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MUNICIPAL PARTNERS
FUND II INC.
ANNUAL REPORT
-----------------------------------------
JUNE 30, 1995
----------------------------------
SALOMON BROTHERS ASSET MANAGEMENT
-------------------------------
<PAGE> 2
MUNICIPAL PARTNERS FUND II INC.
August 18, 1995
To Our Shareholders:
We are pleased to provide this annual report to the shareholders of Municipal
Partners Fund II Inc. for the year ended June 30, 1995. The three months ended
June 30, 1995 saw favorable results for fixed income securities as signs of
economic weakness triggered a rally in the bond markets. As a result, Municipal
Partners Fund II Inc. benefited with a 3.6% investment return for the quarter
and 18.6% for the first six months of 1995 (the investment return based on net
asset value assumes the reinvestment of monthly dividends in additional shares
of the Fund). At June 30, 1995, the Fund had a closing net asset value and
market price per share of $12.58 and $10.75, respectively. During the quarter,
the Fund paid a regular monthly dividend of $.059 per common share.
Bond prices improved during the quarter as weak economic data led market
participants to believe that the next move by the Federal Reserve would result
in lower interest rates. This in fact did occur on July 6 when the Fed lowered
the Fed funds rate 25 basis points to 5.75%. While municipals achieved positive
returns for the quarter, they failed to keep pace with Treasuries.
Contributing to the municipal bond market's underperformance relative to
Treasuries was a lack of demand from individual investors. Lower nominal yields,
a record setting stock market, and concerns about a flat tax were factors which
diverted money from the municipal bond market. Additionally, Orange County,
California's reluctance to address their debt obligations cast a shadow over the
tax-exempt marketplace. However, the technicals are strong for the municipal
bond market as new issue supply for the first half of the year was 25% lower
than the similar period last year. There continues to be a considerable amount
of money available to enter the market from bond calls, maturities and coupon
payments.
As of June 30, 1995, the Fund's portfolio consisted of 44 issues in 22 different
states with an average maturity of 20.7 years and average coupon of 6.23%.
Sector weightings emphasize housing, healthcare and transportation.
We encourage you to review the audited financial statements that follow for
further details on the Fund.
Finally, we thank you for your support and confidence. We invite you to call
with any questions or comments at 1-800-725-6666 or (212) 783-1301. In addition,
a recorded periodic update that reviews the municipal debt market and contains
specific information regarding the Fund and its portfolio, including top ten
holdings and portfolio diversification, is available by calling 1-800-421-4777.
Cordially,
/s/ MARK C. BIDERMAN /s/ MICHAEL S. HYLAND
-------------------- ---------------------
Mark C. Biderman Michael S. Hyland
Chairman of the Board President
<PAGE> 3
MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF INVESTMENTS
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
000'S LONG-TERM INVESTMENTS -- 157.3% CREDIT RATING (NOTE 2)
---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
ALASKA -- 13.2%
Alaska State Housing Finance Corporation Insured
$6,000 Mortgage Program, 5.90%, 12/01/33..................... Aa1/A+ $ 5,645,580
Alaska State Housing Finance Corporation
Collateralized Home Mortgage Bonds, Subseries A-3,
3,750 5.85%, 6/01/25........................................ Aaa/AAA 3,495,187
Valdez, Alaska Marine Terminal Revenue Refunding (BP
910 Pipelines Inc. Project), 5.65%, 12/01/28.............. A1/AA- 833,751
------------
9,974,518
------------
CALIFORNIA -- 19.8%
California Pollution Control Financing Authority,
Pollution Control Revenue (Southern California Edison
3,600 Company), Series B, 6.40%, 12/01/24................... A2/A+ 3,614,904
California State Public Works Board, Lease Revenue
Refunding Bonds (Various University of California
2,900 Projects), 1993 Series A, 7.00%, 3/01/14.............. A/A- 3,078,814
California State Public Works Board, Lease Revenue
Refunding Bonds (Department of Corrections), Series A,
2,175 6.875%, 11/01/14...................................... A/A- 2,276,768
Los Angeles, California Department of Water & Power
Electric Plant Revenue, Crossover Refunding, 5.25%,
1,000 11/15/26.............................................. Aa/AA 868,020
Los Angeles, California Department of Water & Power
Waterworks Revenue, Crossover Refunding, 5.25%,
2,250 4/15/18............................................... Aa/AA 1,998,248
Los Angeles Community Redevelopment Agency, California
1,300 (Grand Central Square), 5.90%, 12/01/26............... A/A 1,184,716
California Educational Facilities Authority Revenue,
Pooled College & University Financings (Pepperdine
1,000 University), Series A, MBIA, 5.50%, 6/01/19........... Aaa/AAA 921,990
South Gate, California Public Financing Authority Tax
Allocation Revenue (South Gate Redevelopment Project
