327 | ||||||
| Net change in unrealized appreciation (depreciation) |
1,542,535 | 495,650 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
5,032,465 | 8,087,015 | ||||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(3,566,542 | ) | (7,248,134 | ) | ||||
|
|
|
|
|
|||||
| (3,566,542 | ) | (7,248,134 | ) | |||||
|
|
|
|
|
|||||
| Net Increase in Net Assets Applicable to Common Shareholders |
1,465,923 | 838,881 | ||||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of period |
173,118,877 | 172,279,996 | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 174,584,800 | $ | 173,118,877 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 769,310 | $ | 1,130,256 | ||||
|
|
|
|
|
|||||
27
Table of Contents
Statements of changes in net assets
Delaware Investments® Closed-End Municipal Bond Funds
| Delaware Investments National Municipal Income Fund |
||||||||
| Six months ended 9/30/16 (Unaudited) |
Year ended 3/31/16 |
|||||||
| Increase in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 1,499,940 | $ | 3,150,504 | ||||
| Net realized gain |
154,470 | 398,496 | ||||||
| Net change in unrealized appreciation (depreciation) |
1,050,119 | 96,636 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
2,704,529 | 3,645,636 | ||||||
|
|
|
|
|
|||||
| Dividends and Distributions to Common Shareholders from: |
||||||||
| Net investment income |
(1,607,597 | ) | (3,441,617 | ) | ||||
|
|
|
|
|
|||||
| (1,607,597 | ) | (3,441,617 | ) | |||||
|
|
|
|
|
|||||
| Net Increase in Net Assets Applicable to Common Shareholders |
1,096,932 | 204,019 | ||||||
| Net Assets Applicable to Common Shareholders: |
||||||||
| Beginning of period |
68,007,894 | 67,803,875 | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 69,104,826 | $ | 68,007,894 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 108,610 | $ | 216,267 | ||||
|
|
|
|
|
|||||
See accompanying notes, which are an integral part of the financial statements.
28
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
Six months ended September 30, 2016 (Unaudited)
| Delaware Investments Colorado Municipal Income Fund, Inc. |
Delaware Investments Minnesota Municipal Income Fund II, Inc. |
Delaware Investments National Municipal Income Fund | |||||||||||||
| Net Cash Provided by (Used for) Operating Activities: |
|||||||||||||||
| Net increase in net assets resulting from operations |
$ | 2,841,807 | $ | 5,032,465 | $ | 2,704,529 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Adjustments to reconcile net increase in net assets from operations to cash provided by (used for) operating activities: |
|||||||||||||||
| Amortization of premium and accretion of discount on investments |
178,432 | 1,065,516 | 245,503 | ||||||||||||
| Purchase of investment securities |
(4,183,506 | ) | (16,537,149 | ) | (8,971,038 | ) | |||||||||
| Proceeds from disposition of investment securities |
5,023,491 | 15,054,343 | 8,269,077 | ||||||||||||
| Purchase of short-term investment securities, net |
(100,000 | ) | (2,650,000 | ) | 350,000 | ||||||||||
| Net realized gain on investments |
(484,641 | ) | (284,334 | ) | (154,470 | ) | |||||||||
| Net change in net unrealized appreciation (depreciation) of investments |
(713,976 | ) | (1,542,535 | ) | (1,050,119 | ) | |||||||||
| Increase in receivable for securities sold |
— | (15,165 | ) | — | |||||||||||
| Decrease in interest receivable |
17,129 | 146,835 | 18,970 | ||||||||||||
| Decrease in other accrued expenses receivable |
2,818 | — | — | ||||||||||||
| Decrease in offering costs for preferred shareholders |
(6,826 | ) | (2,767 | ) | (5,597 | ) | |||||||||
| Increase (decrease) in payable for securities purchased |
(1,113,180 | ) | 2,601,705 | (179,133 | ) | ||||||||||
| Decrease in investment management fees payable |
(403 | ) | (1,498 | ) | (367 | ) | |||||||||
| Decrease in Trustees’ fees and expenses payable |
(528 | ) | (1,214 | ) | (472 | ) | |||||||||
| Decrease in audit fees payable |
(19,530 | ) | (19,530 | ) | (20,250 | ) | |||||||||
| Decrease in other affiliates payable |
(1,051 | ) | (710 | ) | (1,333 | ) | |||||||||
| Increase in other accrued expenses |
