<PAGE>
Municipal Partners
Fund Inc.
Annual Report
DECEMBER 31, 1997
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
February 23, 1998
To Our Shareholders:
We are pleased to provide this annual report to the shareholders of Municipal
Partners Fund (the "Fund") for the year ended December 31, 1997. Benefiting from
the bond market rally, the Fund achieved a 7.88% return in net asset value
during the second half of 1997 and 12.28% for the year ended December 31, 1997
(assuming the reinvestment of monthly common stock dividends in additional
shares of the Fund). The Fund's average maturity and leverage contributed to
this performance. On December 31, 1997 the Fund had a closing net asset value
and market price per share of $14.85 and $13.50, respectively. The Fund
continued to pay a monthly common stock dividend of $0.0665 per share.
U.S. fixed-income securities registered positive price returns during the second
half of 1997 as the bond market continued to benefit from a healthy domestic
economy with little concern of inflation. The fixed-income markets also received
a boost from the political and fiscal turmoil in Asia. Many investors seeking a
safe haven purchased United States Treasury securities, causing a significant
increase in demand for these securities.
Municipal prices advanced during the latter half of the year, but failed to keep
pace with the rally in Treasuries. An influx of municipal new issue supply
prompted by lower interest rates, prevented municipal prices from keeping up
with their taxable counterpart. For the year, total municipal new issue volume
was $220 billion, a 19% increase over 1996 and the third highest year on record.
Demand from property and casualty insurance companies remained a constant due to
their profitability, while purchases from individuals and mutual funds depended
upon the level of nominal yields and cash availability.
As of December 31, 1997, the Fund's portfolio consisted of 42 issues throughout
26 different states with an average maturity of 9.98 years and an average coupon
of 6.32%, excluding short-term investments. Sector weightings emphasize housing,
industrial development and healthcare.
ANNUAL SHAREHOLDERS AND SPECIAL MEETINGS
The Fund held its annual shareholders meeting on October 14, 1997 and a special
meeting on January 15, 1998. At the meeting on October 14, 1997, shareholders
approved a new investment management agreement between Value Advisors LLC
("Value Advisors") and the Fund and a new investment advisory and administration
agreement among Value Advisors, Salomon Brothers Asset Management Inc ("SBAM")
and the Fund, elected each of the nominees proposed for election to the Fund's
Board of Directors and ratified the selection of Price Waterhouse LLP as the
independent accountants of the Fund. The new agreement took effect upon the
closing of the sale of Value Advisors by Oppenheimer Group Inc. to PIMCO
Advisors L.P., which occurred on November 4, 1997. At the special meeting on
January 15, 1998, shareholders elected William D. Cvengros to the Fund's Board
of Directors and approved a new investment advisory and administration agreement
among SBAM, Value Advisors and the Fund. Approval of the agreement was necessary
due to the merger of Salomon Inc, which had been the ultimate parent company of
SBAM, with and into Smith Barney Holdings Inc., a subsidiary of Travelers Group
Inc., which occurred on November 28, 1997. Travelers is now the ultimate parent
company of SBAM. The following table provides information concerning the matters
voted on at the meetings:
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
OCTOBER 14, 1997
1. Approval of a new investment management agreement between Value Advisors and
the Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
4,703,093 32,414 91,345
2. Approval of a new investment advisory and administration agreement among
Value Advisors, SBAM and the Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
4,708,938 33,083 84,831
3. Election of directors (common and preferred shares voting).
NOMINEES VOTES FOR VOTES WITHHELD
-------- ----------- --------------
Mark C. Biderman* 4,764,473 62,379
Robert L. Rosen 4,762,873 63,979
*Mr. Biderman subsequently resigned from the Board of Directors on November 4,
1997.
