diminnesota_nq.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM N-Q
 
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF
REGISTERED MANAGEMENT INVESTMENT COMPANY
 
Investment Company Act file number: 811-07420
 
Exact name of registrant as specified in charter: Delaware Investments Minnesota
  Municipal Income Fund II, Inc.
 
Address of principal executive offices: 2005 Market Street
  Philadelphia, PA 19103
 
Name and address of agent for service: David F. Connor, Esq.
  2005 Market Street
  Philadelphia, PA 19103
 
Registrant’s telephone number, including area code: (800) 523-1918
   
Date of fiscal year end: March 31
 
Date of reporting period: June 30, 2010


Item 1. Schedule of Investments.
 
Schedule of Investments (Unaudited)
 
Delaware Investments Minnesota Municipal Income Fund II, Inc.
 
June 30, 2010
 
Principal
Amount              Value
Municipal Bonds – 98.72%
Corporate-Backed Revenue Bonds – 5.82%
Cloquet Pollution Control Revenue Refunding (Potlatch Project) 5.90% 10/1/26 $ 5,500,000 $ 5,245,350
Laurentian Energy Authority I Cogeneration Revenue Series A 5.00% 12/1/21 3,325,000 3,273,762
Sartell Environmental Improvement Revenue Refunding (International Paper) Series A 5.20% 6/1/27 1,000,000 957,630
  9,476,742
Education Revenue Bonds – 8.42%
Minnesota Higher Education Facilities Authority Revenue
       (Augsburg College) Series 6-J1 5.00% 5/1/28 1,500,000 1,510,785
       (Carleton College)
       Series 6-T 5.00% 1/1/28 1,000,000 1,076,680
       Series 7-D 5.00% 3/1/30   1,120,000   1,203,429
       (College of St. Benedict) Series 5-W 5.00% 3/1/20 2,000,000 2,034,840
       (St. Mary's University) Series 5-U 4.80% 10/1/23 1,400,000 1,409,114
       (University of St. Thomas)
       Series 6-X 5.00% 4/1/29 2,250,000 2,333,295
       Series 7-A 5.00% 10/1/39 1,000,000 1,024,490
University of Minnesota
       Series A 5.25% 4/1/29 1,000,000 1,102,740
       Series C 5.00% 12/1/19 1,290,000 1,506,281
University of the Virgin Islands Improvement Series A 5.375% 6/1/34 500,000 491,065
  13,692,719
Electric Revenue Bonds – 10.15%
Chaska Electric Revenue Refunding (Generating Facilities) Series A 5.25% 10/1/25 250,000 260,568
Minnesota Municipal Power Agency Electric Revenue Series A
       5.00% 10/1/34 1,900,000 1,929,659
       5.25% 10/1/19 1,610,000 1,721,992
Puerto Rico Electric Power Authority Revenue Series XX 5.25% 7/1/40 1,645,000 1,653,899
Southern Minnesota Municipal Power Agency Supply Revenue Series A 5.25% 1/1/14 (AMBAC) 5,250,000 5,884,987
Western Minnesota Municipal Power Agency Supply Revenue Series A 5.00% 1/1/30 (NATL-RE) 5,000,000 5,058,550
  16,509,655
Health Care Revenue Bonds – 15.73%
Bemidji Health Care Facilities First Mortgage Revenue (North Country Health Services) 5.00% 9/1/24 (RADIAN) 1,500,000 1,481,910
Glencoe Health Care Facilities Revenue (Glencoe Regional Health Services Project) 5.00% 4/1/25 2,000,000 1,928,040
Maple Grove Health Care System Revenue (Maple Grove Hospital) 5.25% 5/1/37 1,000,000 980,180
Minneapolis Health Care System Revenue
       (Fairview Health Services)
       Series A 6.625% 11/15/28 600,000 671,670
       Series B 6.50% 11/15/38 (ASSURED GTY) 295,000 330,961
       Series D 5.00% 11/15/34 (AMBAC) 2,000,000 1,999,880
Minnesota Agricultural & Economic Development Board Revenue (Fairview Health Care System)
       Un-Refunded Balance Series A
       5.75% 11/15/26 (NATL-RE) 100,000 100,039
       6.375% 11/15/29 195,000 197,473
Rochester Health Care & Housing Revenue Refunding
       (Samaritan Bethany) Series A 7.375% 12/1/41 1,220,000 1,269,825
Shakopee Health Care Facilities Revenue (St. Francis Regional Medical Center) 5.25% 9/1/34 1,560,000 1,464,481
St. Cloud Health Care Revenue (Centracare Health System Project)
       Series A 5.125% 5/1/30 1,125,000 1,125,349
       Series D 5.50% 5/1/39 (ASSURED GTY) 1,500,000 1,556,940
St. Louis Park Health Care Facilities Revenue Refunding (Park Nicollet Health Services)
       5.75% 7/1/39 1,500,000 1,500,000
       Series C 5.50% 7/1/23 1,000,000 1,031,650
St. Paul Housing & Redevelopment Authority Health Care Facilities Revenue
       (Allina Health System)
       Series A 5.00% 11/15/18 (NATL-RE) 1,380,000 1,497,590
       Series A-1 5.25% 11/15/29 1,395,000 1,419,719
       (Children’s Hospital) 5.00% 8/15/34 (AGM) 500,000 507,115
       (Health Partners Obligation Group Project) 5.25% 5/15/36   2,000,000     1,868,600
       (Regions Hospital Project) 5.30% 5/15/28   1,000,000     970,710


