<PAGE>
Municipal Partners
Fund II Inc.
Semi-Annual Report
DECEMBER 31, 1997
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
February 23, 1998
To Our Shareholders:
We are pleased to provide this semi-annual report to the shareholders of
Municipal Partners Fund II Inc. (the "Fund") for the six months ended December
31, 1997. Benefiting from the bond market rally, the Fund achieved a 7.88%
return in net asset value (assuming the reinvestment of monthly dividends in
additional shares of the Fund). The Fund's average maturity and leverage
contributed to this performance. On December 31, 1997 the Fund had a closing net
asset value and market price per share of $14.39 and $12.9375, respectively. The
Fund continued to pay a monthly common stock dividend of $0.0625 per share.
U.S. fixed-income securities registered positive price returns during the second
half of 1997 as the bond market continued to benefit from a healthy domestic
economy with little concern of inflation. The fixed-income markets also received
a boost from the political and fiscal turmoil in Asia. Many investors seeking a
safe haven purchased United States Treasury securities, causing a significant
increase in demand for these securities.
Municipal prices advanced during the latter half of the year, but failed to keep
pace with the rally in Treasuries. An influx of municipal new issue supply
prompted by lower interest rates, prevented municipal prices from keeping up
with their taxable counterpart. For the year, total municipal new issue volume
was $220 billion, a 19% increase over 1996 and the third highest year on record.
Demand from property and casualty insurance companies remained a constant due to
their profitability, while purchases from individuals and mutual funds depended
upon the level of nominal yields and cash availability.
As of December 31, 1997, the Fund's portfolio consisted of 52 issues throughout
24 different states with an average maturity of 8.84 years and an average coupon
of 6.22%, excluding short-term investments. Sector weightings emphasize
transportation, healthcare and housing.
ANNUAL SHAREHOLDERS AND SPECIAL MEETINGS
The Fund held its annual shareholders meeting on October 14, 1997 and a special
meeting on January 15, 1998. At the meeting on October 14, 1997, shareholders
approved a new investment management agreement between Value Advisors LLC
("Value Advisors") and the Fund and a new investment advisory and administration
agreement among Value Advisors, Salomon Brothers Asset Management Inc ("SBAM")
and the Fund, elected each of the nominees proposed for election to the Fund's
Board of Directors and ratified the selection of Price Waterhouse LLP as the
independent accountants of the Fund. The new agreement took effect upon the
closing of the sale of Value Advisors by Oppenheimer Group Inc. to PIMCO
Advisors L.P., which occurred on November 4, 1997. At the special meeting on
January 15, 1998, shareholders elected William D. Cvengros to the Fund's Board
of Directors and approved a new investment advisory and administration agreement
among SBAM, Value Advisors and the Fund. Approval of the agreement was necessary
due to the merger of Salomon Inc, which had been the ultimate parent company of
SBAM, with and into Smith Barney Holdings Inc., a subsidiary of Travelers Group
Inc., which occurred on November 28, 1997. Travelers is now the ultimate parent
company of SBAM. The following table provides information concerning the matters
voted on at the meetings:
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
OCTOBER 14, 1997
1. Approval of a new investment management agreement between Value Advisors and
the Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
5,040,072 71,435 125,727
2. Approval of a new investment advisory and administration agreement among
Value Advisors, SBAM and the Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
5,042,873 66,835 127,526
3. Election of directors (common and preferred shares voting).
NOMINEES VOTES FOR VOTES WITHHELD
--------- ------------ --------------
Mark C. Biderman* 5,122,614 114,620
Robert L. Rosen 5,126,573 110,661
*Mr. Biderman subsequently resigned from the Board of Directors on November 4,
1997.
4. Election of a director (preferred shares voting only).
NOMINEE VOTES FOR VOTES WITHHELD
--------- ----------- --------------
Dr. Riordan Roett 665 0
5. Ratification of Price Waterhouse LLP as the Independent Accountants of the
Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
5,116,996 29,878 90,360
JANUARY 15, 1998
1. Election of a director (common and preferred shares voting).
NOMINEE VOTES FOR VOTES WITHHELD
--------- ------------ --------------
William D. Cvengros 5,407,888 104,794
2. Approval of a new investment advisory and administration agreement among
SBAM, Value Advisors and the Fund (common and preferred shares voting).
