2018 Annual Report
Dear Shareholder: The Puerto Rico Tax Free Target Maturity Fund II, Inc. (the "Fund") is pleased to present its Annual Report to Shareholders for the period from June 1, 2017 through May 23, 2018. PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. The Fund's investment objectives are (1) t o achieve a high level of current income that, for certain Puerto Rico investors, is exempt from U.S. Federal and Puerto Rico income taxes, consistent with the preservation of capital, and (2) to distribute to its holders of the Shares during the period commencing on January 1, 2008 and ending approximately on December 31, 2028, an amount at least equal, in the aggregate, to the initial offering price of $10 per share of Common Stock (collectively, the "Shares"). On May 24, 2018, the Fund's Board of Directors authorized a final distribution of principal to its holders of the Shares and approved the liquidation and dissolution of the Fund. Thereafter, on May 31, 2018, the Fund effected an aggregate final distribution amounting to $8,918,698, representing $1.73 of the initial offering price of $10 per Share, upon surrender of the Shares so held to Banco Popular de Puerto Rico, as the Fund's transfer agent. The payment of this final distribution of principal will result in the Fund's liquidation, and its dissolution will be effected upon surrender of all outstanding Shares to the Fund's transfer agent. Any final distribution amount that cannot be distributed to the holders of the Shares on or by June 15, 2018 will be deposited with Banco Popular de Puerto Rico for the benefit of such remaining holders, until the statutory period for abandoned property under Puerto Rico law has elapsed. Upon the Fund's dissolution, the books and records of the Fund shall be filed with Banco Popular de Puerto Rico, as the Fund's administrator, for a period of six (6) years. FUND PERFORMANCE The Fund's aggregate principal distributions since July 2008 (the initial principal distribution date), including the before-mentioned final principal distribution amount, amounted to $70,705,698, representing $9.93 per Share. The average dividend yield for the 12-month period, computed over the Fund s remaining principal for distribution, was 0.05%. At the end of the period on May 23, 2018, the market price of the shares was $1.44. ECONOMIC OVERVIEW Puerto Rico Economy The Puerto Rico Fiscal Agency and Financial Advisory Authority's Economic Activity Index (EAI) is an indicator of the general economic activity in Puerto Rico that is highly correlated with real GNP. For May 2018 the EAI figure was 120.4, a 1.6% contraction compared to May 2017, but a 0.4% increase compared to the previous month. Throughout the Fund's fiscal year, Puerto Rico bonds experienced high price volatility while continuing to trade at distressed levels. As measured by the Standard and Poor's Puerto Rico 1
Municipal Bond Index, Puerto Rico bonds as a group declined 3.65% for the 12-month reporting period. On September 20, 2017, the passage of Hurricane María through Puerto Rico is considered the most destructive storm to hit Puerto Rico in almost 90 years. It knocked out all electric power, destroyed more than 100,000 homes, and ruptured bridges and other public infrastructure. Puerto Rico is facing substantial economic and revenue disruption in the near term, and diminished output and revenue has negatively impacted the Puerto Rico government's ability to repay its debt. While it remains too early to determine the long-term economic effects post-hurricane María, the longterm repercussions may be mixed. On one hand, an exodus of residents relocating to the U.S. mainland has eroded Puerto Rico's economic base. However, significant amounts of U.S. federal aid and private insurance proceeds will be available to aid in rebuilding, thereby spurring economic growth and infrastructure replacement. On February 9, 2018, President Donald J. Trump signed into law the Bipartisan Budget Act of 2018, which includes a disaster relief package of up to $16 billion for Puerto Rico and the U.S. Virgin Islands, to be used for the Medicaid program and projects under the Community Development Block Grant. Governor Ricardo Rosselló has also announced plans to privatize PREPA and the generation of energy in Puerto Rico and award a concession of the distribution and transmission of energy. Thereafter, on February 13, 2018, the Commonwealth, PREPA, and the Puerto Rico Aqueducts and Sewers Authority submitted revised fiscal plans to the Oversight Board for its review and certification. Such fiscal plans will establish the fiscal roadmap for the Commonwealth through the fiscal year ending in 2023. The Oversight Board raised objections to such fiscal plans, and upon revision of the same by the Commonwealth, such fiscal plans were certified by the Oversight Board on April 19, 2018. The United States Economy Over