St. Paul Housing & Redevelopment Authority Revenue
       (Franciscan Health Elderly Project) 5.40% 11/20/42 (GNMA) (FHA) 2,700,000              2,716,631
Winona Health Care Facilities Revenue Refunding (Winona Health Obligation Group) 5.00% 7/1/23 1,010,000 969,418
  25,588,181
Housing Revenue Bonds – 8.25%
Chanhassen Multifamily Housing Revenue Refunding (Heritage Park Apartments Project)
       6.20% 7/1/30 (FHA) (HUD) (AMT) 1,105,000 1,106,006
Dakota County Community Development Agency Mortgage Revenue
       5.85% 10/1/30 (GNMA) (FNMA) (AMT) 10,000 10,006
Minneapolis Multifamily Housing Revenue  
       ·(Gaar Scott Loft Project) 5.95% 5/1/30 (AMT) (LOC – U.S. Bank N.A.) 890,000 894,797
       (Olson Townhomes Project) 6.00% 12/1/19 (AMT) 755,000 755,272
       (Seward Towers Project) 5.00% 5/20/36 (GNMA) 2,000,000 2,024,100
       (Sumner Housing Project) Series A 5.15% 2/20/45 (GNMA) (AMT) 2,000,000 2,005,900
Minnesota Housing Finance Agency Revenue
       (Rental Housing)
       Series A 5.00% 2/1/35 (AMT) 1,000,000 988,790
       Series D 5.95% 2/1/18 (NATL-RE) 120,000 120,498
       (Residential Housing)  
       Series B-1 5.35% 1/1/33 (AMT) 1,555,000 1,559,805
       ·Series D 4.75% 7/1/32 (AMT) 1,000,000 965,570
       Series I 5.15% 7/1/38 (AMT) 745,000 748,181
       Series L 5.10% 7/1/38 (AMT) 1,495,000 1,495,000
Washington County Housing & Redevelopment Authority Revenue Refunding
       (Woodland Park Apartments Project) 4.70% 10/1/32 750,000 753,195
  13,427,120
Lease Revenue Bonds – 6.30%
Andover Economic Development Authority Public Facilities Lease Revenue Refunding
       (Andover Community Center)
       5.125% 2/1/24 205,000 226,880
       5.20% 2/1/29 410,000 454,817
Puerto Rico Public Buildings Authority Revenue Un-Refunded Balance
       (Government Facilities Bond) Series D 5.25% 7/1/27 530,000 530,599
St. Paul Port Authority Lease Revenue (Cedar Street Office Building Project)
       5.00% 12/1/22 2,385,000 2,471,504
       5.25% 12/1/27 2,800,000 2,882,459
       (Robert Street Office Building Project) Series 3-11 5.00% 12/1/27 2,000,000 2,064,560
Virginia Housing & Redevelopment Authority Health Care Facility Lease Revenue
       5.25% 10/1/25 680,000 673,962
       5.375% 10/1/30 965,000 942,236
  10,247,017
Local General Obligation Bonds – 9.43%
Dakota County Community Development Agency Governmental Housing Refunding
       (Senior Housing Facilities) Series A 5.00% 1/1/23 1,100,000 1,165,835
Minneapolis Special School District #1 5.00% 2/1/19 (AGM) 1,175,000 1,268,060
Morris Independent School District #769 5.00% 2/1/28 (NATL-RE) 3,750,000 4,090,576
Rocori Independent School District #750 (School Building) Series B
       5.00% 2/1/22 1,010,000 1,147,390
       5.00% 2/1/24 1,075,000 1,204,075
       5.00% 2/1/25 1,115,000 1,240,259
       5.00% 2/1/26 1,155,000 1,273,930
Washington County Housing & Redevelopment Authority Refunding Series B
       5.50% 2/1/22 (NATL-RE) 1,705,000 1,785,237
       5.50% 2/1/32 (NATL-RE) 2,140,000 2,172,314
  15,347,676
§Pre-Refunded/Escrowed to Maturity Bonds – 21.71%
Andover Economic Development Authority Public Facilities Lease Revenue (Andover Community Center)
       5.125% 2/1/24-14 295,000 326,485
       5.20% 2/1/29-14 590,000 654,493
Dakota-Washington Counties Housing & Redevelopment Authority Revenue
       (Bloomington Single Family Residential Mortgage)
       8.375% 9/1/21 (GNMA) (FHA) (VA) (AMT) 7,055,000 9,646,724
Hennepin County Series B 5.00% 12/1/18-10 1,000,000 1,019,880
Minneapolis Community Planning & Economic Development Department Supported
       (Limited Tax Common Bond Fund) Series G-1 5.70% 12/1/19-11 1,100,000 1,152,448