4. Election of a director (preferred shares voting only).
NOMINEE VOTES FOR VOTES WITHHELD
------- ----------- --------------
Dr. Riordan Roett 717 0
5. Ratification of Price Waterhouse LLP as the Independent Accountants of the
Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
4,781,619 16,533 28,700
JANUARY 15, 1998
1. Election of a director (common and preferred shares voting).
NOMINEE VOTES FOR VOTES WITHHELD
------- ----------- --------------
William D. Cvengros 4,991,733 93,702
2. Approval of a new investment advisory and administration agreement among
Value Advisors SBAM, and the Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
4,949,621 36,533 99,281
Cordially,
/s/ WILLIAM D. CVENGROS /s/ MICHAEL S. HYLAND
William D. Cvengros Michael S. Hyland
Co-Chairman of the Board Co-Chairman of the Board
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Investments
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments - 143.6% CREDIT RATING (NOTE 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALABAMA - 4.0%
Alabama Special Care Facilities Financing Authority Revenue
$2,145 (Daughters of Charity-St. Vincents), 5.00%, 11/01/25.......... Aa2/AA+ $ 2,039,766
Courtland, Alabama Industrial Development Board Solid Waste Disposal
Revenue (Champion International Corporation Project), Series A,
1,225 7.00%, 11/01/22............................................... Baa1/BBB 1,345,172
------------
3,384,938
------------
CALIFORNIA - 2.6%
West Covina, California Certificate of Participation (Queen of the
2,000 Valley Hospital), 6.50%, 8/15/14.............................. A2/A 2,205,600
------------
COLORADO - 5.6%
E-470 Public Highway Authority, Colorado Revenue, Series A, MBIA,
1,630 5.00%, 9/01/21................................................ Aaa/AAA 1,594,482
Colorado Health Facilities Authority Hospital Revenue (Rocky Mountain
3,000 Adventist Healthcare Project), 6.625%, 2/01/22................ Baa2/BBB 3,198,780
------------
4,793,262
------------
CONNECTICUT - 1.2%
Connecticut State Health & Educational Facilities Authority Revenue
1,000 (Windham Community Memorial Hospital), Series C, 6.00%, 7/01/20 Baa3/BBB- 1,037,510
------------
GEORGIA - 3.3%
Fulton County, Georgia Housing Authority Single-Family Mortgage,
360 6.60%, 3/01/28................................................ NR/AAA 380,743
Georgia Municipal Electric Authority Power Revenue, Series Z, FGIC,
2,250 5.50%, 1/01/20................................................ Aaa/AAA 2,411,595
------------
2,792,338
------------
HAWAII - 3.3%
2,610 Hawaii General Obligation, FGIC, 5.50%, 10/01/10.............. Aaa/AAA 2,831,876
------------
ILLINOIS - 7.4%
Illinois Health Facilities Authority Revenue (Highland Park Hospital
1,165 Project), Series A, MBIA, 5.50%, 10/01/08..................... Aaa/AAA 1,235,785
Illinois Health Facilities Authority Revenue Refunding (Lutheran General
1,500 Health System), Series C, 7.00%, 4/01/14...................... A1/A+ 1,817,745
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 3
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments (continued) CREDIT RATING (NOTE 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ILLINOIS - 7.4% (CONTINUED)
$3,000 Illinois State Sales Tax Revenue, Series V, 6.375%, 6/15/20... Aa3/AAA $ 3,303,450
------------
6,356,980
------------
MAINE - 3.3%
Maine State Housing Authority Mortgage Purchase, Series A-4,
525 6.375%, 11/15/12.............................................. Aa2/AA 551,198
Maine State Housing Authority Mortgage Purchase, Series A-2,
2,110 6.65%, 11/15/25............................................... Aa2/AA 2,242,782
------------
2,793,980
------------
MARYLAND - 4.8%
Northeast Maryland Waste Disposal Authority, Solid Waste Revenue
(Montgomery County Resource Recovery, Ogden Martin Systems Project A),
3,750 MBIA, 6.30%, 7/01/16.......................................... Aaa/AAA 4,071,563
------------
MASSACHUSETTS - 9.2%
3,255 Massachusetts State Special Obligation Revenue, Series A, 5.50%,
6/01/13....................................................... Aa3/AA 3,490,044
4,445 Massachusetts General Obligation, Series D, 5.00%, 11/01/16... Aaa/AAA 4,397,661
------------
7,887,705
------------
MINNESOTA - 4.1%
Minnesota State Housing Finance Agency Single-Family Mortgage,
3,355 Series H, 6.50%, 1/01/26...................................... Aa2/AA+ 3,533,822
------------
MONTANA - 2.5%
Montana State Board Housing Single-Family Program, Series A-2,
2,000 6.05%, 12/01/12............................................... Aa2/AA+ 2,102,700
------------
NEBRASKA - 7.7%
Nebraska Higher Education Loan Program Inc., Revenue, Sub-Series A-6,
6,000 6.45%, 6/01/18................................................ A/NR 6,623,220
------------
NEVADA - 8.6%
Clark County, Nevada Passenger Facility Revenue (Macarran International
1,350 Airport), MBIA, 5.75%, 7/01/23................................ Aaa/AAA 1,404,081
Nevada Housing Division, Single-Family Program, Series B-2,
4,355 6.40%, 10/01/25............................................... Aa2/NR 4,576,321
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 4
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments (continued) CREDIT RATING (NOTE 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEVADA - 8.6% (CONTINUED)
Nevada Housing Division, Single-Family Program, Series B-2,
$1,300 6.95%, 10/01/26............................................... Aa/NR $ 1,393,353
