<PAGE> 1
MUNICIPAL INCOME TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1995
DEAR SHAREHOLDER:
Bonds rallied significantly during 1995. Progressive tightening of monetary
policy by the Federal Reserve Board over the 12 months through February 1995
slowed economic growth and caused bonds to advance throughout the year. The
trend toward lower long-term interest rates was aided by the central bank's
easing of short-term interest rates in July and December.
MUNICIPAL MARKET CONDITIONS
Long-term municipal bond yields declined from 6.97 percent in December 1994 to
5.71 percent at the end of December 1995, as tracked by The Bond Buyer Revenue
Bond Index*. This 126 basis point drop in yield corresponded to a 10 percent
price increase for callable municipal bonds with 30-year maturities. Yields on
1-year municipal notes experienced a similar move, declining from 4.95 to 3.60
percent. At the end of the year, the yield pickup for extending maturity from
1-year (3.60%) to 30-years (5.71%) was 211 basis points.
Tax-exempt bond prices began the year by outperforming the prices of U.S.
Treasury bonds, but gradually deteriorated. The ratio of the Revenue Bond Index
yield to the 30-year U.S. Treasury bond yield moved from 89 percent in December
1994 to 84 percent by the end of February 1995. A declining ratio means that
municipal bond prices have been stronger than U.S. Treasury prices. In the
spring, the municipal market began to discount the risk of comprehensive changes
in the tax code created by flat-tax rhetoric from Washington. This caused the
yield ratio to move above 90 percent during the summer and end the year at 95
percent. Over the past 10 years, long municipal yields have averaged 89 percent
of U.S. Treasury yields.
- ---------------
*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 Investors Service, Inc., and AA+
to A- by Standard & Poor's Corp.
<PAGE> 2
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1995, continued
Despite a resurgence in new issue volume in the second half of 1995, the
municipal market continued to experience consolidation. Municipal underwriting
was down 25 percent through June 1995, but ended the year only 5 percent below
1994's level. This followed a 44 percent drop in volume for all of 1994. Lower
underwriting volume and diminished profitability caused several major dealers to
withdraw from the municipal business.
TAX REFORM
Flat-tax advocates have generated increased publicity for their proposals and
have influenced the municipal market since early 1995. Most tax-reform
discussions have been based on concepts containing broad assumptions and lacking
specific details. The various plans seek to simplify the tax process, but raise
questions about the fairness of changing from a progressive tax structure.
Flat-tax proposals call for the elimination of deductions of mortgage interest,
charitable contributions, property taxes, and state and local income taxes. As
politicians have focused more on tax reform as an issue in the 1996 elections,
media coverage has expanded from the financial page to the front page. Municipal
bonds have periodically come under political pressure in the past. For example,
prior to passage of major tax reform legislation in 1986, municipal yields
briefly exceeded taxable yields.
Flat-tax proposals would also affect municipal credits. If mortgage interest and
property tax deductions were eliminated, municipalities would experience a
decline in their property tax base. The loss of state and local income tax
deductions would increase the relative economic disadvantage that high-tax
states already face. The flat tax represents an attempt to shift tax
accountability from the federal level to local governments. Taxpayer recognition
of the extent of the changes under consideration may impede the passage of
comprehensive tax reform.
PERFORMANCE
The net asset value of Municipal Income Trust II rose from $9.75 to $10.35 per
share during the fiscal year ended December 31, 1995. Based on this NAV change,
plus reinvestment of tax-free dividends totaling $0.63 per share and capital
gains distributions totaling $0.12 per share, the Fund's total return was 14.63
percent. Over the same period, the Fund's market price on the New York Stock
Exchange appreciated from $9.125 to $10.00 per share. Based on this market price
change and reinvestment of tax-free dividends and distributions, the Fund's
total return was 18.34 percent. The Fund began the
<PAGE> 3
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1995, continued
period trading at a 6 percent discount to NAV and closed at a 3 percent
discount. Undistributed net investment income totaled $0.105 per share on
December 31, 1995, versus $0.084 per share a year ago.
