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Managed Municipals
Portfolio II Inc.
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Quarterly Report
November 30, 1998
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Managed Municipals
Portfolio II Inc.
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November 30, 1998
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Dear Shareholder:
We are pleased to provide the first quarter report for the Managed Municipals
Portfolio II Inc. ("Fund") for the period ended November 30, 1998. Over the
three months covered by this report, the Fund distributed income dividends
totaling $0.15 per share. The table below shows the annualized distribution rate
and three-month total return based on the Fund's November 30, 1998 net asset
value ("NAV") per share and its New York Stock Exchange ("NYSE") closing price.
Price Annualized Three-Month
Per Share Distribution Rate(*) Total Return
------------ -------------------- -------------
$12.45 (NAV) 4.72% 1.03%
$11.50 (NYSE) 5.11% 7.71%
In comparison, general closed-end municipal bond funds posted an average
total return on NAV of 1.33% for the same time period, as reported by Lipper
Analytical Services, Inc. (Lipper is a major fund-tracking organization.)
Municipal Bond Market Update
In general, the bond market has had quite a full plate to deal with for the
past several months. The tremendous economic weakness in Asia combined with a
hint of deflation, default on sovereign Russian debt, the debacle of a large
hedge fund and, finally, three very swift drops in short-term rates from the
Federal Reserve Board ("Fed") gave bond managers more than enough events to
ponder.
(*) This distribution assumes a current monthly income dividend rate of $0.049
per share for twelve months.
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Municipal bonds generally were less volatile than U.S. Treasuries with
record new issue volume coming into the marketplace. This heavy supply caused
municipal bonds to lag U.S. Treasuries in the rally but has created unusual
relative values in municipal bonds versus taxable bonds. As of November 30,
1998, the yields at which long-term municipal bonds were trading were, on
average, 99% of the yields for comparable U.S. government bonds. In many years
of experience in the financial markets, this is only the second time we have
seen such high attractive relative values for municipal bonds. At today's yield
spreads, municipal bonds make sense for investors in almost any tax bracket. And
while interest rates are as low as they have been in 30 years, so too is
inflation. In our view, these conditions should be with us for the foreseeable
future, providing a benign backdrop for bonds.
Fund's Investment Strategy
During the reporting period, the municipal bond market has put very little
premium on interest rate and credit risk. Intermediate- and long-term municipal
bonds yield nearly the same, and the spreads between high-quality issuers and
less economically stable ones are at all-time narrow levels. Our investment
strategy during the period has been quite simple: we want to buy high-quality
municipal bonds with maturities a bit shorter and stay there until the
interest-rate environment changes. In times of economic uncertainty, if we are
going to err with respect to our investment strategy, we think that it should be
on the side of prudence and conservatism.
The Fund focused on transportation bonds (11.1%), general obligation bonds
(10.7%) and utility bonds (10.5%) because we believe they offered good relative
values during the reporting period. At the end of November, the Fund's weighted
average maturity was approximately 20 years. In addition, as of November 30,
1998, approximately 83% of the Fund's holdings were rated investment grade by
either Standard & Poor's Ratings Group or Moody's Investors Services Inc., with
about 45% of the Portfolio invested in AAA bonds, the highest rating.
Municipal Bond Market Outlook
Over the next few months, we believe that interest rates should go down a
bit more. Moreover, we expect a gradual rise in rates later on in
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2
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1999 from the level set early in the year. And, if interest rates do gradually
rise, we believe our current investment strategy should result in less
volatility in the municipal bond market while still offering our shareholders
great relative values.
In closing, thank you for investing in the Managed Municipals Portfolio II
Inc. We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Joseph P. Deane
Heath B. McLendon Joseph P. Deane
Chairman Vice President and
Investment Officer
December 17, 1998
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Take Advantage of the Fund's Dividend Reinvestment Plan!
Did you know that Fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investments put time to work for you through the strength of
compounding.
As an investor in the Fund, you can participate in its Dividend Reinvestment
Plan ("Plan"), a convenient, simple and efficient way to reinvest your dividends
and capital gains, if any, in additional shares of the Fund. Below is a short
summary of how the Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your dividends in
the form of a cash payment, then your dividend and capital gain distributions
will be reinvested automatically in additional shares of the Fund.
The number of common stock shares in the Fund you will receive in lieu of a cash
dividend is determined in the following manner. If the market price of the
common stock is equal to or exceeds the net asset value per share ("NAV") on the
determination date, you will be issued shares by the Fund at a price reflecting
the NAV, or 95% of the market price, whichever is greater.
If the market price is less than the NAV at the time of valuation (the close of
business on the determination date), or if the Fund declares a dividend or
capital gains distribution payable only in cash, the Plan Agent (First Data
Investor Services Group Inc.) will buy common stock for your account in the open
market.