1,000 No. 1), AMBAC, 5.875%, 9/01/24........................ Aaa/AAA 981,430
------------
14,924,890
------------
</TABLE>
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See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF INVESTMENTS (continued)
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
000'S LONG-TERM INVESTMENTS (CONTINUED) CREDIT RATING (NOTE 2)
---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
COLORADO -- 1.3%
Colorado Health Facilities Authority Hospital Revenue
(Rocky Mountain Adventist Healthcare Project), Series
$1,000 1993, 6.625%, 2/01/13................................. Baa/BBB $ 974,120
------------
GEORGIA -- 1.1%
Savannah, Georgia Hospital Authority Revenue Refunding
800 & Improvement (Candler Hospital), 7.00%, 1/01/23...... Baa/BBB+ 793,232
------------
ILLINOIS -- 24.2%
Illinois Housing Development Authority, Series A,
5,800 6.00%, 7/01/18........................................ A1/A+ 5,672,632
Chicago Heights, Illinois General Obligation, Series
6,050 A, FGIC, 5.65%, 12/01/16.............................. Aaa/AAA 5,754,155
Chicago, Illinois O'Hare International Airport Special
Facility Revenue (International Terminal), MBIA,
3,500 6.75%, 1/01/18........................................ Aaa/AAA 3,670,485
Illinois Health Facilities Authority Revenue (South
1,000 Suburban Hospital Project), 7.00%, 2/15/18............ NR/A 1,031,170
Illinois Health Facilities Authority Revenue (OSF
2,300 Healthcare System), 6.00%, 11/15/23................... A1/A+ 2,165,818
------------
18,294,260
------------
INDIANA -- 3.8%
Indiana Bond Bank Special Program (Sanitary District
of the City of Gary, Indiana Project), Series B,
2,850 6.20%, 2/01/13........................................ Baa/A 2,837,717
------------
IOWA -- 4.5%
Iowa Finance Authority Hospital Facility Revenue
Refunding (Trinity Regional Hospital Project), 7.00%,
3,350 7/01/12............................................... NR/BBB+ 3,374,355
------------
</TABLE>
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See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF INVESTMENTS (continued)
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
000'S LONG-TERM INVESTMENTS (CONTINUED) CREDIT RATING (NOTE 2)
---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LOUISIANA -- 7.1%
Louisiana Public Facilities Authority Hospital Revenue
Refunding (Touro Infirmary Project), Series B, 6.125%,
$6,000 8/15/23............................................... Baa/BBB $ 5,364,360
------------
MARYLAND -- 4.8%
Prince Georges County, Maryland Housing Authority
Mortgage Revenue Refunding (Timber Ridge/
3,750 Cypress Creek), Series A, 6.00%, 6/20/28.............. NR/AAA 3,639,938
------------
MASSACHUSETTS -- 5.9%
Massachusetts State Health & Educational Facilities
Authority Revenue (Dana Farber Cancer Project), Series
1,000 G-1, 6.25%, 12/01/22.................................. A1/A 950,980
Massachusetts State Water Resource Authority General
3,800 Refunding, Series B, 5.50%, 3/01/17................... A/A 3,523,208
------------
4,474,188
------------
NEBRASKA -- 4.1%
Nebraska Higher Education Loan Program, Inc., Senior
Subordinated Bonds, 1993-2 Series A-5A, 6.65%,
3,115 6/01/08............................................... Aa/NR 3,121,448
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NEVADA -- 5.6%
Clark County, Nevada Industrial Development Revenue
Refunding (Nevada Power Project), AMBAC, 7.20%,
3,000 10/01/22.............................................. Aaa/AAA 3,292,590
Clark County, Nevada Passenger Facility Revenue,
(Macarran International Airport), MBIA, 5.75%,
1,000 7/01/23............................................... Aaa/AAA 921,250
------------
4,213,840
------------
NEW JERSEY -- 1.4%
New Jersey Economic Development Authority, Water
Facilities Revenue (New Jersey American Water Co.,
1,000 Inc. Project), FGIC, 6.875%, 11/01/34................. Aaa/AAA 1,084,830
------------
</TABLE>
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See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF INVESTMENTS (continued)
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
000'S LONG-TERM INVESTMENTS (CONTINUED) CREDIT RATING (NOTE 2)
---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
NEW YORK -- 16.8%
Battery Park City Authority, New York Housing Revenue,
$2,500 Series A, 5.75%, 6/01/23.............................. NR/AAA $ 2,375,175
Metropolitan Transportation Authority, New York
(Transit Facilities), Series O, MBIA, 6.375%,
2,500 7/01/20............................................... Aaa/AAA 2,556,525
The City of New York, General Obligation Bonds, Fiscal
3,000 1994 Series B, Subseries B-1, 7.00%, 8/15/16.......... Baa1/A- 3,102,750
Port Authority of New York & New Jersey Construction,
4,400 Ninety-Sixth Series, FGIC, 6.60%, 10/01/23............ Aaa/AAA 4,645,608
------------
12,680,058
------------
OHIO -- 4.2%
The Student Loan Funding Corporation, Cincinnati,
3,250 Ohio, Series 1993B, 6.20%, 8/01/12.................... A/NR 3,140,248
------------
PENNSYLVANIA -- 6.3%
Monroeville Hospital Authority Hospital Revenue