20,542 | 22,164 | 5,328 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Total adjustments |
(1,381,229 | ) | (2,164,339 | ) | (1,493,901 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net cash provided by operating activities |
1,460,578 | 2,868,126 | 1,210,628 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Cash Flows Used for Financing Activities: |
|||||||||||||||
| Cash dividends and distributions paid to common shareholders |
(1,741,356 | ) | (3,566,542 | ) | (1,607,597 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net cash used for financing activities |
(1,741,356 | ) | (3,566,542 | ) | (1,607,597 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net increase (decrease) in cash |
(280,778 | ) | (698,416 | ) | (396,969 | ) | |||||||||
| Cash at beginning of period |
22,839 | 84,407 | 128,699 | ||||||||||||
|
|
|
|
|
|
|
||||||||||
| Cash at end of period |
$ | (257,939 | ) | $ | (614,009 | ) | $ | (268,270 | ) | ||||||
|
|
|
|
|
|
|
||||||||||
| Cash paid for interest on leverage |
$ | 253,701 | $ | 634,253 | $ | 253,669 | |||||||||
|
|
|
|
|
|
|
||||||||||
See accompanying notes, which are an integral part of the financial statements.
29
Table of Contents
Delaware Investments® Colorado Municipal Income Fund, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Six months ended 9/30/161 |
Year ended | |||||||||||||||||||||||||||||
| (Unaudited) | 3/31/16 | 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | |||||||||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.660 | $ | 15.550 | $ | 14.430 | $ | 15.370 | $ | 15.010 | $ | 13.370 | ||||||||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||||||||||
| Net investment income2 |
0.340 | 0.705 | 0.706 | 0.700 | 0.733 | 0.638 | ||||||||||||||||||||||||
| Net realized and unrealized gain (loss) |
0.250 | 0.120 | 1.104 | (0.935 | ) | 0.416 | 1.582 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total from investment operations |
0.590 | 0.825 | 1.810 | (0.235 | ) | 1.149 | 2.220 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||||||||||
| Net investment income |
(0.360 | ) | (0.715 | ) | (0.690 | ) | (0.690 | ) | (0.690 | ) | (0.580 | ) | ||||||||||||||||||
| Net realized gain |
— | — | — | (0.015 | ) | (0.099 | ) | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total dividends and distributions |
(0.360 | ) | (0.715 | ) | (0.690 | ) | (0.705 | ) | (0.789 | ) | (0.580 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net asset value, end of period |
$ | 15.890 | $ | 15.660 | $ | 15.550 | $ | 14.430 | $ | 15.370 | $ | 15.010 | ||||||||||||||||||
|
|
|
|
|
|
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|
|
|
|
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|
|||||||||||||||||||
| Market value, end of period |
$ | 15.300 | $ | 15.070 | $ | 14.350 | $ | 13.330 | $ | 14.840 | $ | 14.600 | ||||||||||||||||||
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|
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|
|
|||||||||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||||||||||
| Market value |
3.89% | 10.38% | 13.01% | (5.25% | ) | 6.92% | 22.41% | |||||||||||||||||||||||
| Net asset value |
3.84% | 5.85% | 13.12% | (0.97% | ) | 7.71% | 17.19% | |||||||||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 76,872 | $ | 75,771 | $ | 75,226 | $ | 69,781 | $ | 74,349 | $ | 72,613 | ||||||||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4 |
1.55% | 1.52% | 1.43% | 1.49% | 1.44% | 0.95% | ||||||||||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders5 |
4.24% | 4.59% | 4.65% | 4.90% | 4.72% | 4.46% | ||||||||||||||||||||||||
| Portfolio turnover |
5% | 13% | 14% | 26% | 8% | 64% | ||||||||||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||||||||||
| Value of preferred shares outstanding
(000 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | ||||||||||||||||||
| Net asset coverage per share of preferred shares, end of period6 |
$ | 356,239 | $ | 352,571 | $ | 350,753 | $ | 332,602 | $ | 347,829 | $ | 342,045 | ||||||||||||||||||
| Liquidation value per share of preferred shares6
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
| ||||||||||||
