M U N I C I P A L P A R T N E R S F U N D I I I N C .
November 22, 1996
To Our Shareholders:
We are pleased to provide this quarterly report to the shareholders of Municipal
Partners Fund II Inc. (the "Fund") for the period ending September 30, 1996. The
Fund's net asset value (assuming the reinvestment of monthly dividends in
additional shares of the Fund) increased 3.85% during the third quarter. At
September 30, 1996, the Fund had a closing net asset value of $13.23 per share
and based on the Fund's closing market price of $11.375 per share on September
30, 1996, the Fund's current yield was 6.59%. During the quarter ended September
30, 1996, the Fund paid one monthly common stock dividend of $0.059 per share.
The dividend was raised from $0.059 per share to $0.0625 per share for the
Fund's dividends declared and paid in August and September.
Renewed doubts over the strength of the economy coupled with benign inflation
data lifted bond prices during the quarter. Periods of volatility occurred,
however, as investors speculated as to whether the Federal Reserve would raise
short-term interest rates. The Federal Reserve decided to leave short-term
interest rates unchanged at its September 24th Federal Open Market Committee
meeting, thus enabling the market to end the quarter on a firm note.
Positive supply and demand factors during the quarter allowed municipal bonds to
fare better than taxable securities on all but the shortest of maturities. While
the total new issue volume for the quarter was just over $35 billion, it was
easily absorbed by an estimated $70 billion that was available to be reinvested
in municipals from maturities, calls and coupon payments. Cash-laden individual
investors and property and casualty insurance companies showed strong demand for
tax-exempt securities.
As of September 30, 1996, the Fund's portfolio consisted of 53 issues in 24
states with an average maturity of 13.2 years and an average coupon of 6.25% for
the Fund's long-term holdings. Sector weightings emphasize housing,
transportation and healthcare.
Although the Fund will continue to issue a semi-annual and annual report to
shareholders, a press release containing financial highlights and other Fund
information will be issued in lieu of a first and third quarter interim report.
This will result in some cost savings for the Fund while still providing
shareholders with current information about 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,
Mark C. Biderman Michael S. Hyland
Chairman of the Board President
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments
September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments-- 152.8% Credit Rating (Note 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California -- 14.6%
California State Housing Finance Agency Home Mortgage Revenue,
$3,000 Series H, 6.15%, 8/01/16.................................................... Aa/AA- $ 3,022,260
California State Public Works Board, Lease Revenue Refunding Bonds
2,175 (Department of Corrections), Series A, 6.875%, 11/01/14..................... A/A 2,393,022
California State Public Works Board, Lease Revenue Refunding Bonds
2,900 (Various University of California Projects), 1993 Series A, 7.00%, 3/01/14 . A/A 3,206,327
San Francisco, California Airport Revenue (San Francisco International
2,000 Airport), Series A-9, FGIC, 5.60%, 5/01/14.................................. Aaa/AAA 1,958,300
West Covina, California Certificate of Participation (Queen of the Valley
1,000 Hospital), 6.50%, 8/15/14................................................... A/A 1,039,780
------------
11,619,689
------------
Colorado -- 1.3%
Colorado Health Facilities Authority Hospital Revenue (Rocky Mountain
1,000 Adventist Healthcare Project), Series 1993, 6.625%, 2/01/13................. Baa/BBB 1,008,020
------------
Georgia -- 1.4%
Fulton County, Georgia Housing Authority Single-Family Mortgage,
1,130 6.60%, 3/01/28.............................................................. NR/AAA 1,152,679
------------
Hawaii -- 1.3%
Hawaii State Department of Budget & Finance Special Purpose Revenue,
1,000 6.00%, 7/01/11.............................................................. A/A 1,014,210
------------
Illinois -- 28.1%
Chicago Heights, Illinois General Obligation, Series A, FGIC,
6,050 5.65%, 12/01/16............................................................. Aaa/AAA 5,977,763
Chicago, Illinois Board of Education (Chicago School Reform), MBIA,
4,255 6.00%, 12/01/16#............................................... ............ Aaa/AAA 4,313,294
Chicago, Illinois O'Hare International Airport Special Facility Revenue
3,500 (International Terminal), MBIA, 6.75%, 1/01/18.............................. Aaa/AAA 3,715,425
Chicago, Illinois Wastewater Transmission Revenue, FGIC,
1,000 5.125%, 1/01/25............................................................. Aaa/AAA 909,240
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 2
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments (continued)