------------
7,373,755
------------
NEW HAMPSHIRE - 0.8%
New Hampshire State Housing Finance Authority, Single-Family
630 Residential, Series A, 6.80%, 7/01/15......................... Aa/A+ 671,089
------------
NEW JERSEY - 12.5%
New Jersey Economic Development Authority, Pollution Control Revenue
5,150 (Public Service Electric and Gas Co. Project), MBIA, 6.40%, 5/01/32 Aaa/AAA 5,641,619
New Jersey Economic Development Authority, Water Facilities Revenue
4,450 (New Jersey American Water Co., Inc. Project), FGIC, 6.875%, 11/01/34 Aaa/AAA 5,040,916
------------
10,682,535
------------
NEW YORK - 5.0%
Port Authority of New York & New Jersey Construction, Ninety-Sixth Series,
950 FGIC, 6.60%, 10/01/23......................................... Aaa/AAA 1,049,778
Triborough Bridge & Tunnel Authority, New York General Purpose Revenue,
3,000 Series Y, 5.50%, 1/01/17...................................... Aa/A+ 3,209,370
------------
4,259,148
------------
OHIO - 11.6%
Miami County, Ohio Hospital Facilities Revenue Refunding & Improvement
2,000 (Upper Valley Medical Center), 6.25%, 5/15/13................. Baa2/BBB 2,125,340
Ohio State Water Development Authority Solid Waste Disposal Revenue
7,200 (Cargill Inc.), 6.30%, 9/01/20................................ Aa3/AA- 7,803,936
------------
9,929,276
------------
PENNSYLVANIA - 7.8%
Monroeville, Pennsylvania Hospital Authority Hospital Revenue (Forbes
6,095 Health System), 7.00%, 10/01/13............................... A3/A- 6,640,990
------------
RHODE ISLAND - 3.9%
Rhode Island Housing & Mortgage Finance Corporation, Homeownership
3,115 Opportunity, Series 7B, 6.80%, 10/01/25....................... Aa2/AA+ 3,309,594
------------
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 5
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments (concluded) CREDIT RATING (NOTE 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOUTH DAKOTA - 6.2%
South Dakota Housing Development Authority, Homeowner Mortgage,
$4,955 Series D, 6.85%, 5/01/26...................................... Aa1/AAA $ 5,284,458
------------
TENNESSEE - 4.4%
The Industrial Development Board of Humphreys County, Tennessee
3,400 (E.I. duPont de Nemours and Company Project), 6.70%, 5/01/24.. Aa3/AA- 3,769,308
------------
TEXAS - 15.2%
Lower Neches Valley Authority, Texas Industrial Development Corporation
6,000 (Mobil Oil Refining Corporate Project), 6.40%, 3/01/30........ Aa2/AA 6,508,740
Richardson, Texas Hospital Authority Hospital Revenue Refunding and
3,000 Improvement (Richardson Medical Center), 6.75%, 12/01/23...... Baa3/BBB- 3,252,750
330 Texas State Veterans Housing Assistance, 6.80%, 12/01/23...... Aa2/AA 352,384
West Side Calhoun County, Texas Navigation District Solid Waste Disposal
2,750 Revenue (Union Carbide Chemicals), 6.40%, 5/01/23............. Baa2/BBB 2,901,525
------------
13,015,399
------------
VIRGINIA - 3.6%
Giles County, Virginia Industrial Development Authority Revenue
2,000 (Hoechst Celanese Project), 5.95%, 12/01/25................... A2/A+ 2,085,840
Virginia State Housing Development Authority, Commonwealth Mortgage,
955 Subseries B-5, 6.30%, 1/01/27................................. Aa1/AA+ 992,608
------------
3,078,448
------------
WASHINGTON - 1.8%
Washington State Housing Finance Commission, Single-Family Mortgage
1,460 Revenue Refunding, 6.15%, 1/01/26............................. NR/AAA 1,580,260
------------
WEST VIRGINIA - 3.2%
West Virginia State Water Development Authority, Loan Program II,
2,445 Series A, 7.00%, 11/01/31, Pre-Refunded 11/01/01.............. NR/A- 2,729,353
------------
Total Long-Term Investments (cost $115,025,651)...................................... 122,739,107
------------
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 6
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Investments (concluded)
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Short-Term Investments - 1.2% CREDIT RATING (NOTE 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IDAHO - 0.5%
$400 Power County, Idaho Pollution Control Revenue, VR, 5.10%, 1/02/98 VMIG-1/NR $ 400,000
------------
VIRGINIA - 0.6%
Alexandria, Virginia Redevelopment & Housing Authority Revenue, VR,
500 5.00%, 1/02/98................................................ NR/A-1 500,000
------------
WASHINGTON - 0.1%
100 Washington State Health Care Facilities Revenue, VR, 5.00%, 1/02/98 VMIG-1/A-1+ 100,000
------------
Total Short-Term Investments (cost $1,000,000)....................................... 1,000,000
------------
Total Investments - 144.8% (cost $116,025,651)...................................... 123,739,107
------------
Other Assets in Excess of Liabilities - 2.0%......................................... 1,746,764
------------
Total Net Assets - 146.8%............................................................ 125,485,871
------------
Par value of 800 shares of preferred stock at $50,000 per share (Note 5)-(46.8%)..... (40,000,000)
------------
Net Assets Applicable to Common Stock - 100%
(equivalent to $14.85 per share on 5,757,094 common shares outstanding).............. $ 85,485,871
============
<FN>
- -----------------------------------------------------------------------------------------------------------------
The following abbreviations are used in portfolio descriptions:
FGIC -- Insured as to principal and interest by the Financial Guaranty
Insurance Company.