| 1 | Ratios have been annualized and total return and portfolio turnover have not been annualized. |
| 2 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.052, $0.079, $0.077, $0.078, $0.079, and $0.031 per share for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012, respectively, and from realized capital gains of $0.002, $0.006, and $0.000 per share for the years ended March 31, 2014, 2013, and 2012, respectively. |
| 3 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 0.89%, 1.01%, 0.92%, 0.94%, 0.89%, and 0.73%, respectively. |
| 5 | The ratio of net investment income excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013 and 2012 were 4.90%, 5.11%, 5.16%, 5.45%, 5.27%, and 4.68%, respectively. |
| 6 | In November 2011, the Fund issued a series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share (Series 2016 Shares). The Series 2016 Shares were redeemed on Feb. 2, 2016 and replaced with Series 2021 Shares, which are the same amount and value as the Fund’s Series 2016 Shares. |
See accompanying notes, which are an integral part of the financial statements.
30
Table of Contents
Delaware Investments® Minnesota Municipal Income Fund II, Inc.
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Six months ended 9/30/161 |
Year ended | |||||||||||||||||||||||||||||
| (Unaudited) | 3/31/16 | 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | |||||||||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.050 | $ | 14.970 | $ | 14.310 | $ | 15.270 | $ | 14.940 | $ | 13.700 | ||||||||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||||||||||
| Net investment income2 |
0.279 | 0.629 | 0.641 | 0.648 | 0.715 | 0.640 | ||||||||||||||||||||||||
| Net realized and unrealized gain (loss) |
0.151 | 0.081 | 0.689 | (0.802 | ) | 0.345 | 1.180 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total from investment operations |
0.430 | 0.710 | 1.330 | (0.154 | ) | 1.060 | 1.820 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||||||||||
| Net investment income |
(0.310 | ) | (0.630 | ) | (0.670 | ) | (0.690 | ) | (0.690 | ) | (0.580 | ) | ||||||||||||||||||
| Net realized gain |
— | — | — | (0.116 | ) | (0.040 | ) | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total dividends and distributions |
(0.310 | ) | (0.630 | ) | (0.670 | ) | (0.806 | ) | (0.730 | ) | (0.580 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net asset value, end of period |
$ | 15.170 | $ | 15.050 | $ | 14.970 | $ | 14.310 | $ | 15.270 | $ | 14.940 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Market value, end of period |
$ | 14.980 | $ | 14.700 | $ | 13.850 | $ | 13.340 | $ | 15.630 | $ | 14.230 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||||||||||
| Market value |
4.02% | 11.17% | 8.97% | (9.26% | ) | 15.18% | 17.95% | |||||||||||||||||||||||
| Net asset value |
2.89% | 5.30% | 9.80% | (0.36% | ) | 7.18% | 13.90% | |||||||||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 174,585 | $ | 173,119 | $ | 172,280 | $ | 164,599 | $ | 175,629 | $ | 171,835 | ||||||||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4 |
1.54% | 1.46% | 1.40% | 1.51% | 1.40% | 0.93% | ||||||||||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders5 |
3.64% | 4.24% | 4.33% | 4.54% | 4.65% | 4.44% | ||||||||||||||||||||||||
| Portfolio turnover |
9% | 16% | 10% | 17% | 24% | 44% | ||||||||||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)6 |
$ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | $ | 75,000 | ||||||||||||||||||
| Net asset coverage per share of preferred shares, end of period6 |
$ | 332,780 | $ | 330,825 | $ | 329,707 | $ | 319,465 | $ | 334,172 | $ | 329,113 | ||||||||||||||||||
| Liquidation value per share of preferred shares6
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
| ||||||||||||
| 1 | Ratios have been annualized and total return and portfolio turnover have not been annualized. |
| 2 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.055, $0.083, $0.081, $0.076, $0.084, and $0.033 per share for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012, respectively, and from realized capital gains of $0.014, $0.005, and $0.000 per share for the years ended March 31, 2014, 2013, and 2012, respectively. |
