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.
Letter From the Chairman
[Picture of R. Jay Gerken]
Chairman and
Chief Executive
Officer
Dear Shareholder,
Please allow me to introduce myself as the new Chairman and Chief Executive
Officer of the Municipal Partners Fund II Inc. ("Fund"), replacing Heath B.
McLendon, who has been appointed Chairman of Salomon Smith Barney Inc.'s new
Equity Research Policy Committee. On behalf of all our shareholders and the
Fund's Board of Directors, I would like to extend my deepest gratitude to Heath
for his years of service and for his dedication to keeping shareholders' needs
as the firm's top priority. I look forward to keeping you informed about the
investment perspectives of the Fund's manager by regularly providing you with
these shareholder letters in the future.
To better acquaint you with my experience, I am currently a managing director of
Salomon Smith Barney Inc., and I have previously managed the Smith Barney Growth
and Income Fund for six years; developed and managed the Smith Barney Allocation
Series Inc. from its inception in 1996 through the end of 2001; and was
responsible for the investment design and implementation of Citigroup Asset
Management's college savings programs with the states of Illinois and Colorado.
I am pleased to provide the semi-annual report for the Fund for the six months
ended December 31, 2002. In this report, the Fund's manager summarizes what he
believes to be the period's prevailing economic and market conditions and
outlines the Fund's investment strategy. A detailed summary of the Fund's
performance can be found in the appropriate sections that follow. I hope you
find this report to be useful and informative.
Sincerely,
/s/ R. Jay Gerken
R. JAY GERKEN
Chairman and
Chief Executive Officer
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.
Letter From the Manager
PERFORMANCE REVIEW 1
During the six months ended December 31, 2002, the Fund distributed income
dividends to shareholders totaling $0.40 per share. The table below shows the
annualized distribution yield and six-month total return based on the Fund's
December 31, 2002, net asset value ("NAV") per share and its New York Stock
Exchange ("NYSE") closing price 2.
PRICE ANNUALIZED SIX-MONTH
PER SHARE DISTRIBUTION YIELD 3 TOTAL RETURN 3
--------------- ------------------ --------------
$15.04 (NAV) 5.43% 7.76%
$13.30 (NYSE) 6.14% 5.46%
The Fund's Lipper ("Lipper") 4 peer group of general municipal debt closed-end
funds (leveraged) returned 5.53% based on NAV for the six months ended December
31, 2002.
INVESTMENT STRATEGY
The Fund's primary investment objective is to achieve a high level of current
income, which is exempt 5 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 the Investment Advisor, may appreciate in value relative to other
similar obligations in the marketplace.
PORTFOLIO MANAGER MARKET AND FUND OVERVIEW
Following on the heels of a strong second quarter in 2002, municipal bonds
proved resilient on a total return basis for the third quarter as investors
continued to seek less-volatile investment alternatives to equities. Demand for
municipal bonds was impressive as individual and institutional investors easily
absorbed new municipal bond issues coming to market at a record-setting pace.
-----------------------------------------------
1 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
2 NAV is calculated by subtracting total liabilities and outstanding preferred
stock from the closing value of all securities held by the Fund (plus all
other assets) and dividing the result (total net assets) by the total number
of the common shares outstanding. The NAV fluctuates with changes in the
market prices of securities in which the Fund has invested. However, the price
at which an investor may buy or sell shares of the Fund is at the Fund's
market price as determined by supply of and demand for the Fund's shares.
3 Total returns are based on changes in NAV or the market price, respectively.
Total returns assume the reinvestment of all dividends and/or capital gains
distributions in additional shares. Annualized distribution yield is the
Fund's current monthly income dividend rate, annualized, and then divided by
the NAV or the market price noted in this report. The annualized distribution
yield assumes a current monthly income dividend rate of $0.068 for twelve
months. This rate is as of December 31, 2002, and is subject to change. The
important difference between a total return and an annualized distribution
yield is that the total return takes into consideration a number of factors
including the fluctuation of the NAV or the market price during the period
reported. The NAV fluctuation includes the effects of unrealized appreciation
or depreciation in the Fund. Accordingly, since an annualized distribution
yield only reflects the current monthly income dividend rate annualized, it
should not be used as the sole indicator to judge the return you receive from
your Fund investment.
4 Lipper is a major independent mutual fund tracking organization. Average
annual returns are based on the 12-month period ended December 31, 2002,
calculated among 59 funds in the Lipper general municipal debt closed-end
funds (leveraged) category with reinvestment of dividends and capital gains
excluding sales charges.
5 Please note a portion of the Fund's income may be subject to the ALTERNATIVE
MINIMUM TAX ("AMT"). State and local income taxes may apply. Capital gains, if
any, are fully taxable. Please consult your personal tax adviser.
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.
As the reporting period commenced during mid-2002, issuance levels registered
approximately 20% above the prior year's near-record volume. Much of the
increase in new-issue volume was attributable to the sale of tobacco bonds by
state and local governments. These bonds (secured by future payments from the
tobacco industry) were sold with increased frequency in an effort to close many
states' widening budget gaps.
The flight-to-quality reallocation of investment capital from stocks into U.S.
Treasury bonds dominated market activity during the third quarter ending
September 30, 2002. The period was one of the most difficult quarters ever for
equities and one of the strongest for intermediate-term U.S. government bonds.