PORTFOLIO STRUCTURE
On December 31, 1995, the Fund's $287
million in net assets was diversified
among 14 long-term municipal sectors
and 58 credits. The three largest
sectors -- refunded, resource recovery
and industrial development/pollution
control revenue bonds -- represented
approximately 35 percent of the
portfolio. Bonds callable in the next
four years were reduced from 54 to 38
percent of the portfolio. Call
protection was maintained at 6 years on
average. The average maturity of the
long-term portfolio moved from 19 to 20
years. Credit quality was upgraded
during 1995. Long-term holdings rated
AA and AAA increased from 30 to 45
percent. The credit quality of the
portfolio is illustrated at the right.
MOODY'S OR STANDARD & POOR'S CREDIT
RATING
AS OF DECEMBER 31, 1995
(% OF TOTAL LONG-TERM INVESTMENTS)
<TABLE>
<S> <C>
AAA OR AAA 33
NOT RATED 8
BAA OR BBB 15
A OR A 32
AA OR AA 12
</TABLE>
LOOKING AHEAD
The slower pace of economic growth in 1995 and the Federal Reserve Board's
latest interest rate moves have improved bond-market expectations. The
decreasing supply of new issues, combined with significant maturities and calls
for redemptions, should continue to be positive for the municipal market.
However, tax-reduction proposals are likely to continue to receive publicity and
cloud the outlook for tax-exempt bonds. With long-term municipal securities
yielding more than 90 percent of the yield on U.S. Treasuries, the market has
already begun the process of discounting the risk that a flat tax might
eventually become law.
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is through purchases 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,
<PAGE> 4
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1995, continued
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, 1995, the Fund purchased and retired 217,150 shares of common stock
at a weighted average market discount of 5.78 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> 5
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (103.6%)
General Obligation (8.4%)
$ 2,250 California, Various Purpose dtd 10/01/92 (MBIA)......................... 6.00 % 10/01/21 $ 2,346,165
3,000 Moulton-Niguel Water District, California, Refg 1993 (MBIA)............. 5.00 09/01/19 2,894,880
5,250 Chicago, Illinois, Refg Ser 1995 A-2 (AMBAC) (WI)....................... 6.25 01/01/14 5,739,143
2,450 Rosemont, Illinois, 1993 Ser B.......................................... 5.50 12/01/07 2,572,182
3,000 Massachusetts, 1995 Ser B (AMBAC)....................................... 5.50 07/01/15 3,058,950
3,000 New York City, New York, 1995 Ser D (MBIA).............................. 6.20 02/01/07 3,335,880
4,000 New York State, Refg Ser 1995 B......................................... 5.70 08/15/10 4,220,800
- -------- ----------
22,950 24,168,000
- -------- ------------
Educational Facilities Revenue (6.1%)
4,000 California Public Works Board, University of California 1993 Ser A...... 5.50 06/01/21 3,914,080
3,000 Massachusetts Health & Educational Facilities Authority, Boston College
Ser K.................................................................. 5.25 06/01/18 2,953,260
2,000 New Jersey Economic Development Authority, Educational Testing Service
Ser 1995 B (MBIA)...................................................... 6.25 05/15/25 2,155,320
New York State Dormitory Authority, State University
2,000 1990 Ser A............................................................. 7.50 05/15/13 2,464,320
2,000 1993 Ser A............................................................. 5.25 05/15/15 1,929,180
4,000 Delaware County Authority, Pennsylvania, Villanova University Ser 1995
(AMBAC)................................................................ 5.70 08/01/15 4,102,160
- -------- ----------
17,000 17,518,320
- -------- ------------
Electric Revenue (8.6%)
10,000 South Carolina Public Service Authority, Refg Ser 1996 A (MBIA) (WI).... 5.75 01/01/13 10,281,100
12,000 San Antonio, Texas, Electric & Gas Refg Ser 1994........................ 4.70 02/01/06 11,735,880
2,575 Washington Public Power Supply System, Nuclear Proj #2 Refg Ser 1990
