<PAGE> 1
----------------------------------------------------------------------
MUNICIPAL PARTNERS
FUND II INC.
INTERIM REPORT
----------------------------------------
MARCH 31, 1996
<PAGE> 2
MUNICIPAL PARTNERS FUND II INC.
May 17, 1996
To Our Shareholders:
We are pleased to supply this quarterly report to the shareholders of Municipal
Partners Fund II Inc. (the "Fund") for the period ending March 31, 1996.
Stronger than expected economic growth reported during the first quarter caused
fixed-income prices to decline. The much higher than expected employment data
reported for February surprised the market. The average monthly number of new
jobs created in the first quarter of 1996 exceeded the rate for the fourth
quarter of 1995. Thus, expectations for additional easing of short-term interest
rates by the Federal Reserve diminished. Reported inflation statistics, however,
do not seem to indicate increased inflationary pressures.
During the quarter, the net asset value return for the Fund was negative 4.13%,
assuming the reinvestment of monthly dividends in additional shares of the Fund.
At March 29, 1996 (the last business day of the period), the Fund had a closing
net asset value per share and market price per share of $13.00 and $11.00,
respectively. The Fund continued to pay a monthly common stock dividend of
$0.059 per share.
Municipal bonds outperformed their taxable counterparts for the quarter as fears
of a flat tax abated and individual investors returned to the marketplace. These
investors found renewed interest in municipals given their lack of concern about
tax reform and the higher level of interest rates. Insurance companies continued
to be large purchasers of municipal bonds due to their profitability. The strong
demand during the quarter was met with substantially increased new issue supply.
For the first three months of 1996, the $39.1 billion of new issuance was 35%
higher than the similar period last year.
As of March 29, 1996, the Fund's portfolio consisted of 52 issues in 24 states
with an average maturity of 15.9 years and an average coupon of 6.22%. Sector
allocation overweights transportation, healthcare and industrial development.
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.
<TABLE>
<S> <C>
Cordially,
/s/ Mark C. Biderman /s/ Michael S. Hyland
Mark C. Biderman Michael S. Hyland
Chairman of the Board President
</TABLE>
<PAGE> 3
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS
March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
(000) LONG-TERM INVESTMENTS -- 154.8% CREDIT RATING (NOTE 2)
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
ALASKA -- 4.7%
Alaska State Housing Finance Corporation Collateralized Home
$ 3,750 Mortgage Bonds, Subseries A-3, 5.85%, 6/01/25................... Aaa/AAA $ 3,637,463
------------
CALIFORNIA -- 14.8%
California State Public Works Board, Lease Revenue Refunding
2,175 Bonds (Department of Corrections), Series A, 6.875%, 11/01/14... A/A- 2,374,926
California State Public Works Board, Lease Revenue Refunding
Bonds (Various University of California Projects), 1993 Series
2,900 A, 7.00%, 3/01/14............................................... A/A- 3,176,573
Los Angeles, California Department of Water & Power Waterworks
2,250 Revenue, Crossover Refunding, 5.25%, 4/15/18.................... Aa/AA 2,065,658
San Francisco, California Airport Revenue (San Francisco
2,000 International Airport), Series A-9, FGIC, 5.60%, 5/01/14........ Aaa/AAA 1,931,120
South Gate, California Public Financing Authority Tax Allocation
Revenue (South Gate Redevelopment Project No. 1), AMBAC, 5.875%,
1,000 9/01/24......................................................... Aaa/AAA 977,260
West Covina, California Certificate of Participation (Queen of
1,000 the Valley Hospital), 6.50%, 8/15/14............................ A/A 1,024,930
------------
11,550,467
------------
COLORADO -- 1.3%
Colorado Health Facilities Authority Hospital Revenue
(Rocky Mountain Adventist Healthcare Project),
1,000 Series 1993, 6.625%, 2/01/13.................................... Baa/BBB 1,002,200
------------
GEORGIA -- 1.4%
Fulton County, Georgia Housing Authority Single-Family Mortgage,
1,130 6.60%, 3/01/28.................................................. NR/AAA 1,131,141
------------
ILLINOIS -- 22.9%
Chicago Heights, Illinois General Obligation, Series A, FGIC,
6,050 5.65%, 12/01/16................................................. Aaa/AAA 5,884,230
Chicago, Illinois O'Hare International Airport Special Facility
3,500 Revenue (International Terminal), MBIA, 6.75%, 1/01/18.......... Aaa/AAA 3,737,335
Chicago, Illinois Wastewater Transmission Revenue, FGIC, 5.125%,
1,000 1/01/25......................................................... Aaa/AAA 894,490
</TABLE>
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See accompanying notes to financial statements.