the twelve-month reporting period, U.S. economic data continued to indicate modest growth in the 2.5% range. Job growth remained solid, with employers averaging 200,000 new jobs per month from June 2017 through May 2018. In addition, the national unemployment rate fell to 3.8% in May 2018, compared to 4.3% the prior year. The unemployment rate remains near its lowest level since 2000. Higher commodity prices throughout the reporting period brought inflation closer to the 2% level, which represents the Fed s long-run target. As measured by the U.S. Personal Consumption Expenditure Core Price Index, consumer prices rose 1.95% in the 12 months ended in May 2018. During the Fund s fiscal year, the U.S. Federal Reserve continued its gradual tightening of monetary policy, slowly moving away from near-zero short-term interest rates. For the period, the Federal Reserve raised interest rates three times (June 2017, December 2017, March 2018). In each case, the Federal Reserve approved a 0.25% increase in its target funds rate. Therefore, the target range has gone from 0.75%-1.00% at the beginning of the Fund s fiscal year to 1.50%-1.75% as of the end of May 2018. 2
As reiterated by the Fed in its May 2018 FOMC statement, the process of normalizing interest rates will continue, but the timing and size of future adjustments will be data-dependent, with the expectation that subsequent increases will continue to be gradual. For the 12-month reporting period, the U.S. Treasury yield curve flattened. Yields went up for all maturities. However, the change in yield was significantly larger for short-term maturities than for intermediate and longer-term maturities. For example, two-year U.S. Treasury yields rose from 1.38% at the beginning of the period, to 2.42% at the end of the period. At the same time, the 10- year U.S. Treasury note went up 55 basis points in yield, from 2.30% to 2.85%. On the long end of the curve, 30-year U.S. Treasuries yielded 3.02% at the end of the Fund s fiscal year, compared to 2.83% at the beginning. The Board of Directors thanks you for the honor to serve you for over 20 years and extend our best wishes in your future investment endeavors. Enrique Vila del Corral, CPA Chairman of the Board and President 3
SHARE REPURCHASE PROGRAM On January 31, 2014, the Board of Directors approved the implementation of a Share Repurchase Program for the acquisition of the Fund's shares of Common Stock (the "Shares"), in open-market transactions at share prices equal to or at a discount of the corresponding NAV per Share, of up to 25% of each Fund's total assets as of such date. The Fund's Share Repurchase Program is implemented on a discretionary basis, under the direction of the co-investment Advisers. The Fund's repurchase activity for each fiscal year is disclosed in the Annual Report to Shareholders attached hereto (see Note 3), as well as the quarterly reports to shareholders. The undertaking of a repurchase program does not obligate the Fund to purchase specific amounts of Shares. During the fiscal year, the Shares continued to experience a period of limited liquidity and/or trading at a discount to their net asset value. Although the holders of the Shares do not have the right to redeem their Shares inasmuch as the Fund is closed-ended, the Fund may, at its sole discretion, effect repurchases of Shares in the open market, in an attempt to increase the liquidity of the Shares as well as reduce any market discount from their corresponding net asset value. There is no assurance that, if such action is undertaken, it will result in the improvement of the Shares' liquidity or reducing any such market discount. Moreover, while such undertaking may have a favorable effect on the market price of the Shares, the repurchase of the Shares by the Fund will decrease the Fund's total assets and therefore, have the effect of increasing the Fund's expense ratio. Repurchases by the Fund must be conducted in accordance with the terms and conditions contained in Article 10 of Regulation No. 8469 issued by the Puerto Rico Office of the Commissioner of Financial Institutions (the "PROCFI") and procedures adopted by the Fund's Board of Directors to address potential conflicts of interest with affiliated broker-dealers Popular Securities and UBS Financial Services Incorporated of Puerto Rico. Among other things, such regulation and procedures require that to the extent that various sellers indicate interest in selling shares of the Fund, it will purchase such shares starting with the lowest offered price and in the following order of priority for each price: (1) individual and corporate investors, irrespective of the broker-dealer that serves as record owner of the shares to be repurchased; (2) the trading desks of Puerto Rico broker-dealers which are unaffiliated with the Fund; and (3) the trading desks of Popular Securities and UBS Financial Services