Southern Minnesota Municipal Power Agency Power Supply Revenue Refunding            
       Series A 5.75% 1/1/18-13 3,715,000 4,011,383
       Series B 5.50% 1/1/15 (AMBAC) 390,000 409,122
St. Louis Park Health Care Facilities Revenue (Park Nicollet Health Services)  
       Series B 5.25% 7/1/30-14 1,250,000 1,436,963
St. Paul Housing & Redevelopment Authority Sales Tax (Civic Center Project)
       5.55% 11/1/23 2,300,000 2,470,867
       5.55% 11/1/23 (NATL-RE) (IBC) 4,200,000 4,512,018
University of Minnesota Hospital & Clinics 6.75% 12/1/16 2,580,000 3,165,376
University of Minnesota Series A 5.50% 7/1/21 4,000,000   4,739,440
Western Minnesota Municipal Power Agency Power Supply Revenue Series A 6.625% 1/1/16 1,535,000   1,776,532
    35,321,731
Special Tax Revenue Bonds – 3.52%
Minneapolis Community Planning & Economic Development Department Supported
       (Common Bond Fund) Series 5 5.70% 12/1/27 375,000   376,695
       (Limited Tax Common Bond Fund) Series A 6.75% 12/1/25 (AMT) 865,000 869,706
Minneapolis Development Revenue (Limited Tax Supported Common Bond Fund) Series 1 5.50% 12/1/24 (AMT) 1,000,000 1,024,700
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue Series B 5.00% 7/1/46 800,000 769,048
Puerto Rico Sales Tax Financing Corporation Sales Tax Revenue First Subordinate Series B 5.75% 8/1/37 1,200,000 1,249,896
St. Paul Port Authority (Brownfields Redevelopment Tax) Series 2 5.00% 3/1/37 895,000 923,604
Virgin Islands Public Finance Authority Revenue (Senior Lien Matching Fund Loan Note) Series A 5.25% 10/1/23 500,000 511,845
  5,725,494
State General Obligation Bond – 0.66%
Puerto Rico Commonwealth Public Improvement Refunding Series C 6.00% 7/1/39 1,010,000 1,068,994
  1,068,994
Transportation Revenue Bonds – 7.81%
Minneapolis - St. Paul Metropolitan Airports Commission Revenue
       Series A
       5.00% 1/1/22 (NATL-RE) 3,000,000 3,075,090
       5.00% 1/1/28 (NATL-RE) 2,120,000 2,140,818
       5.25% 1/1/16 (NATL-RE) 1,000,000 1,076,160
       Series B
       5.00% 1/1/35 (AMBAC) 2,000,000 2,013,600
       5.25% 1/1/24 (NATL-RE) (FGIC) (AMT) 1,000,000 1,003,090
St. Paul Housing & Redevelopment Authority Parking Revenue (Block 19 Ramp Project)
       Series A 5.35% 8/1/29 (AGM) 3,350,000 3,394,522
  12,703,280
Water & Sewer Revenue Bond – 0.92%
St. Paul Sewer Revenue Series D 5.00% 12/1/21 1,325,000 1,504,233
  1,504,233
Total Municipal Bonds (cost $154,115,174) 160,612,842
 
