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.
August 21, 1996
To Our Shareholders:
We are pleased to supply this annual report to the shareholders of Municipal
Partners Fund II Inc. (the "Fund") for the twelve months ended June 30, 1996.
Strong bond market performance in June reversed April and May's losses, enabling
the fixed-income markets to post positive returns for the second quarter. This
was evidenced by the Fund's 0.78% net asset value return (assuming the
reinvestment of monthly dividends in additional shares of the Fund) for the
quarter. The Fund continued to pay a monthly common stock dividend of $0.059 per
share during the quarter. Based on the Fund's closing market price of $10.75 on
June 28, 1996, the Fund's current yield was 6.59%. On August 1, the Fund's
dividend was raised to $0.0625 per share payable on August 30, 1996 to
shareholders of record on August 13, 1996.
Municipal bonds outperformed taxable bonds for the quarter due to positive
supply and demand factors. Although tax-exempt returns for April and May were
negative, losses were tempered due to renewed interest in the municipal market
from individuals and continued support from insurance companies. Individual
investors were drawn to the municipal bond market when the stock market became
more volatile and long-term yields exceeded 6%. At the same time, continued
profitability from property and casualty insurance companies enabled them to
remain a significant purchaser of municipal bonds.
In June, the bond market overcame higher than anticipated job creation to record
its first monthly price increase since January of this year. Mixed signals
regarding the strength of the economy, modest inflation and a growing consensus
that the Federal Reserve would not imminently raise short-term interest rates
allowed bond prices to finish the quarter on a firm tone. Municipals received an
added boost as many investors armed with cash from June 1st coupon payments,
maturities and redemptions reinvested much of these proceeds into the municipal
bond market. Looking ahead, anticipated cash from municipal coupon payments,
maturities and redemptions, combined with an expected light new issue calendar
should enable the municipal bond market to continue its favorable technical
position.
As of June 30, 1996, the Fund's portfolio consisted of 62 issues in 27 different
states with an average maturity of 15.0 years and an average coupon of 6.24%.
Sector weightings emphasize housing, transportation and healthcare.
The annual meeting of shareholders of the Fund will be held on October 24, 1996
at 10:00 a.m. at Salomon Brothers Asset Management, 7 World Trade Center, in New
York City. We hope those of you who are able to will attend.
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.
<TABLE>
<CAPTION>
Statement of Investments
June 30, 1996
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments - 155.3% Credit Rating (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California -- 14.8%
California State Housing Finance Agency Home Mortgage Revenue,
$3,000 Series H, 6.15%, 8/01/16 ...................................................... Aa/AA- $ 2,979,300
California State Public Works Board, Lease Revenue Refunding Bonds
2,175 (Department of Corrections), Series A, 6.875%, 11/01/14 ....................... A/A- 2,377,406
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- 3,178,603
San Francisco, California Airport Revenue (San Francisco International
2,000 Airport), Series A-9, FGIC, 5.60%, 5/01/14 .................................... Aaa/AAA 1,912,920
West Covina, California Certificate of Participation (Queen of the Valley
1,000 Hospital), 6.50%, 8/15/14 ..................................................... A/A 1,021,470
------------
11,469,699
------------
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 1,001,540
------------
Georgia -- 1.5%
Fulton County, Georgia Housing Authority Single-Family Mortgage,
1,130 6.60%, 3/01/28 ................................................................ NR/AAA 1,143,413
------------
Hawaii - 1.3%
Hawaii State Department of Budget & Finance Special Purpose Revenue,
1,000 6.00%, 7/01/11 ................................................................ A/A 1,005,090
------------
Illinois -- 28.3%
Chicago Heights, Illinois General Obligation, Series A, FGIC,
6,050 5.65%, 12/01/16 ............................................................... Aaa/AAA 5,864,507
Chicago, Illinois Board of Education (Chicago School Reform), MBIA,
4,255 6.00%, 12/01/16# .............................................................. Aaa/AAA 4,265,850
Chicago, Illinois O'Hare International Airport Special Facility Revenue
3,500 (International Terminal), MBIA, 6.75%, 1/01/18 ................................ Aaa/AAA 3,665,410
Chicago, Illinois Wastewater Transmission Revenue, FGIC,
1,000 5.125%, 1/01/25 ............................................................... Aaa/AAA 883,670
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 2
</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.