2,490 (Forbes Health System), 7.00%, 10/01/13............... Baa1/BBB+ 2,494,631
Philadelphia, Pennsylvania Hospitals & Higher
Education Facilities Authority Revenue (Graduate
2,425 Health System), Series A, 6.25%, 7/01/13.............. Baa1/BBB+ 2,256,778
------------
4,751,409
------------
RHODE ISLAND -- 4.7%
Rhode Island Convention Center Authority Revenue, 1993
3,800 Series A, AMBAC, 5.75%, 5/15/27....................... Aaa/AAA 3,583,324
------------
TENNESSEE -- 15.0%
Tennessee Housing Development Agency Mortgage Finance
6,800 Refunding, Series A, 5.95%, 7/01/28................... A1/A+ 6,543,844
Memphis-Shelby County Airport Authority, Airport
Revenue Refunding, Series 1993B, MBIA, 5.50%,
3,000 2/15/12............................................... Aaa/AAA 2,804,430
The Industrial Development Board of Humphreys County,
Tennessee (E.I. du Pont de Nemours and Company
1,950 Project), 6.70%, 5/01/24.............................. Aa3/AA- 2,001,109
------------
11,349,383
------------
</TABLE>
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See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF INVESTMENTS (continued)
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
000'S LONG-TERM INVESTMENTS (CONTINUED) CREDIT RATING (NOTE 2)
---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
TEXAS -- 8.5%
Matagorda County Navigation District No. 1 (Texas)
Pollution Control Revenue Refunding (Central Power &
$3,800 Light Company Project), 6.00%, 7/01/28................ A3/A- $ 3,667,912
Port Corpus Christi Authority Texas Nueces County
Pollution Control Revenue (Hoechst Celanese Corporate
2,665 Project), 6.875%, 4/01/17............................. A2/A+ 2,759,314
------------
6,427,226
------------
VIRGINIA -- 2.5%
Fairfax County, Virginia Economic Development
Authority Lease Revenue (Government Center
2,000 Properties), 5.50%, 5/15/18........................... Aa/AA 1,864,500
------------
WASHINGTON -- 0.4%
Public Utility District No. 1 of Snohomish County,
Washington Generation System Revenue, Series B, 5.80%,
350 1/01/24............................................... A1/A+ 323,057
------------
WEST VIRGINIA -- 2.1%
West Virginia State Water Development Authority, Loan
1,555 Program II, Series A, 7.00%, 11/01/31................. NR/BBB+ 1,603,236
------------
TOTAL LONG-TERM INVESTMENTS (cost $120,631,307)....... 118,794,137
------------
</TABLE>
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See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF INVESTMENTS (concluded)
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
000'S SHORT-TERM INVESTMENTS -- 0.8% CREDIT RATING (NOTE 2)
---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FLORIDA -- 0.1%
Pinellas County Florida Health Facility, VR, 4.20%,
$ 100 7/03/95............................................... VMIG-1/A-1 $ 100,000
------------
LOUISIANA -- 0.7%
Louisiana State Offshore Terminal Authority, Deepwater
Port Revenue (1st stage A-Loop Inc.), VR, 4.20%,
500 7/03/95............................................... VMIG-1/A-1+ 500,000
------------
TOTAL SHORT-TERM INVESTMENTS (cost $600,000).......... 600,000
------------
TOTAL INVESTMENTS -- 158.1% (cost $121,231,307)....... 119,394,137
------------
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.5%......... 1,147,054
------------
TOTAL NET ASSETS -- 159.6%............................ 120,541,191
------------
Par value of 900 shares of preferred stock at $50,000
per share (Note 5) -- (59.6%)......................... (45,000,000)
------------
NET ASSETS APPLICABLE TO COMMON STOCK -- 100%
(equivalent to $12.58 per share on 6,007,094 common
shares outstanding)................................... $ 75,541,191
------------
</TABLE>
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The following abbreviations are used in portfolio descriptions:
AMBAC -- Insured as to principal and interest by the AMBAC Indemnity
Corporation.
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. Maturity date shown is the date of the next
interest rate change and coupon rate is the rate in effect on June 30,
1995.
See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $121,231,307)..................................................... $119,394,137
Cash.......................................................................................... 29,513
Interest receivable........................................................................... 2,161,727
Unamortized organization expenses............................................................. 53,432
Prepaid expenses.............................................................................. 34,562
------------
Total assets.......................................................................... 121,673,371
------------
LIABILITIES
Payable for investments purchased............................................................. 929,613
Accrued management fee (Note 3)............................................................... 60,408
Accrued audit and tax return preparation fees................................................. 48,500