PAGE 1
<PAGE> 4
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
(000) LONG-TERM INVESTMENTS (CONTINUED) CREDIT RATING (NOTE 2)
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
ILLINOIS -- 22.9% (CONCLUDED)
Illinois Health Facilities Authority Revenue (OSF Healthcare
$ 2,300 System), 6.00%, 11/15/23........................................ A1/A+ $ 2,239,349
Illinois Health Facilities Authority Revenue (Servantcor
2,000 Project), FSA, 6.00%, 8/15/12................................... Aaa/AAA 2,016,740
Illinois Health Facilities Authority Revenue (South Suburban
1,000 Hospital Project), 7.00%, 2/15/18............................... NR/A 1,039,710
Illinois Health Facilities Authority Revenue Refunding (SSM
1,850 Health Care), MBIA, 6.55%, 6/01/13.............................. Aaa/AAA 2,044,250
------------
17,856,104
------------
INDIANA -- 6.1%
Indiana Bond Bank Special Program (Sanitary District of the City
2,850 of Gary, Indiana Project), Series B, 6.20%, 2/01/13............. Baa/A 2,906,202
Indiana Transportation Finance Authority Airport Facilities
2,000 Lease Revenue, Series A, 5.50%, 11/01/17........................ A/A 1,870,560
------------
4,776,762
------------
IOWA -- 4.4%
Iowa Finance Authority Hospital Facility Revenue Refunding
3,350 (Trinity Regional Hospital Project), 7.00%, 7/01/12............. NR/A- 3,412,444
------------
LOUISIANA -- 7.1%
Louisiana Public Facilities Authority Hospital Revenue Refunding
6,000 (Touro Infirmary Project), Series B, 6.125%, 8/15/23............ Baa/BBB 5,555,160
------------
MASSACHUSETTS -- 5.3%
Boston, Massachusetts Hospital Authority Revenue Refunding
2,000 (Boston City Hospital), Series B, 5.75%, 2/15/23................ Aa/AA- 1,932,220
Massachusetts State Health & Educational Facilities Authority
Revenue (Dana Farber Cancer Project), Series G-1, 6.25%,
1,000 12/01/22........................................................ A1/A 1,005,650
Massachusetts State Water Resource Authority General Refunding,
1,300 Series B, 5.50%, 3/01/17........................................ A/A 1,215,708
------------
4,153,578
------------
</TABLE>
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See accompanying notes to financial statements.
PAGE 2
<PAGE> 5
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
(000) LONG-TERM INVESTMENTS (CONTINUED) CREDIT RATING (NOTE 2)
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
NEBRASKA -- 3.9%
Nebraska Higher Education Loan Program, Inc., Senior
$ 3,115 Subordinated Bonds, 1993-2 Series A-5A, 6.65%, 6/01/08.......... Aa/NR $ 3,072,542
------------
NEVADA -- 6.9%
Clark County, Nevada Industrial Development Revenue Refunding
3,000 (Nevada Power Project), AMBAC, 7.20%, 10/01/22.................. Aaa/AAA 3,330,120
Clark County, Nevada Passenger Facility Revenue, (Macarran
1,000 International Airport), MBIA, 5.75%, 7/01/23.................... Aaa/AAA 949,860
Nevada Housing Division, Single-Family Program, Series C, AMBAC,
1,100 6.35%, 10/01/12................................................. Aaa/AAA 1,104,312
------------
5,384,292
------------
NEW JERSEY -- 1.4%
New Jersey Economic Development Authority, Water Facilities
Revenue (New Jersey American Water Co., Inc. Project), FGIC,
1,000 6.875%, 11/01/34................................................ Aaa/AAA 1,090,490
------------
NEW YORK -- 19.0%
Metropolitan Transportation Authority, New York (Transit
2,500 Facilities), Series O, MBIA, 6.375%, 7/01/20.................... Aaa/AAA 2,594,000
New York State Dorm Authority Revenue (Department of Health),
1,000 5.50%, 7/01/25.................................................. Baa1/BBB 902,190
New York State Local Government Assistance Corporation Revenue
2,110 Refunding, Series C, 5.50%, 4/01/18............................. A/A 1,986,944
New York State Local Government Assistance Corporation Revenue,
1,500 Series A, 6.00%, 4/01/16........................................ A/A 1,496,535
Port Authority of New York & New Jersey Construction,
4,400 Ninety-Sixth Series, FGIC, 6.60%, 10/01/23...................... Aaa/AAA 4,685,120
The City of New York, General Obligation Bonds, Fiscal 1994
3,000 Series B, Subseries B-1, 7.00%, 8/15/16......................... Baa1/BBB+ 3,174,720
------------
14,839,509
------------
</TABLE>
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See accompanying notes to financial statements.