MBIA -- Insured as to principal and interest by the
Municipal Bond Investors Assurance Corporation.
NR -- Not rated by Moody's or S&P as indicated.
VMIG -- Variable Moody Investment Grade.
VR -- Variable Rate Demand Note. Date shown is date of next interest
rate change and coupon rate is the rate in effect on December 31, 1997.
</FN>
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 7
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C>
Assets
Investments, at value (cost - $116,025,651)................................................ $123,739,107
Cash....................................................................................... 36,897
Interest receivable........................................................................ 1,843,444
Unamortized organization expenses (Note 2)................................................. 1,050
Prepaid expenses........................................................................... 13,232
------------
Total assets................................................................... 125,633,730
------------
Liabilities
Accrued management fee (Note 3)............................................................ 63,654
Accrued audit and tax return preparation fees.............................................. 52,574
Accrued printing and mailing fees.......................................................... 11,000
Accrued legal fee.......................................................................... 9,999
Accrued custodian expense.................................................................. 4,984
Accrued transfer agent expense............................................................. 2,147
Other accrued expenses..................................................................... 3,501
------------
Total liabilities.............................................................. 147,859
------------
Net Assets
Preferred Stock (Note 5)................................................................... 40,000,000
------------
Common Stock ($.001 par value, 100,000,000 shares authorized; 5,757,094 shares outstanding) 5,757
Additional paid-in capital................................................................. 79,673,514
Undistributed net investment income........................................................ 394,026
Accumulated realized loss on investments................................................... (2,300,882)
Net unrealized appreciation on investments................................................. 7,713,456
------------
Net assets applicable to common stock.......................................... $ 85,485,871
------------
Total net assets............................................................... $125,485,871
============
Net asset value per share of common stock ($85,485,871 / 5,757,094 shares outstanding).... $14.85
======
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 8
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest (reduced by net premium amortization of $26,571)...................... $ 7,231,002
OPERATING EXPENSES
Management fee (Note 3).............................................$730,635
Auction agent fee................................................... 111,168
Audit and tax services.............................................. 73,511
Legal............................................................... 44,247
Directors' fees and expenses (Note 3)............................... 28,807
Custodian........................................................... 26,138
Printing............................................................ 23,966
Listing fee......................................................... 16,169
Amortization of organization expenses (Note 2)...................... 14,155
Transfer agent...................................................... 14,033
Shareholder annual meeting.......................................... 2,031
Other............................................................... 17,535
--------
Total operating expenses................................................... 1,102,395
-----------
Net investment income.............................................................. 6,128,607
-----------
NET REALIZED AND UNREALIZED GAIN
Net realized gain on investments................................................... 911,206
Change in net unrealized appreciation on investments............................... 4,003,941
-----------
Net realized gain and change in net unrealized appreciation on investments......... 4,915,147
-----------
Net Increase in Net Assets from Operations......................................... $11,043,754
===========
- -----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 9
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income................................................ $ 6,128,607 $ 6,209,052
Net realized gain (loss) on investments.............................. 911,206 (52,016)
Change in net unrealized appreciation (depreciation) on investments.. 4,003,941 (1,292,674)
------------ ------------
Net increase in net assets from operations........................... 11,043,754 4,864,362
------------ ------------
DIVIDENDS
To common shareholders from net investment income.................... (4,594,161) (4,533,712)
To preferred shareholders from net investment income................. (1,516,642) (1,475,233)
------------ ------------
(6,110,803) (6,008,945)
------------ ------------
Total increase (decrease) in net assets.............................. 4,932,951 (1,144,583)
NET ASSETS
Beginning of year.................................................... 120,552,920 121,697,503
------------ ------------
End of year (includes undistributed net investment income of
$394,026 and $376,222, respectively)............................ $125,485,871 $120,552,920
============ ============
</TABLE>
Statement of Cash Flows
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Proceeds from sales of portfolio securities........................................ $ 33,743,019
Purchases of portfolio securities.................................................. (32,944,169)
Net purchases of short-term securities............................................. (990,000)
------------
(191,150)
Net investment income.............................................................. 6,128,607
Amortization of net premium on investments......................................... 26,571
Amortization of organization expenses.............................................. 14,155
Net change in receivables/payables related to operations........................... 98,961
------------
Net cash provided by operating activities...................................... 6,077,144
------------
Cash Flows used by Financing Activities:
Common stock dividends paid........................................................ (4,594,161)
Preferred stock dividends paid..................................................... (1,516,642)
------------
Net cash used by financing activities.......................................... (6,110,803)
------------
Net decrease in cash.................................................................... (33,659)
Cash at beginning of year............................................................... 70,556
------------
Cash at end of year..................................................................... $ 36,897
============
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 10
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Notes to Financial Statements
Note 1. Organization
Municipal Partners Fund Inc. (the "Fund") was incorporated in Maryland on
November 24, 1992 and is registered as a diversified, closed-end, management
investment company under the Investment Company Act of 1940, as amended. The
Board of Directors authorized 100 million shares of $.001 par value common
stock. The Fund may classify or reclassify any unissued shares of common stock
into one or more series of preferred stock (See Note 5). The Fund commenced
operations on January 29, 1993. The Fund's primary investment objective is to
seek a high level of current income which is exempt from regular federal income
taxes, consistent with the preservation of capital. As a secondary investment
objective, the Fund intends to enhance portfolio value by purchasing tax exempt
securities that, in the opinion of Salomon Brothers Asset Management Inc (the
"Investment Adviser"), may appreciate in value relative to other similar
obligations in the marketplace.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
("GAAP"). The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that effect the reported
amounts and disclosures in the financial statements. Actual amounts could differ
from those estimates.