Accrued legal fee............................................................................. 35,072
Accrued shareholder annual meeting expense.................................................... 22,336
Accrued printing and mailing fees............................................................. 17,743
Other accrued expenses........................................................................ 18,508
------------
Total liabilities..................................................................... 1,132,180
------------
NET ASSETS
Preferred Stock (Note 5)...................................................................... 45,000,000
Common Stock ($.001 par value, authorized 100,000,000; 6,007,094 shares outstanding).......... 6,007
Additional paid-in capital.................................................................... 83,244,145
Undistributed net investment income........................................................... 101,006
Accumulated realized loss on investments...................................................... (5,972,797)
Net unrealized depreciation on investments.................................................... (1,837,170)
------------
Net assets............................................................................ $120,541,191
------------
</TABLE>
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See accompanying notes to financial statements.
PAGE 7
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF OPERATIONS
For the Year Ended June 30, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest (includes net premium amortization of $46,664)................................. $ 7,489,285
OPERATING EXPENSES
Management fee............................................................... $696,346
Auction agent fee............................................................ 114,055
Audit and tax services....................................................... 68,087
Legal........................................................................ 35,575
Directors' fees and expenses................................................. 25,999
Custodian.................................................................... 22,656
Amortization of deferred organization expenses............................... 21,058
Printing..................................................................... 18,082
Listing fee.................................................................. 16,170
Transfer agent............................................................... 12,800
Shareholder annual meeting................................................... 5,000
Other........................................................................ 34,519
--------
Total operating expenses............................................................ 1,070,347
-----------
Net investment income....................................................................... 6,418,938
-----------
NET REALIZED LOSS ON INVESTMENTS................................................................ (3,960,676)
CHANGE IN NET UNREALIZED DEPRECIATION ON INVESTMENTS............................................ 7,374,853
-----------
Net realized loss and change in net unrealized depreciation on investments...................... 3,414,177
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS...................................................... $ 9,833,115
-----------
</TABLE>
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See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR PERIOD ENDED
ENDED JUNE JUNE 30,
30, 1995 1994(a)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income..................................................... $ 6,418,938 $ 5,331,168
Net realized loss on investments.......................................... (3,960,676) (2,012,121)
Change in net unrealized appreciation (depreciation) on investments....... 7,374,853 (9,212,023)
------------ ------------
Net increase (decrease) in net assets resulting from operations........... 9,833,115 (5,892,976)
DIVIDENDS
To common shareholders from net investment income......................... (4,739,597) (4,132,877)
To preferred shareholders from net investment income...................... (1,774,225) (1,002,401)
------------ ------------
(6,513,822) (5,135,278)
CAPITAL SHARE TRANSACTIONS
Net proceeds from public offering of Fund's common stock (Note 1)......... -- 84,166,577
Net proceeds from preferred stock issuance (Note 5)....................... -- 43,983,550
------------ ------------
-- 128,150,127
------------ ------------
Total increase in net assets.............................................. 3,319,293 117,121,873
------------ ------------
NET ASSETS
Beginning of period....................................................... 117,221,898 100,025
------------ ------------
End of period (includes undistributed net investment income of $101,006
and $195,890, respectively)............................................. $120,541,191 $117,221,898
------------ ------------
</TABLE>
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(a) For the period from commencement of investment operations on July 30, 1993
through June 30, 1994.