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
5,354,982 48,620 109,080
Cordially,
/s/ William D. Cvengros /s/ Michael S. Hyland
William D. Cvengros Michael S. Hyland
Co-Chairman of the Board Co-Chairman of the Board
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments-- 148.0% CREDIT RATING (NOTE 2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA -- 11.8%
California State Housing Finance Agency Home Mortgage Revenue,
$3,000 Series H, 6.15%, 8/01/16................................................... Aa2/AA- $ 3,162,090
California State Public Works Board, Lease Revenue Refunding Bonds
(Department of Corrections), Series A, 6.875%, 11/01/14,
2,175 Pre-Refunded 11/01/04...................................................... Aaa/A 2,550,362
California State Public Works Board, Lease Revenue Refunding Bonds
(Various University of California Projects), 1993 Series A, 7.00%, 3/01/14,
2,900 Pre-Refunded 3/01/04....................................................... Aaa/A 3,383,169
West Covina, California Certificate of Participation (Queen of the Valley
1,000 Hospital), 6.50%, 8/15/14.................................................. A2/A 1,102,800
-------------
10,198,421
-------------
COLORADO -- 3.5%
Colorado Health Facilities Authority Hospital Revenue (Rocky Mountain
1,000 Adventist Healthcare Project), Series 1993, 6.625%, 2/01/13................ Baa2/BBB 1,067,640
E-470 Public Highway Authority, Colorado Revenue,
2,000 Series A, MBIA, 5.00%, 9/01/21............................................. Aaa/AAA 1,956,420
-------------
3,024,060
-------------
GEORGIA -- 0.2%
Fulton County, Georgia Housing Authority Single-Family Mortgage,
205 6.60%, 3/01/28............................................................. NR/AAA 216,812
-------------
HAWAII -- 3.7%
2,000 Hawaii General Obligation, FGIC, 5.50%, 10/01/10........................... Aaa/AAA 2,170,030
Hawaii State Department of Budget & Finance Special Purpose Revenue,
1,000 6.00%, 7/01/11............................................................. A/A 1,068,280
-------------
3,238,310
-------------
ILLINOIS -- 24.7%
Chicago Heights, Illinois General Obligation, Series A, FGIC,
6,050 5.65%, 12/01/16............................................................ Aaa/AAA 6,384,746
Chicago, Illinois Board of Education (Chicago School Reform), MBIA,
4,255 6.00%, 12/01/16............................................................ Aaa/AAA 4,648,162
Chicago, Illinois O'Hare International Airport Special Facility Revenue
3,500 (International Terminal), MBIA, 6.75%, 1/01/18............................. Aaa/AAA 3,810,310
Illinois Health Facilities Authority Revenue (Highland
1,000 Park Project B), FGIC, 5.55%, 10/01/06..................................... Aaa/AAA 1,074,060
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
PAGE 1
</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)
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments (continued) CREDIT RATING (NOTE 2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ILLINOIS -- 24.7% (CONCLUDED)
Illinois Health Facilities Authority Revenue (Servantcor Project), Series A,
$2,000 FSA, 6.00%, 8/15/12........................................................ Aaa/AAA $ 2,165,060
Illinois Health Facilities Authority Revenue (South Suburban Hospital
605 Project), 7.00%, Escrowed to Maturity 2/15/18.............................. NR/A 700,312
Illinois Health Facilities Authority Revenue (South Suburban Hospital
395 Project), 7.00%, 2/15/18, Pre-Refunded 2/15/02............................. NR/A 442,455
Illinois Health Facilities Authority Revenue Refunding (SSM Health Care),
1,850 MBIA, 6.55%, 6/01/13....................................................... Aaa/AAA 2,168,681
-------------
21,393,786
-------------
INDIANA -- 5.4%
Indiana Transportation Finance Authority Airport Facilities Lease Revenue,
2,000 Series A, 5.50%, 11/01/17.................................................. A2/A 2,045,580
Indianapolis, Indiana Airport Authority Revenue Refunding, Series A, FGIC,
2,500 5.60%, 7/01/15............................................................. Aaa/AAA 2,612,450
-------------
4,658,030
-------------
IOWA -- 4.4%
Iowa Finance Authority Hospital Facility Revenue Refunding (Trinity
3,350 Regional Hospital Project), 7.00%, 7/01/12, Pre-Refunded 7/01/02........... NR/NR 3,765,970
-------------
LOUISIANA -- 7.2%
Louisiana Public Facilities Authority Hospital Revenue Refunding (Touro
6,000 Infirmary Project), Series B, 6.125%, 8/15/23.............................. Baa2/BBB 6,211,620
-------------
MASSACHUSETTS -- 1.3%
Massachusetts State Health & Educational Facilities Authority Revenue
1,000 (Dana Farber Cancer Project), Series G-1, 6.25%, 12/01/22.................. A1/A 1,078,890
-------------
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 2,666,575
-------------
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 3,445,501
-------------
- ---------------------------------------------------------------------------------------------------------------------
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 .