Investors rushed to buy U.S. Treasuries as the prospect of conflict in Iraq
heightened and economic data released during the quarter pointed to the
likelihood that the U.S. economy would not display dramatic and consistent
positive growth on its road to recovery in the foreseeable future. Furthermore,
many investors' hopes for a stock market rally faded when the Federal Open
Market Committee ("FOMC") 6 left its target for short-term interest rates
unchanged at both its August and September meetings, which prompted many
investors to continue to seek refuge in more conservative investment
alternatives, such as fixed-income securities. Municipal bond prices generally
advanced during the quarter but were unable to match the total returns achieved
by U.S. Treasuries during this period.
The seesaw pricing action between stocks and bonds continued during the fourth
quarter. A larger-than-expected reduction by the FOMC in its short-term interest
rate target on November 6, 2002 positively impacted the equity markets, which
rose during the month, while bond prices generated mixed results over the
quarter. What surprised many market observers was that the FOMC elected to lower
its target for the federal funds rate ("fed funds rate") 7 by half a percentage
point (double consensus forecasts). The reduction marked the Fed's first change
to its short-term rate target in almost a year. The fixed-income markets had a
mixed reaction to the news as prices for investment-grade and high-yield
corporate bonds improved, while prices of U.S. Treasuries and municipal bonds
moved somewhat lower. Although municipal bond prices continued to pare some of
their earlier gains, selling was contained.
Stocks faltered and bonds rallied at the end of the year, thus completing a
difficult year for equities and a terrific one for many fixed-income securities
classes. Pricing action between stocks and bonds diverged for most of 2002 as a
dismal showing in the equity markets prompted many investors to pursue the
relative safety of U.S. Treasuries, agencies and municipal bonds. Bonds
outperformed stocks for the third year in a row, marking the first time that
bonds beat equities for three consecutive years since the 1939 to 1941 period.
In summary, 2002 was a banner year for municipal securities as state and local
governments collectively issued more than $357 billion of debt to fund new
projects and refinance outstanding bonds. Tax-exempt new issue volume exceeded
2001's total levels by 25% and easily eclipsed the previous record of $292
billion established in 1993. Despite historically low nominal yields, demand for
municipal securities was equally impressive as the combination of investment
activity from mutual funds, property and casualty insurance companies,
institutions and individual investors resulted in an easy absorption of new
supply.
-------------
6 The FOMC is a policy-making body of the Federal Reserve System responsible for
the formulation of a policy designed to promote economic growth, full
employment, stable prices, and a sustainable pattern of international trade
and payments.
7 The fed funds rate is the interest rate that banks with excess reserves at a
Federal Reserve district bank charge other banks that need overnight loans.
The fed funds rate often points to the direction of U.S. interest rates.
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.
Looking ahead to 2003, tax-exempt new issue supply is not expected to match
2002's record number. Early estimates project total volume for the New Year to
be between $275 billion and $300 billion. States and cities will continue to
face challenges of declining revenues and increasing costs from healthcare,
homeland security and education. Additionally, market volatility shows no signs
of abating yet with pricing action in the fixed-income securities markets likely
to be driven by the direction of the equity markets. As of the period's close,
the average credit quality of holdings in the Fund was in the AA/Aa territory.
We believe that municipal securities will continue to be an attractive asset
class over the long-term.
LOOKING FOR ADDITIONAL INFORMATION?
The Municipal Partners Fund II Inc. is traded on the New York Stock Exchange
under the symbol "MPT" and its closing market price is available in most
newspapers under the New York Stock Exchange listings. Daily net asset value
closing prices are available online under symbol XMPTX. Barron's and The Wall
Street Journal's Monday editions carry closed-end fund tables that will provide
weekly net asset value per share information. In addition, the Fund issues a
quarterly allocation press release that can be found on most major financial web
sites.
Sincerely,
/s/ Robert E. Amodeo
ROBERT E. AMODEO
Executive Vice President
January 14, 2003
The information provided in this commentary by the portfolio manager represents
the opinion of the portfolio manager and is not intended to be a forecast of
future events, a guarantee of future results or investment advice. Views
expressed are those of the portfolio manager and may differ from those of other
portfolio managers or of the firm as a whole. Furthermore, there is no assurance
that certain securities will remain in or out of the Fund or that the percentage
of the Fund's assets in various sectors will remain the same. Please refer to
pages 5 through 9 for a list and percentage breakdown of the Fund's holdings.
Also, please note that any discussion of the Fund's holding's, the Fund's
performance, and the portfolio manager's views are as of December 31, 2002 and
are subject to change.
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.
Schedule of Investments (unaudited)
December 31, 2002
FACE
AMOUNT RATING(a) SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS -- 99.7%
ARIZONA -- 0.4%
$ 500,000 AAA Phoenix, AZ Civic Improvement Corp. Water Systems Revenue,
FGIC-Insured, 5.500% due 7/1/20 ..................................... $ 545,985
-----------
CALIFORNIA -- 2.3%
3,000,000 AA- California Housing Finance Agency Home Mortgage Revenue, Series H,
6.150% due 8/1/16 ................................................... 3,151,230
-----------
DISTRICT OF COLUMBIA -- 1.6%
2,000,000 AAA District of Columbia Revenue, (American University), AMBAC-Insured,
5.625% due 10/1/26 .................................................. 2,126,360
-----------
FLORIDA -- 0.8%
1,000,000 AAA St. Johns County, FL Water and Sewer Revenue, MBIA-Insured,
5.500% due 6/1/11 ................................................... 1,148,540
-----------
GEORGIA -- 0.1%
95,000 AAA Fulton County, GA Housing Authority, Single-Family Mortgage, Series A,
GNMA-Collateralized, 6.600% due 3/1/28 .............................. 97,099
-----------
IDAHO -- 0.9%
1,250,000 AAA Idaho State Building Authority Revenue, Series A, XLCA-Insured,
5.000% due 9/1/43 ................................................... 1,251,587
----------
ILLINOIS -- 15.1%
Chicago, IL Board of Education, (Chicago School Reform):
1,000,000 AAA AMBAC-Insured, 5.750% due 12/1/27 ................................... 1,085,410
4,255,000 AAA MBIA-Insured, 6.000% due 12/1/16 .................................... 4,884,442
1,750,000 AAA Chicago, IL Midway Airport Revenue, Series B, MBIA-Insured,
5.625% due 1/1/29 ................................................... 1,832,705
250,000 AAA Cook County, IL Refunding GO, Series A, MBIA-Insured,
5.625% due 11/15/16 ................................................. 281,572
2,000,000 Aaa* Illinois Development Finance Authority, Revolving Fund Revenue,
5.250% due 9/1/12 ................................................... 2,251,640
1,000,000 AA+ Illinois Educational Facilities Authority Revenue, (Northwestern
University), 5.500% due 12/1/13 ..................................... 1,150,030
Illinois Health Facilities Authority Revenue:
1,850,000 AAA Refunding, (SSM Health Care), MBIA-Insured, 6.550% due 6/1/13 ....... 2,253,356
2,000,000 AAA Servantcor Project, Series A, FSA-Insured, 6.000%,
Escrowed to maturity 8/15/12 ...................................... 2,379,800
605,000 A South Suburban Hospital Project, 7.000%, Escrowed to maturity 2/15/18 765,264
3,000,000 AAA Illinois State, First Series, MBIA-Insured, 5.500% due 8/1/17 ......... 3,443,220
-----------
20,327,439
-----------
--------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 5
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.
Schedule of Investments (unaudited) (continued)
December 31, 2002
FACE
AMOUNT RATING(a) SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
INDIANA -- 1.7%
$ 2,000,000 BBB+ Indiana State Development Finance Authority, Environmental Revenue,
(USX Corp. Project), 5.250% due 12/1/22 ............................. $ 2,017,180
250,000 AAA Indiana State Revolving Fund Revenue, Series B, 5.000% due 8/1/23 ..... 254,530
-----------
2,271,710
-----------
KENTUCKY -- 0.6%
750,000 AAA Louisville & Jefferson County, KY Metropolitan Sewer District, Sewer
& Drain System, Series A, FGIC-Insured, 5.000% due 5/15/30 .......... 756,398
-----------
LOUISIANA -- 3.8%
5,000,000 BBB+ Louisiana Public Facilities Authority Hospital Revenue Refunding,
(Touro Infirmary Project), Series A, 6.125% due 8/15/23 ............. 5,073,650
-----------
MARYLAND -- 1.5%
Maryland State Health & Higher Educational Facilities Authority Revenue:
1,500,000 Baa1* Carroll County General Hospital, 6.000% due 7/1/37 .................. 1,545,975
500,000 A University of Maryland Medical Systems, 6.000% due 7/1/32 ........... 531,230
-----------
2,077,205
-----------
MASSACHUSETTS -- 4.0%
1,250,000 AAA Massachusetts State GO, Series C, FGIC-Insured, 5.500% due 11/1/15 .... 1,440,787
1,000,000 A Massachusetts State Health & Educational Facilities Authority Revenue,
(Dana Farber Cancer Project), Series G-1, 6.250% due 12/1/22 ........ 1,046,070
2,650,000 AAA Massachusetts State Water Pollution Abatement, Series A,
5.750% due 8/1/29 ................................................... 2,889,798
-----------
5,376,655
-----------
MICHIGAN -- 3.5%
1,000,000 AAA Michigan State Comprehensive Transitional Revenue, Series B,
FSA-Insured, 5.250% due 5/15/09 ..................................... 1,131,260
2,500,000 AA- Michigan State Hospital Finance Authority, Revenue Refunding,
(Trinity Health), Credit C, 5.375% due 12/1/30 ...................... 2,518,025
1,000,000 AAA Detroit, MI City School District, (School Building & Site Improvement),
Series A, FGIC-Insured, 5.500% due 5/1/17 ........................... 1,119,590
-----------
4,768,875
-----------
MISSOURI -- 2.1%
2,500,000 AA Missouri State Environmental Improvement & Energy Research Authority
PCR Refunding, (Associated Electric Co-op Thomas Hill),
5.500% due 12/1/10 .................................................. 2,812,775
-----------
NEVADA -- 3.6%
Clark County, NV:
3,000,000 AAA IDR Refunding, (Nevada Power Co. Project), Series C, AMBAC-Insured,
7.200% due10/1/22 ................................................. 3,144,450
1,000,000 AAA Passenger Facility Revenue, (McCarran International Airport),
Series A, MBIA-Insured, 5.750% due 7/1/23 ......................... 1,059,360
--------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 6
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.
Schedule of Investments (unaudited) (continued)
December 31, 2002
FACE
AMOUNT RATING(a) SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
NEVADA -- 3.6% (CONTINUED)
$ 580,000 AAA Nevada Housing Division, Single-Family Program, Series C,
AMBAC-Insured, 6.350% due 10/1/12 .................................. $ 608,594
-----------
4,812,404
-----------
NEW JERSEY -- 1.7%
1,000,000 AAA New Jersey EDA, Water Facilities Revenue, (New Jersey American
Water Co., Inc. Project), Series A, FGIC-Insured, 6.875% due 11/1/34 1,101,770
1,000,000 AAA New Jersey State Transportation Trust Fund Authority Transportation
System, Series B, MBIA-Insured, 6.000% due 12/15/19 ................. 1,156,620
-----------
2,258,390
-----------
NEW YORK -- 18.2%
New York City, NY GO:
1,000,000 A Series A, 6.000% due 5/15/30 ........................................ 1,074,310
1,000,000 Aaa* Series B-1, 7.000% due 8/15/16, Pre-Refunded 8/15/04 ................ 1,101,890
1,600,000 AA New York City, NY Municipal Water Finance Authority, Water &
Sewer System Revenue, Series A, 5.500% due 6/15/23 .................. 1,671,952
4,500,000 AA+ New York City, NY Transitional Finance Authority Revenue, Series A,
5.500% due 11/15/17 ................................................. 5,014,755
1,435,000 AA- New York State Local Government Assistance Corp. Revenue, Series A,
6.000% due 4/1/16 ................................................... 1,578,644
1,245,000 Aaa* New York State Mortgage Agency Revenue, 24th Series,
6.125% due 10/1/30 .................................................. 1,331,714
New York State Urban Development Corp. Revenue, Correctional
Facilities:
1,500,000 AAA AMBAC-Insured, 5.375% due 1/1/25 .................................. 1,688,610
1,300,000 AAA FSA-Insured, 5.375% due 1/1/25 .................................... 1,463,462
4,400,000 AAA Port Authority of New York and New Jersey Construction, 96th Series,
FGIC-Insured, 6.600% due 10/1/23 .................................... 4,780,688
Triborough Bridge & Tunnel Authority, NY General Purpose Revenue,
Series Y:
1,370,000 AAA 5.500% due 1/1/17 ................................................. 1,572,829
2,750,000 AAA MBIA-Insured, 5.500% due 1/1/17 ................................... 3,157,138
-----------
24,435,992
-----------
OHIO -- 6.1%
750,000 A Erie County, OH Hospital Facilities Revenue (Firelands Regional Medical
Center), Series A, 5.625% due 8/15/32 ............................... 756,210
2,500,000 AA- Franklin County, OH Hospital Revenue, (Holy Cross Health Systems Corp.),
5.875% due 6/1/21 ................................................... 2,603,775
1,170,000 AA Ohio State Building Authority, (Correctional Facilities), Series A,
5.250% due 10/1/09 .................................................. 1,326,125
--------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 7
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.
Schedule of Investments (unaudited) (continued)
December 31, 2002
FACE
AMOUNT RATING(a) SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
OHIO -- 6.1% (CONTINUED)
$ 3,300,000 A Ohio State Water Development Authority, Solid Waste Disposal Revenue,
(Broken Hill Proprietary Co., Ltd.), 6.450% due 9/1/20 .............. $ 3,472,260
-----------
8,158,370
-----------
PENNSYLVANIA -- 0.2%
250,000 AAA Philadelphia, PA School District, Series A, FSA-Insured,
5.500% due 2/1/31 ................................................... 265,208
-----------
PUERTO RICO -- 3.4%
1,600,000 AAA Puerto Rico Commonwealth Highway & Transportation Authority,
Highway Revenue, Series X, FSA-Insured, 5.500% due 7/1/15 ........... 1,858,272
1,400,000 AAA Puerto Rico Commonwealth Refunding, FGIC-Insured, 5.500% due 7/1/13 ... 1,630,202
1,000,000 AAA Puerto Rico Municipal Finance Agency, Series A, FSA-Insured,
5.250% due 8/1/21 ................................................... 1,073,120
-----------
4,561,594
-----------
TENNESSEE -- 3.3%
1,950,000 AA- Humphreys County, TN IDB, Solid Waste Disposal Revenue,
(E.I. Du Pont de Nemours & Co. Project), 6.700% due 5/1/24 .......... 2,071,680
1,200,000 AAA Memphis-Shelby County, TN Airport Authority Revenue, Series D,
AMBAC-Insured, 6.000% due 3/1/24 .................................... 1,300,980
995,000 AA Tennessee Housing Development Agency, (Homeownership Program),
Series 2C, 6.350% due 1/1/31 ........................................ 1,062,013
-----------
4,434,673
-----------
TEXAS -- 8.9%
Austin, TX Airport System Revenue, Series A, MBIA-Insured:
4,170,000 AAA 6.200% due 11/15/15 ................................................. 4,623,237
330,000 AAA 6.200% due 11/15/15, Pre-Refunded 11/15/07 .......................... 384,107
1,500,000 AAA Dallas, TX Independent School District, GO, PSFG-Insured,
5.500% due 2/15/16 .................................................. 1,668,060
1,000,000 AAA Lower Colorado River Authority Texas Revenue Refunding, MBIA-Insured,
5.000% due 5/15/08 .................................................. 1,114,540
1,380,000 AAA North Harris Montgomery Community College District Texas Refunding,
FGIC-Insured, 5.375% due 2/15/16 .................................... 1,521,560
2,500,000 AAA Texas State Turnpike Authority Revenue, First Tier, Series A,
AMBAC-Insured, 5.500% due 8/15/39 ................................... 2,643,325
-----------
11,954,829
-----------
UTAH -- 1.1%
1,400,000 AAA Utah State Housing Finance Agency, Single-Family Mortgage, Issue H-2,
6.250% due 7/1/22 ................................................... 1,468,334
-----------
--------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 8
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.
Schedule of Investments (unaudited) (continued)
December 31, 2002
FACE
AMOUNT RATING(a) SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
VIRGINIA -- 4.0%
$ 2,000,000 AA+ Fairfax County, VA EDA Lease Revenue, (Government Center Properties),
5.500% due 5/15/18 ................................................ $ 2,068,180
2,915,000 A- Greater Richmond Convention Center Authority, VA Hotel Tax Revenue,
(Convention Center Expansion Project), 6.125% due 6/15/20 ......... 3,254,627
-----------
5,322,807
-----------
WASHINGTON -- 7.3%
1,900,000 AAA Chelan County, WA Public Utility District, (Chelan Hydro System No. 1),
Construction Revenue, Series A, AMBAC-Insured, 5.450% due 7/1/37 .. 1,948,279
3,500,000 AAA Energy Northwest, Washington Electric Revenue Refunding,
(Project No. 1), Series A, MBIA-Insured, 5.750% due 7/1/17 ........ 3,944,780
400,000 AAA Seattle, WA GO, Series B, FSA-Insured, 5.750% due 12/1/28 ........... 436,120
1,950,000 AA+ Washington State GO, Series C, 5.500% due 7/1/18 .................... 2,224,677
1,200,000 AAA Washington State Public Power Supply System Revenue Refunding,
(Nuclear Project No. 1), Series A, MBIA-Insured, 5.125% due 7/1/17. 1,293,408
-----------
9,847,264
-----------
WISCONSIN -- 1.9
2,485,000 AA Wisconsin Housing & EDA Homeownership Revenue, Series G,
6.300% due 9/1/17 ................................................. 2,557,388
-----------
WYOMING -- 1.6%
2,000,000 AA Wyoming Community Development Authority Housing Revenue, Series 1,
6.100% due 12/1/14 ................................................ 2,103,620
-----------
Total Long-Term Investments (Cost -- $124,444,346) .................. 133,966,381
-----------
Short-Term Investments -- 0.3%
NORTH CAROLINA -- 0.2%
300,000 A-1+ University of North Carolina, Hospital Chapel Hill Revenue, Series A,
VRDD, 1.630% due 2/15/31 .......................................... 300,000
-----------
WYOMING -- 0.1%
100,000 A-1+ Lincoln County, WY Pollution Control Revenue, (Project-B), VRDD,
1.480% due 11/1/14 ................................................ 100,000
-----------
Total Short-Term Investments (Cost -- $400,000) ..................... 400,000
-----------
Total Investments -- 100% (Cost -- $124,844,346**) .................. $134,366,381
============
----------------------
(a)All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*), which are rated by Moody's Investors Service.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 10 and 11 for definitions of ratings and certain security descriptions.
--------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 9
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.
Long-Term Security Ratings (unaudited)
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"BB" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard
&Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
Moody's Investors Service ("Moody's") -- Numerical modifiers 1, 2 and 3 may be
applied to each generic rating from "Aa" to "Baa," where 1 is the highest and 3
the lowest ranking within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time
in the future.
Baa -- Bonds rated "Baa" are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
NR -- Indicates that the bond is not rated by Moody's or Standard &
Poor's.
PAGE 10
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.
Short-Term Security Ratings (unaudited)
SP-1 -- Standard &Poor's highest rating indicating very strong or strong
capacity to pay principal and interest; those issues determined to
possess overwhelming safety characteristics are denoted with a plus
(+) sign.
A-1 -- Standard &Poor's highest commercial paper and variable-rate demand
obligation ("VRDO") rating indicating that the degree of safety
regarding timely payment is either overwhelming or very strong; those
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign.
VMIG -- Moody's highest rating for issues having a demand feature -- VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to the
advent of the VMIG 1 rating.
Security Descriptions (unaudited)
ABAG - Association of Bay Area Governors GO - General Obligation Bonds
AIG - American International Guaranty HDC - Housing Development Corporation
AMBAC - American Municipal Bond Assurance HFA - Housing Finance Authority
Corporation IDA - Industrial Development Authority
BAN - Bond Anticipation Notes IDB - Industrial Development Board
BIG - Bond Investors Guaranty IDR - Industrial Development Revenue
CGIC - Capital Guaranty Insurance Company INFLOS - Inverse Floaters
CHFCLI - California Health Facility ISD - Independent School District
Construction Loan Insurance LEVRRS - Leveraged Reverse Rate Securities
CONNIE LOC - Letter of Credit
LEE - College Construction Loan Association MBIA - Municipal Bond Investors Assurance
COP - Certificate of Participation Corporation
EDA - Economic Development Authority MVRICS - Municipal Variable Rate Inverse
EDR - Economic Development Revenue Coupon Security
FGIC - Financial Guaranty Insurance Company PCR - Pollution Control Revenue
FHA - Federal Housing Administration PSFG - Permanent School Fund Guaranty
FHLMC - Federal Home Loan Mortgage RAN - Revenue Anticipation Notes
Corporation RIBS - Residual Interest Bonds
FLAIRS - Floating Adjustable Interest Rate RITES - Residual Interest Tax-Exempt Securities
Securities SYCC - Structured Yield Curve Certificate
FNMA - Federal National Mortgage Association TAN - Tax Anticipation Notes
FRTC - Floating Rate Trust Certificates TECP - Tax Exempt Commercial Paper
FSA - Financial Security Assurance TOB - Tender Option Bonds
GIC - Guaranteed Investment Contract TRAN - Tax and Revenue Anticipation Notes
GNMA - Government National Mortgage VA - Veterans Administration
Association VRDD - Variable Rate Daily Demand
VRWE - Variable Rate Wednesday Demand
PAGE 11
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, 2002 (unaudited)
ASSETS:
Investments, at value (Cost -- $124,844,346) ....................................... $ 134,366,381
Cash ............................................................................... 44,559
Receivable for securities sold ..................................................... 1,778,495
Interest receivable ................................................................ 2,039,924
-------------
TOTAL ASSETS ....................................................................... 138,229,359
-------------
LIABILITIES:
Payable for securities purchased ................................................... 2,691,393
Management fee payable ............................................................. 65,190
Preferred dividends payable ........................................................ 1,838
Accrued expenses ................................................................... 106,366
-------------
TOTAL LIABILITIES .................................................................. 2,864,787
-------------
SERIES M AUCTION RATE PREFERRED STOCK
(900 SHARES AUTHORIZED AND ISSUED AT $50,000 PER SHARE) (NOTE 4) ................... 45,000,000
-------------
TOTAL NET ASSETS ........................................................................ $ 90,364,572
=============
NET ASSETS:
Common stock ($0.001 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 ................................................ 1,321,489
Accumulated net realized loss from security transactions ........................... (3,729,104)
Net unrealized appreciation of investments ......................................... 9,522,035
-------------
TOTAL NET ASSETS ........................................................................ $ 90,364,572
=============
NET ASSET VALUE, PER SHARE ($90,364,572 / 6,007,094 capital shares outstanding) ......... $15.04
=======
---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 12
M U N I C I P A L P A R T N E R S F U N D I I I N C.
Statement of Operations
For the Six Months Ended December 31, 2002 (unaudited)
INVESTMENT INCOME:
Interest.............................................................................. $ 3,477,835
------------
EXPENSES:
Management fee (Note 2) .............................................................. 401,021
Auction agent fees.................................................................... 60,740
Shareholder communications............................................................ 38,716
Audit and tax services ............................................................... 29,943
Legal ................................................................................ 16,929
Directors' fees ...................................................................... 15,995
Transfer agent ....................................................................... 12,107
Custody............................................................................... 11,408
Listing fees.......................................................................... 11,345
Other................................................................................. 30,331
------------
TOTAL EXPENSES........................................................................ 628,535
------------
NET INVESTMENT INCOME...................................................................... 2,849,300
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Net Realized Gain From Security Transactions (excluding short-term securities):
Proceeds from sales................................................................ 55,037,874
Cost of securities sold............................................................ 53,400,241
------------
NET REALIZED GAIN..................................................................... 1,637,633
------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period................................................................ 7,038,116
End of period...................................................................... 9,522,035
------------
INCREASE IN NET UNREALIZED APPRECIATION............................................... 2,483,919
------------
NET GAIN ON INVESTMENTS.................................................................... 4,121,552
------------
DISTRIBUTIONS PAID TO AUCTION RATE PREFERRED STOCKHOLDERS
FROM NET INVESTMENT INCOME............................................................... (313,357)
------------
INCREASE IN NET ASSETS FROM OPERATIONS..................................................... $ 6,657,495
============
---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 13
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.
Statements of Changes in Net Assets
For the Six Months Ended December 31, 2002 (unaudited)
and the Year Ended June 30, 2002
DECEMBER 31 JUNE 30
---------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income ............................................... $ 2,849,300 $ 5,995,484
Net realized gain.................................................... 1,637,633 1,992,736
Increase (decrease) in net unrealized appreciation................... 2,483,919 (233,802)
Distributions paid to Auction Rate Preferred Stockholders
from net investment income......................................... (313,357) (850,313)
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS .............................. 6,657,495 6,904,105
----------- -----------
DIVIDENDS PAID TO COMMON STOCK SHAREHOLDERS FROM:
Net investment income................................................ (2,414,852) (4,529,350)
----------- -----------
DECREASE IN NET ASSETS FROM DIVIDENDS PAID TO
COMMON STOCK SHAREHOLDERS.......................................... (2,414,852) (4,529,350)
----------- -----------
INCREASE IN NET ASSETS.................................................... 4,242,643 2,374,755
NET ASSETS:
Beginning of period.................................................. 86,121,929 83,747,174
----------- -----------
END OF PERIOD*....................................................... $90,364,572 $86,121,929
=========== ===========
* Includes undistributed net investment income of:........................ $ 1,321,489 $1,200,398
=========== ===========
---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 14
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, 2002 (unaudited)
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Proceeds from sales of portfolio securities............................................. $60,524,063
Purchases of portfolio securities....................................................... (60,166,547)
Net purchase of short-term securities................................................... (400,000)
-----------
(42,484)
Net investment income .................................................................. 2,849,300
Amortization of net discount on investments............................................. 66,270
Net change in receivables/payables related to operations................................ (156,932)
-----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES......................................... 2,716,154
-----------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Common stock dividends paid............................................................. (2,414,852)
Preferred stock dividends paid.......................................................... (322,983)
-----------
NET CASH FLOWS USED BY FINANCING ACTIVITIES............................................. (2,737,835)
-----------
Net Decrease in Cash......................................................................... (21,681)
Cash, Beginning of period.................................................................... 66,240
-----------
CASH, END OF PERIOD.......................................................................... $ 44,559
===========
--------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 15
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 and Significant Accounting Policies
Municipal Partners Fund II Inc. ("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 $0.001 par value common stock. 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 ("Investment Manager"), may
appreciate in value relative to other similar obligations in the marketplace.
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 accounting principles generally accepted in the
United States of America ("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.
DIVIDENDS AND DISTRIBUTIONS. The Fund declares and pays dividends to common
shareholders monthly from net investment income. Net realized gains, if any, in
excess of loss carryovers are expected to be distributed annually (See Note 7).
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
PAGE 16
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) (continued)
Note 4. 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.
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 2. MANAGEMENT AND ADVISORY FEES AND OTHER TRANSACTIONS
For the period from July 1, 2002 through December 15, 2002, the Fund had entered
into a management agreement with PIMCO Funds Advisors LLC ("PIMCO"), an indirect
wholly-owned subsidiary of Allianz Dresdner Asset Management of America L.P.,
formerly known as PIMCO Advisors L.P., a wholly-owned subsidiary of Allianz AG,
pursuant to which PIMCO, among other things, supervises the Fund's investment
program and monitors the performance of the Fund's service providers.
Effective December 16, 2002, the Fund entered into a new investment advisory and
administration agreement with Salomon Brothers Asset Management Inc
("Investment Manager"), a wholly-owned subsidiary of Salomon Smith Barney
Holdings Inc. which, in turn, is a subsidiary of Citigroup Inc. Under the terms
of the new investment advisory and administration agreement approved by
shareholders at the Special Joint Meeting of Stockholders held on December 11,
2002, the Investment Manager will provide all management, advisory and
administrative services for the Fund and PIMCO will cease to act as investment
manager for the Fund. The Investment Manager has delegated certain
administrative services to Smith Barney Fund Management LLC("SBFM"), an
affiliate of the Investment Manager, pursuant to a Sub-Administration Agreement
between the Investment Manager and SBFM.
The Fund pays the Investment Manager a monthly fee at an annual rate of 0.55% 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.
PAGE 17
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) (continued)
NOTE 3. INVESTMENTS
For the six months ended December 31, 2002, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases ....................................................... $57,504,969
===========
Sales ........................................................... $55,037,874
===========
At December 31, 2002, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
Gross unrealized appreciation ................................... $ 9,559,024
Gross unrealized depreciation ................................... (36,989)
===========
Net unrealized appreciation ..................................... $ 9,522,035
===========
NOTE 4. PREFERRED STOCK
On October 1, 1993, the Fund closed its public offering of 900 shares of $0.001
par value Auction Rate Preferred Stock ("Preferred Stock") at an offering price
of $50,000 per share. The Preferred Stock has 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 Stock during the six months
ended December 31, 2002 ranged from 1.000% to 1.750%. The weighted average
dividend rate for the six months ended December 31, 2002 was 1.361%. The Board
of Directors designated the dividend period commencing December 31, 2002 as a
Special Rate Period. Pursuant to this Special Rate Period, the dividend rate set
by the auction held on December 30, 2002 remained in effect through January 1,
2003 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 1.490%.
The Fund is subject to certain restrictions relating to the Preferred Stock. 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 Stock would be less than 200%. The Preferred Stock is 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.
PAGE 18
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) (continued)
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.
Under Emerging Issues Task Force ("EITF") announcement Topic D-98,
Classification and Measurement of Redeemable Securities, which was issued on
July 19, 2001, preferred securities that are redeemable for cash or other assets
are to be classified outside of permanent equity to the extent that the
redemption is at a fixed or determinable price and at the option of the holder
or upon the occurrence of an event that is not solely within the control of the
issuer. Subject to the guidance of the EITF, the Fund's preferred stock, which
was previously classified as a component of net assets, has been reclassified
outside of permanent equity (net assets) in the accompanying financial
statements. Prior year amounts have also been reclassified to conform with this
presentation. The impact of this reclassification creates no change to the net
assets available to common shareholders.
NOTE 5. ASSET MAINTENANCE AND ASSET COVERAGE REQUIREMENTS
The Fund is required to maintain certain asset coverages with respect to the
Preferred Stock. If the Fund fails to maintain these coverages and does not cure
any such failure within the required time period, the Fund is required to redeem
a requisite number of the Preferred Stock in order to meet the applicable
requirement. Additionally, failure to meet the foregoing asset requirements
would restrict the Fund's ability to pay dividends.
NOTE 6. CONCENTRATION OF 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.
NOTE 7. EVENTS SUBSEQUENT TO DECEMBER 31, 2002
COMMON STOCK DIVIDENDS. On October 23, 2002, the Board of Directors of the Fund
declared two common share dividends from net investment income, each in the
amount of $0.068 per share, payable on January 31 and February 28, 2003 to
shareholders of record on January 14 and February 19, 2003, respectively. In
addition, on January 23, 2003, the Board of Directors of the Fund declared three
common share dividends from net investment income, each in the amount of $0.068
per share, payable on March 28, April 25 and May 30, 2003 to shareholders of
record on March 18, April 15 and May 13, 2003, respectively.
PAGE 19
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) (continued)
PREFERRED STOCK DIVIDENDS. The Board of Directors designated each of the
following dividend periods as a Special Rate Period. With each auction date, the
regular auction procedure resumes, subject to the Fund's ability to designate
any subsequent dividend period as a Special Rate Period.
AUCTION COMMENCEMENT OF RATE EFFECTIVE PREFERRED
DATE RATE PERIOD THROUGH RATE
--------------------------------------------------------------------------------
12/30/02 12/31/02 1/6/03 1.490%
1/6/03 1/7/03 1/13/03 1.200
1/13/03 1/14/03 1/17/03 0.970
1/17/03 1/21/03 1/27/03 0.940
1/27/03 1/28/03 2/3/03 1.250
2/3/03 2/4/03 2/10/03 1.200
--------------------------------------------------------------------------------
NOTE 8. CAPITAL LOSS CARRYFORWARD
At June 30, 2002, the Fund had, for Federal income tax purposes, approximately
$5,367,000 of loss carryforwards available to offset future capital gains. To
the extent that these carryforward losses are used to offset capital gains, it
is probable that the gains so offset will not be distributed. The amount and
expiration of the carryforwards are indicated below. Expiration occurs on the
last day in June of the year indicated:
2003 2004 2005 2007 2008
--------------------------------------------------------------------------------
Carryforward amounts $782,000 $3,081,000 $810,000 $141,000 $553,000
--------------------------------------------------------------------------------
PAGE 20
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 year ended June 30:
2002(1) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............. $14.34 $13.94 $13.09 $13.71 $14.42 $13.70
------ ------ ------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS:
Net investment income.......................... 0.47 1.00 1.04 1.04 1.04 1.03
Net realized and unrealized gain (loss)........ 0.68 0.29 0.86 (0.60) (0.73) 0.72
Distributions paid to Auction Rate Preferred
Stockholders from net investment income ..... (0.05) (0.14) (0.30) (0.31) (0.27) (0.28)
------ ------ ------ ------ ------ ------
Total Income From Operations...................... 1.10 1.15 1.60 0.13 0.04 1.47
------ ------ ------ ------ ------ ------
DIVIDENDS PAID TO COMMON STOCK
SHAREHOLDERS FROM:
Net investment income........................... (0.40) (0.75) (0.75) (0.75) (0.75) (0.75)
------ ------ ------ ------ ------ ------
Total Dividends Paid to Common Stock Shareholders (0.40) (0.75) (0.75) (0.75) (0.75) (0.75)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD.................... $15.04 $14.34 $13.94 $13.09 $13.71 $14.42
====== ====== ====== ====== ====== ======
PER SHARE MARKET VALUE, END OF PERIOD............. $13.30 $13.00 $12.52 $11.5625 $12.3125 $12.75
====== ====== ====== ======== ======== ======
TOTAL RETURN, BASED ON MARKET PRICE(2)............ 5.46%++ 10.11% 15.14% 0.26% 2.27% 9.20%
RATIOS TO AVERAGE NET ASSETS OF
COMMON SHAREHOLDERS(3):
Operating expenses.............................. 1.41%+ 1.35% 1.38% 1.39% 1.30% 1.36%
Net investment income........................... 6.38%+ 7.02 7.63 7.95 7.23 7.27
NET ASSETS OF COMMON SHAREHOLDERS,
END OF PERIOD (000S)............................ $90,365 $83,122 $83,747 $78,617 $82,365 $86,600
PORTFOLIO TURNOVER RATE........................... 42% 52% 15% 40% 19% 20%
AUCTION RATE PREFERRED STOCK:
Total Amount Outstanding (000s)................. $45,000 $45,000 $45,000 $45,000 $45,000 $45,000
Asset Coverage Per Share........................ 150,406 142,691 143,052 137,352 141,517 146,222
Involuntary Liquidating Preference Per Share.... 50,000 50,000 50,000 50,000 50,000 50,000
Average Market Value Per Share.................. 50,000 50,000 50,000 50,000 50,000 50,000
-----------------------------------------------------------------------------------------------------------
(1) For the six months ended December 31, 2002 (unaudited).
(2) 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.
(3) Ratios calculated on the basis of income and expenses relative to the
average net assets of common shares and excludes the effect of dividend
payments to preferred stockholders.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
PAGE 21
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.
Dividend Reinvestment Plan (unaudited)
Pursuant to certain rules of the Securities and Exchange Commission, the
following additional disclosure is provided.
Pursuant to the Fund's Dividend Reinvestment Plan ("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 ("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 who 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, who 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 22
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.
Dividend Reinvestment Plan (unaudited) (continued)
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.
------------------------------------
This report is transmitted to the shareholders of Municipal Partners Fund II
Inc. for their information. This is not a prospectus, circular or representation
intended for use in the purchase of shares of the Fund or any securities
mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
PAGE 23
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 MUNICIPAL PARTNERS FUND II INC.
LESLIE H. GELB 125 Broad Street
President, The Council 10th Floor, MF-2
on Foreign Relations New York, New York 10004
Telephone 1-888-777-0102
R. JAY GERKEN
Chairman of the Board; INVESTMENT MANAGER
Managing Director, Salomon Smith Barney Inc. Salomon Brothers Asset Management Inc
President and Director, 399 Park Avenue
Smith Barney Fund Management LLC New York, New York 10022
and Travelers Investment Adviser, Inc.
AUCTION AGENT
RIORDAN ROETT Bankers Trust Company
Professor and Director, LatinAmerican 4 Albany Street
Studies Program, Paul H. Nitze New York, New York 10006
School of Advanced International Studies,
The Johns Hopkins University CUSTODIAN
State Street Bank and Trust Company
JESWALD W. SALACUSE 225 Franklin Street
Henry J. Braker Professor of Boston, Massachusetts 02110
Commercial Law and formerly Dean,
The Fletcher School of Law & Diplomacy, DIVIDEND DISBURSING AND TRANSFER AGENT
Tufts University State Street Bank and Trust Company
225 Franklin Street
OFFICERS Boston, Massachusetts 02110
R. JAY GERKEN LEGAL COUNSEL
Chairman and Chief Executive Officer Simpson Thacher & Bartlett
425 Lexington Avenue
PETER J. WILBY New York, New York 10017
President
INDEPENDENT ACCOUNTANTS
LEWIS E. DAIDONE PricewaterhouseCoopers LLP
Executive Vice President and 1177 Avenue of the Americas
Chief Administrative Officer New York, New York 10036
ROBERT E. AMODEO NEW YORK STOCK EXCHANGE SYMBOL
Executive Vice President MPT
FRANCES M. GUGGINO
Controller
CHRISTINA T. SYDOR
Secretary
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State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
Municipal Partners
Fund II Inc.
Semi-Annual Report
December 31, 2002
MPTSEMI 12/02
03-4459