<TABLE>
<CAPTION>
Statement of Investments (continued)
June 30, 1996
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (continued) Credit Rating (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Illinois -- 28.3% (concluded)
Illinois Health Facilities Authority Revenue (OSF Healthcare System),
$2,300 6.00%, 11/15/23 ............................................................... A1/A+ $ 2,230,724
Illinois Health Facilities Authority Revenue (Servantcor Project), Series A,
2,000 FSA, 6.00%, 8/15/12 ........................................................... Aaa/AAA 2,014,920
Illinois Health Facilities Authority Revenue (South Suburban Hospital
1,000 Project), 7.00%, 2/15/18 ...................................................... NR/A 1,046,100
Illinois Health Facilities Authority Revenue Refunding (SSM Health Care),
1,850 MBIA, 6.55%, 6/01/13 .......................................................... Aaa/AAA 2,021,329
------------
21,992,510
------------
Indiana -- 5.6%
Indiana Transportation Finance Authority Airport Facilities Lease Revenue,
2,000 Series A, 5.50%, 11/01/17 ..................................................... A/A 1,891,840
Indianapolis, Indiana Airport Authority Revenue Refunding, Series A, FGIC,
2,500 5.60%, 7/01/15 ................................................................ Aaa/AAA 2,412,200
------------
4,304,040
------------
Iowa -- 4.4%
Iowa Finance Authority Hospital Facility Revenue Refunding (Trinity
3,350 Regional Hospital Project), 7.00%, 7/01/12 .................................... NR/A- 3,442,762
------------
Louisiana -- 7.2%
Louisiana Public Facilities Authority Hospital Revenue Refunding (Touro
6,000 Infirmary Project), Series B, 6.125%, 8/15/23 ................................. Baa/BBB 5,613,120
------------
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 1,002,370
Massachusetts State Water Pollution Abatement Water Pollution Revenue
2,000 (New Bedford Loan Program), Series A, 5.70%, 2/01/14 .......................... Aa/NR 1,967,200
------------
2,969,570
------------
- -------------------------------------------------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Statement of Investments (continued)
June 30, 1996
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (continued) Credit Rating (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Missouri -- 3.2%
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 $ 2,472,925
------------
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 3,099,612
------------
Nevada -- 6.9%
Clark County, Nevada Industrial Development Revenue Refunding
3,000 (Nevada Power Project), AMBAC, 7.20%, 10/01/22 ................................ Aaa/AAA 3,321,120
Clark County, Nevada Passenger Facility Revenue (Macarran
1,000 International Airport), MBIA, 5.75%, 7/01/23 .................................. Aaa/AAA 960,320
Nevada Housing Division, Single-Family Program, Series C, AMBAC,
1,100 6.35%, 10/01/12 ............................................................... Aaa/AAA 1,106,677
------------
5,388,117
------------
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 1,078,590
------------
New York -- 18.6%
Metropolitan Transportation Authority, New York (Transit Facilities),
2,500 Series O, MBIA, 6.375%, 7/01/20 ............................................... Aaa/AAA 2,586,875
New York State Dormitory Authority Revenue (Department of Health),
1,000 5.50%, 7/01/25 ................................................................ Baa1/BBB 896,450
New York State Local Government Assistance Corporation Revenue,
1,500 Series A, 6.00%, 4/01/16 ...................................................... A/A 1,510,470
Port Authority of New York & New Jersey Construction, Ninety-Sixth Series,
4,400 FGIC, 6.60%, 10/01/23 ......................................................... Aaa/AAA 4,643,496
The City of New York, General Obligation Bonds, Fiscal 1994 Series B,
3,000 Subseries B-1, 7.00%, 8/15/16 ................................................. Baa1/BBB+ 3,138,150
Triborough Bridge & Tunnel Authority, New York General Purpose Revenue,
1,670 Series Y, 5.50%, 1/01/17 ...................................................... Aa/A+ 1,625,962
------------
14,401,403
------------
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Investments (continued)