If the Plan Agent begins to purchase additional shares in the open market and
the market price of the shares subsequently rises above the previously
determined NAV before the purchases are completed, the Plan Agent will attempt
to terminate purchases and have the Fund issue the remaining dividend or
distribution in shares at the greater of the previously determined NAV or 95% of
the market price. In that case, the number of Fund shares you receive will be
based on the weighted average of prices paid for shares purchased in the open
market and the price at which the Fund issues the remaining shares.
Restated Plan Adopted
A more complete description of the current Plan appears beginning on page 23.
The description is based on a restated version of the Plan, which was recently
adopted to reflect current practices of the Plan Agent and for the purpose of
standardizing the terms among all closed-end Mutual Funds managed by Mutual
Management Corp.
To find out more detailed information about the Plan and about how you can
participate, please call First Data Investors Services Group Inc. at (800)
331-1710.
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Schedule of Investments
November 30, 1998 (unaudited)
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Face
Amount Rating(a) Security Value
================================================================================
Alaska -- 2.2%
$ 2,895,000 A2(*) Alaska Industrial Development & Export
Authority, Series A, 6.500% due 4/1/14(b) $ 3,079,556
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California -- 10.7%
2,500,000 Baa3(*) California Educational Facilities Authority
Revenue, (Pooled College & University
Projects), Series A, 5.625% due 7/1/23 2,615,625
1,000,000 AAA California Health Facilities Finance Authority
Revenue, Kaiser Permanente, Series A,
FSA-Insured, 5.500% due 6/1/22 1,066,250
5,105,000 AAA Los Angeles, CA Metropolitan Transportation
Authority, Sales Tax Revenue, Series A,
MBIA-Insured, 5.250% due 7/1/18 5,245,388
1,000,000 AAA Los Angeles, CA Public Works Finance
Authority Revenue, Series A,
Multiple Capital Facilities, (Project V),
AMBAC-Insured, 5.125% due 6/1/17 1,016,250
1,465,000 AA Metropolitan Water District, Southern
California Water Works,
Series A, 5.000% due 7/1/16 1,485,144
2,200,000 AAA Roseville, CA Water Utility Revenue, COP,
FGIC-Insured, 5.200% due 12/1/18 2,255,000
1,000,000 AAA San Jose, CA Redevelopment Agency,
(Tax Revenue Project), MBIA-Insured,
5.250% due 8/1/16 1,026,250
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14,709,907
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Colorado -- 17.2%
1,000,000 Aaa(*) Arapahoe County, CO Capital Improvement
Transportation Fund, Highway Revenue,
(Pre-Refunded-- Escrowed with
U.S. government securities to 8/31/05
Call @ 103), 7.000% due 8/31/26 1,202,500
1,000,000 A Colorado Health Facilities Authority Revenue,
Series B, 5.350% due 8/1/15 1,026,250
4,000,000 BBB+ Colorado Springs, CO Airport Revenue,
Series A, 7.000% due 1/1/22 (b)(c) 4,390,000
30,000,000 Aaa(*) Dawson Ridge, CO Metropolitan District No. 1,
Series A, (Escrowed to maturity with Refco
Strips), zero coupon bond to yield 6.644%
due 10/1/22 8,250,000
See Notes to
Financial Statements.
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Schedule of Investments
November 30, 1998 (unaudited) (continued)
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Face
Amount Rating(a) Security Value
================================================================================
Colorado -- 17.2% (continued)
Denver, CO Airport Revenue, Series C:
$ 3,465,000 BBB+ 6.125% due 11/15/25 (b)(c) $ 3,685,894
2,785,000 BBB+ Partially Escrowed to maturity with
U.S. government securities,
6.125% due 11/15/25 (b)(c) 3,174,900
2,000,000 AAA E-470 Public Highway Authority,
CO Revenue, Series A, MBIA-Insured,
5.000% due 9/1/15 2,017,500
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23,747,044
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Florida -- 5.7%
1,500,000 BBB- Martin County, FL IDA, Indiantown
Cogeneration, Series A,
7.875% due 12/15/25 (b) 1,726,875
4,000,000 NR Tampa, FL Revenue Bonds, (Florida
Aquarium Inc. Project), (Pre-Refunded--
Escrowed with U.S. government
securities to 5/1/02 Call @102),
7.750% due 5/1/27 (c)(e) 4,585,000
1,500,000 AAA Tampa, FL Revenue Health Systems,
4.875% due 11/15/18 1,481,250
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7,793,125
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Hawaii -- 1.5%
2,000,000 AAA Hawaii State GO, Series CP, FGIC-Insured,
5.000% due 10/1/16 2,012,500
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Illinois -- 3.2%
1,000,000 Aaa(*) Illinois Health Facilities Authority,
Memorial Health System, MBIA-Insured,
5.250% due 10/1/18 1,023,750
Kane County, IL GO, School District
No. 129, Aurora West Side, FGIC-Insured:
590,000 Aaa(*) 5.500% due 2/1/11 633,513
675,000 Aaa(*) 5.500% due 2/1/12 723,937
1,000,000 Aaa(*) 5.125% due 2/1/14 1,021,250
1,000,000 Aaa(*) 5.000% due 2/1/16 1,002,500
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4,404,950
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Iowa -- 1.2%
1,500,000 AA- Dawson, IA IDR, (Cargill Inc. Project),
6.500% due 7/15/12 1,625,625
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See Notes to
Financial Statements.