B...................................................................... 7.00 07/01/12 2,823,874
- -------- ----------
24,575 24,840,854
- -------- ------------
Hospital Revenue (6.5%)
1,320 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc Refg
1990 Ser D............................................................. 9.50 11/15/15 1,567,078
4,500 Missoula County, Montana, Community Medical Center Inc Refg Ser 1988
B...................................................................... 9.00 06/01/18 4,924,755
3,500 New York State Medical Care Facilities Finance Agency, Montefiore
Medical Center - FHA Insured Mtge 1989 Ser A........................... 7.25 02/15/24 3,806,390
1,295 Ward County, North Dakota, Trinity Obligated Group Crossover Refg Ser
1991 B................................................................. 7.50 07/01/21 1,412,560
6,500 Muskingum County, Ohio, Franciscan Health Advisory Services Ser 1987.... 7.50 03/01/12 6,902,675
- -------- ----------
17,115 18,613,458
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1995, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
<C> <S> <C> <C> <C>
Industrial Development/Pollution Control Revenue (8.8%)
$ 5,500 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA)................ 7.00 % 06/01/31 $ 6,229,850
5,000 New York State Energy Research & Development Authority, New York State
Electric & Gas Corp 1987 Ser A (AMT) (MBIA)............................ 6.15 07/01/26 5,270,000
2,000 Dayton, Ohio, Emery Air Freight Corp Ser 1988 A......................... 12.50 10/01/09 2,318,840
5,000 Tulsa Municipal Airport Trust, Oklahoma, American Airlines Inc Ser 1988
(AMT).................................................................. 7.375 12/01/20 5,370,350
Lexington County, South Carolina, Ellett Brothers Inc
1,000 Refg Ser 1988.......................................................... 10.625 09/01/02 1,043,550
1,000 Refg Ser 1988.......................................................... 10.625 09/01/08 1,043,640
4,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995..................... 6.00 11/01/14 3,989,320
- -------- ----------
23,500 25,265,550
- -------- ------------
Mortgage Revenue - Multi-Family (0.7%)
2,715 Eden Prairie, Minnesota, Fountain Place Apts Phase II Ser 1989 A........ 9.75 07/15/19 2,090,550
- -------- ----------
Mortgage Revenue - Single Family (8.7%)
5,000 Alaska Housing Finance Corporation Inc, 1993 1st Ser.................... 5.90 12/01/33 5,025,800
2,000 California Housing Finance Agency, 1995 Ser B (AMT) (AMBAC)............. 6.25 08/01/14 2,036,440
19,480 Pinnellas County Housing Finance Authority, Florida, Ser 1983........... 0.00 01/01/15 2,785,445
11,590 Illinois Housing Development Authority, Ser 1984 B...................... 0.00 02/01/16 1,509,018
1,135 Olathe, Kansas, GNMA Collateralized Ser 1989 A (AMT).................... 8.00 11/01/20 1,206,153
5,500 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT).................... 6.40 11/15/23 5,590,750
2,195 New Hampshire Housing Finance Authority, Residential GNMA-Backed Ser
1988 A (AMT)........................................................... 7.70 07/01/29 2,306,374
34,710 Southeast Texas Housing Finance Corporation, GNMA-Backed Ser 1988 A..... 0.00 04/01/21 4,437,326
- -------- ----------
81,610 24,897,306
- -------- ------------
Nursing & Health Related Facilities Revenue (3.4%)
3,000 Iowa Finance Authority, Mercy Health Initiatives Ser 1989............... 9.95 07/01/19 3,230,760
2,975 Chester County Industrial Development Authority, Pennsylvania, RHA/PA
Nursing Homes Inc Ser 1989............................................. 10.125 05/01/19 3,281,217
4,580 Kirbyville Health Facilities Development Corporation, Texas, Heartway
III Corp Ser 1988 A.................................................... 11.25 03/20/21 3,114,400
- -------- ----------
10,555 9,626,377
- -------- ------------
Public Facilities Revenue (4.4%)
5,000 New York State Dormitory Authority, Court Facs Ser A.................... 5.625 05/15/13 4,947,750
7,000 Virginia Port Authority, Commonwealth Port Ser 1988 (AMT)............... 8.20 07/01/08 7,697,340
- -------- ----------
12,000 12,645,090