Incorporated of Puerto Rico. If sellers offer more shares for repurchase than the Fund is able to accept at any particular price for a particular level of priority, repurchase offers will be accepted on a pro-rata basis within that particular level of priority. Additionally, to the extent that Popular Securities or UBS Financial Services Incorporated of Puerto Rico elects to offer the Fund's shares of Common Stock for repurchase from its respective securities inventory, it must do so at its corresponding offer price per share reported to the public. For the period ended May 23, 2018, the Fund did not repurchase any shares. Since the program's inception, the Fund has repurchased 2,379,683 shares of common stock in the open market with a net asset value of $3,686,773 and a cost of $3,290,087, which represent 15.95% of the total assets of the Fund as of January 31, 2014. 4
GLOSSARY OF MUTUAL FUND TERMS Bond - Security issued by a government or corporation to those from whom it has borrowed money. A bond usually promises to pay interest income to the bondholder at regular intervals and to repay the entire amount borrowed at maturity date. Realized Gain (Loss) - The profit (loss) from the sale of securities. Realized gains are paid to fund shareholders on a per share basis. When a gain distribution is made, the fund's net asset value drops by the amount of the distribution because the distribution is no longer considered part of the fund's assets. Dividend - A per share distribution of the income earned from the fund's portfolio holdings. When a dividend distribution is made, the fund's net asset value drops by the amount of the distribution because the distribution is no longer considered part of the fund's assets. Interest Rate Swap - An agreement to exchange one interest rate stream for another. No principal changes hands. Investment Adviser - An investment professional who is responsible for managing a portfolio's assets prudently and making appropriate investment decisions, such as which securities to buy, hold and sell, based on the investment objectives of the portfolio. Leverage - Vehicle used by the Fund to increase the amounts available for investment through the issuance of commercial paper or repurchase agreements transactions. Long-Term - An investment with a maturity greater than one year. Mutual Fund - A company which combines the investment money of many people whose financial goals are similar, and invests that money in a variety of securities. A mutual fund allows the smaller investor the benefits of diversification, professional management and constant supervision usually available only to large investors. Net Asset Value (NAV) Per Share - The NAV per share is determined by subtracting a fund's total liabilities from its total assets, and dividing that amount by the number of fund shares outstanding. Offering Price - The offering price of a share of a mutual fund is the price at which the share is sold to the public. Repurchase Agreements - Transactions in which the Fund sells securities to a bank or dealer, and agrees to repurchase them at a mutually agreed date and price. Short-Term - An investment with a maturity of one year or less. Total Investment Return - The change in value of a fund investment over a specified period of time, taking into account the change in a fund's market price and the reinvestment of all fund distributions. Turnover Ratio - The turnover ratio represents the fund's level of trading activity. A fund divides the lesser of purchases or sales (expressed in dollars and excluding all securities with maturities of less than one year) by the fund's average monthly assets. Yield - The annualized rate of income as measured against the current net asset value of fund shares. 5
Puerto Rico Tax-Free Target Maturity Fund II, Inc. May 31, 2018 STATEMENT OF NET ASSETS IN LIQUIDATION AS OF MAY 31, 2018 Assets: Cash and cash equivalents $46,387 Interest and other receivables 413 Total assets 46,800 Liabilities: Payables: Investment advisory fees 69 Administration fees 346 415 Accrued liquidation expenses 46,385 Total liabilities 46,800 Net Assets Applicable to Common Shares: - Net Assets Capital Stock - Consist of: Paid-in capital - Net assets applicable to common shares - Net asset value applicable to common shares - The accompanying notes are an integral part of these financial statements. 6