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Schedule of Investments
November 30, 1998 (unaudited) (continued)
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Face
Amount Rating(a) Security Value
================================================================================
Maryland -- 0.9%
$ 4,000,000 NR Maryland State Energy Financing
Administration, Solid Waste Disposal
Revenue, (Hagerstown Recycling Project),
9.000% due 10/15/16 (b)(f) $1,240,000
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Massachusetts -- 3.3%
4,000,000 NR Massachusetts Solid Waste Disposal Revenue,
Massachusetts Recycling Association,
Series A, 9.000% due 8/1/16 (b)(f) 1,500,000
1,000,000 AAA Massachusetts State Housing Finance Agency,
Housing Development, Series B,
MBIA-Insured, 5.300% due 12/1/17 1,016,250
Massachusetts State Water Resource Authority,
MBIA-Insured:
1,000,000 AAA Series B, 5.000% due 12/1/25 991,250
1,000,000 AAA Series C, 5.250% due 12/1/20 1,016,250
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4,523,750
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Michigan -- 7.3%
4,000,000 NR Michigan State Strategic Fund Resource
Recovery, Central Wayne Energy,
Series A, 7.000% due 7/1/27 4,050,000
5,600,000 NR Midland County, MI Economic Development
Corp., PCR, Limited Obligation,
Series B, 9.500% due 7/23/09 (b)(c) 6,055,000
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10,105,000
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Mississippi -- 0.9%
1,200,000 Aa2(*) Jackson County, MS PCR, (Chevron USA
Incorporated Project), 3.250% due 6/1/23 1,200,000
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Missouri -- 1.4%
1,000,000 AAA Fenton, MO COP (Capital Improvements
Project), MBIA-Insured, 5.125% due 9/1/17 1,015,000
1,000,000 AAA St. Louis, MO Board of Education GO,
Missouri Direct Deposit Program,
Series B, FGIC-Insured, 5.000% due 4/1/16 1,008,750
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2,023,750
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Montana -- 1.4%
2,000,000 NR Montana State Board of Investments Resource
Recovery, (Yellowstone Energy Project),
7.000% due 12/31/19 (b) 1,935,000
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See Notes to
Financial Statements.
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Schedule of Investments
November 30, 1998 (unaudited) (continued)
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Face
Amount Rating(a) Security Value
================================================================================
Nevada -- 3.7%
$ 4,650,000 BBB- Clark County, NV IDR, Southwest Gas
Corporation, 7.500% due 9/1/32 (b)(c) $5,149,875
New Jersey -- 1.3%
780,000 AAA Essex County, NJ Improvement Authority
Revenue, Utility System (Orange Franchise),
Series A, MBIA-Insured, 5.375% due 7/1/18 813,150
1,000,000 AAA Middlesex County, NJ COP, MBIA-Insured,
5.200% due 6/15/18 1,028,750
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1,841,900
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New York -- 5.7%
2,000,000 A- Long Island Power Authority, NY Electric
System Revenue, Series A,
5.500% due 12/1/29 2,062,500
New York State Dormitory Authority Revenue:
1,135,000 AAA Barnard College, AMBAC-Insured,
5.250% due 7/1/16 1,171,887
1,000,000 AAA City University System, Series A,
FGIC-Insured, 5.000% due 7/1/16 1,008,750
1,500,000 AAA Mental Health Services Facilities,
FSA-Insured, 5.125% due 8/15/17 1,518,750
1,000,000 AAA Montefiore Medical Center,
AMBAC/FHA-Insured, 5.250% due 2/1/15 1,031,250
1,000,000 AAA Municipal Health Facility Improvement,
Series A, FSA-Insured, 5.500% due 5/15/16 1,060,000
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7,853,137
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North Carolina -- 1.2%
1,500,000 A(*) Coastal Regional Solid Waste Management
Disposal Authority, North Carolina
Solid Waste Revenue, 6.500% due 6/1/08 1,631,250
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Ohio -- 0.9%
1,220,000 AAA Ohio State Higher Educational Facility
Community Revenue, University of Dayton,
AMBAC-Insured, 5.350% due 12/1/17 1,284,050
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Pennsylvania -- 1.8%
2,500,000 AAA Altoona, PA City Authority Water Revenue,
FGIC-Insured, 5.000% due 11/1/19 2,500,000
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See Notes to
Financial Statements.