| 3 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 0.82%, 0.90%, 0.85%, 0.88%, 0.82%, and 0.70%, respectively. |
| 5 | The ratio of net investment income excluding interest expense to average net assets for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 4.36%, 4.80%, 4.88%, 5.17%, 5.23%, and 4.67%, respectively. |
| 6 | In November 2011, the Fund issued a series of 750 variable rate preferred shares, with a liquidation preference of $100,000 per share (Series 2016 Shares). The Series 2016 Shares were redeemed on Feb. 2, 2016 and replaced with Series 2021 Shares, which are the same amount and value as the Fund’s Series 2016 Shares. |
See accompanying notes, which are an integral part of the financial statements.
| (continues) | 31 |
Table of Contents
Financial highlights
Delaware Investments® National Municipal Income Fund
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Six months ended 9/30/161 |
Year ended | |||||||||||||||||||||||||||||
| (Unaudited) | 3/31/16 | 3/31/15 | 3/31/14 | 3/31/13 | 3/31/12 | |||||||||||||||||||||||||
| Net asset value, beginning of period |
$ | 15.020 | $ | 14.970 | $ | 13.810 | $ | 14.990 | $ | 14.020 | $ | 12.620 | ||||||||||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||||||||||||
| Net investment income2 |
0.331 | 0.696 | 0.711 | 0.710 | 0.722 | 0.531 | ||||||||||||||||||||||||
| Net realized and unrealized gain (loss) |
0.264 | 0.114 | 1.219 | (1.180 | ) | 0.858 | 1.409 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total from investment operations |
0.595 | 0.810 | 1.930 | (0.470 | ) | 1.580 | 1.940 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Less dividends and distributions to common shareholders from: |
||||||||||||||||||||||||||||||
| Net investment income |
(0.355 | ) | (0.760 | ) | (0.770 | ) | (0.710 | ) | (0.610 | ) | (0.540 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total dividends and distributions |
(0.355 | ) | (0.760 | ) | (0.770 | ) | (0.710 | ) | (0.610 | ) | (0.540 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net asset value, end of period |
$ | 15.260 | $ | 15.020 | $ | 14.970 | $ | 13.810 | $ | 14.990 | $ | 14.020 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Market value, end of period |
$ | 14.070 | $ | 13.800 | $ | 13.140 | $ | 12.350 | $ | 14.480 | $ | 13.240 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total investment return based on:3 |
||||||||||||||||||||||||||||||
| Market value |
4.51% | 11.32% | 12.87% | (9.65% | ) | 14.12% | 13.19% | |||||||||||||||||||||||
| Net asset value |
4.14% | 6.35% | 14.99% | (2.41% | ) | 11.56% | 15.87% | |||||||||||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||||||||||||
| Net assets applicable to common shares, end of period (000 omitted) |
$ | 69,105 | $ | 68,008 | $ | 67,804 | $ | 62,526 | $ | 67,876 | $ | 63,487 | ||||||||||||||||||
| Ratio of expenses to average net assets applicable to common shareholders4 |
1.65% | 1.70% | 1.60% | 1.58% | 1.56% | 1.02% | ||||||||||||||||||||||||
| Ratio of net investment income to average net assets applicable to common shareholders5 |
4.32% | 4.72% | 4.86% | 5.17% | 4.86% | 3.96% | ||||||||||||||||||||||||
| Portfolio turnover |
12% | 25% | 38% | 40% | 42% | 101% | ||||||||||||||||||||||||
| Leverage analysis: |
||||||||||||||||||||||||||||||
| Value of preferred shares outstanding (000 omitted)6 |
$ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | ||||||||||||||||||
| Net asset coverage per share of preferred shares, end of period6 |
$ | 330,349 | $ | 326,693 | $ | 326,013 | $ | 308,420 | $ | 326,254 | $ | 311,625 | ||||||||||||||||||
| Liquidation value per share of preferred shares6
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
$
|
100,000
|
| ||||||||||||
| 1 | Ratios have been annualized and total return and portfolio turnover have not been annualized. |
| 2 | Net investment income is reduced by dividends paid to preferred shareholders from net investment income of $0.056, $0.084, $0.083, $0.085, $0.090, and $0.004 per share for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012, respectively. |