June 30, 1996
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (continued) Credit Rating (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio -- 11.6%
Franklin County, Ohio Hospital Revenue (Holy Cross Health Systems
$2,500 Corporation), 5.875%, 6/01/21 ................................................. Aa/AA $ 2,447,075
Ohio State Water Development Authority Solid Waste Disposal Revenue
3,300 (North Star BHP Broken Hill Project), 6.45%, 9/01/20# ......................... A2/A 3,373,458
The Student Loan Funding Corporation, Cincinnati, Ohio, Series 1993B,
3,250 6.20%, 8/01/12 ................................................................ A/NR 3,159,650
------------
8,980,183
------------
Pennsylvania -- 3.3%
Monroeville, Pennsylvania Hospital Authority Hospital Revenue (Forbes
2,490 Health System), 7.00%, 10/01/13 ............................................... Baa1/BBB+ 2,568,261
------------
South Carolina -- 3.1%
Greenville, South Carolina Hospital Systems Hospital Facilities Revenue,
2,500 Series B, 5.70%, 5/01/12 ...................................................... Aa/AA- 2,436,225
------------
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- 2,053,409
------------
Texas -- 9.5%
4,500 Austin, Texas Airport System Revenue, Series A, MBIA, 6.20%, 11/15/15 ......... Aaa/AAA 4,554,584
Port Corpus Christi Authority Texas Nueces County Pollution Control
2,665 Revenue (Hoechst Celanese Corporate Project), 6.875%, 4/01/17 ................. A2/A+ 2,822,875
------------
7,377,459
------------
Utah -- 7.2%
Intermountain Power Agency, Utah Power Supply Revenue Refunding,
1,000 Series D, 5.00%, 7/01/21 ...................................................... Aa/AA- 863,120
Utah State Housing Finance Agency Single-Family Mortgage, Issue H-2,
4,815 6.25%, 7/01/22 ................................................................ Aaa/AAA 4,735,986
------------
5,599,106
------------
- -------------------------------------------------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Statement of Investments (continued)
June 30, 1996
Principal
Amount Moody's/S&P Value
(000) Long-Term Investments (concluded) Credit Rating (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia -- 7.6%
Chesapeake Bay Bridge & Tunnel Commission, Virginia District General
$1,850 Resolution Revenue Refunding, MBIA, 5.00%, 7/01/22 ......................... Aaa/AAA $ 1,627,760
Fairfax County, Virginia Economic Development Authority Lease Revenue
2,000 (Government Center Properties), 5.50%, 5/15/18 ............................. Aa/AA 1,911,700
Virginia State Housing Development Authority Commonwealth Mortgage,
1,015 Subseries A-4, MBIA, 6.20%, 7/01/12 ........................................ Aaa/AAA 1,020,796
Virginia State Housing Development Authority, Commonwealth Mortgage,
1,300 Subseries I-1, 6.55%, 7/01/17 .............................................. Aa1/AA+ 1,311,881
------------
5,872,137
------------
West Virginia -- 2.2%
West Virginia State Water Development Authority, Loan Program II,
1,555 II, Series A, 7.00%, 11/01/31, Pre-Refunded 11/01/01 ....................... NR/A 1,729,175
------------
Wisconsin -- 3.2%
Wisconsin Housing & Economic Development Authority Revenue Refunding
2,485 Refunding (Home Ownership), Series G, 6.30%, 9/01/17 ....................... Aa/AA 2,500,580
------------
Wyoming -- 2.6%
Wyoming Community Development Authority Housing Revenue, Series 1,
2,000 Series 1, 6.10%, 12/01/14 ................................................. Aa/AA 1,995,500
------------
Total Long-Term Investments (cost $118,892,964) ......................................... 120,494,426
------------
Short-Term Investments - 8.8%
- -------------------------------------------------------------------------------------------------------------------------
Arizona - 1.0%
Pinal County, Arizona Industrial Development Authority Pollution Control
800 Revenue (Magma Copper Co.), VR, 3.60%, 7/01/96 ............................. P-1/A-1+ 800,000
------------
California - 0.1%
Los Angeles County, California Industrial Development Authority Industrial
100 Development Revenue (Walter &Howard Lim), VR, 4.20%, 7/01/96 ............... NR/A-1 100,000
------------
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 6
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C.