PAGE 3
<PAGE> 6
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
(000) LONG-TERM INVESTMENTS (CONTINUED) CREDIT RATING (NOTE 2)
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
OHIO -- 8.3%
Ohio State Water Development Authority Solid Waste Disposal
$ 3,300 Revenue (North Star BHP Broken Hill Project), 6.45%, 9/01/20.... A2/A $ 3,365,241
The Student Loan Funding Corporation, Cincinnati, Ohio, Series
3,250 1993B, 6.20%, 8/01/12........................................... A/NR 3,149,218
------------
6,514,459
------------
PENNSYLVANIA -- 3.3%
Monroeville, Pennsylvania Hospital Authority Hospital Revenue
2,490 (Forbes Health System), 7.00%, 10/01/13......................... Baa1/BBB+ 2,575,283
------------
RHODE ISLAND -- 4.6%
Rhode Island Convention Center Authority Revenue, 1993 Series A,
3,800 AMBAC, 5.75%, 5/15/27........................................... Aaa/AAA 3,625,390
------------
SOUTH CAROLINA -- 3.2%
Greenville, South Carolina Hospital Systems Hospital Facilities
2,500 Revenue, Series B, 5.70%, 5/01/12............................... Aa/AA- 2,461,100
------------
TENNESSEE -- 2.7%
The Industrial Development Board of Humphreys County, Tennessee
1,950 (E.I. duPont de Nemours and Company Project), 6.70%, 5/01/24.... Aa3/AA- 2,080,182
------------
TEXAS -- 14.3%
Austin, Texas Airport System Revenue, Series A, MBIA, 6.20%,
4,500 11/15/15........................................................ Aaa/AAA 4,589,279
Matagorda County Navigation District No. 1 (Texas) Pollution
Control Revenue Refunding (Central Power & Light Company
3,800 Project), 6.00%, 7/01/28........................................ A3/A- 3,754,172
Port Corpus Christi Authority Texas Nueces County Pollution
Control Revenue (Hoechst Celanese Corporate Project), 6.875%,
2,665 4/01/17......................................................... A2/A+ 2,821,062
------------
11,164,513
------------
UTAH -- 1.1%
Intermountain Power Agency, Utah Power Supply Revenue Refunding,
1,000 Series D, 5.00%, 7/01/21........................................ Aa/AA- 880,350
------------
</TABLE>
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See accompanying notes to financial statements.