September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (continued) Credit Rating (Note 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Illinois -- 28.1% (concluded)
Illinois Health Facilities Authority Revenue (OSF Healthcare System),
$2,300 6.00%, 11/15/23 ............................................................ A1/A+ $ 2,275,505
Illinois Health Facilities Authority Revenue (Servantcor Project), Series A,
2,000 FSA, 6.00%, 8/15/12 ........................................................ Aaa/AAA 2,031,100
Illinois Health Facilities Authority Revenue (South Suburban Hospital
1,000 Project), 7.00%, 2/15/18 ................................................... NR/A 1,055,750
Illinois Health Facilities Authority Revenue Refunding (SSM Health Care),
1,850 MBIA, 6.55%, 6/01/13 ....................................................... Aaa/AAA 2,040,791
------------
22,318,868
------------
Indiana -- 5.5%
Indiana Transportation Finance Authority Airport Facilities Lease Revenue,
2,000 Series A, 5.50%, 11/01/17 .................................................. A/A 1,934,500
Indianapolis, Indiana Airport Authority Revenue Refunding, Series A, FGIC,
2,500 5.60%, 7/01/15 ............................................................. Aaa/AAA 2,440,250
------------
4,374,750
------------
Iowa -- 4.4%
Iowa Finance Authority Hospital Facility Revenue Refunding (Trinity
3,350 Regional Hospital Project), 7.00%, 7/01/12 ................................. NR/A- 3,477,099
------------
Louisiana -- 7.2%
Louisiana Public Facilities Authority Hospital Revenue Refunding (Touro
6,000 Infirmary Project), Series B, 6.125%, 8/15/23 .............................. Baa/BBB 5,688,420
------------
Massachusetts -- 3.8%
Massachusetts State Health & Educational Facilities Authority Revenue
1,000 (Dana Farber Cancer Project), Series G-1, 6.25%, 12/01/22 .................. A1/A 1,016,780
Massachusetts State Water Pollution Abatement Water Pollution Revenue
2,000 (New Bedford Loan Program), Series A, 5.70%, 2/01/14 ....................... Aa/NR 2,000,480
------------
3,017,260
------------
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 3
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments (continued)
September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (continued) Credit Rating (Note 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Missouri -- 3.1%
Missouri State Environmental Improvement & Energy Research Authority,
Pollution Control Revenue Refunding (Associated Electric Coop Thomas Hill),
$2,500 5.50%, 12/01/10 ............................................................ A1/AA $ 2,497,350
------------
Nebraska -- 4.0%
Nebraska Higher Education Loan Program, Inc., Senior Subordinated Bonds,
3,115 1993-2 Series A-5A, 6.65%, 6/01/08 ......................................... Aa/NR 3,190,850
------------
Nevada -- 6.9%
Clark County, Nevada Industrial Development Revenue Refunding
3,000 (Nevada Power Project), AMBAC, 7.20%, 10/01/22 ............................. Aaa/AAA 3,383,250
Clark County, Nevada Passenger Facility Revenue (Macarran
1,000 International Airport), MBIA, 5.75%, 7/01/23 ............................... Aaa/AAA 974,590
Nevada Housing Division, Single-Family Program, Series C, AMBAC,
1,100 6.35%, 10/01/12 ............................................................ Aaa/AAA 1,117,688
------------
5,475,528
------------
New Jersey -- 1.4%
New Jersey Economic Development Authority, Water Facilities Revenue
1,000 (New Jersey American Water Co., Inc. Project), FGIC, 6.875%, 11/01/34 ...... Aaa/AAA 1,094,740
------------
New York -- 18.4%
Metropolitan Transportation Authority, New York (Transit Facilities),
2,500 Series O, MBIA, 6.375%, 7/01/20 ............................................ Aaa/AAA 2,634,200
New York State Dormitory Authority Revenue (Department of Health),
1,000 5.50%, 7/01/25 ............................................................. Baa1/BBB 921,550
New York State Local Government Assistance Corporation Revenue,
1,500 Series A, 6.00%, 4/01/16 ................................................... A/A 1,516,290
Port Authority of New York & New Jersey Construction, Ninety-Sixth Series,
4,400 FGIC, 6.60%, 10/01/23 ...................................................... Aaa/AAA 4,741,396
The City of New York, General Obligation Bonds, Fiscal 1994 Series B,
3,000 Subseries B-1, 7.00%, 8/15/16 .............................................. Baa1/BBB+ 3,204,660
Triborough Bridge & Tunnel Authority, New York General Purpose Revenue,
1,670 Series Y, 5.50%, 1/01/17 ................................................... Aa/A+ 1,655,755
------------
14,673,851
------------
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 4
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments (continued)
September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (continued) Credit Rating (Note 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio -- 11.5%
Franklin County, Ohio Hospital Revenue (Holy Cross Health Systems