<TABLE>
<CAPTION>
Statement of Investments (continued)
June 30, 1996
Principal
Amount Moody's/S&P Value
(000) Short-Term Investments (concluded) Credit Rating (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Florida - 2.2%
Manatee County, Florida Pollution Control Revenue Refunding (Florida
$ 900 Power & Light Co. Project), VR, 3.60%, 7/01/96 ................................ VMIG-1/A-1+ $ 900,000
Pinellas County, Florida Health Facilities Authority Revenue Refunding
800 (Pooled Hospital Loan Program), VR, 3.60%, 7/01/96 ............................ VMIG-1/A-1 800,000
-----------
1,700,000
-----------
Indiana - 0.4%
Rockport, Indiana Pollution Control Revenue Refunding (AEP Generating
300 Co. Project B), VR, 3.60%, 7/01/96 ............................................ NR/A-1 300,000
-----------
Louisiana - 0.4%
Ascension Parish, Louisiana Pollution Control Revenue (BASF Wyandotte
300 Corp.), VR, 3.60%, 7/01/96 .................................................... P-1/NR 300,000
-----------
New York - 4.1%
Metropolitan Transportation Authority, New York Commuter Facilities
1,200 Revenue, VR, 3.15%, 7/01/96 ................................................... VMIG-1/A-1 1,200,000
The City of New York, General Obligation Bonds, Subseries A-4,
1,150 VR, 3.60%, 7/01/96 ............................................................ VMIG-1/A-1 1,150,000
The City of New York, Housing Development Corporation Mortgage Revenue
400 (Columbus Green Project A), VR, 3.90%, 7/01/96 ................................ VMIG-2/NR 400,000
The City of New York, Industrial Development Agency Industrial
400 Development Revenue (Nippon Cargo Airlines Co.), VR, 4.30%, 7/01/96 ........... NR/A-1 400,000
-----------
3,150,000
-----------
Washington - 0.6%
Washington State Health Care Facilities Authority Revenue (Sisters
500 Province-E), VR, 3.55%, 7/01/96 ............................................... VMIG-1/A-1+ 500,000
-----------
Total Short-Term Investments (cost $6,850,000) ............................................ 6,850,000
-----------
Total Investments - 164.1% (cost $125,742,964) ............................................ 127,344,426
-----------
- -------------------------------------------------------------------------------------------------------------------------
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.
<TABLE>
Statement of Investments (concluded)
June 30, 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities in Excess of Other Assets - (6.1%) ............................................. $ (4,716,128)
-------------
Total Net Assets - 158.0% .................................................................. 122,628,298
-------------
Par value of 900 shares of preferred stock at $50,000 per share (Note 5) - (58.0%) ......... (45,000,000)
-------------
Net Assets Applicable to Common Stock - 100%
(equivalent to $12.92 per share on 6,007,094 common shares outstanding) .................... $ 77,628,298
-------------
- -------------------------------------------------------------------------------------------------------------------------
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 June 30, 1996.
# - Securities valued at $7,639,308 as of June 30, 1996 were segregated
to be available for the purchase of delayed delivery securities with
a cost of $6,657,067.
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 8
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C.
<TABLE>
Statement of Assets and Liabilities
June 30, 1996
<S> <C>
Assets
Investments, at value (cost - $125,742,964) .................................................. $127,344,426
Cash ......................................................................................... 80,818
Interest receivable .......................................................................... 1,968,489
Unamortized organization expenses (Note 2) ................................................... 38,997
Prepaid expenses ............................................................................. 35,320
------------
Total assets ..................................................................... 129,468,050
------------
Liabilities
Payable for investments purchased ............................................................ 6,657,067
Accrued management fee (Note 3) .............................................................. 59,766
Accrued audit and tax return preparation fees ................................................ 51,679
Accrued printing and mailing fees ............................................................ 27,200
Accrued legal fee ............................................................................ 20,000
Accrued shareholder annual meeting expense ................................................... 11,821
Accrued custodian expense .................................................................... 3,394
Accrued transfer agent expense ............................................................... 2,825
Other accrued expenses ....................................................................... 6,000
------------
Total liabilities ................................................................ 6,839,752
------------
Net Assets
Preferred Stock (Note 5) ..................................................................... 45,000,000
Common Stock ($.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 .......................................................... 461,030
Accumulated realized loss on investments ..................................................... (7,684,346)
Net unrealized appreciation on investments ................................................... 1,601,462
------------
Net assets ....................................................................... $122,628,298
------------
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.
<TABLE>
Statement of Operations
For the Year Ended June 30, 1996
Investment Income
Income
<S> <C>
Interest (reduced by net premium amortization of $23,984)........................... $ 7,468,541
Operating expenses
Management fee (Note 3)................................................... $741,705
Auction agent fee......................................................... 122,576
Audit and tax services.................................................... 72,639
Printing.................................................................. 35,462
Legal..................................................................... 33,913
Directors' fees and expenses (Note 3)..................................... 26,924
Custodian................................................................. 24,849
Listing fee............................................................... 16,214
Transfer agent............................................................ 16,137
Amortization of deferred organization expenses (Note 2)................... 14,435
Other..................................................................... 22,389
--------
Total operating expenses.......................................................... 1,127,243
-----------
Net investment income................................................................... 6,341,298
-----------
Net Realized and Unrealized Gain (Loss)
Net Realized Loss on Investments........................................................ (1,711,549)
Change in Net Unrealized Appreciation on Investments.................................... 3,438,632
-----------
Net realized loss and change in net unrealized appreciation on investments.............. 1,727,083
-----------
Net Increase in Net Assets from Operations.............................................. $ 8,068,381
-----------
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Page 10
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C.