PAGE 4
<PAGE> 7
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (continued)
March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MOODY'S/S&P VALUE
(000) LONG-TERM INVESTMENTS (CONCLUDED) CREDIT RATING (NOTE 2)
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
VIRGINIA -- 10.1%
Chesapeake Bay Bridge & Tunnel Commission, Virginia District
$ 1,850 General Resolution Revenue Refunding, MBIA, 5.00%, 7/01/22...... Aaa/AAA $ 1,646,981
Fairfax County, Virginia Economic Development Authority Lease
2,000 Revenue (Government Center Properties), 5.50%, 5/15/18.......... Aa/AA 1,887,580
Fairfax County, Virginia Water Authority Water Revenue
3,000 Refunding, 6.00%, 4/01/22....................................... Aa/AA- 3,037,830
Virginia State Housing Development Authority, Commonwealth
1,300 Mortgage, Subseries I-1, 6.55%, 7/01/17......................... Aa1/AA+ 1,308,203
------------
7,880,594
------------
WEST VIRGINIA -- 2.2%
West Virginia State Water Development Authority, Loan Program
1,555 II, Series A, 7.00%, 11/01/31, Pre-Refunded 11/01/01............ NR/BBB+ 1,752,081
------------
WISCONSIN -- 3.2%
Wisconsin Housing & Economic Development Authority Revenue
2,485 Refunding (Home Ownership), Series G, 6.30%, 9/01/17............ Aa/AA 2,494,891
------------
WYOMING -- 2.6%
Wyoming Community Development Authority Housing Revenue, Series
2,000 1, 6.10%, 12/01/14.............................................. Aa/AA 2,001,400
------------
TOTAL LONG-TERM INVESTMENTS (cost $119,401,980)................................... 120,892,395
------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT -- 0.1%
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CALIFORNIA -- 0.1%
Los Angeles County, California Industrial Development Revenue
100 (Coe & Dru Inc.), VR, 4.75%, 4/01/96 (cost $100,000)............ NR/NR 100,000
------------
TOTAL INVESTMENTS -- 154.9% (cost $119,501,980)................................... 120,992,395
------------
</TABLE>
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See accompanying notes to financial statements.
PAGE 5
<PAGE> 8
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (concluded)
March 31, 1996 (unaudited)
<TABLE>
<CAPTION>
MARKET
VALUE
(NOTE 2)
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
OTHER ASSETS IN EXCESS OF LIABILITIES -- 2.7%..................................... $ 2,122,600
------------
TOTAL NET ASSETS -- 157.6%........................................................ 123,114,995
------------
Par value of 900 shares of preferred stock at $50,000 per share (Note
5) -- (57.6%)..................................................................... (45,000,000)
------------
NET ASSETS APPLICABLE TO COMMON STOCK -- 100%
(equivalent to $13.00 per share on 6,007,094 common shares outstanding)........... $ 78,114,995
------------
</TABLE>
- --------------------------------------------------------------------------------
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.
FSA -- Insured as to principal and interest by the Financial Security
Assurance Corporation.
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.
VR -- Variable Rate Demand Note. Date shown is date of next interest rate
change and coupon rate is the rate in effect on March 31, 1996.
See accompanying notes to financial statements.
PAGE 6
<PAGE> 9
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996 (unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost -- $119,501,980)................................................. $120,992,395
Cash......................................................................................... 86,522
Interest receivable.......................................................................... 2,167,113
Receivable for investments sold.............................................................. 1,457,695
Unamortized organization expenses (Note 2)................................................... 43,673
Prepaid expenses............................................................................. 43,012
------------
Total assets......................................................................... 124,790,410
------------
LIABILITIES
Payable for investments purchased............................................................ 1,491,860
Accrued management fee (Note 3).............................................................. 62,932
Accrued audit and tax return preparation fees................................................ 48,532
Accrued legal fee............................................................................ 23,874
Accrued printing and mailing fees............................................................ 19,555
Accrued shareholder annual meeting expense................................................... 10,000
Accrued custodian expense.................................................................... 4,842
Accrued transfer agent expense............................................................... 2,854
Accrued directors' fees and expenses (Note 3)................................................ 1,088
Other accrued expenses....................................................................... 9,878
------------
Total liabilities.................................................................... 1,675,415
------------
NET ASSETS
Preferred Stock (Note 5)..................................................................... 45,000,000
Common Stock ($.001 par value, 100,000,000 shares authorized; 6,007,094 shares
outstanding)............................................................................... 6,007
Additional paid-in capital................................................................... 83,244,145
Undistributed net investment income.......................................................... 359,116
Accumulated realized loss on investments..................................................... (6,984,688)
Net unrealized appreciation on investments................................................... 1,490,415
------------
Net assets........................................................................... $123,114,995
------------
</TABLE>
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See accompanying notes to financial statements.