Total Value of Securities – 98.72%
       (cost $154,115,174) 160,612,842
Receivables and Other Assets Net of Liabilities (See Notes) – 1.28% 2,089,194
Net Assets Applicable to 11,504,975 Shares Outstanding – 100.00% $ 162,702,036

§Pre-Refunded bonds. Municipal bonds that are generally backed or secured by U.S. Treasury bonds. For Pre-Refunded bonds, the stated maturity is followed by the year in which the bond is pre-refunded. See Note 3 in "Notes."
·Variable rate security. The rate shown is the rate as of June 30, 2010. Interest rates reset periodically.
 
Summary of Abbreviations:
AGM – Insured by Assured Guaranty Municipal Corporation
AMBAC – Insured by the AMBAC Assurance Corporation
AMT – Subject to Alternative Minimum Tax
ASSURED GTY – Insured by the Assured Guaranty Corporation
FGIC – Insured by the Financial Guaranty Insurance Company
FHA – Insured by Federal Housing Administration
FNMA – Federal National Mortgage Association Collateral
GNMA – Government National Mortgage Association Collateral
HUD – Housing and Urban Development Section 8
IBC – Insured Bond Certificate
LOC – Letter of Credit
NATL-RE – Insured by the National Public Finance Guarantee Corporation
RADIAN – Insured by Radian Asset Assurance
VA –Veterans Administration Collateral
 

Notes
 
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by Delaware Investments Minnesota Municipal Income Fund II, Inc. (Fund). This report covers the period of time since the Fund’s last fiscal year end.
 
Security Valuation – Debt securities are valued by an independent pricing service or broker. 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. Short-term debt securities are valued at market value. Generally, other securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Fund’s Board of Directors (Board). In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures or suspension of trading in a security.
 
Federal Income Taxes – No provision for federal income taxes has been made as the Fund intends to continue to qualify for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and make the requisite distributions to shareholders. The Fund evaluates tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years (March 31, 2007 – March 31, 2010), and has concluded that no provision for federal income tax is required in the 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 reported amounts of 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.
 
Other – Expenses directly attributable to the Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments® Family of Funds are allocated amongst such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Interest income is recorded on the accrual basis. Discounts and premiums are amortized to interest income over the lives of the respective securities. The Fund declares and pays dividends from net investment income monthly and distributions from net realized gain on investments, if any, annually.
 