| 3 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 4 | The ratio of expenses to average net assets applicable to common shareholders excluding interest expense for the six months ended Sept. 30, 2016 and the years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 0.92%, 1.13%, 1.03%, 0.96%, 0.96%, and 0.99%, respectively. |
| 5 | The ratio of net investment income excluding interest expense to average net assets for the six months ended Sept. 30, 2016 and years ended March 31, 2016, 2015, 2014, 2013, and 2012 were 5.05%, 5.29%, 5.44%, 5.79%, 5.46%, and 3.99%, respectively. |
| 6 | In March 2012, the Fund issued a series of 300 variable rate preferred shares, with a liquidation preference of $100,000 per share (Series 2017 Shares). The Series 2017 Shares were redeemed on Feb. 2, 2016 and replaced with Series 2021 Shares, which are the same amount and value as the Fund’s Series 2017 Shares. |
See accompanying notes, which are an integral part of the financial statements.
32
Table of Contents
Delaware Investments® Closed-End Municipal Bond Funds
September 30, 2016 (Unaudited)
Delaware Investments Colorado Municipal Income Fund, Inc. (Colorado Municipal Fund) and Delaware Investments Minnesota Municipal Income Fund II, Inc. (Minnesota Municipal Fund II) are organized as Minnesota corporations and Delaware Investments National Municipal Income Fund (National Municipal Fund) is organized as a Massachusetts business trust (each referred to as a Fund and collectively as the Funds). Colorado Municipal Fund, Minnesota Municipal Fund II, and National Municipal Fund are considered diversified closed-end management investment companies under the Investment Company Act of 1940, as amended. The Funds’ shares trade on the New York Stock Exchange MKT, the successor to the American Stock Exchange.
The investment objective of each of the Colorado Municipal Fund and Minnesota Municipal Fund II is to provide current income exempt from federal income tax and from state personal income tax, if any, consistent with the preservation of capital. The investment objective of the National Municipal Fund is to provide current income exempt from federal income tax, consistent with the preservation of capital. Each of Colorado Municipal Fund and Minnesota Municipal Fund II seeks to achieve its investment objective by investing substantially all of its net assets in investment grade, tax-exempt municipal obligations of its respective state at the time of investment. The National Municipal Fund seeks to achieve its investment objective by investing at least 80% of its net assets in securities the income from which is exempt from federal income tax.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Funds.
Security Valuation — Debt securities are valued based upon valuations provided by an independent pricing service or broker and reviewed by management. To the extent current market prices are not available, the pricing service may take into account developments related to the specific security, as well as transactions in comparable securities. Valuations for fixed income securities utilize matrix systems, which reflect such factors as security prices, yields, maturities, and ratings, and are supplemented by dealer and exchange quotations. Generally, other securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of each Fund’s Board of Directors/Trustees (each a Board, or collectively, the Boards). In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures or suspension of trading in a security.
Federal Income Taxes — No provision for federal income taxes has been made as each Fund intends to continue to qualify for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and make the requisite distributions to shareholders. The Funds evaluate tax positions taken or expected to be taken in the course of preparing each Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. Management has analyzed each Fund’s tax positions taken for all open federal income tax years (March 31, 2013–March 31, 2016), and has concluded that no provision for federal income tax is required in any Fund’s financial statements.
Cash and Cash Equivalents — Cash and cash equivalents include deposits held at financial institutions, which are available for the Fund’s use with no restrictions, with original maturities of 90 days or less.
Use of Estimates — Each Fund is an investment company, whose financial statements are prepared in conformity with U.S. GAAP. Therefore, each Fund follows the accounting and reporting guidelines for investment companies. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material.
Other — Expenses directly attributable to each Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments Family of Funds are generally allocated among such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are accreted or amortized to interest income, respectively, over the lives of the respective securities using the effective interest method. Each Fund declares and pays dividends from net investment income monthly and distributions from net realized gain on investments, if any, annually. Each Fund may distribute more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
| (continues) | 33 |
Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
1. Significant Accounting Policies (continued)
Each Fund may receive earnings credits from its custodian when positive cash balances are maintained, which may be used to offset custody fees. There were no such earnings credits for the six months ended Sept. 30, 2016.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its respective investment management agreement, each Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee of 0.40% which is calculated based on each Fund’s adjusted average daily net assets.
Delaware Investments Fund Services Company (DIFSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to each Fund. For these services, DIFSC’s fees are calculated based on the aggregate daily net assets of the Delaware Investments Family of Funds at the following annual rate: 0.0050% of the first $30 billion; 0.0045% of the next $10 billion; 0.0040% of the next $10 billion; and 0.0025% of aggregate average daily net assets in excess of $50 billion. The fees payable to DIFSC under the service agreement described above are allocated among all funds in the Delaware Investments Family of Funds on a relative net asset value basis. These amounts are included on the “Statements of operations” under “Accounting and administration expenses.” For the six months ended Sept. 30, 2016, each Fund was charged for these services as follows:
|
Colorado |
Minnesota Fund II |
National | ||
| $2,532 | $5,914 | $2,345 | ||
As provided in the investment management agreement, each Fund bears a portion of the cost of certain resources shared with DMC, including the cost of internal personnel of DMC and/or its affiliates that provide legal, tax, and regulatory reporting services to each Fund. These amounts are included on the “Statements of operations” under “Legal fees.” For the six months ended Sept. 30, 2016, each Fund was charged for internal legal, tax, and regulatory reporting services provided by DMC and/or its affiliates’ employees as follows:
|
Colorado |
Minnesota Fund II |
National | ||
| $9,283 | $20,582 | $6,605 | ||
Directors’/Trustees’ fees include expenses accrued by each Fund for each Director’s/Trustee’s retainer and meeting fees. Certain officers of DMC and DSC are officers and/or Directors/Trustees of the Trust. These officers and Directors/Trustees are paid no compensation by the Funds.
Cross trades for the six months ended Sept. 30, 2016, were executed by the Funds pursuant to procedures adopted by the Boards designed to ensure compliance with Rule 17a-7 under the 1940 Act. Cross trading is the buying or selling of portfolio securities between funds of investment companies, or between a fund of an investment company and another entity, that are or could be considered affiliates by virtue of having a common investment advisor (or affiliated investment advisors), common directors/trustees and/or common officers. At their regularly scheduled meetings, the Boards review such transactions for compliance with the procedures adopted by the Boards. Pursuant to these procedures, for the six months ended Sept. 30, 2016, the Funds engaged in securities purchases and securities sales, which did not result in any net realized gains (losses) as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||||||||||||
| Purchases |
$ | 1,000,139 | $ | 3,850,355 | $ | 1,750,148 | |||||||||
| Sales |
1,100,183 | 4,150,791 | 1,800,441 | ||||||||||||
| Net realized gain |
— | — | — | ||||||||||||
34
Table of Contents
3. Investments
For the six months ended Sept. 30, 2016, each Fund made purchases and sales of investment securities other than short-term investments as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||||||||||||