Statement of Investments (continued)
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments (continued) CREDIT RATING (NOTE 2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEVADA -- 6.4%
Clark County, Nevada Industrial Development Revenue Refunding
$3,000 (Nevada Power Project), AMBAC, 7.20%, 10/01/22............................. Aaa/AAA $ 3,363,760
Clark County, Nevada Passenger Facility Revenue (Macarran
1,000 International Airport), MBIA, 5.75%, 7/01/23............................... Aaa/AAA 1,040,060
Nevada Housing Division, Single-Family Program, Series C, AMBAC,
1,100 6.35%, 10/01/12............................................................ Aaa/AAA 1,163,295
-------------
5,567,115
-------------
NEW JERSEY -- 1.3%
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 1,132,790
-------------
NEW YORK -- 19.2%
Metropolitan Transportation Authority, New York (Transit Facilities),
2,500 Series O, MBIA, 6.375%, 7/01/20............................................ Aaa/AAA 2,825,225
New York State Dormitory Authority Revenue (Manhattan Eye, Ear &
2,000 Throat Hospital), 5.125%, 7/01/07.......................................... Baa1/BBB 2,029,300
New York State Local Government Assistance Corporation Revenue,
1,500 Series A, 6.00%, 4/01/16................................................... A3/A 1,625,445
Port Authority of New York & New Jersey Construction, Ninety-Sixth Series,
4,400 FGIC, 6.60%, 10/01/23...................................................... Aaa/AAA 4,862,132
The City of New York, General Obligation Bonds, Fiscal 1994 Series B,
405 Subseries B-1, 7.00%, 8/15/16, Pre-Refunded 8/15/04........................ NR/BBB+ 471,331
The City of New York, General Obligation Bonds, Fiscal 1994 Series B,
2,595 Subseries B-1, 7.00%, 8/15/16.............................................. Baa1/BBB+ 2,953,344
Triborough Bridge & Tunnel Authority, New York General Purpose Revenue,
1,670 Series Y, 5.50%, 1/01/17................................................... Aa/A+ 1,786,549
-------------
16,553,326
-------------
OHIO -- 13.6%
Franklin County, Ohio Hospital Revenue (Holy Cross Health Systems
2,500 Corporation), 5.875%, 6/01/21.............................................. Aa3/AA 2,650,800
Hamilton County, Ohio Sewer Systems Revenue,
2,000 Series A, FGIC, 5.50%, 12/01/11............................................ Aaa/AAA 2,159,880
Ohio State Water Development Authority Solid Waste Disposal Revenue
3,300 (Broken Hill Proprietary Co., LTD.), 6.45%, 9/01/20........................ A2/A 3,583,503
The Student Loan Funding Corporation, Cincinnati, Ohio, Series 1993B,
3,250 6.20%, 8/01/12............................................................. A/NR 3,392,772
-------------
11,786,955
-------------
- ---------------------------------------------------------------------------------------------------------------------
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)
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments (continued) CREDIT RATING (NOTE 2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA -- 3.1%
Monroeville, Pennsylvania Hospital Authority Hospital Revenue (Forbes
$2,490 Health System), 7.00%, 10/01/13............................................ A3/BBB+ $ 2,713,054
-------------
SOUTH CAROLINA -- 3.1%
Greenville, South Carolina Hospital Systems Hospital Facilities Revenue,
2,500 Series B, 5.70%, 5/01/12................................................... Aa3/AA- 2,642,175
-------------
TENNESSEE -- 2.5%
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- 2,161,809
-------------
TEXAS -- 9.1%
4,500 Austin, Texas Airport System Revenue, Series A, MBIA, 6.20%, 11/15/15...... Aaa/AAA 4,927,095
Port Corpus Christi Authority Texas Nueces County Pollution Control
2,665 Revenue (Hoechst Celanese Corporate Project), 6.875%, 4/01/17.............. A2/A+ 2,901,412
-------------
7,828,507
-------------
UTAH -- 5.7%
Utah State Housing Finance Agency Single-Family Mortgage, Issue H-2,
4,695 6.25%, 7/01/22............................................................. Aaa/AAA 4,937,262
-------------
VIRGINIA -- 7.3%