Puerto Rico Tax-Free Target Maturity Fund II, Inc. STATEMENT OF OPERATIONS FOR THE PERIOD FROM JUNE 1, 2017 THROUGH MAY 23, 2018 For the period from June 1, 2017 through May 23, 2018 Investment income: Interest $650,874 Expenses: Interest and leverage related expenses 63,910 Investment advisory fees 51,171 Administration fees 12,793 Custodian and transfer agent fees 12,793 Professional fees 45,169 Insurance expense 9,497 Directors' fees and expenses 27,750 Printing and shareholders reports 8,625 Other 20,095 Total expenses 251,803 Waived investment advisory, administration, custodian, and transfer agent fees (69,081) Net expenses after waived fees 182,722 Net investment income: 468,152 Realized Gain (Loss) & Unrealized Net realized gain on investments 389,186 Appreciation (Depreciation) on Change in unrealized depreciation on investments (863,612) Investments and Derivatives: Net loss on investments (474,426) Net decrease in net assets resulting from operations ($6,274) The accompanying notes are an integral part of these financial statements. 7
Puerto Rico Tax-Free Target Maturity Fund II, Inc. STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD FROM JUNE 1, 2017 THROUGH MAY 23, 2018 Increase (Decrease) in Net Assets: For the period from June 1, 2017 through May 23, 2018 Operations: Net investment income $468,152 Net realized gain on investments 389,186 Change in unrealized depreciation on investments (863,612) Net decrease in net assets resulting from operations (6,274) Distributions to Common Dividends from net investment income (4,253) Shareholders From: Decrease in net assets derived from common shares transactions (4,253) Net Assets: Net decrease in net assets attributable to common shares (10,527) Balance at June 1, 2017 8,929,225 Balance at May 23, 2018 $8,918,698 The accompanying notes are an integral part of these financial statements. 8
Puerto Rico Tax-Free Target Maturity Fund II, Inc. STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION FOR THE PERIOD FROM MAY 24, 2018 THROUGH MAY 31, 2018 Increase (Decrease) in Net Assets: For the period from May 24, 2018 through May 31, 2018 Distributions to Common Return of Capital (8,918,698) Shareholders From: Decrease in net assets derived from common shares transactions (8,918,698) Net Assets: Net decrease in net assets attributable to common shares (8,918,698) Net assets in liquidation at May 24, 2018 8,918,698 Net assets in liquidation at May 31, 2018 - The accompanying notes are an integral part of these financial statements. 9
Puerto Rico Tax-Free Target Maturity Fund II, Inc. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JUNE 1, 2017 THROUGH MAY 23, 2018 Increase (Decrease) in Cash: For the period from June 1, 2017 through May 23, 2018 Cash Provided by Net decrease in net assets from operations ($6,274) Operating Activities: Adjusted by: Sales of portfolio securities $5,333,828 Proceeds from mortgage-backed securities paydowns 1,060,576 Net realized loss on paydowns 2,626 Net realized gain on investments (389,186) Change in unrealized depreciation on investments 863,612 Accretion of discounts on investments (270,173) Amortization of premiums on investments 3,451 Decrease in interest and other receivables 26,785 Decrease in other assets 907 Decrease in interest payable (2,551) Decrease in administration fees payable (242) Decrease in investment advisory fees payable (48) Increase in accrued expenses and other liabilities 45,103 Total cash provided by operating activities 6,668,414 Cash Used in Repurchase agreements related repayments; net of issuances of $61,593,000 (4,128,000) Financing Activities: Dividends to common shareholders paid in cash (4,640) Total cash used in financing activities (4,132,640) Cash: Net increase in cash and cash equivalents 2,535,774 Cash and cash equivalents at June 1, 2017 464,988 Cash and cash equivalents at May 23, 2018 $3,000,762 Cash Flow Cash paid for interest and leverage related expenses $66,693 Information: The accompanying notes are an integral part of these financial statements. 10
PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. MAY 31, 2018 NOTES TO FINANCIAL STATEMENTS (IN LIQUIDATION) Note 1 - Reporting Entity and Significant Accounting Policies: 97BPuerto Rico Tax-Free Target Maturity Fund II, Inc. (the "Fund") is a non-diversified, closed-end management investment company. The Fund is a corporation organized under the laws of the Commonwealth of Puerto Rico and is registered as an investment company under the Puerto Rico Investment Companies Act of 1954, as amended. The Fund was incorporated on June 12, 1997 and started operations on July 31, 1997. On May 24, 2018, the Board of Directors approved a plan for the early liquidation and dissolution of the Fund (the Plan of Liquidation ), based on the Fund s Investment Advisers recommendation (Refer to Note 2 for details on investment agreements), given the small level of assets in its portfolio. Both the Fund s Ruling with the Office of the Commissioner of Financial Institutions ( OCFI ) and the Fund s Prospectus provide that, upon the reduction of the outstanding principal portfolio investments balance to 5% or less of the investments purchased with the Shares initial public offering, the Fund may sell the remaining portfolio securities to any person and use the proceeds to complete the distributions of principal on the shares. All portfolio securities were sold by