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Schedule of Investments
November 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Face
Amount Rating(a) Security Value
================================================================================
Puerto Rico -- 0.7%
$ 1,000,000 AAA Puerto Rico Commonwealth Infrastructure
Financing Authority, Series A,
AMBAC-Insured, 5.000% due 7/1/16 $ 1,015,000
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South Carolina -- 3.2%
2,000,000 AAA Lexington County, SC Health Services District,
Hospital Revenue, FSA-Insured,
5.250% due 11/1/17 2,055,000
2,120,000 A3(*) Myrtle Beach, SC COP, Myrtle Beach
Convention Center, 6.875% due 7/1/07 2,377,050
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4,432,050
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Tennessee -- 0.7%
1,000,000 AA Metropolitan Government Nashville &
Davidson County, TN Electrical Revenue,
Series A, 5.125% due 5/15/15 1,018,750
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Texas -- 7.7%
1,000,000 Aaa(*) Azle, TX ISD, PSFG, Series C,
5.000% due 2/15/22 997,500
2,000,000 BBB Brazos River Authority, TX PCR, Utility
Electric Company, 5.550% due 6/1/30 1,962,500
Burleson, TX ISD GO, PSFG:
435,000 Aaa(*) 6.750% due 8/1/24 492,638
1,065,000 NR Pre-Refunded-- Escrowed with
U.S. government securities to 8/1/06,
Call @ 100, 6.750% due 8/1/24 (e) 1,252,706
1,000,000 AA Harris County, TX GO, (Toll Road Sub Lien),
5.125% due 8/15/17 1,016,250
1,830,000 AA Texas State GO, Water Development,
Series D, 5.000% due 8/1/16 1,848,300
1,500,000 AAA Texas Water Development Board Revenue,
State Revolving Fund, Senior Lien-B,
5.000% due 7/15/15 1,511,250
1,520,000 AAA West Texas Municipal Power Agency Revenue,
MBIA-Insured, 5.000% due 2/15/16 1,523,800
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10,604,944
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Utah -- 1.5%
2,000,000 AAA Intermountain Power Agency, UT Power
Supply Revenue, MBIA-Insured,
5.250% due 7/1/15 2,057,500
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See Notes to
Financial Statements.
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Schedule of Investments
November 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Face
Amount Rating(a) Security Value
================================================================================
Virgin Islands -- 0.7%
$ 1,000,000 BBB- Virgin Islands Public Finance Authority
Revenue, Series A, 5.500% due 10/1/22 $ 1,012,500
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Virginia -- 8.6%
2,000,000 AAA Riverside, VA Regional Jail Facility, Revenue
Bonds, MBIA-Insured, 6.000% due 7/1/25 2,212,500
2,000,000 AA Virginia College Building Authority,
VA Educational Facilities Revenue,
(21st Century College Program),
5.125% due 8/1/11 2,112,500
Virginia State Housing Development Authority:
1,245,000 AA+ Commonwealth Mortgage, Series D,
5.700% due 7/1/09 1,315,031
1,000,000 AAA Mortgage Housing Revenue,
MBIA-Insured, 5.600% due 7/1/12 1,056,250
3,985,000 AA+ Series F, 6.400% due 7/1/17 4,244,025
925,000 AA+ Series K, 5.900% due 11/1/11 985,125
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11,925,431
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Washington -- 0.8%
1,000,000 AAA Washington State Public Power Supply System,
(Nuclear Project No. 2), Series A,
FSA-Insured, 5.125% due 7/1/11 1,041,250
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West Virginia -- 1.3%
Marion County, WV County Commissioner, Solid Waste
Disposal Facilities Revenue, Adirondak Recycling, Series
A:
1,689,766 NR 8.000% due 12/1/25 (b) 1,520,789
237,705 NR 10.000% due 12/1/25 (b) 213,935
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1,734,724
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Wisconsin -- 3.3%
Wisconsin Housing & Economic Development
Authority, Series A:
2,000,000 AA Home Ownership Revenue,
6.450% due 3/1/17 2,132,500
1,370,000 A1(*) Housing Revenue, 5.650% due 11/1/23 1,397,400
See Notes to
Financial Statements.
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Schedule of Investments
November 30, 1998 (unaudited) (continued)
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Face
Amount Rating(a) Security Value
================================================================================
Wisconsin -- 3.3% (continued)
$ 1,000,000 AAA Wisconsin State Health & Educational Facilities,
The Medical College of Wisconsin,
MBIA-Insured, 5.400% due 12/1/16 $ 1,042,500
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4,572,400
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TOTAL INVESTMENTS -- 100%
(COST-- $133,272,173**) $138,074,968
================================================================================
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*) are rated by Moody's Investor's Service, Inc.
(b) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(c) Securities segregated by Custodian for open purchase commitment.
(d) Variable rate obligation payable at par at any time on no more than seven
days notice.
(e) Pre-Refunded bonds escrowed by U.S. government securities and bonds
escrowed to maturity with U.S. government securities are considered by the
investment adviser to be triple-A rated even if issuer has not applied for
new ratings.
(f) Security is in default.
(**) Aggregate cost for Federal income tax purposes is substantially the same.