2. Investments
At June 30, 2010, the cost of investments for federal income tax purposes has been estimated since final tax characteristics cannot be determined until fiscal year end. At June 30, 2010, the cost of investments and unrealized appreciation (depreciation) for the Fund were as follows:
 
Cost of investments $ 154,115,174
Aggregate unrealized appreciation $ 7,557,363
Aggregate unrealized depreciation (1,059,695 )
Net unrealized appreciation $ 6,497,668

For federal income tax purposes, at March 31, 2010, capital loss carryforwards of $2,257,889 may be carried forward and applied against future capital gains. Such capital loss carryforwards will expire as follows: $9,826 expires in 2013, $1,983,869 expires in 2017, and $264,194 expires in 2018.
 
U.S. GAAP defines fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. A three level hierarchy for fair value measurements has been established based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting 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. The 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
Level 2 – inputs are observable, directly or indirectly
Level 3 – inputs are unobservable and reflect assumptions on the part of the reporting entity
 
The following table summarizes the valuation of the Fund’s investments by fair value hierarchy levels as of June 30, 2010:
 
Level 2
Municipal Bonds $ 160,612,842
Total $ 160,612,842
 
There were no Level 3 securities at the beginning or end of the period.
 
3. Credit and Market Risk
The Fund concentrates its investments in securities issued by Minnesota municipalities. The value of these investments may be adversely affected by new legislation within the state, regional or local economic conditions, and differing levels of supply and demand for municipal bonds. Many municipalities insure repayment for their obligations. Although bond insurance reduces the risk of loss due to default by an issuer, such bonds remain subject to the risk that value may fluctuate for other reasons and there is no assurance that the insurance company will meet its obligations. A real or perceived decline in creditworthiness of a bond insurer can have an adverse impact on the value of insured bonds held in the Fund. At June 20, 2010, 25% of the Fund’s net assets were insured by bond insurers. These securities have been identified in the schedule of investments.
 

The Fund invests a portion of its assets in high yield fixed income securities, which carry ratings of BB or lower by Standard & Poor’s Ratings Group (S&P) and/or Ba or lower by Moody’s Investors Service, Inc. (Moody’s). Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
 
The Fund may invest in advanced refunded bonds, escrow secured bonds or defeased bonds. Under current federal tax laws and regulations, state and local government borrowers are permitted to refinance outstanding bonds by issuing new bonds. The issuer refinances the outstanding debt to either reduce interest costs or to remove or alter restrictive covenants imposed by the bonds being refinanced. A refunding transaction where the municipal securities are being refunded within 90 days from the issuance of the refunding issue is known as a "current refunding". "Advance refunded bonds" are bonds in which the refunded bond issue remains outstanding for more than 90 days following the issuance of the refunding issue. In an advance refunding, the issuer will use the proceeds of a new bond issue to purchase high grade interest bearing debt securities which are then deposited in an irrevocable escrow account held by an escrow agent to secure all future payments of principal and interest and bond premium of the advance refunded bond. Bonds are "escrowed to maturity" when the proceeds of the refunding issue are deposited in an escrow account for investment sufficient to pay all of the principal and interest on the original interest payment and maturity dates.
 
Bonds are considered "pre-refunded" when the refunding 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.
 
The Fund may invest up to 15% of its net assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Fund’s Board has delegated to Delaware Management Company, a series of Delaware Management Business Trust, the day-to-day functions of determining whether individual securities are liquid for purposes of the Fund’s limitation on investments in illiquid assets. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Fund’s 15% limit on investments in illiquid securities. As of June 30, 2010, there were no Rule 144A securities and no securities have been determined to be illiquid under the Fund's Liquidity Procedures.
 
4. Subsequent Events
Management has determined no material events or transactions occurred subsequent to June 30, 2010 that would require recognition or disclosure in the Fund’s schedule of investments.
 

Item 2. Controls and Procedures.
 
     The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of the filing of this report and have concluded that they are effective in providing reasonable assurance that the information required to be disclosed by the registrant in its reports or statements filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
 
     There were no significant changes in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
Item 3. Exhibits.
 
     File as exhibits as part of this Form a separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)), exactly as set forth below: