<PAGE> 1
MUNICIPAL INCOME TRUST II
Two World Trade Center
New York, New York 10048
DEAR SHAREHOLDER:
- --------------------------------------------------------------------------------
MARKET CONDITIONS
Interest rates moved higher throughout 1994 as the fixed-income markets
focused on the strong pace of economic growth and the potential for higher
inflation. Satisfied that economic growth would be sustained, the Federal
Reserve Board began to tighten monetary policies. Between February and November,
the central bank raised the federal-funds rate from 3.00 percent to 5.50 percent
in six stages. This led to a severe bear market in bonds.
Municipal yields, as tracked by The Bond Buyer Revenue Bond Index,* began
1994 at 5.52 percent, nearly a record low. The Index peaked at 7.37 percent in
November and ended the year at 6.97 percent. The 145 basis point yield increase
during the year was equivalent to an 18 percent price decline for a bond with a
30 year maturity. In contrast, over the six-year period between 1987 and 1993,
yields fell from 9.00 percent to 5.50 percent and bond prices appreciated 24
percent.
The municipal bond market's weakness paralleled trends in other
fixed-income sectors. The 30-year U.S. Treasury bond's yield increased 160 basis
points and closed 1994 at 7.84 percent. During the year, the ratio of Revenue
Bond Index yields to 30-year U.S. Treasury bond yields ranged from a low of 85
percent to a high of 92 percent and ended the year at 89 percent. (At higher
ratios, municipals are more attractive relative to taxable investments.)
The fiscal year was also marked by periods of supply/demand imbalance in
municipals. Between February and May, dealer inventories reached near-record
levels as long-term bonds were sold to pay taxes and increase cash. A semblance
of stability returned to the market between June and August. However, after
Labor Day the market was again subject to a renewed round of bond sales as fund
redemptions mounted and tax-loss selling accelerated. Market conditions improved
in December as the "January effect" -- the reinvestment of coupons, redemptions
and maturities at a time of seasonally scarce supply -- was anticipated. This
seasonal pattern more than offset market uncertainty caused by the Orange
County, California bankruptcy filing. On December 6, 1994, Orange County, one of
the most affluent areas in the country, was forced to seek protection after its
pooled investment fund faced unprecedented losses.
Higher interest rates slowed state and local government debt issuance.
New-issue volume dropped 44 percent to $163 billion in 1994. The driving force
behind this sharp decline was the virtual halt in refunding issues, which
plummeted 74 percent. Last year the level of redemptions from maturing debt and
refunding calls reached $191 billion and exceeded the supply of new issues
coming to market. This marked the decline in the amount of municipal securities
outstanding. A repeat of this supply scarcity is expected in 1995 and bodes well
for the relative performance of municipals.
PERFORMANCE
Municipal Income Trust II's net asset value (NAV) declined from $10.81 to
$9.75 per share during the fiscal year ended December 31, 1994. Based on this
NAV change and reinvestment of tax-free dividends totaling $0.64 per share, the
Fund's total return for the year was -2.42 percent. Concurrently, the Fund's
market price on the New York Stock Exchange (Symbol: TFB) declined from $10.875
to $9.125 per share. Based on this market change and reinvestment of dividends,
the Fund's total return for
- ---------------
* The Bond Buyer Revenue Bond Index is an arithmetic average of the yields of 25
selected municipal revenue bonds with 30-year maturities. Credit ratings of
these bonds range from Aa1 to Baa1 by Moody's and AA+ to A- by Standard &
Poor's.
<PAGE> 2
the fiscal year was -9.61 percent. The Fund began the period trading at 0.60
percent premium to NAV and closed at a 6.41 percent discount to NAV. On December
31, 1994, undistributed net investment income totaling $0.084 per share was
available to help sustain the Fund's current dividend.
INVESTMENT STRATEGY
During a year of rapidly rising interest rates, the Fund benefited from its
established mix of older high-coupon bonds. At the end of the fiscal year, the
portfolio held 27 percent of its net assets in refunded issues, which were
secured by U.S. government securities held in escrow to redeem these issues on
their first call dates. The Fund also increased its short-term investment and
cash position to 4 percent of net assets at year-end 1994.
On December 31, 1994, the portfolio's long-term investments were
diversified among 14 specific municipal sectors and 51 credits. The Fund's
exposure to the Orange County investment pool was limited to one holding insured
by MBIA. The three largest sectors were public facilities, hospital and resource
recovery revenue bonds, representing 38 percent of net assets. The average
maturity and call protection of the Fund's long-term holdings were 19 years and
6 years, respectively. Bonds subject to the alternative minimum tax (AMT)
comprised approximately 27 percent of net assets. The credit-quality ratings of
the long-term portfolio are summarized below:
<TABLE>
<CAPTION>
MOODY'S OR STANDARD & POOR'S RATING PERCENT
--------------------------------------------------------------------------- -------
<S> <C>
Aaa or AAA................................................................. 17%
Aa or AA................................................................... 13
A or A..................................................................... 36
Baa or BBB................................................................. 24
Not rated.................................................................. 10
</TABLE>
LOOKING AHEAD
Moving into 1995, the Fund plans to reduce its defensive positions,
including refunded bonds, as the pace of economic growth and inflationary
expectations moderate. New investments will continue to stress credit quality
and essential service sectors. However, even with the move to higher yields that
occurred last year, the Fund cannot obtain the yield of many older investments
that may be called or sold in the next few years.
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is by purchase in the open market. This method helps to support
the market value of the Fund's shares. In addition, we would like to remind you
that the Trustees have approved a procedure whereby the Fund, when appropriate,
may purchase shares in the open market or in privately negotiated transactions
at a price not above market value or net asset value, whichever is lower at the
time of purchase. During the fiscal year ended December 31, 1994, the Fund
purchased 710,800 shares of common stock at a weighted average discount of 6.88
percent.
We appreciate your ongoing support of Municipal Income Trust II and look
forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
----------------------------
Charles A. Fiumefreddo
Chairman of the Board
<PAGE> 3
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (in Coupon Maturity
thousands) Rate Date Value
- ---------- ------- --------- -------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (95.4%)
GENERAL OBLIGATION (2.4%)
$ 2,250 California, Various Purpose dtd 10/01/92 (MBIA
Insured)............................................. 6.00 % 10/01/21 $ 2,047,185
3,000 Moulton Niguel Water District, California, Refg 1993
(MBIA Insured)....................................... 5.00 09/01/19 2,305,350
2,450 Rosemont, Illinois, 1993 Ser B......................... 5.50 12/01/07 2,225,923
- ---------- -------------
7,700 6,578,458
- ---------- -------------
EDUCATIONAL FACILITIES REVENUE (3.4%)
4,000 California Public Works Board, University of California
1993 Ser A........................................... 5.50 06/01/21 3,208,920
3,000 Massachusetts Health & Educational Facilities
Authority, Boston College Ser K...................... 5.25 06/01/18 2,464,860
New York State Dormitory Authority, State University
2,000 1990 Ser A........................................... 7.50 05/15/13 2,108,640
2,000 1993 Ser A........................................... 5.25 05/15/15 1,615,480
- ---------- -------------
11,000 9,397,900
- ---------- -------------
ELECTRIC REVENUE (4.7%)
12,000 San Antonio, Texas, Electric & Gas Refg Ser 1994....... 4.56 02/01/06 10,144,080
2,575 Washington Public Power Supply System, Nuclear Proj #2
Refg Ser 1990 B...................................... 7.00 07/01/12 2,582,390
- ---------- -------------
14,575 12,726,470
- ---------- -------------
HOSPITAL REVENUE (11.6%)
1,360 Illinois Health Facilities Authority, Glen Oaks Medical
Center Inc Refg 1990 Ser D........................... 9.50 11/15/15 1,528,871
5,000 Kokomo Hospital Authority, Indiana, St Joseph's
Hospital & Health Center Refg 1988 Ser A
(Prerefunded)........................................ 8.75 02/15/13 5,601,750
4,500 Missoula County, Montana, Community Medical Center Inc
Refg Ser 1988 B...................................... 9.00 06/01/18 4,776,615
3,500 New York State Medical Care Facilities Finance Agency,
Montefiore Medical Center - FHA Insured Mtge 1989
Ser A................................................ 7.25 02/15/24 3,591,455
5,750 North Carolina Medical Care Commission, Scotland
Memorial Hospital Ser 1988 (Prerefunded)............. 8.625 10/01/11 6,436,090
1,295 Ward County, North Dakota, Trinity Obligated Group
Crossover Refg Ser 1991 B............................ 7.50 07/01/21 1,307,924
6,500 Muskingum County, Ohio, Franciscan Health Advisory
Services Ser 1987.................................... 7.50 03/01/12 6,461,780
2,000 Montgomery County Higher Education & Health Authority,
Pennsylvania, Frankford Hospital Ser 1986............ 7.875 01/01/19 1,960,960
- ---------- -------------
29,905 31,665,445
- ---------- -------------
</TABLE>
<PAGE> 4
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (in Coupon Maturity
thousands) Rate Date Value
- ---------- ------- --------- -------------
<C> <S> <C> <C> <C>
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (5.3%)
$ 5,500 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA
Insured)............................................. 7.00 % 06/01/31 $ 5,572,435
2,000 Dayton, Ohio, Emery Air Freight Corp Ser 1988 A........ 12.50 10/01/09 2,200,000
5,000 Tulsa Municipal Airport Trust, Oklahoma,
American Airlines Inc Ser 1988 (AMT)................. 7.375 12/01/20 4,660,000
Lexington County, South Carolina, Ellett Brothers Inc
1,000 Refg Ser 1988........................................ 10.625 09/01/02 1,060,670
1,000 Refg Ser 1988........................................ 10.625 09/01/08 1,061,490
- ---------- -------------
14,500 14,554,595
- ---------- -------------
MORTGAGE REVENUE - MULTI-FAMILY (0.7%)
2,715 Eden Prairie, Minnesota, Fountain Place Apts
- ---------- Phase II Ser 1989 A.................................. 9.75 07/15/19 1,791,900
-------------
MORTGAGE REVENUE - SINGLE FAMILY (8.0%)
5,000 Alaska Housing Finance Corporation Inc, 1993 1st Ser... 5.90 12/01/33 4,165,450
28,940 Pinellas County Housing Finance Authority, Florida,
Ser 1983............................................. 0.00 01/01/15 3,612,870
11,590 Illinois Housing Development Authority, Ser 1984 B..... 0.00 02/01/16 1,284,636
1,300 Olathe, Kansas, GNMA Collateralized Ser 1989 A (AMT)... 8.00 11/01/20 1,350,011
5,500 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)... 6.40 11/15/23 4,900,830
2,305 New Hampshire Housing Finance Authority, Residential
GNMA-Backed Ser A (AMT).............................. 7.70 07/01/29 2,351,053
39,285 Southeast Texas Housing Finance Corporation,
GNMA-Backed Ser 1988 A............................... 0.00 04/01/21 4,278,922
- ---------- -------------
93,920 21,943,772
- ---------- -------------
NURSING & HEALTH RELATED FACILITIES REVENUE (3.8%)
3,000 Iowa Finance Authority, Mercy Health Initiatives Ser
1989................................................. 9.95 07/01/19 3,147,720
3,000 Chester County Industrial Development Authority,
Pennsylvania, RHA/PA Nursing Homes Inc............... 10.125 05/01/19 3,104,160
4,630 Kirbyville Health Facilities Development Corporation,
Texas, Heartway III Corp Ser 1988 A.................. 11.25 03/20/21 4,028,100
- ---------- -------------
10,630 10,279,980
- ---------- -------------
</TABLE>
<PAGE> 5
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (in Coupon Maturity
thousands) Rate Date Value
- ---------- ------- --------- -------------
<C> <S> <C> <C> <C>
PUBLIC FACILITIES REVENUE (17.4%)
$ 20,100 San Francisco Redevelopment Agency, California,
George R Moscone Convention Ctr Ser 1988
(Crossover Refunded)................................. 0.00**% 07/01/14 $ 12,361,500
3,580 Hall County, Georgia, Ser 1988 (Prerefunded)........... 8.625 01/01/08 3,969,432
2,250 Collinsville, Illinois, Metropolitan Exposition
Auditorium & Office Building Hotel Motel Food &
Beverage Tax
(Prerefunded)........................................ 8.625 01/01/17 2,480,918
Indianapolis, Local Public Improvement Bond Bank,
Indiana,
32,235 Ser 1988 D (AMT) (Prerefunded)....................... 0.00 02/01/18 5,215,301
10,000 Ser 1988 D (AMT) (Prerefunded)....................... 8.50 02/01/18 11,011,600
5,000 New York State Dormitory Authority, Court Facs Ser A... 5.625 05/15/13 4,258,100
460 New York State Urban Development Corporation,
Correctional 1991 Ser I.............................. 7.50 04/01/02 496,377
7,000 Virginia Port Authority, Commonwealth Port Fund
Ser 1988 (AMT)....................................... 8.20 07/01/08 7,691,320
- ---------- -------------
80,625 47,484,548
- ---------- -------------
RESOURCE RECOVERY REVENUE (9.3%)
1,500 Regional Waste Systems Inc, Maine, 1986 Ser D-F (AMT).. 8.15 07/01/11 1,579,800
7,095 Greater Detroit Resource Recovery Authority, Michigan,
Ser H................................................ 9.25 12/13/08 7,443,506
16,000 Lancaster County Solid Waste Management Authority,
Pennsylvania, 1988 Ser A (AMT)....................... 8.50 12/15/10 16,297,600
- ---------- -------------
24,595 25,320,906
- ---------- -------------
TAX ALLOCATION (3.2%)
5,000 El Cajon Redevelopment Agency, California, Refg Ser
1992 (AMBAC Insured)................................. 6.60 10/01/22 4,930,400
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A.. 5.60 10/01/33 3,922,900
- ---------- -------------
10,000 8,853,300
- ---------- -------------
TRANSPORTATION FACILITIES REVENUE (7.0%)
2,000 Port Authority of New York & New Jersey, Cons Ser 61
(AMT)***............................................. 8.125 08/15/23 2,080,960
Allegheny County, Pennsylvania, Greater Pittsburgh
Intl Airport
5,500 Ser 1988 C (AMT) (MBIA Insured)...................... 8.25 01/01/16 5,910,025
10,500 Ser 1988 D (AMT) (FGIC Insured)...................... 7.75 01/01/19 10,965,570
- ---------- -------------
18,000 18,956,555
- ---------- -------------
WATER & SEWER REVENUE (3.8%)
4,750 Fulton County, Georgia, Water & Sewer (Prerefunded).... 8.25 01/01/14 5,188,853
2,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA
Insured)............................................. 6.375 01/01/24 1,878,580
4,000 Massachusetts Water Resources Authority, 1993 Ser C.... 5.25 12/01/20 3,204,000
- ---------- -------------
10,750 10,271,433
- ---------- -------------
</TABLE>
<PAGE> 6
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (in Coupon Maturity
thousands) Rate Date Value
- ---------- ------- --------- -------------
<C> <S> <C> <C> <C>
OTHER REVENUE (14.8%)
$ 3,500 California Special Districts Finance Authority, COPs
1988 Ser A........................................... 8.50 % 07/01/18 $ 3,684,310
19,580 Boulder County, Colorado, National Center for
Atmospheric Research Ser 1988 (Prerefunded).......... 8.25 12/01/13 21,437,163
Tampa, Florida, Cap Impr
4,360 Ser 1988 A........................................... 8.25 10/01/18 4,615,496
10,000 Ser 1988 B........................................... 8.375 10/01/18 10,542,300
- ---------- -------------
37,440 40,279,269
- ---------- -------------
366,355 TOTAL MUNICIPAL BONDS (IDENTIFIED COST $255,598,959)... 260,104,531
- ---------- -------------
SHORT-TERM MUNICIPAL OBLIGATION (2.4%)
6,500 Harris County Health Facilities Development
- ---------- Corporation, Texas, Methodist Hospital Ser 1994
(Tender 01/03/95) (Identified Cost $6,500,000)....... 5.85* 12/01/25 6,500,000
-------------
$372,855 TOTAL INVESTMENTS (IDENTIFIED COST $262,098,959) (a).............. 97.8% 266,604,531
- ----------
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.................... 2.2 6,042,323
----- -------------
NET ASSETS........................................................ 100.0% $ 272,646,854
===== =============
</TABLE>
- ---------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Variable or floating rate security. Coupon rate shown reflects current
rate.
** Currently zero coupon bond; will become interest bearing at a future date.
*** Jointly issued within New York and New Jersey.
(a) The aggregate cost for federal income tax purposes is $262,098,959, the
aggregate gross unrealized appreciation is $14,164,751 and the aggregate
gross unrealized depreciation is $9,659,179, resulting in net unrealized
appreciation of $4,505,572.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Alaska................ 1.5% Iowa.................. 1.2% Montana............... 1.8% Oklahoma.............. 1.7%
California............ 11.9 Kansas................ 2.5 New Hampshire......... 0.9 Pennsylvania.......... 14.0
Colorado.............. 7.8 Maine................. 2.4 New York.............. 4.4 South Carolina........ 0.8
Florida............... 6.8 Massachusetts......... 2.1 North Carolina........ 2.4 Texas................. 9.2
Georgia............... 3.4 Michigan.............. 2.7 North Dakota.......... 0.5 Virginia.............. 2.8
Illinois.............. 3.4 Minnesota............. 0.7 Ohio.................. 3.2 Washington............ 0.9
Indiana............... 8.0 Joint Issuers......... 0.8
----
Total................. 97.8%
====
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 7
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
- ----------------------------------------------------------
ASSETS:
Investments in securities, at value
(identified cost $262,098,959)........... $ 266,604,531
Cash....................................... 486,803
Receivable for:
Interest................................. 4,895,484
Investments sold......................... 951,148
Prepaid expenses and other assets.......... 7,045
-------------
TOTAL ASSETS....................... 272,945,011
-------------
LIABILITIES:
Payable for:
Investment advisory fee.................. 105,301
Administration fee....................... 66,080
Accrued expenses and other payables........ 126,776
-------------
TOTAL LIABILITIES.................. 298,157
-------------
NET ASSETS:
Paid-in-capital............................ 265,882,506
Net unrealized appreciation................ 4,505,572
Accumulated undistributed net investment
income................................... 2,345,116
Distributions in excess of net realized
loss..................................... (86,340)
-------------
NET ASSETS......................... $ 272,646,854
=============
NET ASSET VALUE PER SHARE,
27,975,116 shares outstanding (unlimited
shares authorized of $.01 par value)..... $9.75
=====
STATEMENT OF OPERATIONS
For the year ended December 31, 1994
- ----------------------------------------------------------
NET INVESTMENT INCOME:
INTEREST INCOME........................... $ 20,973,839
-------------
EXPENSES
Investment advisory fee.................. 1,119,850
Administration fee....................... 704,785
Transfer agent fees and expenses......... 135,008
Professional fees........................ 96,558
Shareholder reports and notices.......... 52,190
Registration fees........................ 32,498
Trustees' fees and expenses.............. 29,837
Custodian fees........................... 4,142
Other.................................... 15,179
-------------
TOTAL EXPENSES......................... 2,190,047
-------------
NET INVESTMENT INCOME................ 18,783,792
-------------
NET REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain........................ 1,345,242
Net change in unrealized appreciation.... (28,993,284)
-------------
NET LOSS............................... (27,648,042)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS.......... $ (8,864,250)
=============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
year ended year ended
December 31, 1994 December 31, 1993
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net Investment income................................................... $ 18,783,792 $ 19,860,821
Net realized gain....................................................... 1,345,242 2,645,205
Net change in unrealized appreciation................................... (28,993,284) 7,409,189
--------------- ---------------
Net increase (decrease)............................................. (8,864,250) 29,915,215
--------------- ---------------
Dividends and distributions to shareholders from:
Net investment income................................................... (18,024,634) (19,793,282)
Net realized gain....................................................... (3,962,043) (114,744)
--------------- ---------------
Total............................................................... (21,986,677) (19,908,026)
Net decrease from transactions in shares of beneficial interest........... (6,682,683) --
--------------- ---------------
Total increase (decrease)........................................... (37,533,610) 10,007,189
NET ASSETS:
Beginning of period....................................................... 310,180,464 300,173,275
--------------- ---------------
END OF PERIOD (including undistributed net investment income of $2,345,116
and $1,585,958, respectively)............................................ $ 272,646,854 $ 310,180,464
=============== ===============
</TABLE>
See Notes to Financial Statements
<PAGE> 8
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- Municipal Income Trust II (the
"Fund") is registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Fund was organized as
a Massachusetts business trust on March 15, 1988 and commenced operations on
June 1, 1988.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- Portfolio securities are valued for the Fund
by an outside independent pricing service approved by the Trustees. The
pricing service has informed the Fund that in valuing the Fund's portfolio
securities, it uses both a computerized matrix of tax-exempt securities and
evaluations by its staff, in each case based on information concerning
market transactions and quotations from dealers which reflect the bid side
of the market each day. The Fund's portfolio securities are thus valued by
reference to a combination of transactions and quotations for the same or
other securities believed to be comparable in quality, coupon, maturity,
type of issue, call provisions, trading characteristics and other features
deemed to be relevant. Short-term debt securities having a maturity date of
more than sixty days at time of purchase are valued on a mark-to-market
basis until sixty days prior to maturity and thereafter at amortized cost
based on their value on the 61st day. Short-term debt securities having a
maturity date of sixty days or less at the time of purchase are valued at
amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined on the identified cost
method. The Fund amortizes premiums and discounts on securities purchased
over the life of the respective securities. Interest income is accrued
daily.
C. Federal Income Tax Status -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. Dividends and Distributions to Shareholders -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in capital.
2. INVESTMENT ADVISORY AGREEMENT -- Pursuant to an Investment Advisory
Agreement with Dean Witter InterCapital Inc. (the "Investment Adviser"), the
Fund pays its Investment Adviser an advisory fee, calculated weekly and payable
monthly, by applying the following annual rates to the Fund's average weekly net
assets: 0.40% to the portion of the Fund's average weekly net assets not
exceeding $250 million and 0.30% to the portion of the Fund's average weekly net
assets exceeding $250 million.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Adviser pays the salaries of all personnel,
including officers of the Fund, who are employees of the Investment Adviser.
<PAGE> 9
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
3. ADMINISTRATION AGREEMENT -- Pursuant to an Administration Agreement with
Dean Witter Services Company Inc. (the "Administrator"), the Fund pays an
administration fee, calculated weekly and payable monthly, by applying the
following annual rates to the Fund's average weekly net assets: 0.25% to the
portion of the Fund's average weekly net assets not exceeding $250 million;
0.20% to the portion of the Fund's average weekly net assets exceeding $250
million but not exceeding $500 million; 0.167% to the portion to the Fund's
average weekly net assets exceeding $500 million but not exceeding $750 million;
and 0.133% to the portion of the Fund's average weekly net assets exceeding $750
million. On January 1, 1994, the Administration Agreement between the Former
Administrator and the Fund had been terminated and a new Administration
Agreement had been entered into between the Administrator, a wholly-owned
subsidiary of the former administrator, and the Fund. The nature and scope of
the services being provided to the Fund or any fees being paid by the Fund under
the new Agreement are identical to those of the previous Agreement.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Fund's books and records and furnishes, at its own expense,
office space, facilities, equipment, clerical, bookkeeping and certain legal
services and pays the salaries of all personnel, including officers of the Fund
who are employees of the Administrator. The Administrator also bears the cost of
telephone services, heat, light, power and other utilities provided to the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES -- The cost of
purchases and proceeds from sales of portfolio securities, excluding short-term
investments, for the year ended December 31, 1994 aggregated $26,433,000 and
$41,333,868, respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At December 31, 1994, the Fund had
transfer agent fees and expenses payable of approximately $20,000.
On April 1, 1991, the Fund established an unfunded noncontributory defined
benefit pension plan covering all independent Trustees of the Fund who will have
served as independent Trustees for at least five years at the time of
retirement. Benefits under this plan are based on years of service and
compensation during the last five years of service. Aggregate pension costs for
the year ended December 31, 1994, included in Trustees' fees and expenses in the
Statement of Operations, amounted to $8,163. At December 31, 1994, the Fund had
an accrued pension liability of $46,890 which is included in accrued expenses in
the Statement of Assets and Liabilities.
5. SHARES OF BENEFICIAL INTEREST -- Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
Capital Paid
Par Value of in Excess of
Shares Shares Par Value
---------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1992 and December 31, 1993.......................... 28,685,916 $286,859 $272,278,330
Treasury shares purchased and retired (weighted average discount
6.88%)*................................................................. (710,800) (7,108) (6,675,575)
---------- ---------- ------------
Balance December 31, 1994................................................. 27,975,116 $279,751 $265,602,755
========== ========== ============
</TABLE>
- ---------------
* The Trustees have voted to retire the shares purchased.
6. DIVIDENDS -- The Fund declared the following dividends from net investment
income--
<TABLE>
<CAPTION>
Amount
Declaration per Record Payable
Date Share Date Date
- ----------------- -------- ------------------ ------------------
<S> <C> <C> <C>
January 3, 1995 $0.0525 January 13, 1995 January 27, 1995
January 31, 1995 $0.0525 February 10, 1995 February 24, 1995
</TABLE>
7. FEDERAL INCOME TAX STATUS -- Capital losses incurred after October 31
("post-October losses") within the taxable year are deemed to arise on the first
business day of the Fund's next taxable year. The Fund incurred and will elect
to defer net capital losses of approximately $86,000 during fiscal 1994. As of
December 31, 1994, the Fund had temporary book/tax differences primarily
attributable to post-October losses.
<PAGE> 10
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
8. SELECTED QUARTERLY FINANCIAL DATA -- (unaudited)
<TABLE>
<CAPTION>
Quarters Ended*
--------------------------------------------------------------------------
12/31/94 9/30/94 6/30/94 3/31/94
----------------- --------------- ---------------- -----------------
Per Per Per Per
Total Share Total Share Total Share Total Share
-------- ------ ------ ------ ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income......................... $ 5,185 $ 0.18 $5,239 $ 0.19 $ 5,230 $ 0.18 $ 5,320 $ 0.19
Net investment income........................... 4,620 0.16 4,710 0.17 4,686 0.16 4,768 0.17
Net realized and unrealized gain (loss)......... (10,186) (0.33) 1,454 0.05 (7,155) (0.25) (11,761) (0.41)
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended*
--------------------------------------------------------------------------
12/31/93 9/30/93 6/30/93 3/31/93
----------------- --------------- ---------------- -----------------
Per Per Per Per
Total Share Total Share Total Share Total Share
-------- ------ ------ ------ ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income......................... $ 5,480 $ 0.19 $5,601 $ 0.20 $ 5,567 $ 0.19 $ 5,512 $ 0.19
Net investment income........................... 4,946 0.17 5,025 0.18 4,992 0.17 4,898 0.17
Net realized and unrealized gain (loss)......... (410) (0.01) 2,644 0.09 3,176 0.11 4,644 0.16
</TABLE>
- ---------------
* Totals expressed in thousands of dollars.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------------------
1994* 1993* 1992* 1991* 1990*
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 10.81 $ 10.46 $ 10.34 $ 9.79 $ 9.90
--------- --------- --------- --------- ---------
Net investment income.......................................... 0.66 0.69 0.70 0.71 0.77
Net realized and unrealized gain (loss)........................ (0.94) 0.35 0.12 0.54 (0.13)
--------- --------- --------- --------- ---------
Total from investment operations............................... (0.28) 1.04 0.82 1.25 0.64