See accompanying notes to financial statements.
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MUNICIPAL PARTNERS FUND II INC.
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STATEMENT OF CASH FLOWS
For the Year Ended June 30, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from sales of portfolio investments.............................................. $ 26,830,270
Purchases of portfolio securities......................................................... (27,168,094)
Net sales of short-term investments....................................................... 200,000
------------
(137,824)
Net investment income..................................................................... 6,418,938
Amortization of net premium on investments................................................ 46,664
Amortization of organization expenses..................................................... 21,058
Net change in receivables/payables related to operations.................................. 115,587
------------
Net cash provided by operating activities............................................. 6,464,423
------------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Common stock dividends paid............................................................... (4,739,597)
Preferred stock dividends paid............................................................ (1,774,225)
------------
Net cash used by financing activities................................................. (6,513,822)
------------
Net decrease in cash.......................................................................... (49,399)
Cash at beginning of period................................................................... 78,912
------------
CASH AT END OF PERIOD......................................................................... $ 29,513
------------
</TABLE>
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See accompanying notes to financial statements.
PAGE 10
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MUNICIPAL PARTNERS FUND II INC.
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NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND COMMON STOCK OFFERING
Municipal Partners Fund II Inc. (the "Fund") was incorporated in Maryland on
June 21, 1993 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 had no transactions until July 19, 1993 when it sold 7,094 shares of
its common stock to Oppenheimer & Co., Inc. ("Oppenheimer") and Salomon Brothers
Asset Management Inc (the "Investment Adviser") for an aggregate purchase price
of $100,025. On July 30, 1993, the Fund sold 5,500,000 shares of common stock in
its initial public offering and received proceeds of $77,116,577 after deducting
offering expenditures and underwriting commissions. Offering expenditures
amounted to $433,423 and have been charged to additional paid-in capital.
Underwriting commissions paid to underwriters, including Salomon Brothers Inc
and Oppenheimer, amounted to $4,950,000. On September 9, 1993 an additional
500,000 common shares were issued by the underwriters pursuant to their
over-allotment option at the original offering price of $15.00 per share. This
resulted in a $7,050,000 increase in the Fund's net assets after deducting the
underwriters' discount paid to underwriters, including Salomon Brothers Inc and
Oppenheimer, of $450,000. Total underwriting commissions paid to Salomon
Brothers Inc and Oppenheimer amounted to $114,748 and $2,523,878, respectively.
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.
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 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 recorded on the
accrual basis. The Fund amortizes premiums and accretes discounts on securities
purchased using the 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
PAGE 11
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MUNICIPAL PARTNERS FUND II INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
investment companies, and to distribute all of its income to its shareholders.
Therefore, no federal income tax or excise tax provision is required.
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 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 generally accepted accounting principles.
UNAMORTIZED ORGANIZATION EXPENSES. Organization expenses amounting to $93,817
were incurred in connection with the organization of the Fund. These costs have
been deferred and are being amortized ratably over a period of sixty months from
the date the Fund commenced investment 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 discount or premium on debt obligations.