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1995, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Resource Recovery Revenue (11.7%)
$ 1,500 Regional Waste Systems Inc, Maine, 1986 Ser D-F (AMT)................... 8.15 % 07/01/11 $ 1,654,905
7,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT)....................................................... 6.30 07/01/16 7,289,310
7,095 Greater Detroit Resource Recovery Authority, Michigan, Ser H............ 9.25 12/13/08 7,327,077
16,000 Lancaster County Solid Waste Management Authority, Pennsylvania,
1988 Ser A (AMT)....................................................... 8.50 12/15/10 17,312,480
- -------- ----------
31,595 33,583,772
- -------- ------------
Tax Allocation (3.5%)
5,000 El Cajon Redevelopment Agency, California, Refg Ser 1992 (AMBAC)........ 6.60 10/01/22 5,447,000
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A................... 5.60 10/01/33 4,590,900
- -------- ----------
10,000 10,037,900
- -------- ------------
Transportation Facilities Revenue (7.8%)
Allegheny County, Pennsylvania, Greater Pittsburgh Int'l Airport
5,500 Ser 1988 C (AMT) (MBIA)................................................ 8.25 01/01/16 5,995,275
10,500 Ser 1988 D (AMT) (FGIC)................................................ 7.75 01/01/19 11,153,625
5,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)............... 6.125 11/15/25 5,265,050
- -------- ----------
21,000 22,413,950
- -------- ------------
Water & Sewer Revenue (6.8%)
4,000 Dade County, Florida, Ser 1995 (FGIC)................................... 5.50 10/01/18 4,041,040
2,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)........................... 6.375 01/01/24 2,158,480
Massachusetts Water Resources Authority,
4,000 1993 Ser C............................................................. 5.25 12/01/20 3,870,280
5,000 1995 Ser B (MBIA) (WI)................................................. 5.00 12/01/25 4,761,550
5,000 Upper Occoquan Sewerage Authority, Virginia, Regional Sewerage
Ser 1995 A (MBIA) (WI)................................................. 5.00 07/01/25 4,777,450
- -------- ----------
20,000 19,608,800
- -------- ------------
Other Revenue (3.7%)
3,500 California Special Districts Finance Authority, 1988 Ser A COPs......... 8.50 07/01/18 3,854,830
4,360 Tampa, Florida, Cap Impr Ser 1988 A..................................... 8.25 10/01/18 4,785,928
2,000 New York Local Government Assistance Corporation, Ser 1995 A............ 6.00 04/01/24 2,096,600
- -------- ----------
9,860 10,737,358
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1995, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Refunded (14.5%)
$ 20,100 San Francisco Redevelopment Agency, California, George R Moscone
Convention Ctr Ser 1988 (Crossover).................................... 0.00+% 07/01/14 $ 14,245,473
19,580 Boulder County, Colorado, National Center for Atmospheric Research Ser
1988 (Crossover)....................................................... 8.25 12/01/13 21,894,552
30,000 Indianapolis, Local Public Improvement Bond Bank, Indiana, Ser 1988 D... 0.00 02/01/98++ 5,292,600
- --------- ----------
69,680 41,432,625
- --------- ------------
374,155 TOTAL MUNICIPAL BONDS (Identified Cost $278,288,294)............................................. 297,479,910
- ---------
----------
SHORT-TERM MUNICIPAL OBLIGATION (3.1%)
9,000 Parish Industrial Development Board, Alabama, Alabama Power Co Refg Ser
- --------- 1994 (Demand 01/02/96) (Identified Cost $9,000,000).................... 6.00* 06/01/15 9,000,000
------------
$383,155 TOTAL INVESTMENTS (Identified Cost $287,288,294) (a)..................................... 106.7% 306,479,910
===========
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS........................................... (6.7) (19,235,546)
---- ----------
NET ASSETS............................................................................... 100.0% $287,244,364
==== ==========
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when issued basis.
+ Currently a zero coupon bond; will convert to 8.50% on July 1, 2002.
* Current coupon of variable rate security.
++ Prerefunded to call date shown.