--------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income........................................ (0.64) (0.69) (0.69) (0.67) (0.73)
Net realized gain............................................ (0.14) --** (0.01) (0.03) (0.02)
--------- --------- --------- --------- ---------
Total dividends and distributions.............................. (0.78) (0.69) (0.70) (0.70) (0.75)
--------- --------- --------- --------- ---------
Net asset value, end of period................................. $ 9.75 $ 10.81 $ 10.46 $ 10.34 $ 9.79
========= ========= ========= ========= =========
Market value, end of period.................................... $ 9.125 $ 10.875 $ 10.50 $ 10.00 $ 9.25
========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN+....................................... (9.61)% 10.32% 12.23% 16.12% (0.60)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....................... $ 272,647 $ 310,180 $ 300,173 $ 296,554 $ 280,344
Ratio to average net assets:
Expenses..................................................... 0.76% 0.75% 0.86% 0.86% 0.88%
Net investment income........................................ 6.48% 6.46% 6.70% 7.05% 7.24%
Portfolio turnover rate........................................ 10% 12% 7% 15% 24%
</TABLE>
- ---------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
** Includes a distribution of $0.004 per share.
+ Total investment return is based upon the current market value on the last
day of each period reported. Dividends and distributions are assumed to be
reinvested at the prices obtained under the Fund's dividend reinvestment
plan. Total investment return does not reflect sales charges or brokerage
commissions.
See Notes to Financial Statements
<PAGE> 11
MUNICIPAL INCOME TRUST II
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of Municipal Income Trust II
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Municipal Income Trust II (the
"Fund") at December 31, 1994, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities owned at
December 31, 1994 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 13, 1995
1994 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1994, the Fund paid to the shareholders
$0.635 per share from net investment income. All of the Fund's dividends
from net investment income were exempt interest dividends, excludable from
gross income for Federal income tax purposes. For the year ended December
31, 1994, the Fund paid to shareholders $0.140 per share from long-term
capital gains.
<PAGE> 12
TRUSTEES
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Phillip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
MUNICIPAL
INCOME
TRUST II
Annual Report
December 31, 1994
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 262,098,959
<INVESTMENTS-AT-VALUE> 266,604,531
<RECEIVABLES> 5,846,632
<ASSETS-OTHER> 493,848
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 272,945,011
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 298,157
<TOTAL-LIABILITIES> 298,157
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 265,882,506
<SHARES-COMMON-STOCK> 27,975,116
<SHARES-COMMON-PRIOR> 28,685,916
<ACCUMULATED-NII-CURRENT> 2,345,116
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86,340)
<ACCUM-APPREC-OR-DEPREC> 4,505,572
<NET-ASSETS> 272,646,854
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 20,973,839
<OTHER-INCOME> 0
<EXPENSES-NET> 2,190,047
<NET-INVESTMENT-INCOME> 18,783,792
<REALIZED-GAINS-CURRENT> 1,345,242
<APPREC-INCREASE-CURRENT> (28,993,284)
<NET-CHANGE-FROM-OPS> (8,864,250)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18,024,634
<DISTRIBUTIONS-OF-GAINS> 3,962,043
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 710,800
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (37,533,610)
<ACCUMULATED-NII-PRIOR> 1,585,958
<ACCUMULATED-GAINS-PRIOR> 2,645,205
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,119,850
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,190,047
<AVERAGE-NET-ASSETS> 288,927,673
<PER-SHARE-NAV-BEGIN> 10.81
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> (0.94)
<PER-SHARE-DIVIDEND> 0.64
<PER-SHARE-DISTRIBUTIONS> 0.14
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.75
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