May 22, 2018. The Plan of Liquidation contemplates each holder of the shares surrendering its Share certificates to Banco Popular de Puerto Rico, as the Fund s transfer agent, in exchange for the final distribution of principal payment. In this manner, the Fund s corporate charter may be dissolved with the Puerto Rico Department of State, when Banco Popular receives the totality of the outstanding Shares. To the extent that Banco Popular fails to receive the totality of the outstanding Shares, it may still dissolve the Fund at a special meeting of holders of the Shares. As a result, the Fund adopted the liquidation basis of accounting on May 24, 2018. Accordingly, assets are measured to reflect the estimated amount of cash or other consideration expected to be collected in settling or disposing of such assets, and liabilities are measured in accordance with the measurement provisions of accounting standard codification topics that otherwise will apply. As such, the measurement of assets and liabilities represents estimates, based on present facts and circumstances, of the realizable value of the assets and the costs associated with carrying out the Plan of Liquidation. The actual values and costs associated with carrying out the Plan of Liquidation may differ from amounts reflected in the financial statements because of the inherent uncertainty in estimating future events. At May 31, 2018, the Fund has recorded a liability of $46,385 reflecting estimated expenses through the completion of the Fund s liquidation. The change in accounting basis did not have a material effect on the Fund s carrying value of assets and liabilities. The Fund is an investment company that applies the accounting and reporting guidance in the Financial Accounting Standards Board ( FASB ) Accounting Standards Codification Topic 946, Financial Services Investment Companies ( ASC 946 ). The financial statements are prepared in accordance with U.S. generally accepted accounting principles ( GAAP ), which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements: New accounting pronouncement adopted and basis of accounting On April 2013, FASB issued Accounting Standard Update ( ASU ) No. 2013-07 Preparation of Financial Statements (Topic 205) Liquidation Basis of Accounting. The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). 11
PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. MAY 31, 2018 NOTES TO FINANCIAL STATEMENTS (IN LIQUIDATION) In preparing financial statements using the liquidation basis of accounting, the Fund needs to present relevant information about the entity s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The Fund should include in its presentation of assets any items it had not previously recognized under U.S. GAAP but that it expects to either sell in liquidation or use in settling liabilities. Additionally, the Fund should recognize and measure its liabilities in accordance with U.S. GAAP that otherwise applies to those assets. The Fund is also required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with sale or settlement of those assets and liabilities. 10B(a) Cash and Cash Equivalents - Cash and cash equivalents are valued at fair value. At May 31, 2018, cash and cash equivalents consisted of a time deposit open account amounting to $46,387 with Banco Popular de Puerto Rico, which is an affiliated entity. 101B(b) Valuation of Investments - Investments held by the Fund during the pre-liquidation period were stated at fair values as determined by Banco Popular de Puerto Rico, as the Fund's administrator, with the assistance of the Investment Advisers (Refer to Note 2 for details on investment agreements), on the basis of valuations provided by dealers or by pricing services, which are approved by the Fund s management and the Board of Directors, in accordance with the valuation methods set forth in the Governing Documents and related policies and procedures. 102B(c) Taxation - The Fund has elected to be treated as a registered investment company under the Puerto Rico Internal Revenue Code of 2011, as amended, and the regulations and administrative pronouncements promulgated thereunder. As a registered investment company, the Fund will be treated as a conduit or pass-through entity that will be disregarded for Puerto Rico income tax purposes. Accordingly, the income earned by the Fund is not subject to Puerto Rico income tax at the Fund level if it distributes to its shareholders at least 90% of its taxable net investment income for the taxable year, among other requirements. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund s tax return 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 its Puerto Rico income tax returns for all open tax years (the current and prior three tax years) and has concluded that no liability should be recorded related to uncertain tax positions taken on returns filed for the current and prior three tax years. (d) Dividends and Distributions to Shareholders - Dividends from substantially all of the Fund s net investment income were declared and paid monthly. The Fund recorded dividends and distributions to its shareholders on the ex-dividend date. During the period ended May 23, 2018 (pre-liquidation period), the Fund paid ordinary dividends to the Shareholders in the amount of $4,253, and in connection with the Plan of Liquidation on May 24, 2018, the Fund paid ordinary capital distributions to the Shareholders amounting to $8,918,698 on May 31, 2018. (e) Securities Sold Under Agreements to Repurchase - Under these agreements, the Fund sells securities, receives cash in exchange and agrees to repurchase the securities at a mutually agreed date and price. Ordinarily, those counterparties with which the Fund enters into these agreements require delivery of collateral, nevertheless, the Fund retains ownership of the collateral through the agreement that requires the repurchase and return of such collateral. These transactions are treated as financings and recorded as liabilities. Therefore, no gain or loss is recognized on the transaction and the securities pledged as collateral remain recorded as assets of the Fund (See Note 5). (f) Paydowns - Realized gains and losses on mortgage-backed securities paydowns are recorded as an adjustment to interest income as required by GAAP. For the period ended May 23, 2018, the Fund decreased interest income in the amount of $2,626 related to realized losses on mortgage-backed securities paydowns. For purposes of dividend 12
PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. MAY 31, 2018 NOTES TO FINANCIAL STATEMENTS (IN LIQUIDATION) distributions, net investment income excludes the effect of mortgage-backed securities paydowns gains and losses (See Note 7). (g) Other - Security transactions are accounted for on the trade date (the date the order to buy or sell is executed). Realized gains and losses on security transactions are determined based on the identified cost method. Premiums and discounts on securities purchased are amortized over the life or the expected life of the respective securities using the effective interest method. Interest income is accrued daily except when collection is not expected. 218BNote 2 - Investment Advisory, Administrative, Custodian, Transfer Agency Arrangements, and Other Transactions with Affiliates: 10BPursuant to separate Investment Advisory Agreements with UBS Asset Managers of Puerto Rico, a division of UBS Trust Company of Puerto Rico, and Banco Popular de Puerto Rico ("Banco Popular"), the Fund receives advisory services in exchange for a fee. The investment advisory fee is calculated at an annual rate of.40% of the Fund s average weekly net assets, as defined in the agreement. For the period ended May 23, 2018, the gross investment advisory fees amounted to $51,171. For this calculation, average net assets include the liquidation value of all outstanding debt securities of the Fund. Total waived fees amounted to $49,892 for a net fee of $1,279. Banco Popular also provides administrative, custody and transfer agency services pursuant to Administration, Custodian and Transfer Agency Agreements. Under the terms of the Administration Agreement, Banco Popular provides facilities and personnel to the Fund for the performance of the administrator duties. The fees related to administration services are calculated at an annual rate of.10% of the Fund s average weekly net assets, as defined above. For the period ended May 23, 2018, the gross fees for such services amounted to $12,793. Total waived fees amounted to $6,396 for a net fee of $6,397. The fees related to Custody and Transfer Agency are calculated at an annual rate of.10% of the Fund s average weekly net assets and amounted to $12,793 for the period ended May 23, 2018. These fees were waived in their entirety. The Fund is not registered under the U.S. Investment Company Act of 1940, as amended, and therefore is not subject to the restrictions contained therein regarding, among other things, transactions between the Fund, Banco Popular and UBS Financial Services Incorporated of Puerto Rico ( UBS Puerto Rico ) or their affiliates ("Affiliated Transactions"). In that regard, the Board of Directors of the Fund adopted a set of procedures ("Procedures") for Affiliated Transactions in an effort to address potential conflicts of interest that may arise. Certain officers and directors of the Fund are also officers and directors of the Investment Advisers and/or their affiliates. The six independent directors of the Fund's Board are paid based upon an agreed fee of $1,000 per meeting. Three of the independent directors of the Fund also serve on the Fund's audit committee and are paid based upon an agreed fee of $1,000 per committee meeting. In addition to the meetings at $1,000 which amounted to $27,000, the directors also met once for an extraordinary director committee meeting at an agreed fee of $125 per director. For the period ended May 23, 2018, the compensation expense for the six independent directors of the Fund was $27,750. 15BThe affiliates of the Fund may have lending, banking, brokerage, underwriting, or other business relationships with the issuers of the securities in which the Fund invests. 13
PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. MAY 31, 2018 NOTES TO FINANCIAL STATEMENTS (IN LIQUIDATION) The total amount (in thousands) of other affiliated and unaffiliated transactions, listed by counterparty, during the period ended May 23, 2018 were as follows: Counterparty 26BSales of Portfolio Securities 27B% 26BSecurities sold under Agreements to Repurchase 27B% UBS Puerto Rico 23B$ 11,964 99% 23B$ 37,180 60% Popular Securities LLC 161 1% - - Unaffiliated - - 24,413 40% Total 254B$ 12,125 25B100% 254B$ 61,593 25B100% Note 3 Capital Share Transactions: Capital share transactions for the period ended May 23, 2018, were as follows: Dollar Amount Common shares: Period ended May 23, 2018 Return of Capital $ - Dividends declared (4,253) Decrease in net assets derived from common shares transactions $ (4,253) Number of Shares Common shares: Period ended May 23, 2018 Beginning balance 5,155,317 Repurchase of common shares - Ending balance 5,155,317 Prior to liquidation, the Fund had made capital distributions in the amount of $8.20 per share. During the liquidation period, the Fund made a final distribution of $1.73 per share, for a total return of capital of $9.93 of the initial offering price per share of Common Stock of $10. In connection with the Plan of Liquidation on May 24, 2018, the Fund paid ordinary capital distributions to the Shareholders amounting to $8,918,698 on May 31, 2018. All of the Fund's outstanding shares were redeemed as part of the capital distributions made to Shareholders at May 31, 2018. The Fund had no outstanding shares at year-end. 14
PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. MAY 31, 2018 NOTES TO FINANCIAL STATEMENTS (IN LIQUIDATION) Note 4 - Investment Transactions: The proceeds from sales, maturities, calls and paydowns of portfolio securities (in thousands), excluding short-term transactions, for the period ended May 23, 2018 were as follows: Investment Category Purchases Sales Maturities/Calls Paydowns Puerto Rico Agencies $ - $ 6,791 $ - $ 109 Puerto Rico Tax-Exempt Notes - 204-55 Puerto Rico GNMA Taxable - 1,907-399 Puerto Rico GNMA Exempt - 2,742-400 Puerto Rico Fannie Mae Taxable - 98-16 Puerto Rico Freddie Mac Taxable - 222-34 Puerto Rico Collateralized Mortgage Obligations - 161-53 Total $ - $ 12,125 $ - $ 1,066 343BNote 5 - Securities Sold under Agreements to Repurchase: 34BWeighted average interest rate at end of year 346BMaximum aggregate balance outstanding at any time during the year 348BAverage balance outstanding during the year 350BAverage interest rate during the year 345BN/A 347B$4,943,000 349B$3,901,621 351B1.63% Note 6 Credit Facility: The Fund has available with Banco Popular de Puerto Rico (an affiliate of one of the Investment Advisers) an uncommitted line of credit that is part of a credit facility extended to the Puerto Rico Investors Family of Funds and the Popular Family of Funds. The proceeds of the credit advances will be exclusively used by the Fund for short term funding needs arising from failed repurchase agreement transactions or cash shortfalls due to the non-receipt by the Fund of payments in the settlement process of transactions to which the Fund is a party. The Fund can obtain credit advances not to exceed the lesser of $7,000,000 or ten percent (10%) of Banco Popular s capital stock and surplus, provided that the aggregate sum of all outstanding balances under all credit facilities never exceeds $200,000,000. Interest on the unpaid balance of each credit advance accrues at a rate of 2.25% over the one week LIBOR Rate and will be payable on the dates set forth in each credit facility note. As of May 31, 2018, the Fund had no outstanding balance. 15
PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. MAY 31, 2018 NOTES TO FINANCIAL STATEMENTS (IN LIQUIDATION) Note 7 - Reconciliation between Net Investment Income and Distributable Net Investment Income for Tax Purposes and Net Realized Gain on Investments and Net Realized Gain on Investments for Tax Purposes: 359BAs a result of certain reclassifications made for financial statement presentation, the Fund s net investment income and net realized gain on investments for the period ended May 23, 2018 differ from distributable net investment income and net realized gain on investments for tax purposes, respectively, as follows: 360BNet investment income 361B$ 468,152 362BReclassification of realized loss on securities paydowns 2,626 36BDistributable net investment