| Purchases |
$ | 4,183,506 | $ | 16,537,149 | $ | 8,971,038 | |||||||||
| Sales |
5,023,491 | 15,054,343 | 8,269,077 | ||||||||||||
At Sept. 30, 2016, the cost of investments for federal income tax purposes has been estimated since final tax characteristics cannot be determined until fiscal year end. At Sept. 30, 2016, the cost of investments and unrealized appreciation (depreciation) for each Fund were as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||||||||||||
| Cost of investments |
$ | 65,769,876 | $ | 232,651,151 | $ | 88,349,413 | |||||||||
|
|
|
|
|
|
|
||||||||||
| Aggregate unrealized appreciation of investments |
$ | 9,849,472 | $ | 17,165,315 | $ | 9,805,670 | |||||||||
| Aggregate unrealized depreciation of investments |
(8,603 | ) | (223,766 | ) | (178,235 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||
| Net unrealized appreciation of investments |
$ | 9,840,869 | $ | 16,941,549 | $ | 9,627,435 | |||||||||
|
|
|
|
|
|
|
||||||||||
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carryforwards remaining at March 31, 2016, if not utilized in future years, will expire as follows:
| Year of Expiration |
Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund | |||
| 2018 |
$— | $— | $407,888 |
On Dec. 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Funds are permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
Losses that will be carried forward under the Act are as follows:
| Colorado Municipal Fund |
Minnesota Municipal Fund II |
National Municipal Fund |
||||||||||
| Loss carryforward character: |
||||||||||||
| Short-term |
$ | 990,319 | $798,305 | $ | 975,123 | |||||||
| Long-term |
163,249 | 618,200 | — | |||||||||
U.S. GAAP defines fair value as the price that each Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. A three-level hierarchy for fair value measurements has been established based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity.
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Table of Contents
Notes to financial statements
Delaware Investments® Closed-End Municipal Bond Funds
3. Investments (continued)
Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best information available under the circumstances. Each Fund’s investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-level hierarchy of inputs is summarized below.
| Level 1 – | Inputs are quoted prices in active markets for identical investments. (Examples: equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) | |
| Level 2 – | Other observable inputs, including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates) or other market-corroborated inputs. (Examples: debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) | |
| Level 3 – | Significant unobservable inputs, including each Fund’s own assumptions used to determine the fair value of investments. (Examples: broker-quoted securities, fair valued securities) | |
Level 3 investments are valued using significant unobservable inputs. Each Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity, and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following tables summarize the valuation of each Fund’s investments by fair value hierarchy levels as of Sept. 30, 2016:
| Colorado Municipal Fund | |||||
| Securities |
Level 2 | ||||
| Municipal Bonds |
$ | 105,510,745 | |||
| Short-Term Investments |
100,000 | ||||
|
|
|
||||
| Total Value of Securities |
$ | 105,610,745 | |||
|
|
|
||||
| Minnesota | |||||
| Municipal Fund II | |||||
| Securities |
Level 2 | ||||
| Municipal Bonds |
$ | 246,942,700 | |||
| Short-Term Investments |
2,650,000 | ||||
|
|
|
||||
| Total Value of Securities |
$ | 249,592,700 | |||
|
|
|
||||
| National Municipal Fund | |||||
| Securities |
Level 2 | ||||
| Municipal Bonds |
$ | 97,326,848 | |||
| Short-Term Investments |
650,000 | ||||
|
|
|
||||
| Total Value of Securities |
$ | 97,976,848 | |||
|
|
|
||||
During the six months ended Sept. 30, 2016, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a material impact to the Funds. The Funds’ policy is to recognize transfers between levels at the beginning of the reporting period.
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4. Capital Stock
Pursuant to their articles of incorporation, Colorado Municipal Fund and Minnesota Municipal Fund II each have 200 million shares of $0.01 par value common shares authorized. National Municipal Fund has been authorized to issue an unlimited amount of $0.01 par value common shares. Shares issuable under each Fund’s dividend reinvestment plan are purchased by each Fund’s transfer agent, Computershare, Inc., in the open market.