$2,500 Corporation), 5.875%, 6/01/21 .............................................. Aa/AA $ 2,478,850
Ohio State Water Development Authority Solid Waste Disposal Revenue
3,300 (Broken Hill Proprietary Co., LTD.), 6.45%, 9/01/20# ....................... A2/A 3,418,833
The Student Loan Funding Corporation, Cincinnati, Ohio, Series 1993B,
3,250 6.20%, 8/01/12 ............................................................. A/NR 3,283,865
------------
9,181,548
------------
Pennsylvania -- 3.3%
Monroeville, Pennsylvania Hospital Authority Hospital Revenue (Forbes
2,490 Health System), 7.00%, 10/01/13 ............................................ A/BBB+ 2,582,902
------------
South Carolina -- 3.1%
Greenville, South Carolina Hospital Systems Hospital Facilities Revenue,
2,500 Series B, 5.70%, 5/01/12 ................................................... Aa/AA- 2,478,975
------------
Tennessee -- 2.6%
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- 2,078,583
------------
Texas -- 9.4%
4,500 Austin, Texas Airport System Revenue, Series A, MBIA, 6.20%, 11/15/15 ...... Aaa/AAA 4,634,505
Port Corpus Christi Authority Texas Nueces County Pollution Control
2,665 Revenue (Hoechst Celanese Corporate Project), 6.875%, 4/01/17 .............. A2/A+ 2,837,239
------------
7,471,744
------------
Utah -- 6.1%
Utah State Housing Finance Agency Single-Family Mortgage, Issue H-2,
4,815 6.25%, 7/01/22 ............................................................. Aaa/AAA 4,818,274
------------
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 5
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments (continued)
September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (concluded) Credit Rating (Note 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia -- 7.5%
Chesapeake Bay Bridge & Tunnel Commission, Virginia District General
$1,850 Resolution Revenue Refunding, MBIA, 5.00%, 7/01/22 ......................... Aaa/AAA $ 1,673,769
Fairfax County, Virginia Economic Development Authority Lease Revenue
2,000 (Government Center Properties), 5.50%, 5/15/18 ............................. Aa/AA 1,928,840
Virginia State Housing Development Authority, Commonwealth Mortgage,
1,015 Subseries A-4, MBIA, 6.20%, 7/01/12 ........................................ Aaa/AAA 1,035,483
Virginia State Housing Development Authority, Commonwealth Mortgage,
1,300 Subseries I-1, 6.55%, 7/01/17 .............................................. Aa1/AA+ 1,324,193
------------
5,962,285
------------
West Virginia -- 2.2%
West Virginia State Water Development Authority, Loan Program II,
1,555 Series A, 7.00%, 11/01/31, Pre-Refunded 11/01/01 ........................... NR/A- 1,731,368
------------
Wisconsin -- 3.2%
Wisconsin Housing & Economic Development Authority Revenue Refunding
2,485 (Home Ownership), Series G, 6.30%, 9/01/17 ................................. Aa/AA 2,514,173
------------
Wyoming -- 2.5%
Wyoming Community Development Authority Housing Revenue, Series 1,
2,000 6.10%, 12/01/14 ............................................................ Aa/AA 2,013,820
------------
Total Long-Term Investments (cost $117,955,653) ......................................... 121,436,986
------------
Short-Term Investments - 1.0%
- --------------------------------------------------------------------------------------------------------------------
Louisiana -- 0.1%
Ascension Parish, Louisiana Pollution Control Revenue (BASF Wyandotte
100 Corp.), VR, 3.80%, 10/01/96 ................................................ P-1/NR 100,000
------------
Missouri -- 0.4%
Missouri State Health & Educational Facilities Authority Health Facilities
300 Revenue (St. Anthony Medical Center Project C), VR, 3.80%, 10/01/96 ........ VMIG-1/A-1+ 300,000
------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 6
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments (concluded)
September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's/S&P Value
(000) Short-Term Investments (concluded) Credit Rating (Note 2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York -- 0.5%
The City of New York, Housing Development Corporation Mortgage
$ 400 Revenue (Columbus Green Project A), VR, 4.20%, 10/01/96 .................... VMIG-2/NR $ 400,000
------------
Total Short-Term Investments (cost $800,000)............................................. 800,000
------------
Total Investments - 153.8% (cost $118,755,653)........................................... 122,236,986
------------
Other Assets in Excess of Liabilities - 2.8%.............................................. 2,255,203
------------
Total Net Assets - 156.6%................................................................. 124,492,189
------------
Par value of 900 shares of preferred stock at $50,000 per share (Note 5) - (56.6%) (45,000,000)
------------
Net Assets Applicable to Common Stock - 100%
(equivalent to $13.23 per share on 6,007,094 common shares outstanding)................... $ 79,492,189
------------
- --------------------------------------------------------------------------------------------------------------------