SECURITIES VALUATION. Tax-exempt securities are valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term investments having a maturity of 60 days or
less are valued at amortized cost which approximates market value. Securities
for which reliable quotations are not readily available are valued at fair value
as determined in good faith by, or under procedures established by, the Board of
Directors.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is accrued on a daily
basis. The Fund amortizes premiums and accretes discounts on securities
purchased using the effective interest method.
FEDERAL INCOME TAXES. The Fund has complied and intends to continue to comply
with the requirements of the Internal Revenue Code of 1986, as amended,
applicable to regulated investment companies, and to distribute all of its
income and capital gains, if any, to its shareholders. Therefore, no federal
income tax or excise tax provision is required.
Page 11
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Notes to Financial Statements (continued)
DIVIDENDS AND DISTRIBUTIONS. The Fund declares and pays dividends and
distributions to common shareholders monthly from net investment income, net
realized short-term capital gains and other sources, if necessary. Long-term
capital gains, if any, in excess of loss carryovers (See Note 4) are expected to
be distributed annually. Dividends and distributions to common shareholders are
recorded on the ex-dividend date. Dividends and distributions to preferred
shareholders are accrued on a weekly basis and are determined as described in
Note 5. The amount of dividends and distributions from net investment income
and net realized gains are determined in accordance with federal income tax
regulations, which may differ from GAAP.
UNAMORTIZED ORGANIZATION EXPENSES. Organization expenses amounting to $89,271
were incurred in connection with the organization of the Fund. These costs have
been deferred and are being amortized ratably over a five-year period from
commencement of operations.
CASH FLOW INFORMATION. The Fund invests in securities and distributes dividends
from net investment income and net realized gains from investment transactions.
These activities are reported in the Statement of Changes in Net Assets.
Additional information on cash receipts and cash payments is presented in the
Statement of Cash Flows. Accounting practices that do not affect reporting
activities on a cash basis include carrying investments at value and amortizing
premium or accreting discount on debt obligations.
Note 3. Management and Advisory Fees and Other Transactions
The Fund has entered into a management agreement with Value Advisors LLC (the
"Investment Manager"), a subsidiary of PIMCO Advisors L.P., pursuant to which
the Investment Manager, among other things, supervises the Fund's investment
program and monitors the performance of the Fund's service providers. The
agreement with the Investment Manager was approved by shareholders at a special
meeting held on October 14, 1997, and has been in effect since the closing of
the sale of the Investment Manager by Oppenheimer Group Inc. to PIMCO Advisors
L.P., which occurred on November 4, 1997. The Investment Manager was the
transferee of the investment management responsibilities for the Fund which were
previously provided by Advantage Advisers, Inc.
The Investment Manager and the Fund entered into an investment advisory and
administration agreement with Salomon Brothers Asset Management Inc (the
"Investment Adviser"), an indirect wholly-owned subsidiary of Travelers Group
Inc. ("Travelers"), pursuant to which the Investment Adviser provides investment
advisory and administrative services to the Fund. The Investment Adviser is
responsible on a day-to-day basis for the management of the Fund's portfolio in
accordance with the Fund's investment objectives and policies and for making
decisions to buy, sell, or hold particular securities and is responsible for
day-to-day administration of the Fund. The agreement with the Investment Adviser
was most recently approved by shareholders at a special meeting held on January
15, 1998. Approval of the agreement was necessary due to the merger of Salomon
Inc., which had been the ultimate parent company of the Investment Adviser, with
and into Smith Barney Holdings Inc., a
Page 12
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Notes to Financial Statements (continued)
subsidiary of Travelers, which occurred on November 28, 1997. Travelers is now
the ultimate parent company of the Investment Adviser.