Chesapeake Bay Bridge & Tunnel Commission, Virginia District General
1,850 Resolution Revenue Refunding, MBIA, 5.00%, 7/01/22......................... Aaa/AAA 1,806,581
Fairfax County, Virginia Economic Development Authority Lease Revenue
2,000 (Government Center Properties), 5.50%, 5/15/18............................. Aa2/AA 2,041,540
Virginia State Housing Development Authority, Commonwealth Mortgage,
1,015 Subseries A-4, MBIA, 6.20%, 7/01/12........................................ Aaa/AAA 1,086,832
Virginia State Housing Development Authority, Commonwealth Mortgage,
1,300 Subseries I-1, 6.55%, 7/01/17.............................................. Aa1/AA+ 1,372,254
-------------
6,307,207
-------------
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
PAGE 4
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Statement of Investments (continued)
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Long-Term Investments (concluded) CREDIT RATING (NOTE 2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WEST VIRGINIA -- 2.0%
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- $ 1,735,846
-------------
WISCONSIN -- 3.0%
Wisconsin Housing & Economic Development Authority Revenue Refunding
2,485 (Home Ownership), Series G, 6.30%, 9/01/17................................. Aa2/AA 2,618,952
-------------
WYOMING -- 2.4%
Wyoming Community Development Authority Housing Revenue, Series 1,
2,000 6.10%, 12/01/14............................................................ Aa2/AA 2,099,160
-------------
Total Long-Term Investments (cost $117,997,806)............................ 127,982,133
-------------
Short-Term Investments - 1.6%
- ---------------------------------------------------------------------------------------------------------------------
MISSISSIPPI -- 0.5%
Perry County, Mississippi Pollution Control Revenue Refunding
400 (Leaf River Forest Project), VR, 5.00%, 1/02/98............................ P-1/NR 400,000
-------------
NEVADA -- 0.5%
Clark County, Nevada Industrial Development Revenue
400 (Nevada Cogeneration Association #2), VR, 5.20%, 1/02/98................... VMIG-1/A-1+ 400,000
-------------
NEW YORK -- 0.4%
100 New York City General Obligation, Subseries E4, VR, 5.00%, 1/02/98......... VMIG-1/A-1+ 100,000
New York City Job Development Authority, Series A-1 Through A-21,
200 VR, 5.25%, 1/02/98......................................................... VMIG-1/A-1+ 200,000
Port Authority of New York & New Jersey Special Obligation Revenue
100 (Versatile Structure Obligation - 4), VR, 4.90%, 1/02/98................... VMIG-1/A-1+ 100,000
-------------
400,000
-------------
TEXAS -- 0.2%
Gulf Coast, Texas Waste Disposal Authority Revenue Refunding
200 (Amoco Oil Company Project), VR, 5.00%, 1/02/98 VMIG-1/A-1+ 200,000
-------------
- ---------------------------------------------------------------------------------------------------------------------
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 (concluded)
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S/S&P VALUE
(000) Short-Term Investments (concluded) CREDIT RATING (NOTE 2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Short-Term Investments (cost $1,400,000)........................................ $ 1,400,000
-------------
Total Investments -- 149.6% (cost $119,397,806)....................................... 129,382,133
-------------
Other Assets in Excess of Liabilities -- 2.4%.......................................... 2,073,451
-------------
Total Net Assets -- 152.0%............................................................. 131,455,584
-------------
Par value of 900 shares of preferred stock at $50,000 per share (Note 5) -- (52.0%).... (45,000,000)
-------------
Net Assets Applicable to Common Stock -- 100%
(equivalent to $14.39 per share on 6,007,094 common shares outstanding)................ $ 86,455,584
=============
- ------------------------------------------------------------------------------
The following abbreviations are used in portfolio descriptions:
AMBAC -- Insured as to principal and interest by the AMBAC Indemnity
Corporation.