<FN>
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.
VMIG - Variable Moody Investment Grade.
VR - Variable Rate Demand Note. Date shown is date of next interest rate change and coupon rate is the rate in
effect on September 30, 1996.
# - Securities valued at $7,732,127 as of September 30, 1996 were segregated to be available for the purchase of
delayed delivery securities.
</FN>
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 7
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Assets and Liabilities
September 30, 1996 (unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (cost - $118,755,653) ............................................... $122,236,986
Cash ...................................................................................... 58,238
Interest receivable ....................................................................... 2,288,660
Unamortized organization expenses (Note 2) ................................................ 34,270
Prepaid expenses .......................................................................... 28,012
------------
Total assets .................................................................. 124,646,166
------------
Liabilities
Accrued management fee (Note 3) ........................................................... 60,751
Accrued audit and tax return preparation fees ............................................. 25,453
Accrued printing and mailing fees ......................................................... 19,116
Accrued legal fee ......................................................................... 18,872
Accrued shareholder annual meeting expense ................................................ 11,821
Accrued custodian expense ................................................................. 7,915
Accrued transfer agent expense ............................................................ 3,070
Other accrued expenses .................................................................... 6,979
------------
Total liabilities ............................................................. 153,977
------------
Net Assets
Preferred Stock (Note 5) .................................................................. 45,000,000
Common Stock ($.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 ....................................................... 514,876
Accumulated realized loss on investments .................................................. (7,754,172)
Net unrealized appreciation on investments ................................................ 3,481,333
------------
Net assets .................................................................... $124,492,189
------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 8
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Operations
For the Three Months Ended September 30, 1996 (unaudited)
<TABLE>
<S> <C> <C>
Investment Income
Income
Interest (reduced by net premium amortization of $6,235)............................ $ 1,865,136
Operating expenses
Management fee (Note 3)................................................... $186,334
Auction agent fee......................................................... 30,895
Audit and tax services.................................................... 18,274
Legal..................................................................... 10,082
Printing.................................................................. 9,074
Custodian................................................................. 7,253
Directors' fees and expenses (Note 3)..................................... 6,805
Amortization of deferred organization expenses (Note 2)................... 4,727
Transfer agent............................................................ 4,292
Listing fee............................................................... 4,076
Other..................................................................... 6,114
--------
Total operating expenses.......................................................... 287,926
-----------
Net investment income................................................................... 1,577,210
-----------
Net Realized and Unrealized Gain (Loss)
Net Realized Loss on Investments........................................................ (69,826)
Change in Net Unrealized Appreciation on Investments.................................... 1,879,871
-----------
Net realized loss and change in net unrealized appreciation on investments.............. 1,810,045
-----------
Net Increase in Net Assets from Operations.............................................. $ 3,387,255
-----------
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 9
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the
Three Months
Ended For the
September 30, Year Ended
1996 June 30,
(unaudited) 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income ................................................ $ 1,577,210 $ 6,341,298
Net realized loss on investments...................................... (69,826) (1,711,549)
Change in net unrealized appreciation (depreciation) on investments... 1,879,871 3,438,632
------------ ------------
Net increase in net assets from operations............................ 3,387,255 8,068,381
------------ ------------
Dividends
To common shareholders from net investment income..................... (1,105,305) (4,253,022)
To preferred shareholders from net investment income.................. (418,059) (1,728,252)
------------ ------------
(1,523,364) (5,981,274)
------------ ------------
Total increase in net assets.......................................... 1,863,891 2,087,107
Net Assets
Beginning of period................................................... 122,628,298 120,541,191
------------ ------------
End of period (includes undistributed net investment income of
$514,876 and $461,030, respectively) ............................... $124,492,189 $122,628,298
------------ ------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
Page 10
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Cash Flows
For the Three Months Ended September 30, 1996 (unaudited)
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Proceeds from sales of portfolio investments.................................................. $ 861,250
Purchases of portfolio securities............................................................. (6,657,067)
Net sales of short-term investments........................................................... 6,050,000
------------
254,183
Net investment income ........................................................................ 1,577,210
Amortization of net premium on investments.................................................... 6,235
Amortization of organization expenses......................................................... 4,727
Net change in receivables/payables related to operations...................................... (341,571)
------------
Net cash provided by operating activities................................................. 1,500,784
------------
Cash Flows used by Financing Activities:
Common stock dividends paid................................................................... (1,105,305)
Preferred stock dividends paid................................................................ (418,059)
------------
Net cash used by financing activities..................................................... (1,523,364)
------------
Net decrease in cash............................................................................... (22,580)
Cash at beginning of period........................................................................ 80,818
------------
Cash at end of period.............................................................................. $ 58,238
------------
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 11
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
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 12
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
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 amounts 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 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 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.
Page 13
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Notes to Financial Statements (continued)
(unaudited)
At September 30, 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 and reimbursement for travel and out-of-pocket
expenses for each board and committee meeting attended.
Note 4. Portfolio Activity
Sales of investment securities, other than short-term investments for the three
months ended September 30, 1996, aggregated $861,250. At June 30, 1996, the Fund
had a net capital loss carryover of approximately $6,813,000, of which $29,000
will be available through June 30, 2002, $3,703,000 will be available through
June 30, 2003 and $3,081,000 will be available through June 30, 2004 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,
1995, but within the fiscal year ended June 30, 1996, 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 $871,000.
The federal income tax cost basis of the Fund's investments at September 30,
1996 was substantially the same as the cost basis for financial reporting. Gross
unrealized appreciation and depreciation amounted to $3,895,901 and $414,568,
respectively, resulting in net unrealized appreciation for federal income tax
purposes of $3,481,333.
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.
Dividend rates generally reset every 28 days and are determined by auction
procedures. The dividend rates on the Preferred Shares during the three months
ended September 30, 1996 ranged from 3.619% to 3.69%. The weighted average
dividend rate for the three months ended September 30, 1996 was 3.635%. The
Board of Directors designated the dividend period commencing September 10, 1996
as a Special Rate Period. Pursuant to this Special Rate Period, the dividend
rate set by the auction held on September 9, 1996 remains in effect through
December 9, 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 3.69%.