income for tax purposes 367B$ 470,778 368BNet realized gain on investments 369B$ 370BReclassification of realized loss on securities paydowns 374BNet realized gain on investments, for tax purposes 375B$ 389,186 371B(2,626) 386,560 Note 8 Financial Highlights: For the period from June 1, 2017 through May 23, 2018 For the period from June 1, 2017 through Per Unit Operating Performance: May 23, 2018 Net asset value, beginning of period $1.73 Net investment income (a) 0.09 Net realized loss and change in net unrealized depreciation on investments (a) (0.09) Total from investment operations - Less: dividends from net investment income - Less: return of capital - Total distributions - Net asset value, end of the period $1.73 Market value, end of the period (g) $1.44 Total Investment Return: Based on market value per share (b)(h) (1.99%) Based on net asset value per share (h) 0.05% Ratios as a Percentage of Average Net Assets: (c) Expenses to average net assets applicable to shareholders net of waived fees (d)(f)(h) 1.99% Operating expenses to average net assets applicable to common shareholders net of waived fees (e)(f)(h) 1.28% Interest and leverage related expenses to average net assets applicable to common shareholders 0.71% Net investment income to average net assets applicable to common shareholders net of waived fees (f)(h) 5.22% 16
PUERTO RICO TAX-FREE TARGET MATURITY FUND II, INC. MAY 31, 2018 NOTES TO FINANCIAL STATEMENTS (IN LIQUIDATION) (a) Based on weekly average outstanding shares of 5,155,317 for the period from June 1, 2017 through May 23, 2018. (b) The return is calculated based on market values provided by UBS Financial Services Incorporated of Puerto Rico, a dealer of the Fund's shares and an affiliated party. The market values shown may reflect limited trading in the shares of the Fund in an over-the-counter market. (c) Based on average net assets applicable to common shareholders of $9,017,357 for the period from June 1, 2017 through May 23, 2018. (d) "Expenses" include both operating and interest and leverage related expenses. (e) "Operating expenses" represent total expenses excluding interest and leverage related expenses. (f) The effect of the expenses waived for the period from June 1, 2017 through May 23, 2018, was to decrease the expense ratios thus increasing the net investment income ratio to average net assets applicable to common shareholders by.76%. (g) Market value as of May 23, 2018 was estimated by UBS Financial Services Incorporated of Puerto Rico, as a result of limited trading activity due to commencement of Distribution of Principal period. The estimated value considers the limited trading activity near the fiscal year end. (h) Percentage is not annualized for the period ended May 23, 2018. Note 9 - Indemnification: In the normal course of business, the Fund enters into contracts that contain a variety of indemnifications. The Fund s maximum exposure under these agreements is unknown. However, the Fund has not incurred or paid prior claims or losses pursuant to these contracts and expects the risk of losses to be remote. 39 Note 10 - Subsequent events: The Fund has performed an evaluation of events occurring subsequent to May 31, 2018 through August 20, 2018, which is the date the financial statements were available to be issued. Management has determined that there were no events occurring in this period that required disclosure in or adjustment to the accompanying financial statements. 17
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INVESTMENT ADVISERS Banco Popular de Puerto Rico 209 Muñoz Rivera Avenue Suite 1112 San Juan, Puerto Rico 00918 UBS Trust Company of Puerto Rico 250 Muñoz Rivera Avenue San Juan, Puerto Rico 00918 ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN Banco Popular de Puerto Rico Popular Fiduciary Services 209 Muñoz Rivera Avenue Popular Center, North Tower, 4 th Floor San Juan, Puerto Rico 00918 PUERTO RICO LEGAL COUNSEL Avilés Pagán Law Offices, PSC 261 Tanca Street, Sixth Floor San Juan, Puerto Rico 00901 U. S. LEGAL COUNSEL Sidley Austin, LLP 787 Seventh Avenue New York, New York 10019 DIRECTORS AND OFFICERS Enrique Vila del Corral Chairman of the Board and President Clotilde Pérez Director Gabriel Pagán Pedrero Director Carlos J. Nido Director Jorge I. Vallejo Director Luis M. Pellot Director Leslie Highley, Jr. Senior Vice President Javier Rubio Senior Vice President Héctor Rivera Rivera Treasurer INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers, LLP PO Box 363566 San Juan, Puerto Rico 00936-3566 Remember that: Mutual Funds Shares are not bank deposits or FDIC insured. Mutual Funds Shares are not obligations of or guaranteed by Banco Popular de Puerto Rico or UBS Financial Services Incorporated of Puerto Rico or any of their affiliates. Mutual Funds Shares are subject to investment risks, including possible loss of the principal amount invested.