The Fund pays the Investment Manager a monthly fee at an annual rate of .60% of
the Fund's average weekly net assets for its services, and the Investment
Manager pays the Investment Adviser a monthly fee at an annual rate of .36% of
the Fund's average weekly net assets for its services. For purposes of
calculating the fees, the liquidation value of any outstanding preferred stock
of the Fund is not deducted in determining the Fund's average weekly net assets.
Certain officers and/or directors of the Fund are also officers and/or directors
of the Investment Manager or the Investment Adviser.
At December 31, 1997, the Investment manager and the Investment Adviser owned
3,547 and 4,275 shares of the Fund, respectively.
The Fund pays each Director not affiliated with the Investment Manager or the
Investment Adviser a fee of $5,000 per year, $700 for attendance at each board
and audit committee meeting and reimbursement for travel and out-of-pocket
expenses for each board and committee meeting attended.
Note 4. Portfolio Activity
Purchases and sales of investment securities, other than short-term investments
for the year ended December 31, 1997, aggregated $32,944,169 and $33,743,019,
respectively. At December 31, 1997, the Fund had a net capital loss carryover of
approximately $2,300,000 of which $1,544,000 will be available through December
31, 2002, $704,000 will be available through December 31, 2003 and $52,000 will
be available through December 31, 2004 to offset future capital gains to the
extent provided by federal income tax regulations. In addition, as permitted
under Federal income tax regulations, the Fund has elected to defer $1,240 of
Post-October net capital losses to the next taxable year.
The federal income tax cost basis of the Fund's investments at December 31, 1997
was substantially the same as the cost basis for financial reporting. Gross
unrealized appreciation and depreciation amounted to $7,713,456 and $0,
respectively, resulting in net unrealized appreciation for federal income tax
purposes of $7,713,456.
Note 5. Preferred Stock
On April 2, 1993, the Fund closed its public offering of 800 shares of $.001 par
value Auction Rate Preferred Stock ("Preferred Shares") at an offering price of
$50,000 per share. The Preferred Shares have a liquidation preference of $50,000
per share plus an amount equal to accumulated but unpaid dividends (whether or
not earned or declared) and, subject to certain restrictions, are redeemable in
whole or in part.
Page 13
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Notes to Financial Statements (concluded)
Dividend rates generally reset every 28 days and are determined by auction
procedures. The dividend rates on the Preferred Shares during the year ended
December 31, 1997 ranged from 3.575% to 3.825%. The weighted average dividend
rate for the year ended December 31, 1997 was 3.74%. The Board of Directors
designated the dividend period commencing October 21, 1997 as a Special Rate
Period. Pursuant to this Special Rate Period, the dividend rate set by the
auction held on October 20, 1997 remained in effect through January 19, 1998.
The dividend rate for this Special Rate Period was 3.78%. The Board of Directors
designated the dividend period commencing January 20, 1998 as a Special Rate
Period. Pursuant to this Special Rate Period, the dividend rate set by the
auction held on January 16, 1998 remains in effect through April 20, 1998 when
the regular auction procedure resumes, subject to the Fund's ability to
designate any subsequent dividend period as a Special Rate Period. The dividend
rate for this Special Rate Period is 3.67%.
The Fund is subject to certain restrictions relating to the Preferred Shares.
The Fund may not declare dividends or make other distributions on shares of
common stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, asset coverage with respect to the outstanding
Preferred Shares would be less than 200%. The Preferred Shares are also subject
to mandatory redemption at $50,000 per share plus any accumulated or unpaid
dividends, whether or not declared, if certain requirements relating to the
composition of the assets and liabilities of the Fund as set forth in its
Articles Supplementary are not satisfied.
The Preferred Shares, which are entitled to one vote per share, generally vote
with the common shares but vote separately as a class to elect two directors and
on certain matters affecting the rights of the Preferred Shares.
Note 6. Concentration of Credit Risk
Since the Fund invests a portion of its assets in issuers located in a single
state, it may be affected by economic and political developments in a specific
state or region. Certain debt obligations held by the Fund are entitled to the
benefit of insurance, standby letters of credit or other guarantees of banks or
other financial institutions.
Note 7. Common Stock Dividends Subsequent to December 31, 1997
On January 2 and February 2, 1998, the Board of Directors of the Fund declared a
common share dividend from net investment income, each in the amount of $.0665
per share, payable on January 30 and February 27, 1998 to shareholders of record
on January 13 and February 18, 1998, respectively.