Page 14
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Notes to Financial Statements (concluded)
(unaudited)
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 September 30, 1996
On October 1 and November 1, 1996, the Board of Directors of the Fund declared a
common share dividend from net investment income, each in the amount of $.0625
per share, payable on October 31 and November 29, 1996 to shareholders of record
on October 16 and November 13, 1996, respectively.
Note 7. Concentration of Credit Risk
Since the Fund invests a portion of its assets in issuers located in a single
state, it may be affected by economic and political developments in a specific
state or region. Certain debt obligations held by the Fund are entitled to the
benefit of insurance, standby letters of credit or other guarantees of banks or
other financial institutions.
Page 15
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Financial Highlights
Data for a share of common stock outstanding throughout each period:
<TABLE>
<CAPTION>
For the Three
Months Ended For the For the For the
September 30, Year Ended Year Ended Period Ended
1996 June 30, June 30, June 30,
(unaudited) 1996 1995 1994(a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period................... $ 12.92 $ 12.58 $ 12.02 $ 14.10
-------- -------- -------- --------
Net investment income.................................. .26 1.05 1.07 .89
Net realized loss and change in net unrealized
appreciation (depreciation) on investments.......... .30 .29 .57 (1.87)
-------- -------- -------- --------
Total from investment operations....................... .56 1.34 1.64 (.98)
-------- -------- -------- --------
Less distributions
Dividends to common shareholders from net
investment income................................. (.18) (.71) (.79) (.69)
Dividends to preferred shareholders from net
investment income................................. (.07) (.29) (.29) (.17)
-------- -------- -------- --------
Total distributions.................................... (.25) (1.00) (1.08) (.86)
-------- -------- -------- --------
Offering costs on issuance of common and preferred
shares.............................................. -- -- -- (.24)
-------- -------- -------- --------
Net asset value, end of period......................... $ 13.23 $ 12.92 $ 12.58 $ 12.02
-------- -------- -------- --------
Per share market value, end of period.................. $11.375 $ 10.75 $ 10.75 $ 11.25
Total investment return based on market price
per share(c)........................................ 7.58% 6.62% 2.97% (15.92%)(b)
Ratios to average net assets of common shareholders(d):
Operating expenses.................................. 1.46%(e) 1.44% 1.50% 1.45%(e)
Net investment income before preferred stock
dividends......................................... 8.01%(e) 8.09% 8.99% 7.22%(e)
Preferred stock dividends........................... 2.12%(e) 2.20% 2.48% 1.67%(e)
Net investment income available to common
shareholders...................................... 5.89%(e) 5.89% 6.51% 5.55%(e)
Net assets of common shareholders, end of
period (000)...................................... $79,492 $77,628 $75,541 $72,222
Preferred stock outstanding, end of period (000) ... $45,000 $45,000 $45,000 $45,000
Portfolio turnover rate............................. -- 55% 24% 50%
- ------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
See accompanying notes to financial statements.
</TABLE>
Page 16
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Selected Quarterly Financial Information (unaudited)
Summary of quarterly results of operations:
<TABLE>
<CAPTION>
Net Realized Gain
(Loss) & Change
in Net Unrealized
Net Investment Appreciation
Income (Depreciation)
----------------- -------------------
Quarter Ended* Total Per Share Total Per Share
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
June 30, 1996................................................ 1,567 .26 (589) (.09)
September 30, 1996........................................... 1,577 .26 1,810 .30
- ----------------------------------------------------------------------------------------------------------
<FN>
*Totals expressed in thousands of dollars except per share amounts.
</FN>
See accompanying notes to financial statements.
Page 17
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
(left column)
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
MARK C. BIDERMAN
Chairman of the Board
MICHAEL S. HYLAND
President
MARYBETH WHYTE
Executive Vice President
LAWRENCE H. KAPLAN
Executive Vice President
and General Counsel
ALAN M. MANDEL
Treasurer
LAURIE A. PITTI
Assistant Treasurer
TANA E. TSELEPIS
Secretary
JENNIFER G. MUZZEY
Assistant Secretary
ROBERT I. KLEINBERG
Assistant Secretary
(right column)
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>
(left column)
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
------------------
(right column)
Municipal Partners
Fund II Inc.
Interim Report
SEPTEMBER 30, 1996