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the For the
Year Ended Year Ended
June 30, June 30,
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income ...................................................... $ 6,341,298 $ 6,418,938
Net realized loss on investments ........................................... (1,711,549) (3,960,676)
Change in net unrealized appreciation on investments ....................... 3,438,632 7,374,853
------------ ------------
Net increase in net assets from operations ................................. 8,068,381 9,833,115
------------ ------------
Dividends
To common shareholders from net investment income .......................... (4,253,022) (4,739,597)
To preferred shareholders from net investment income ....................... (1,728,252) (1,774,225)
------------ ------------
(5,981,274) (6,513,822)
------------ ------------
Total increase in net assets ............................................... 2,087,107 3,319,293
Net Assets
Beginning of year .......................................................... 120,541,191 117,221,898
------------ ------------
End of year (includes undistributed net investment income of $461,030 and
$101,006, respectively) ............................................... $122,628,298 $120,541,191
------------ ------------
- ----------------------------------------------------------------------------------------------------------------
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.
Statement of Cash Flows
For the Year Ended June 30, 1996
Cash Flows from Operating Activities:
Proceeds from sales of portfolio investments ............... $ 66,535,375
Purchases of portfolio securities .......................... (60,805,111)
Net purchases of short-term investments .................... (6,250,000)
------------
(519,736)
Net investment income ...................................... 6,341,298
Amortization of net premium on investments ................. 23,984
Amortization of organization expenses ...................... 14,435
Net change in receivables/payables related to operations ... 172,598
------------
Net cash provided by operating activities .............. 6,032,579
------------
Cash Flows used by Financing Activities:
Common stock dividends paid ................................ (4,253,022)
Preferred stock dividends paid ............................. (1,728,252)
------------
Net cash used by financing activities .................. (5,981,274)
------------
Net increase in cash ............................................ 51,305
Cash at beginning of year ....................................... 29,513
------------
Cash at end of year ............................................. $ 80,818
------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
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
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 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)
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 week ly 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 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 (continued)
At June 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
Purchases and sales of investment securities, other than short-term investments
for the year ended June 30, 1996, aggregated $66,532,565 and $66,535,375,
respectively. 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 June 30, 1996 was
substantially the same as the cost basis for financial reporting. Gross
unrealized appreciation and depreciation amounted to $2,627,577 and $1,026,115,
respectively, resulting in net unrealized appreciation for federal income tax
purposes of $1,601,462.
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 year ended
June 30, 1996 ranged from 3.51% to 4.05%. The weighted average dividend rate for
the year ended June 30, 1996 was 3.778%. The Board of Directors designated the
dividend period commencing June 11, 1996 as a Special Rate Period. Pursuant to
this Special Rate Period, the dividend rate set by the auction held on June 10,
1996 remains in effect through September 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 3.619%.
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.
Notes to Financial Statements (concluded)
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, 1996
On July 1 and August 1, 1996, the Board of Directors of the Fund declared a
common share dividend from net investment income in the amount of $.059 and
$.0625 per share, respectively, payable on July 31 and August 30, 1996 to
shareholders of record on July 16 and August 13, 1996, respectively.
Note 7. Concentration of Credit Risk
Since theFund 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 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.