Page 14
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Financial Highlights
Data for a share of common stock outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993(a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 13.99 $ 14.19 $ 11.55 $ 14.59 $ 14.10
------- ------- ------- ------- -------
Net investment income.................. 1.06 1.08 1.10 1.10 .87
Net realized gain (loss) and change in net
unrealized appreciation (depreciation) on
investments......................... .86 (.24) 2.63 (3.04) .73
------- ------- ------- ------- -------
Total from investment operations....... 1.92 .84 3.73 (1.94) 1.60
------- ------- ------- ------- -------
Less distributions
Dividends to common shareholders from
net investment income............. (.80) (.79) (.80) (.89) (.71)
Dividends to preferred shareholders from
net investment income............. (.26) (.25) (.29) (.21) (.14)
------- ------- ------- ------- -------
Total distributions.................... (1.06) (1.04) (1.09) (1.10) (.85)
------- ------- ------- ------- -------
Offering costs on issuance of common and
preferred shares.................... -- -- -- -- (.26)
------- ------- ------- ------- -------
Net asset value, end of period......... $ 14.85 $ 13.99 $ 14.19 $ 11.55 $ 14.59
======= ======= ======= ======= =======
Per share market value, end of period.. $ 13.50 $ 11.75 $11.625 $ 9.875 $ 13.75
Total investment return based on market
price per share (c)................. 22.31% 7.99% 26.18% (22.57%) 2.31%(b)
Ratios to average net assets of common
shareholders (d):
Operating expenses.................. 1.34% 1.40% 1.43% 1.49% 1.30%(e)
Net investment income............... 7.47% 7.84% 8.41% 8.67% 6.57%(e)
Net assets of common shareholders,
end of period (000)............. $85,486 $80,553 $81,698 $66,469 $84,009
Preferred stock outstanding,
end of period (000)............. $40,000 $40,000 $40,000 $40,000 $40,000
Portfolio turnover rate............. 27% 27% 35% 17% 100%
<FN>
- ----------------------------------------------------------------------------------------------------------------
(a) For the period from commencement of investment operations on January 29, 1993 through December 31, 1993.
(b) Return calculated based on beginning of period price of $14.10 (initial offering price of $15.00 less
underwriting discount of $.90) and end of period market value of $13.75 per share. This calculation is not
annualized.
(c) For purposes of this calculation, dividends on common shares are assumed to be reinvested at prices obtained
under the Fund's dividend reinvestment plan and the broker commission paid to purchase or sell a share is
excluded.
(d) Ratios calculated on the basis of income, expenses and preferred stock dividends relative to the average net
assets of common shares.
(e) Annualized.
</FN>
See accompanying notes to financial statements.
Page 15
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Report of Independent Accountants
To the Board of Directors and Shareholders of
Municipal Partners Fund Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Municipal Partners
Fund Inc. (the "Fund") at December 31, 1997, the results of its operations and
cash flows for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
Page 16
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Selected Quarterly Financial Information (unaudited)
Summary of quarterly results of operations:
<TABLE>
<CAPTION>
NET REALIZED GAIN
(LOSS) & CHANGE
IN NET UNREALIZED
NET INVESTMENT APPRECIATION
INCOME (DEPRECIATION)
----------------- -----------------
QUARTER ENDED* TOTAL PER SHARE TOTAL PER SHARE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1995............................................... $1,585 $.27 $7,580 $1.32
June 30, 1995............................................... . 1,584 .28 1,601 .28
September 30, 1995........................................... 1,572 .27 1,478 .25
December 31, 1995............................................ 1,600 .28 4,478 .78
March 31, 1996............................................... 1,561 .27 (3,781) (.65)
June 30, 1996................................................ 1,551 .27 (424) (.08)
September 30, 1996........................................... 1,546 .27 1,656 .29
December 31, 1996............................................ 1,551 .27 1,204 .20
March 31, 1997............................................... 1,544 .27 (1,587) (.27)
June 30, 1997................................................ 1,535 .27 2,442 .42
September 30, 1997........................................... 1,531 .26 2,071 .36
December 31, 1997............................................ 1,519 .26 1,989 .35
<FN>
- -------------------------------------------------------------------------------------------------------------
*Totals expressed in thousands of dollars except per share amounts.
</FN>
See accompanying notes to financial statements.
PAGE 17
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Other Information
Pursuant to certain rules of the Securities and Exchange Commission, the
following additional disclosure is provided.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), holders of
Common Stock whose shares of Common Stock are registered in their own names will
be deemed to have elected to have all distributions automatically reinvested by
State Street Bank and Trust Company (the "Plan Agent") in Fund shares pursuant
to the Plan, unless they elect to receive distributions in cash. Holders of
Common Stock who elect to receive distributions in cash will receive all
distributions in cash by check in dollars mailed directly to the holder by the
Plan Agent as dividend-paying agent. Holders of Common Stock who do not wish to
have distributions automatically reinvested should notify the Plan Agent at the
address below. Distributions with respect to Common Stock registered in the name
of a bank, broker-dealer or other nominee (i.e., in "street name") will be
reinvested under the Plan unless the service is not provided by the bank,
broker-dealer or other nominee or the holder elects to receive dividends and
distributions in cash. Investors who own shares registered in the name of a
bank, broker-dealer or other nominee should consult with such nominee as to
participation in the Plan through such nominee, and may be required to have
their shares registered in their own names in order to participate in the Plan.