PAGE 7
<PAGE> 10
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 1996 (unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest (includes net premium amortization of $17,911)................................ $ 5,615,584
OPERATING EXPENSES
Management fee (Note 3)..................................................... $559,362
Auction agent fee........................................................... 92,015
Audit and tax services...................................................... 53,493
Legal....................................................................... 27,506
Directors' fees and expenses (Note 3)....................................... 21,150
Printing.................................................................... 18,879
Custodian................................................................... 17,054
Listing fee................................................................. 12,183
Transfer agent.............................................................. 11,892
Amortization of deferred organization expenses (Note 2)..................... 9,759
Other....................................................................... 18,156
--------
Total operating expenses........................................................... 841,449
-----------
Net investment income...................................................................... 4,774,135
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net Realized Loss on Investments........................................................... (1,011,891)
Change in Net Unrealized Appreciation (Depreciation) on Investments........................ 3,327,585
-----------
Net realized loss and change in net unrealized appreciation (depreciation) on
investments............................................................................... 2,315,694
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS................................................. $ 7,089,829
-----------
</TABLE>
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See accompanying notes to financial statements.
PAGE 8
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MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR
MARCH 31, 1996 ENDED JUNE
(UNAUDITED) 30, 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income.................................................. $ 4,774,135 $ 6,418,938
Net realized loss on investments....................................... (1,011,891) (3,960,676)
Change in net unrealized appreciation (depreciation) on investments.... 3,327,585 7,374,853
------------ ------------
Net increase in net assets from operations............................. 7,089,829 9,833,115
------------ ------------
DIVIDENDS
To common shareholders from net investment income...................... (3,189,767) (4,739,597)
To preferred shareholders from net investment income................... (1,326,258) (1,774,225)
------------ ------------
(4,516,025) (6,513,822)
------------ ------------
Total increase in net assets........................................... 2,573,804 3,319,293
NET ASSETS
Beginning of period.................................................... 120,541,191 117,221,898
------------ ------------
End of period (includes undistributed net investment income of $359,116
and $101,006, respectively).......................................... $ 123,114,995 $120,541,191
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
PAGE 9
<PAGE> 12
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For the Nine Months Ended March 31, 1996 (unaudited)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from sales of portfolio investments............................................. $ 40,426,963
Purchases of portfolio securities........................................................ (41,122,886)
Net sales of short-term investments...................................................... 500,000
------------
(195,923)
Net investment income.................................................................... 4,774,135
Amortization of net premium on investments............................................... 17,911
Amortization of organization expenses.................................................... 9,759
Net change in receivables/payables related to operations................................. (32,848)
------------
Net cash provided by operating activities............................................ 4,573,034
------------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Common stock dividends paid.............................................................. (3,189,767)
Preferred stock dividends paid........................................................... (1,326,258)
------------
Net cash used by financing activities................................................ (4,516,025)
------------
Net increase in cash......................................................................... 57,009
Cash at beginning of period.................................................................. 29,513
------------
CASH AT END OF PERIOD........................................................................ $ 86,522
------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
PAGE 10
<PAGE> 13
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1. ORGANIZATION
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 commenced
operations on July 30, 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 affect 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> 14
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(unaudited)
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 $93,817
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 entered into a management agreement with Advantage Advisers, Inc. (the
"Investment Manager"), a subsidiary of Oppenheimer & Co., Inc. ("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 and the fund entered into an investment advisory and
administration agreement with the Investment Adviser, an affiliate of Salomon
Brothers Inc, 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 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
PAGE 12
<PAGE> 15
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(unaudited)
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 March 31, 1996, Oppenheimer and the Investment Adviser owned 3,547 and 4,161
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, $700 for participation in each telephonic 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 nine months ended March 31, 1996, aggregated $41,685,133 and
$41,884,658, respectively. At June 30, 1995, the Fund had a net capital loss
carryover of approximately $3,732,000, of which $29,000 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 federal income tax cost basis of the Fund's investments at March 31, 1996
was substantially the same as the cost basis for financial reporting. Gross
unrealized appreciation and depreciation amounted to $2,797,555 and $1,307,140,
respectively, resulting in net unrealized appreciation for federal income tax
purposes of $1,490,415.