<TABLE>
<CAPTION>
Financial Highlights
Data for a share of common stock outstanding throughout each period:
For the For the For the
Year Ended Year Ended Period Ended
June 30, June 30, June 30,
1996 1995 1994(a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period................................ $ 12.58 $ 12.02 $ 14.10
------- ------- -------
Net investment income............................................... 1.05 1.07 .89
Net realized loss and change in net unrealized appreciation
(depreciation) on investments.................................... .29 .57 (1.87)
------- ------- -------
Total from investment operations.................................... 1.34 1.64 (.98)
------- ------- -------
Less distributions
Dividends to common shareholders from net investment income ..... (.71) (.79) (.69)
Dividends to preferred shareholders from net investment income .. (.29) (.29) (.17)
------- ------- -------
Total distributions................................................. (1.00) (1.08) (.86)
------- ------- -------
Offering costs on issuance of common and preferred shares .......... -- -- (.24)
------- ------- -------
Net asset value, end of period...................................... $ 12.92 $ 12.58 $ 12.02
------- ------- -------
Per share market value, end of period............................... $ 10.75 $ 10.75 $ 11.25
Total investment return based on market price per share(c).......... 6.62% 2.97% (15.92%)(b)
Ratios to average net assets of common shareholders(d):
Operating expenses............................................... 1.44% 1.50% 1.45%(e)
Net investment income before preferred stock dividends .......... 8.09% 8.99% 7.22%(e)
Preferred stock dividends........................................ 2.20% 2.48% 1.67%(e)
Net investment income available to common shareholders.......... 5.89% 6.51% 5.55%(e)
Net assets of common shareholders, end of period (000)........... $77,628 $75,541 $72,222
Preferred stock outstanding, end of period (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.
(d) Ratios calculated on the basis of income, expenses and preferred stock
dividends relative to the average net assets of common shares.
(e) Annualized.
</FN>
See accompanying notes to financial statements.
Page 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.
Report of Independent Accountants
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, 1996, the results of its operations and
cash flows for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at June
30, 1996 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, N.Y.
August 14, 1996
Page 18
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C.
Selected Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
Summary of quarterly results of operations:
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)
- -----------------------------------------------------------------------------------------------------------
<FN>
*Totals expressed in thousands of dollars except per share amounts.
</FN>
See accompanying notes to financial statements.
Page 19
</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.
Other Information
Pursuant to certain rules of the Securities and Exchange Commission, the
following additional disclosure is provided.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), holders of
Common Stock whose shares of Common Stock are registered in their own names will
be deemed to have elected to have all distributions automatically reinvested by
State Street Bank and Trust Company (the "Plan Agent") in Fund shares pursuant
to the Plan, unless they elect to receive distributions in cash. Holders of
Common Stock who elect to receive distributions in cash will receive all
distributions in cash by check in dollars mailed directly to the holder by the
Plan Agent as dividend-paying agent. Holders of Common Stock who do not wish to
have distributions automatically reinvested should notify the Plan Agent at the
address below. Distributions with respect to Common Stock registered in the name
of a bank, broker-dealer or other nominee (i.e., in "street name") will be
reinvested under the Plan unless the service is not provided by the bank,
broker-dealer or other nominee or the holder elects to receive dividends and
distributions in cash. Investors 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.
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.
Page 20
<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.
Other Information (concluded)
There is no charge to participants for reinvesting dividends or capital gains
distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments will be paid by the Fund. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of dividends and
distributions and voluntary cash payments made by the participant. The receipt
of dividends and distributions under the Plan will not relieve participants of
any income tax which may be payable on such dividends or distributions.
Participants may terminate their accounts under the Plan by notifying the Plan
Agent in writing. Such termination will be effective immediately if notice in
writing is received by the Plan Agent not less than ten days prior to any
dividend or distribution record date. Upon termination, the Plan Agent will send
the participant a certificate for the full shares held in the account and a cash
adjustment for any fractional shares or, upon written instruction from the
participant, the Plan Agent will sell part or all of the participant's shares
and remit the proceeds to the participant, less a $2.50 fee plus brokerage
commission for the transaction.
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to all participants in the
Plan at least 30 days before the record date for the dividend or distribution.
The Plan also may be amended by the Fund or the Plan Agent upon at least 30
days' written notice to participants in the Plan.
All correspondence concerning the Plan should be directed to the Plan Agent,
P.O. Box 8209, Boston, Massachusetts 02266-8209.
1996 Federal Tax Notice
During the year ended June 30, 1996, the Fund paid to shareholders $5,981,274
from net investment income. All of the Fund's dividends from net investment
income were exempt interest dividends, excludable from gross income for regular
Federal income tax purposes. You should consult your tax adviser as to the state
and local tax treatment of the dividends you received.
Page 21
<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
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
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
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
New York Stock Exchange Symbol
MPT
<PAGE>
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
Municipal Partners
Fund II Inc.
Annual Report
JUNE 30, 1996
BULK RATE
U.S. POSTAGE
PAID
S. HACKENSACK, NJ
PERMIT No. 750