On Jan. 22, 2016, Colorado Municipal Fund, Minnesota Municipal Fund II, and National Municipal Fund successfully issued $30,000,000, $75,000,000 and $30,000,000, respectively, of Variable Rate MuniFund Term Preferred (“VMTP”) Shares with a $100,000 liquidation value per share in a privately negotiated offering. The net proceeds from each offering were used to redeem the Series 2016 (in the case of Colorado Municipal Fund and Minnesota Municipal Fund II) and Series 2017 (in the case of National Municipal Fund) VMTP Shares previously outstanding. The VMTP Shares were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. Each Fund’s Series 2016 and Series 2017 VMTP Shares were the same amount and value as the respective Fund’s Series 2021 VMTP Shares.
Each of the Funds is obligated to redeem their VMTP Shares on Feb. 1, 2021, unless earlier redeemed or repurchased by a Fund. VMTP Shares are subject to optional and mandatory redemption in certain circumstances. VMTP Shares are redeemable at par. A Fund may be obligated to redeem certain of the VMTP Shares if the Fund fails to maintain certain asset coverage and leverage ratio requirements and such failures are not cured by the applicable cure date. The redemption price per share is equal to the sum of the liquidation value per share plus any accumulated but unpaid dividends. Dividends on the VMTP Shares are set weekly, subject to adjustments in certain circumstances.
The weighted average dividend rates for the six months ended Sept. 30, 2016 were as follows:
| Colorado |
Minnesota |
National | ||
| 0.8% | 0.8% | 0.8% |
The Funds use leverage because their managers believe that, over time, leveraging may provide opportunities for additional income and total return for common shareholders. However, the use of leverage also can expose common shareholders to additional volatility. For example, as the prices of securities held by a Fund decline, the negative impact of these valuation changes on common share net asset value and common shareholder total return is magnified by the use of leverage; accordingly, the use of structural leverage may hurt a Fund’s overall performance.
Leverage may also cause the Funds to incur certain costs. In the event that a Fund is unable to meet certain criteria (including, but not limited to, maintaining certain ratings with Fitch Ratings and Moody’s Investors Service (Moody’s), funding dividend payments, or funding redemptions), that Fund will pay additional fees with respect to the leverage.
For financial reporting purposes, the VMTP Shares are considered debt of the issuer; therefore, the liquidation value which approximates fair value of the VMTP Shares is recorded as a liability in the statements of assets and liabilities. Dividends accrued and paid on the VMTP Shares are included as a component of interest expense in the statements of operations. The VMTP Shares are treated as equity for legal and tax purposes. Dividends paid to holders of the VMTP Shares are generally classified as tax-exempt income for tax-reporting purposes.
Offering costs for VMTP Shares are recorded as a deferred charge and amortized over the 5-year life of the VMTP Shares. These are presented as “Offering cost for preferred shareholders” on the “Statements of assets and liabilities” and “Offering costs” on the “Statements of operations.”
5. Geographic, Credit, and Market Risk
The Funds concentrate their investments in securities issued by municipalities. Because each of the Colorado Municipal Fund and the Minnesota Municipal Fund II invests substantially all of its net assets in municipal obligations of its respective state at the time of investment, events in that state may have a significant impact on the performance and investments of the Colorado Municipal Fund and the Minnesota Municipal Fund II. These events may include economic or political policy changes, tax base erosion, state constitutional limits on tax increases, budget deficits and other financial difficulties, changes in the credit ratings assigned to the state’s municipal issuers, the effects of natural or human-made disasters, or other economic, legislative, or political or social issues. Any downgrade to the credit rating of the securities issued by the U.S. government may result in a downgrade of securities issued by the states or U.S. territories. The National Municipal Fund will be subject to these risks as well but to a lesser extent because it invests at least 80% of its net assets in securities, the income from which is exempt from federal income tax and is not limited to investing substantially all of its assets in municipal obligations of a single state. From time to time and consistent with its investment policies, the National Municipal Fund may invest a considerable portion of its assets in certain municipalities. As
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