See pages 12 and 13 for definitions of ratings and certain security
descriptions.
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Summary of Investments by Combined Ratings
November 30, 1998 (unaudited)
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Summary of Investments by Combined Ratings
November 30, 1998 (unaudited)
Percent of
Moody's and/or Standard & Poor's Total Investments
Aaa AAA 44.5%
Aa AA 13.7
A A 8.4
Baa BBB 17.2
NR NR 16.2
-----
100.0%
=====
See Notes to
Financial Statements.
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Bond Ratings
(unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"BB" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA --Bonds rated "AAA" have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA --Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issue only in a small degree.
A --Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB --Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB --Bonds rated "BB" have less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments.
Moody's Investor's Service, Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3
may be applied to each generic rating from "Aa" to "Baa," where 1 is the highest
and 3 is the lowest ranking within its generic category.
Aaa --Bonds rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa --Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
A --Bonds rated "A" possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the
future.
Baa --Bonds rated "Baa" are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NR --Indicates that the bond is not rated by Standard & Poor's or Moody's.
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Short-Term Security Ratings
(unaudited)
- --------------------------------------------------------------------------------
SP-1 --Standard & Poor's highest rating indicating very strong or strong
capacity to pay principal and interest; those issued determined
possess overwhelming safety characteristics are denoted with a plus
(+) sign.
A-1 --Standard & Poor's highest commercial paper and variable-rate demand
obligation (VRDO) rating indicating that the degree of safety
regarding timely payment is either overwhelming or very strong;
those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+)sign.
A-2 --Standard & Poor's second highest commercial paper and VRDO rating
indicating that the degree of safety regarding timely payment is
either overwhelming or very strong; those issues determined to
possess overwhelming safety characteristics are denoted with a plus
(+) sign.
VMIG 1 --Moody's highest rating for issues having a demand feature -- VRDO.
P-1 --Moody's highest rating for commercial paper and for VRDO prior to
the advent of the VMIG-1 rating.
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Security Descriptions
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
ABAG --Association of Bay Area HFA --Housing Finance Authority
Governments IDA --Industrial Development
AIG --American International Guaranty Authority
AMBAC --AMBAC Indemnity Corporation IDB --Industrial Development Board
BAN --Bond Anticipation Notes IDR --Industrial Development Revenue
BIG --Bond Investors Guaranty IFA --Industrial Finance Agency
CGIC --Capital Guaranty Insurance INFLOS --Inverse Floaters
Company ISD --Independent School District
CHFCLI --California Health Facility LOC --Letter of Credit
Construction Loan Insurance MBIA --Municipal Bond Investors
COP --Certificate of Participation Assurance Corporation
EDA --Economic Development MVRICS --Municipal Variable Rate Inverse
Authority Coupon Security
FAIRS --Floating Adjustable Interest Rate PCR --Pollution Control Revenue
Securities PSFG --Permanent School Fund
FGIC --Financial Guaranty Insurance Guaranty
Company RAN --Revenue Anticipation Notes
FHA --Federal Housing Administration RIBS --Residual Interest Bonds
FHLMC --Federal Home Loan Mortgage RITES --Residual Interest Tax-Exempt
Corporation Securities
FNMA --Federal National Mortgage SYCC --Structured Yield Curve
Association Certificate
FRTC --Floating Rate Trust Certificates TAN --Tax Anticipation Notes
FSA --Financial Security Assurance TECP --Tax Exempt Commercial Paper
GIC --Guaranteed Investment Contract TOB --Tender Option Bonds
GNMA --Government National Mortgage TRAN --Tax and Revenue Anticipation
Association Notes
GO --General Obligation VA --Veterans Administration
HDC --Housing Development VRDD --Variable Rate Daily Demand
Corporation VRWE --Variable Rate Wednesday
Demand
</TABLE>
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Statement of Assets and Liabilities
(unaudited)
- --------------------------------------------------------------------------------
November 30, 1998
================================================================================
ASSETS:
Investments, at value (Cost -- $133,272,173) $138,074,968
Interest receivable 2,368,540
- --------------------------------------------------------------------------------
Total Assets 140,443,508
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 252,080
Payable to broker - variation margin 125,000
Investment advisory fees payable 63,452
Administration fees payable 24,245
Payable to bank 9,669
Accrued expenses 140,970
- --------------------------------------------------------------------------------
Total Liabilities 615,416
- --------------------------------------------------------------------------------
Total Net Assets $139,828,092
================================================================================
NET ASSETS:
Par value of capital shares $ 11,235
Capital paid in excess of par value 134,234,852
Overdistributed net investment income (152,193)
Accumulated net realized gain from security transactions 1,040,778
Net unrealized appreciation of investments and futures contracts 4,693,420
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $12.45 a share on 11,234,706 shares of $0.001
par value outstanding; 500,000,000 shares authorized) $139,828,092
================================================================================
See Notes to
Financial Statements.
[GRAPHIC]
14
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
(unaudited)
- --------------------------------------------------------------------------------
Three Months
Ended
11/30/98
================================================================================
INVESTMENT INCOME:
Interest $1,919,936
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3) 245,083
Administration fees (Note 3) 70,024
Shareholder communications 28,665
Audit and legal 13,463
Directors' fees 10,465
Shareholder and system servicing fees 4,856
Pricing service fees 2,275
Registration fees 1,958
Custody 1,751
Other 2,128
- --------------------------------------------------------------------------------
Total Expenses 380,668
Less: Investment advisory and administration fee waivers (Note 3) (66,522)
- --------------------------------------------------------------------------------
Net Expenses 314,146
- --------------------------------------------------------------------------------
Net Investment Income 1,605,790
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 4 & 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 1,983,550
Cost of securities sold 1,944,450
- --------------------------------------------------------------------------------
Net Realized Gain 39,100
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Futures Contracts:
Beginning of period 5,088,271
End of period 4,693,420
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (394,851)
- --------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (355,751)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $1,250,039
================================================================================
See Notes to
Financial Statements.
[GRAPHIC]
15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
Three Months
Ended Year
11/30/98 Ended
(unaudited) 8/31/98
================================================================================
OPERATIONS:
Net investment income $ 1,605,790 $ 6,195,714
Net realized gain 39,100 1,007,582
Increase (decrease) in net
unrealized appreciation (394,851) 4,890,299
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 1,250,039 12,093,595
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 3):
Net investment income (1,651,502) (6,479,500)
Net realized gains -- (1,901,590)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (1,651,502) (8,381,090)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Net asset value of shares issued for
reinvestment of dividends -- --
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions -- --
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (401,463) 3,712,505
NET ASSETS:
Beginning of period 140,229,555 136,517,050
- --------------------------------------------------------------------------------
End of period(*) $139,828,092 $140,229,555
================================================================================
(*) Includes overdistributed
net investment income of: $(152,193) $(106,481)
================================================================================
See Notes to
Financial Statements.
[GRAPHIC]
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
(unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Managed Municipals Portfolio II Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
non-diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between bid and asked prices provided by an independent
pricing service that are based on transactions in municipal obligations,
quotations from municipal bond dealers, market transactions in comparable
securities and various relationships between securities; (c) securities maturing
within 60 days are valued at cost plus accreted discount, or minus amortized
premium, which approximates value; (d) gains or losses on the sale of securities
are calculated by using the specific identification method; (e) interest income,
adjusted for amortization of premium and accretion of original issue discount,
is recorded on an accrual basis; market discount is recognized upon the
disposition of the security; (f) dividends and distributions to shareholders are
recorded on the ex-dividend date; (g) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At August 31, 1998,
reclassifications were made to undistributed net investment income and
accumulated net realized gains to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; (h) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (i) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
[GRAPHIC]
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
(unaudited) (continued)
- --------------------------------------------------------------------------------
2. Exempt-Interest Dividends and Other Distributions
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from regular Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
3. Investment Advisory Agreement, Administration
Agreement and Other Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith
Barney Holdings Inc. ("SSBH"), acts as investment adviser to the Fund. The
Fund pays MMC an advisory fee calculated at an annual rate of 0.70% of
the average daily net assets of the Fund. This fee is calculated daily and
paid monthly. For the three months ended November 30, 1998, MMC
waived $51,733 of its investment advisory fee.
MMC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly. For the three months ended November 30,
1998, MMC waived $14,789 of its administration fee.
All officers and one Director of the Fund are employees of Salomon Smith
Barney Inc., another subsidiary of SSBH.
4. Investments
For the three months ended November 30, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $1,457,655
- --------------------------------------------------------------------------------
Sales 1,983,550
================================================================================
At November 30, 1998, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $10,358,042
- --------------------------------------------------------------------------------
Gross unrealized depreciation (5,555,247)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 4,802,795
================================================================================
[GRAPHIC]
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
(unaudited) (continued)
- --------------------------------------------------------------------------------
5. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking-to-market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are made or received and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transactions and the Fund's basis in the contract.
The Fund enters into such contracts to hedge a portion of its portfolio. The
Fund bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At November 30, 1998, the Fund had the following open futures contracts:
<TABLE>
<CAPTION>
Expiration # of Basis Market Unrealized
Month/Year Contracts Value Value Loss
=========================================================================================
<S> <C> <C> <C> <C> <C>
Futures contracts to sell:
U.S. Government
Long Bond Index 12/98 100 $12,875,000 $12,984,375 $(109,375)
=========================================================================================
</TABLE>
6. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
[GRAPHIC]
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended August 31,
except where noted:
<TABLE>
<CAPTION>
1998(1) 1998 1997 1996 1995 1994
====================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $12.48 $12.15 $11.98 $12.36 $12.15 $13.37
- -------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income(2) 0.14 0.55 0.63 0.66 0.69 0.64
Net realized and
unrealized gain (loss) (0.02) 0.53 0.48 (0.21) 0.32 (0.61)
- -------------------------------------------------------------------------------------
Total Income
From Operations 0.12 1.08 1.11 0.45 1.01 0.03
- -------------------------------------------------------------------------------------
Offering Costs Credited
(Charged) to
Paid-In Capital -- -- -- -- -- 0.01
- -------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.58) (0.66) (0.67) (0.68) (0.67)
Net realized gains -- (0.17) (0.28) (0.16) (0.12) (0.59)
- -------------------------------------------------------------------------------------
Total Distributions (0.15) (0.75) (0.94) (0.83) (0.80) (1.26)
- -------------------------------------------------------------------------------------
Net Asset Value,
End of Period $12.45 $12.48 $12.15 $11.98 $12.36 $12.15
- -------------------------------------------------------------------------------------
Total Return, Based on
Market Value(*) 7.71%++ (1.31)% 7.75% 7.35% 8.86% 0.72%
- -------------------------------------------------------------------------------------
Total Return, Based on
Net Asset Value(*) 1.03%++ 9.57% 9.86% 4.01% 9.20% 0.48%
- -------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $139,828 $140,230 $136,517 $134,429 $138,649 $136,248
- -------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses(2) 0.90%+ 1.10% 1.10% 1.09% 1.14% 1.12%
Net investment income 4.59+ 5.23 5.23 5.31 5.80 5.08
- -------------------------------------------------------------------------------------
Portfolio Turnover Rate 1% 66% 97% 63% 95% 85%
- -------------------------------------------------------------------------------------
Market Value,
End of Period $11.500 $10.813 $11.688 $11.750 $11.625 $11.500
=====================================================================================
</TABLE>
(1) For the three months ended November 30, 1998 (unaudited).
(2) The investment adviser and administrator waived a part of their fees for the
three months ended November 30, 1998. If such fees were not waived the per
share decrease on the net investment income and the annualized ratio of
expenses to average net assets would have been $0.01 and 1.09%,
respectively.
(*) The total return assumes that dividends are reinvested in accordance with
the Fund's dividend reinvestment plan.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
[GRAPHIC]
20
<PAGE>
- --------------------------------------------------------------------------------
Quarterly Results of Operations
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Realized Net Increase
and Unrealized (Decrease) in
Investment Net Investment Gain (Loss) on Net Assets From
Income Income Investments Operations
------ ------ ----------- ----------
Per Per Per Per
Quarter Ended Total Share Total Share Total Share Total Share
======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
November 30,
1996 $2,227,411 $0.20 $1,879,304 $0.17 $5,753,327 $0.51 $7,632,631 $0.68
February 28,
1997 2,180,922 0.19 1,839,607 0.16 (3,515,568) (0.31) (1,675,961) (0.15)
May 31,
1997 2,225,788 0.20 1,860,549 0.17 (1,006,118) (0.08) 854,431 0.09
August 31,
1997 1,927,002 0.17 1,490,559 0.13 4,050,306 0.36 5,540,865 0.49
November 30,
1997 1,867,638 0.17 1,459,739 0.13 2,741,066 0.25 4,200,805 0.38
February 28,
1998 1,928,672 0.17 1,555,286 0.14 2,311,045 0.20 3,866,331 0.34
May 31,
1998 1,932,962 0.17 1,563,665 0.14 (4,226) (0.00) 1,559,439 0.14
August 31,
1998 1,999,290 0.18 1,617,024 0.14 849,996 0.08 2,467,020 0.22
November 30,
1998 1,919,936 0.17 1,605,790 0.14 (355,751) (0.02) 1,250,039 0.12
======================================================================================================
</TABLE>
[GRAPHIC]
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Data
(unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
NYSE Net Dividend
Record Payable Closing Asset Dividend Reinvestment
Date Date Price+ Value+ Paid Price
================================================================================
9/24/96 9/27/96 $11.625 $12.09 $0.059 $11.66
10/22/96 10/25/96 11.500 12.20 0.059 11.63
11/25/96 11/29/96 11.438 12.49 0.059 11.50
12/23/96(*) 12/27/96 11.375 12.11 0.285++ 11.56
1/28/97 1/31/97 11.500 11.85 0.059 11.52
2/25/97 2/28/97 11.500 12.01 0.059 11.53
3/24/97 3/27/97 11.375 11.68 0.059 11.32
4/22/97 4/25/97 11.375 11.56 0.059 11.38
5/27/97 5/30/97 11.375 11.76 0.059 11.58
6/24/97 6/27/97 11.875 11.99 0.059 11.94
7/22/97 7/25/97 12.000 12.34 0.059 12.06
8/26/97 8/29/97 11.688 12.11 0.059 11.75
9/23/97 9/26/97 11.563 12.25 0.056 11.71
10/28/97 10/31/97 11.438 12.27 0.056 11.47
11/24/97 11/28/97 11.500 12.36 0.056 11.55
12/22/97(*) 12/26/97 11.625 12.41 0.170 11.57
1/27/98 1/30/98 12.188 12.44 0.056 12.12
2/24/98 2/27/98 11.875 12.42 0.056 11.62
3/24/98 3/27/98 11.250 12.40 0.050 11.37
4/21/98 4/24/98 11.125 12.28 0.050 11.10
5/26/98 5/29/98 10.813 12.38 0.050 11.14
6/23/98 6/26/98 11.063 12.34 0.050 11.12
7/28/98 7/31/98 10.813 12.33 0.048 10.86
8/25/98 8/28/98 10.875 12.43 0.048 10.97
9/22/98 9/25/98 11.313 12.52 0.049 11.52
10/27/98 10/30/98 11.688 12.46 0.049 11.66
11/23/98 11/27/98 11.563 12.45 0.049 11.55
================================================================================
+ As of record date.