NOTE 3. MANAGEMENT AND ADVISORY FEES AND OTHER TRANSACTIONS
The Fund entered into a management agreement with Advantage Advisers, Inc. (the
"Investment Manager"), a subsidiary of Oppenheimer, 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 Investment Manager entered into an investment advisory and administration
agreement with the Investment Adviser, an affiliate of Salomon Brothers Inc
("SBI"), pursuant to which the Investment Adviser provides investment advisory
and administrative services to the Fund. The Investment Adviser is responsible
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 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
PAGE 12
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MUNICIPAL PARTNERS FUND II INC.
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NOTES TO FINANCIAL STATEMENTS (continued)
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.
The Fund pays each Director not affiliated with the Investment Manager or the
Investment Adviser a fee of $5,000 per year, plus a fee of $700 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 June 30, 1995, aggregated $28,097,707 and $26,830,270,
respectively. At June 30, 1995, the Fund had a net capital loss carryover of
approximately $3,732,000, of which $29,216 will be available through June 30,
2002, and approximately $3,703,000 will be available through June 30, 2003 to
offset future capital gains to the extent provided by federal income tax
regulations.
For federal income tax purposes, realized losses incurred after October 31,
1994, but within the fiscal year ended June 30, 1995, are deemed to arise on the
first business day of the following fiscal year. The fund incurred and elected
to defer such losses of approximately $2,241,000.
The cost of securities on June 30, 1995 for federal income tax purposes was
$121,231,307, which is the same as for financial statement purposes. As of June
30, 1995 the total unrealized appreciation and depreciation was $1,586,017 and
$3,423,187, respectively, resulting in a net unrealized depreciation of
$1,837,170.
NOTE 5. PREFERRED STOCK
On October 1, 1993, the Fund closed its public offering of 900 shares of $.001
par value Auction Rate Preferred Stock ("Preferred Shares") at an offering price
of $50,000 per share. This resulted in a $43,983,550 increase in the Fund's net
assets after deducting offering costs and underwriting commissions. Offering
costs amounted to $228,950 and underwriting commissions paid to SBI and
Oppenheimer amounted to $787,500. Offering costs and underwriting commissions
incurred in connection with the Preferred Shares offering have been charged to
additional paid-in capital.
PAGE 13
<PAGE> 16
MUNICIPAL PARTNERS FUND II INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
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.
Dividend rates generally reset every 28 days and are determined by auction
procedures. The dividend rates on the Preferred Shares during the year ended
June 30, 1995 ranged from 3.23% to 5.17%. The weighted average dividend rate for
the year ended June 30, 1995 was 3.89%. The Board of Directors designated the
dividend period commencing June 13, 1995 as a Special Rate Period. Pursuant to
this Special Rate Period, the dividend rate set by the auction held on June 12,
1995 remains in effect through September 11, 1995 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 4.05%.
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. COMMON STOCK DIVIDENDS SUBSEQUENT TO JUNE 30, 1995
On July 3, and August 1, 1995, the Board of Directors of the Fund declared a
common share dividend from net investment income, each in the amount of $0.059
per share, payable on July 31 and August 31, 1995 to shareholders of record on
July 13 and August 11, 1995, respectively.
PAGE 14
<PAGE> 17
MUNICIPAL PARTNERS FUND II INC.
-----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
DATA FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
<S> <C> <C>
PERIOD
YEAR ENDED ENDED
JUNE 30, JUNE 30,
1995 1994(a)
------------------------------------------------------------------------------------------------------------
Net investment income........................................................ $1.07 $.89
Net realized loss and change in net unrealized appreciation (depreciation)... .57 (1.87)
----------- -----------
Total from investment operations......................................... 1.64 (.98)
Dividends to common shareholders from net investment income.................. (.79) (.69)
Dividends to preferred shareholders from net investment income............... (.29) (.17)
Offering costs on issuance of common and preferred shares.................... -- (.24)
----------- -----------
Net increase (decrease) in net asset value............................... .56 (2.08)
Net asset value, beginning of period......................................... 12.02 14.10
----------- -----------
Net asset value, end of period............................................... $12.58 $12.02
----------- -----------
Per share market value, end of period........................................ $10.75 $11.25
Total investment return based on market price per share(c)................... 2.97% (15.92%)(b)
Ratios to average net assets of common shareholders(d):
Operating expenses....................................................... 1.50% 1.45%(e)
Net investment income before preferred stock dividends................... 8.99% 7.22%(e)
Preferred stock dividends................................................ 2.48% 1.67%(e)
Net investment income available to common shareholders................... 6.51% 5.55%(e)
Net assets of common shareholders, end of period......................... $75,541,191 $72,221,898
Preferred stock outstanding, end of period............................... $45,000,000 $45,000,000
Portfolio turnover rate.................................................. 24% 50%
</TABLE>
--------------------------------------------------------------------------------
(a) For the period July 30, 1993 (commencement of investment operations) through
June 30, 1994.