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. 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> 16
MUNICIPAL PARTNERS FUND II INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
(unaudited)
Dividend rates generally reset every 28 days and are determined by auction
procedures. The dividend rates on the Preferred Shares during the nine months
ended March 31, 1996 ranged from 3.51% to 4.05%. The weighted average dividend
rate for the nine months ended March 31, 1996 was 3.858%. The Board of Directors
designated the dividend period commencing March 12, 1996 as a Special Rate
Period. Pursuant to this Special Rate Period, the dividend rate set by the
auction held on March 11, 1996 remains in effect through June 10, 1996 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 3.51%.
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 MARCH 31, 1996
On April 1 and May 1, 1996, the Board of Directors of the Fund declared a common
share dividend from net investment income, each in the amount of $.059 per
share, payable on April 30 and May 31, 1996 to shareholders of record on April
16 and May 14, 1996, respectively.
PAGE 14
<PAGE> 17
MUNICIPAL PARTNERS FUND II INC.
- -----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
DATA FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS FOR THE FOR THE
ENDED MARCH YEAR ENDED PERIOD ENDED
31, 1996 JUNE 30, JUNE 30,
(UNAUDITED) 1995 1994(A)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 12.58 $ 12.02 $ 14.10
----------- ---------- -----------
Net investment income....................................... .79 1.07 .89
Net realized loss and change in net unrealized appreciation
(depreciation)............................................ .38 .57 (1.87)
----------- ---------- -----------
Total from investment operations............................ 1.17 1.64 (.98)
----------- ---------- -----------
Less distributions
Dividends to common shareholders from net investment
income................................................ (.53) (.79) (.69)
Dividends to preferred shareholders from net
investment income..................................... (.22) (.29) (.17)
----------- ---------- -----------
Total distributions......................................... (.75) (1.08) (.86)
----------- ---------- -----------
Offering costs on issuance of common and preferred shares... -- -- (.24)
----------- ---------- -----------
Net asset value, end of period.............................. $ 13.00 $ 12.58 $ 12.02
----------- ---------- -----------
Per share market value, end of period....................... $ 11.00 $ 10.75 $ 11.25
Total investment return based on market price per
share(c).................................................. 7.34% 2.97% (15.92%)(b)
Ratios to average net assets of common shareholders(d):
Operating expenses...................................... 1.42%(e) 1.50% 1.45%(e)
Net investment income before preferred stock
dividends............................................. 8.04%(e) 8.99% 7.22%(e)
Preferred stock dividends............................... 2.23%(e) 2.48% 1.67%(e)
Net investment income available to common
shareholders.......................................... 5.81%(e) 6.51% 5.55%(e)
Net assets of common shareholders, end of period
(000)................................................. $ 78,115 $ 75,541 $ 72,222
Preferred stock outstanding, end of period (000)........ $ 45,000 $ 45,000 $ 45,000
Portfolio turnover rate................................. 34% 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. 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. This calculation is not annualized.
(d) Ratios calculated on the basis of income, expenses and preferred stock
dividends relative to the average net assets of common shares.
(e) Annualized.
See accompanying notes to financial statements.
PAGE 15
<PAGE> 18
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)
------------------- ----------------------
QUARTER ENDED* TOTAL PER SHARE TOTAL PER SHARE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
September 30, 1995................................................ 1,578 .26 1,249 .21
December 31, 1995................................................. 1,610 .27 5,586 .93
March 31, 1996.................................................... 1,586 .26 (4,519) (.76)
</TABLE>
- --------------------------------------------------------------------------------
* Totals expressed in thousands of dollars except per share amounts.
See accompanying notes to financial statements.
PAGE 16
<PAGE> 19
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
LAWRENCE H. KAPLAN
Executive Vice President
ALAN M. MANDEL
Treasurer
LAURIE A. PITTI
Assistant Treasurer
TANA E. TSELEPIS
Secretary
ROBERT I. KLEINBERG
Assistant Secretary
MUNICIPAL PARTNERS FUND II INC.
7 World Trade Center
New York, New York 10048
Telephone 1-800-SALOMON
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
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
NEW YORK STOCK EXCHANGE SYMBOL
MPT
- --------------------------------------------------------------------------------
<PAGE> 20
---------------------
BULK RATE
U.S. POSTAGE
PAID
S. HACKENSACK, NJ
PERMIT NO.
750
---------------------
STATE STREET BANK AND TRUST COMPANY
P.O. BOX 8200
BOSTON, MASSACHUSETTS 02266-8200