++ Includes market discount.
(*) Capital gain distribution.
[GRAPHIC]
22
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan
(unaudited)
- --------------------------------------------------------------------------------
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
shares of common stock are registered in his own name will have all
distributions from the fund reinvested automatically by First Data Investor
Services Group Inc. ("First Data") as purchasing agent under the Plan, unless
the shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in street
name) will be reinvested by the broker or nominee in additional shares under the
Plan, unless the service is not provided by the broker or nominee or the
shareholder elects to receive distributions in cash. Investors who own common
stock registered in street name should consult their broker-dealers for details
regarding reinvestment. All distributions to shareholders who do not participate
in the Plan will be paid by check mailed directly to the record holder by or
under the direction of First Data as dividend paying agent.
The number of shares of common stock distributed to participants in the Plan
in lieu of a cash dividend is determined in the following manner. When the
market price of the common stock is equal to or exceeds the net asset value per
share of the common stock on the determination date (generally, the record date
for the distribution), Plan participants will be issued shares of common stock
by the fund at a price equal to the greater of net asset value determined as
described below under "Net Asset Value" or 95% of the market price of the common
stock.
If the market price of the common stock is less than the net asset value of
the common stock at the time of valuation (which is the close of business on the
determination date), or if the fund declares a dividend or capital gains
distribution payable only in cash, First Data will buy common stock in the open
market, on the AMEX or elsewhere, for the participants' accounts. If following
the commencement of the purchases and before First Data has completed its
purchases, the market price exceeds the net asset value of the common stock as
of the valuation time, First Data will attempt to terminate purchases in the
open market and cause the fund to issue the remaining portion of the dividend or
distribution in shares at a price equal to the greater of (a) net asset value as
of the valuation time or (b) 95% of the then current market price. In this case,
the number of shares received by a Plan participant will be based on the
weighted average of prices paid for shares purchased in the open market and the
price at which the fund issues the remaining shares. To the extent First Data is
unable to stop open market purchases and cause the fund to issue the remaining
shares, the average per share purchase price paid by First Data may exceed the
net asset value of the common stock as of the valuation time, resulting in the
acquisition of fewer shares than if the dividend or capital gains distribution
had been paid in common stock issued by the Fund at such net asset value. First
Data will begin to purchase common stock on the open market as soon as
practicable after the determination date
[GRAPHIC]
23
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan
(unaudited) (continued)
- --------------------------------------------------------------------------------
for the dividend or capital gains distribution, but in no event shall such
purchases continue later than 30 days after the payment date for such dividend
or distribution, or the record date for a succeeding dividend or distribution,
except when necessary to comply with applicable provisions of the federal
securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of the Plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
fund. No brokerage charges apply with respect to shares of common stock issued
directly by the fund under the Plan. Each Plan participant will, however, bear a
proportionate share of any brokerage commissions actually incurred with respect
to any open market purchases made under the Plan.
Experience under the Plan may indicate that changes to it are desirable. The
Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, P.O. Box
8030, Boston, Massachusetts 02266-8030 or by telephone at 1-800-451-2010.
--------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase
shares of its common stock in the open market.
[GRAPHIC]
24
<PAGE>
Managed Municipals
Portfolio II Inc.
Directors Investment Adviser
Allan J. Bloostein Mutual Management Corp.
Martin Brody 388 Greenwich Street
Dwight B. Crane New York, New York 10013
Robert A. Frankel
William R. Hutchinson Transfer Agent
Heath B. McLendon, Chairman First Data Investor Services
Group, Inc.
Charles F. Barber, Emeritus P.O. Box 8030
Boston, Massachusetts 02266-8030
Officers
Heath B. McLendon
President and Custodian
Chief Executive Officer PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
Lewis E. Daidone
Senior Vice President
and Treasurer
Joseph P. Deane
Vice President and
Investment Officer
David Fare
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
<PAGE>
This report is intended only for shareholders of the
Managed Municipals Portfolio II Inc.
It is not a Prospectus, circular or representation
intended for use in the purchase or sale of shares of
the Fund or of any securities mentioned in the report.
FD0836 1/99