(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 $11.25 per share.
(c) Dividends are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan. This
calculation is not annualized.
(d) Ratios calculated on the basis of income, expenses and preferred stock
dividends applicable to both common and preferred stock relative to the
average net assets of common shares.
(e) Annualized.
PAGE 15
<PAGE> 18
------------------------------------------------------------------------------
MUNICIPAL PARTNERS FUND II INC.
To the Board of Directors and Shareholders of
Municipal Partners Fund II 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 II Inc. (the "Fund") at June 30, 1995, the results of its operations, and
cash flows for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and for the period July 30, 1993
(commencement of investment operations) through June 30, 1994, 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 our audits,
which included confirmation of securities at June 30, 1995 by correspondence
with the custodian and broker, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
New York, N.Y.
August 15, 1995
PAGE 16
<PAGE> 19
MUNICIPAL PARTNERS FUND II INC.
--------------------------------------------------------------------------------
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)
---------------- --------------------
PER PER
QUARTER ENDED* TOTAL SHARE TOTAL SHARE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1993**....................................... $ 632 $.10 $ 2,669 $ .44
December 31, 1993.......................................... 1,566 .26 (704) (.11)
March 31, 1994............................................. 1,587 .27 (11,652) (1.94)
June 30, 1994.............................................. 1,546 .26 (1,537) (.26)
September 30, 1994......................................... 1,635 .27 (2,062) (.34)
December 31, 1994.......................................... 1,582 .27 (4,312) (.72)
March 31, 1995............................................. 1,590 .26 8,355 1.39
June 30, 1995.............................................. 1,612 .27 1,433 .24
</TABLE>
--------------------------------------------------------------------------------
* Totals expressed in thousands of dollars except per share amounts.
** For the period July 30, 1993 (commencement of investment operations) through
September 30, 1993.
See accompanying notes to financial statements.
PAGE 17
<PAGE> 20
MUNICIPAL PARTNERS FUND II INC.
---------------------------------------------------------------------------
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 State
Street Bank and Trust Company 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 that 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.
PAGE 18
<PAGE> 21
MUNICIPAL PARTNERS FUND II INC.
---------------------------------------------------------------------------
OTHER INFORMATION (continued)
In the case of holders of Common Stock, such as banks, broker-dealers or other
nominees, that 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.
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.
1995 FEDERAL TAX NOTICE
During the year ended June 30, 1995, the fund paid to shareholders $6,513,822
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 advisor as to the state
and local taxes status of the dividends you received.
PAGE 19
<PAGE> 22
MUNICIPAL PARTNERS FUND II INC.
-----------
DIRECTORS
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
MARK C. BIDERMAN
Chairman of the Board; Managing Director, Oppenheimer & Co., Inc.
Executive Vice President,
Advantage Advisers, Inc.
ALLAN C. HAMILTON
Consultant, formerly
Vice President and
Treasurer, Exxon Corp.
MICHAEL S. HYLAND
President; Managing Director,
Salomon Brothers Inc
President, Salomon Brothers
Asset Management Inc
ROBERT L. ROSEN
General Partner
R.L.R. Partners
---------
OFFICERS
MICHAEL S. HYLAND
President
MARYBETH WHYTE
Executive Vice President
ALAN M. MANDEL
Treasurer
TANA E. TSELEPIS
Secretary
ROBERT I. KLEINBERG
Assistant Secretary
LAURIE A. PITTI
Assistant Treasurer
-------------------------------------------
MUNICIPAL PARTNERS FUND II INC.
7 World Trade Center
New York, New York 10048
Telephone 1-800-725-6666
INVESTMENT ADVISER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Advantage Advisers, Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
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
--------------------------------------------------------------------------------
<PAGE> 23
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
------------------