FGIC -- Insured as to principal and interest by the Financial Guaranty
Insurance Company.
MBIA -- Insured as to principal and interest by the Municipal Bond Investors
Assurance Corporation.
NR -- Not rated by Moody's or S&P as indicated.
VMIG -- Variable Moody Investment Grade.
VR -- Variable Rate Demand Note. Date shown is date of next interest rate
change and coupon rate is the rate in effect on December 31, 1997.
- ---------------------------------------------------------------------------------------------------------------------
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 .
Statement of Assets and Liabilities
December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (cost - $119,397,806)............................................ $129,382,133
Cash................................................................................... 32,362
Interest receivable.................................................................... 2,134,372
Unamortized organization expenses (Note 2)............................................. 10,790
Prepaid expenses....................................................................... 37,757
------------
Total assets............................................................... 131,597,414
------------
Liabilities
Accrued management fee (Note 3)........................................................ 66,660
Accrued audit and tax return preparation fees.......................................... 36,077
Accrued printing and mailing fees...................................................... 11,000
Accrued legal fee...................................................................... 9,351
Accrued shareholder annual meeting expense............................................. 6,636
Accrued custodian expense.............................................................. 5,912
Accrued transfer agent expense......................................................... 3,100
Other accrued expenses................................................................. 3,094
------------
Total liabilities.......................................................... 141,830
------------
Net Assets
Preferred Stock (Note 5)............................................................... 45,000,000
------------
Common Stock ($.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.................................................... 632,756
Accumulated realized loss on investments............................................... (7,411,651)
Net unrealized appreciation on investments............................................. 9,984,327
------------
Net assets applicable to common stock...................................... 86,455,584
------------
Total net assets........................................................... $131,455,584
============
Net asset value per share of common stock ($86,455,584 / 6,007,094
shares outstanding)......................................................... $14.39
======
- ---------------------------------------------------------------------------------------------------------
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>
<CAPTION>
Statement of Operations
For the Six Months Ended December 31, 1997 (unaudited)
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest (reduced by net premium amortization of $20,330)........................... $3,710,133
OPERATING EXPENSES
Management fee (Note 3)................................................... $391,430
Auction agent fee......................................................... 57,505
Audit and tax services.................................................... 36,548
Legal..................................................................... 20,165
Printing.................................................................. 14,686
Directors' fees and expenses (Note 3)..................................... 13,914
Custodian................................................................. 13,491
Transfer agent............................................................ 11,829
Amortization of deferred organization expenses (Note 2)................... 9,454
Listing fee............................................................... 8,151
Other..................................................................... 12,965
--------
Total operating expenses.......................................................... 590,138
----------
Net investment income................................................................... 3,119,995
----------
NET REALIZED AND UNREALIZED GAIN
Net realized gain on investments........................................................ 211,678
Change in net unrealized appreciation on investments.................................... 3,937,806
----------
Net realized gain and change in net unrealized appreciation on investments.............. 4,149,484
----------
Net Increase in Net Assets from Operations.............................................. $7,269,479
----------
- ------------------------------------------------------------------------------------------------------------------
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 .
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED FOR THE
DECEMBER 31, YEAR ENDED
1997 JUNE 30,
(UNAUDITED) 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income ................................................ $ 3,119,995 $ 6,332,456
Net realized gain on investments...................................... 211,678 61,017
Change in net unrealized appreciation on investments.................. 3,937,806 4,445,059
------------ ------------
Net increase in net assets from operations............................ 7,269,479 10,838,532
------------ ------------
DIVIDENDS
To common shareholders from net investment income..................... (2,252,660) (4,484,296)
To preferred shareholders from net investment income.................. (878,324) (1,665,445)
------------ ------------
(3,130,984) (6,149,741)
------------ ------------
Total increase in net assets.......................................... 4,138,495 4,688,791
NET ASSETS
Beginning of period................................................... 127,317,089 122,628,298
------------ ------------
End of period (includes undistributed net investment income of $632,756
and $643,745, respectively)...................................... $131,455,584 $127,317,089
------------ ------------
- ------------------------------------------------------------------------------------------------------------
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 Cash Flows
For the Six Months Ended December 31, 1997 (unaudited)
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Proceeds from sales of portfolio securities............................................. $ 11,315,513
Purchases of portfolio securities....................................................... (10,223,700)
Net purchase of short-term securities................................................... (1,120,000)
------------
(28,187)
Net investment income .................................................................. 3,119,995
Amortization of net premium on investments.............................................. 20,330
Amortization of organization expenses................................................... 9,454
Net change in receivables/payables related to operations................................ (41,501)
------------
Net cash provided by operating activities........................................... 3,080,091
------------
Cash Flows used by Financing Activities:
Common stock dividends paid............................................................. (2,252,660)
Preferred stock dividends paid.......................................................... (878,324)
------------
Net cash used by financing activities............................................... (3,130,984)
------------
Net decrease in cash......................................................................... (50,893)
Cash at beginning of period.................................................................. 83,255
------------
CASH AT END OF PERIOD........................................................................ $ 32,362
------------
- --------------------------------------------------------------------------------------------------------------------
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 .
Notes to Financial Statements
(unaudited)
Note 1. Organization
Municipal Partners Fund II Inc. (the "Fund") was incorporated in Maryland on
June 21, 1993 and is registered as a diversified, closed-end, management
investment company under the Investment Company Act of 1940, as amended. The
Board of Directors authorized 100 million shares of $.001 par value common
stock. The Fund may classify or reclassify any unissued shares of common stock
into one or more series of preferred stock (see Note 5). The Fund commenced
operations on July 30, 1993. The Fund's primary investment objective is to seek
a high level of current income which is exempt from regular federal income
taxes, consistent with the preservation of capital. As a secondary investment
objective, the Fund intends to enhance portfolio value by purchasing tax exempt
securities that, in the opinion of Salomon Brothers Asset Management Inc (the
"Investment Adviser"), may appreciate in value relative to other similar
obligations in the marketplace.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
("GAAP"). The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual amounts could differ
from those estimates.
SECURITIES VALUATION. Tax-exempt securities are valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term investments having a maturity of 60 days or
less are valued at amortized cost which approximates market value. Securities
for which reliable quotations are not readily available are valued at fair value
as determined in good faith by, or under procedures established by, the Board of
Directors.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is accrued on a daily
basis. The Fund amortizes premiums and accretes discounts on securities
purchased using the effective interest method.
FEDERAL INCOME TAXES. The Fund has complied and intends to continue to comply
with the requirements of the Internal Revenue Code of 1986, as amended,
applicable to regulated investment companies, and to distribute all of its
income and capital gains, if any, to its shareholders. Therefore, no federal
income tax or excise tax provision is required.
PAGE 11
<PAGE>
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 has entered into a management agreement with Value Advisors LLC (the
"Investment Manager"), a subsidiary of PIMCO Advisors L.P., pursuant to which
the Investment Manager, among other things, supervises the Fund's investment
program and monitors the performance of the Fund's service providers. The
agreement with the Investment Manager was approved by shareholders at a special
meeting held on October 14, 1997, and has been in effect since the closing of
the sale of the Investment Manager by Oppenheimer Group Inc. to PIMCO Advisors
L.P., which occurred on November 4, 1997. The Investment Manager was the
transferee of the investment management responsibilities for the Fund which were
previously provided by Advantage Advisers, Inc.
The Investment Manager and the Fund entered into an investment advisory and
administration agreement with Salomon Brothers Asset Management Inc (the
"Investment Adviser"), an indirect wholly-owned subsidiary of Salomon Inc,
pursuant to which the Investment Adviser provides investment advisory and
administrative services to the Fund. The Investment Adviser is responsible on a
day-to-day basis for the management of the Fund's portfolio in accordance with
the Fund's investment objectives and policies and for making decisions to buy,
sell, or hold particular securities and is responsible for day-to-day
administration of the Fund. The agreement with the Investment Adviser was most
recently approved by shareholders at a special meeting held on January 15, 1998.
Approval of the agreement was necessary due to the
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)
merger of Salomon Inc., which had been the ultimate parent company of the
Investment Adviser, with and into Smith Barney Holdings Inc., a subsidiary of
Travelers Group Inc., which occurred on November 28, 1997. Travelers is now the
ultimate parent company of the Investment Adviser.
The Fund pays the Investment Manager a monthly fee at an annual rate of .60% of
the Fund's average weekly net assets for its services, and the Investment
Manager pays the Investment Adviser a monthly fee at an annual rate of .36% of
the Fund's average weekly net assets for its services. For purposes of
calculating the fees, the liquidation value of any outstanding preferred stock
of the Fund is not deducted in determining the Fund's average weekly net assets.
Certain officers and/or directors of the Fund are also officers and/or directors
of the Investment Manager or the Investment Adviser.
At December 31, 1997, the Investment Adviser owned 4,161 shares of the Fund.
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 six months ended December 31, 1997, aggregated $10,223,700 and
$11,315,513, respectively. At June 30, 1997, the Fund had a net capital loss
carryover of approximately $7,623,000, of which $29,000 will be available
through June 30, 2002, $3,703,000 will be available through June 30, 2003,
$3,081,000 will be available through June 30, 2004 and $810,000 will be
available through June 30, 2005 to offset future capital gains to the extent
provided by federal income tax regulations.
The federal income tax cost basis of the Fund's investments at December 31, 1997
was substantially the same as the cost basis for financial reporting. Gross
unrealized appreciation and depreciation amounted to $9,984,327 and $0,
respectively, resulting in net unrealized appreciation for federal income tax
purposes of $9,984,327.
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.
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 (concluded)
(unaudited)
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 six months
ended December 31, 1997 ranged from 3.749% to 4.00%. The weighted average
dividend rate for the six months ended December 31, 1997 was 3.819%. The Board
of Directors designated the dividend period commencing December 9, 1997 as a
Special Rate Period. Pursuant to this Special Rate Period, the dividend rate set
by the auction held on December 8, 1997 remains in effect through March 9, 1998
when the regular auction procedure resumes, subject to the Fund's ability to
designate any subsequent dividend period as a Special Rate Period. The dividend
rate for this Special Rate Period is 4.00%.
The Fund is subject to certain restrictions relating to the Preferred Shares.
The Fund may not declare dividends or make other distributions on shares of
common stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, asset coverage with respect to the outstanding
Preferred Shares would be less than 200%. The Preferred Shares are also subject
to mandatory redemption at $50,000 per share plus any accumulated or unpaid
dividends, whether or not declared, if certain requirements relating to the
composition of the assets and liabilities of the Fund as set forth in its
Articles Supplementary are not satisfied.
The Preferred Shares, which are entitled to one vote per share, generally vote
with the common shares but vote separately as a class to elect two directors and
on certain matters affecting the rights of the Preferred Shares.
Note 6. Concentration of Credit Risk
Since the Fund invests a portion of its assets in issuers located in a single
state, it may be affected by economic and political developments in a specific
state or region. Certain debt obligations held by the Fund are entitled to the
benefit of insurance, standby letters of credit or other guarantees of banks or
other financial institutions.
Note 7. Common Stock Dividends Subsequent to December 31, 1997
On January 2 and February 2, 1998, the Board of Directors of the Fund declared a
common share dividend from net investment income, each in the amount of $.0625
per share, payable on January 30 and February 27, 1998 to shareholders of record
on January 13 and February 18, 1998, respectively.
PAGE 14
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I I I N C .
Financial Highlights
Data for a share of common stock outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FOR THE FOR THE FOR THE
DECEMBER 31, YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
1997 JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(UNAUDITED) 1997 1996 1995 1994(a)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.70 $ 12.92 $ 12.58 $ 12.02 $ 14.10
------- ------- ------- ------- -------
Net investment income....................... .52 1.05 1.05 1.07 .89
Net realized gain (loss) and change in net
unrealized appreciation (depreciation)
on investments........................... .69 .75 .29 .57 (1.87)
------- ------- ------- ------- -------
Total from investment operations............ 1.21 1.80 1.34 1.64 (.98)
------- ------- ------- ------- -------
Less distributions
Dividends to common shareholders
from net investment income............. (.37) (.74) (.71) (.79) (.69)
Dividends to preferred shareholders
from net investment income............. (.15) (.28) (.29) (.29) (.17)
------- ------- ------- ------- -------
Total distributions......................... (.52) (1.02) (1.00) (1.08) (.86)
------- ------- ------- ------- -------
Offering costs on issuance of common
and preferred shares..................... -- -- -- -- (.24)
------- ------- ------- ------- -------
Net asset value, end of period.............. $ 14.39 $ 13.70 $ 12.92 $ 12.58 $ 12.02
------- ------- ------- ------- -------
Per share market value, end of period....... $12.9375 $12.375 $ 10.75 $ 10.75 $ 11.25
Total investment return based on market
price per share(c)....................... 7.65% 22.80% 6.62% 2.97% (15.92%)(b)
Ratios to average net assets of common
shareholders(d):
Operating expenses..................... 1.38%(e) 1.42% 1.44% 1.50% 1.45%(e)
Net investment income before
preferred stock dividends............ 7.31%(e) 7.90% 8.09% 8.99% 7.22%(e)
Preferred stock dividends.............. 2.06%(e) 2.08% 2.20% 2.48% 1.67%(e)
Net investment income available to
common shareholders.................. 5.25%(e) 5.82% 5.89% 6.51% 5.55%(e)
Net assets of common shareholders,
end of period (000).................. $86,456 $82,317 $77,628 $75,541 $72,222
Preferred stock outstanding, end of
period (000)......................... $45,000 $45,000 $45,000 $45,000 $45,000
Portfolio turnover rate................ 8% 7% 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.
PAGE 15
</TABLE>
<PAGE>
M U N I C I P A L P A R T N E R S F U N D I 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>
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
December 31, 1996............................................ 1,575 .26 1,649 .28
March 31, 1997............................................... 1,591 .27 (1,971) (.33)
June 30, 1997................................................ 1,589 .26 3,018 .50
September 30, 1997........................................... 1,586 .26 2,321 .39
December 31, 1997............................................ 1,534 .26 1,829 .30
<FN>
- ---------------------------------------------------------------------------------------------------------------
*Totals expressed in thousands of dollars except per share amounts.
</FN>
See accompanying notes to financial statements.
PAGE 16
</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 .
Directors
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
MICHAEL S. HYLAND
Co-Chairman of the Board
Managing Director,
Salomon Brothers Inc
President, Salomon Brothers
Asset Management Inc
WILLAM D. CVENGROS
Co-Chairman of the Board; Chief Executive Officer, President
and Member of the Board of Value Advisors LLC and Chief Executive Officer
and President of PIMCO Advisors L.P.
RIORDAN ROETT
Professor and Director, Latin American
Studies Program, Paul H. Nitze
School of Advanced International Studies,
Johns Hopkins University
ROBERT L. ROSEN
General Partner,
R.L.R. Partners
Officers
MICHAEL S. HYLAND
Co-Chairman of the Board
WILLIAM D. CVENGROS
Co-Chairman of the Board
STEPEHN J. TREADWAY
President
NEWTON SCHOTT
Executive Vice President
MARYBETH WHYTE
Executive Vice President
LAWRENCE H. KAPLAN
Executive Vice President
and General Counsel
ALAN M. MANDEL
Treasurer
LAURIE A. PITTI
Assistant Treasurer
NOEL B. DAUGHERTY
Secretary
JENNIFER G. MUZZEY
Assistant Secretary
Municipal Partners Fund II Inc.
7 World Trade Center
New York, New York 10048
Telephone 1-888-777-0102
INVESTMENT ADVISER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Value Advisors LLC
800 Newport Center Drive
Suite 100
Newport Beach, California 92660
AUCTION AGENT
Bankers Trust Company
4 Albany Street
New York, New York 10006
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DIVIDEND DISBURSING AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
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
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