The Plan Agent serves as agent for the holders of Common Stock in administering
the Plan. After the Fund declares a dividend on the Common Stock or determines
to make a capital gain distribution, the Plan Agent will, as agent for the
participants, receive the cash payment and use it to buy the Fund's Common Stock
in the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts. The Fund will not issue any new shares of Common Stock
in connection with the Plan.
Participants have the option of making additional cash payments to the Plan
Agent, monthly, in a minimum amount of $250, for investment in the Fund's Common
Stock. The Plan Agent will use all such funds received from participants to
purchase shares of Common Stock in the open market on or about the first
business day of each month. To avoid unnecessary cash accumulations, and also to
allow ample time for receipt and processing by the Plan Agent, it is suggested
that participants send in voluntary cash payments to be received by the Plan
Agent approximately ten days before an applicable purchase date specified above.
A participant may withdraw a voluntary cash payment by written notice, if the
notice is received by the Plan Agent not less than 48 hours before such payment
is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares of Common Stock in
the account of each Plan participant will be held by the Plan Agent in the name
of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
In the case of holders of Common Stock, such as banks, broker-dealers or other
nominees, who hold shares for others who are beneficial owners, the Plan Agent
will administer the Plan on the basis of the number of shares of Common Stock
certified from time to time by the holders as representing the total amount
registered in such holders' names and held for the account of beneficial owners
that have not elected to receive distributions in cash.
PAGE 18
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Other Information (concluded)
There is no charge to participants for reinvesting dividends or capital gains
distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments will be paid by the Fund. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of dividends and
distributions and voluntary cash payments made by the participant. The receipt
of dividends and distributions under the Plan will not relieve participants of
any income tax which may be payable on such dividends or distributions.
Participants may terminate their accounts under the Plan by notifying the Plan
Agent in writing. Such termination will be effective immediately if notice in
writing is received by the Plan Agent not less than ten days prior to any
dividend or distribution record date. Upon termination, the Plan Agent will send
the participant a certificate for the full shares held in the account and a cash
adjustment for any fractional shares or, upon written instruction from the
participant, the Plan Agent will sell part or all of the participant's shares
and remit the proceeds to the participant, less a $2.50 fee plus brokerage
commission for the transaction.
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to all participants in the
Plan at least 30 days before the record date for the dividend or distribution.
The Plan also may be amended by the Fund or the Plan Agent upon at least 30
days' written notice to participants in the Plan.
All correspondence concerning the Plan should be directed to the Plan Agent,
P.O. Box 8209, Boston, Massachusetts 02266-8209.
1997 Federal Tax Notice (unaudited)
During the year ended December 31, 1997, the Fund paid to shareholders
$6,110,803 from net investment income. All of the Fund's dividends from net
investment income were exempt interest dividends, excludable from gross income
for regular Federal income tax purposes. You should consult your tax adviser as
to the state and local tax treatment of the dividends you received.
PAGE 19
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I N C .
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
MICHAEL S. HYLAND
Co-Chairman of the Board;
Managing Director,
Salomon Brothers Inc
President, Salomon Brothers
Asset Management Inc
WILLIAM D. CVENGROS
Co-Chairman of the Board; Chief Executive Officer, President
and Member of the Board of Value Advisors LLC and President of PIMCO
Advisors L.P.
RIORDAN ROETT
Professor and Director, Latin American
Studies Program, Paul H. Nitze
School of Advanced International Studies,
Johns Hopkins University
ROBERT L. ROSEN
General Partner,
R.L.R. Partners
Officers
MICHAEL S. HYLAND
Co-Chairman of the Board
WILLIAM D. CVENGROS
Co-Chairman of the Board
STEPHEN J. TREADWAY
President
NEWTON SCHOTT
Executive Vice President
MARYBETH WHYTE
Executive Vice President
ALAN M. MANDEL
Treasurer
LAURIE A. PITTI
Assistant Treasurer
NOEL B. DAUGHERTY
Secretary
JENNIFER G. MUZZEY
Assistant Secretary
Municipal Partners Fund Inc.
7 World Trade Center
New York, New York 10048
Telephone 1-888-777-0102
INVESTMENT ADVISER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Value Advisors LLC
800 Newport Center Drive
Suite 100
Newport Beach, California 92660
AUCTION AGENT
Bankers Trust Company
4 Albany Street
New York, New York 10006
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DIVIDEND DISBURSING AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
NEW YORK STOCK EXCHANGE SYMBOL
MNP
<PAGE>
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
---------------------
BULK RATE
U.S. POSTAGE
PAID
S. HACKENSACK, NJ
PERMIT No. 750
---------------------