(a) The aggregate cost for federal income tax purposes is $287,288,294; the aggregate gross unrealized
appreciation is $21,924,932 and the aggregate gross unrealized depreciation is $2,733,316, resulting in net
unrealized appreciation of $19,191,616.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
December 31, 1995
<TABLE>
<S> <C>
Alabama............. 3.1%
Alaska.............. 1.7
California.......... 13.7
Colorado............ 7.6
Florida............. 4.1
Illinois............ 4.7
Indiana............. 1.8
Iowa................ 1.1
Kansas.............. 2.6
Maine............... 2.5%
Maryland............ 2.5
Massachusetts....... 5.1
Michigan............ 2.6
Minnesota........... 0.7
Montana............. 1.7
New Hampshire....... 0.8
New Jersey.......... 0.8
New York............ 9.8
North Dakota........ 0.5%
Ohio................ 3.2
Oklahoma............ 1.9
Pennsylvania........ 14.6
South Carolina...... 4.3
Texas............... 9.9
Virginia............ 4.3
Washington.......... 1.1
----
Total............... 106.7%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
ASSETS:
Investments in securities, at value
(identified cost $287,288,294)....................................... $306,479,910
Cash.................................................................. 601,574
Receivable for:
Interest.......................................................... 4,501,946
Investments sold.................................................. 566,870
Prepaid expenses...................................................... 6,798
----------
TOTAL ASSETS...................................................... 312,157,098
----------
LIABILITIES:
Payable for:
Investments purchased............................................. 24,641,815
Investment advisory fee........................................... 112,563
Administration fee................................................ 70,807
Accrued expenses...................................................... 87,549
----------
TOTAL LIABILITIES................................................. 24,912,734
----------
NET ASSETS:
Paid-in-capital....................................................... 263,812,576
Net unrealized appreciation........................................... 19,191,616
Accumulated undistributed net investment income....................... 2,907,831
Accumulated undistributed net realized gain........................... 1,332,341
----------
NET ASSETS........................................................ $287,244,364
----------
----------
NET ASSET VALUE PER SHARE, 27,757,966 shares outstanding
(unlimited shares authorized of $.01 par value)...................... $10.35
-----
-----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended December 31, 1995
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $20,193,574
---------
EXPENSES
Investment advisory fee................................................ 1,098,461
Administration fee..................................................... 690,526
Transfer agent fees and expenses....................................... 122,682
Professional fees...................................................... 60,301
Registration fees...................................................... 32,789
Shareholder reports and notices........................................ 29,003
Trustees' fees and expenses............................................ 28,738
Custodian fees......................................................... 14,666
Other.................................................................. 15,134
---------
TOTAL EXPENSES BEFORE EXPENSE OFFSET............................... 2,092,300
LESS: EXPENSE OFFSET............................................... (14,644)
---------
TOTAL EXPENSES AFTER EXPENSE OFFSET................................ 2,077,656
---------
NET INVESTMENT INCOME.............................................. 18,115,918
---------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain...................................................... 4,656,870
Net change in unrealized appreciation.................................. 14,686,044
---------
NET GAIN........................................................... 19,342,914
---------
NET INCREASE........................................................... $37,458,832
---------
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................ $ 18,115,918 $ 18,783,792
Net realized gain................................ 4,656,870 1,345,242
Net change in unrealized appreciation............ 14,686,044 (28,993,284)
----------- -----------
NET INCREASE (DECREASE)...................... 37,458,832 (8,864,250)
----------- -----------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income............................ (17,553,203) (18,024,634)
Net realized gain................................ (3,238,189) (3,962,043)
----------- -----------
TOTAL........................................ (20,791,392) (21,986,677)
----------- -----------
Net decrease from transactions in shares of
beneficial interest............................. (2,069,930) (6,682,683)
----------- -----------
TOTAL INCREASE (DECREASE).................... 14,597,510 (37,533,610)
NET ASSETS:
Beginning of period.............................. 272,646,854 310,180,464
----------- -----------
END OF PERIOD
(Including undistributed net investment
income of $2,907,831 and $2,345,116,
respectively)................................ $ 287,244,364 $ 272,646,854
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1995
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's investment objective is to provide a high level
of current income which is exempt from federal income tax. The Fund was
organized as a Massachusetts business trust on March 15, 1988 and commenced
operations on June 1, 1988.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates. 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 by the identified cost method.
Discounts are accreted and premiums are amortized 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.
<PAGE> 13
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1995, continued
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"), an affiliate of Dean Witter Services Company Inc.
(the "Administrator"), the Fund pays 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 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 Investment
Adviser. The Investment Adviser also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement with 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% of the portion to the Fund's
average weekly net assets exceeding
<PAGE> 14
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1995, continued
$500 million but not exceeding $750 million; and 0.133% to the portion of the
Fund's average weekly net assets exceeding $750 million.
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, 1995 aggregated
$68,747,545 and $52,886,073, respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At December 31, 1995, the Fund had
transfer agent fees and expenses payable of approximately $15,000.
The Fund has 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, 1995
included in Trustees' fees and expenses in the Statement of Operations amounted
to $7,130. At December 31, 1995, the Fund had an accrued pension liability of
$52,569 which is included in accrued expenses in the Statement of Assets and
Liabilities.
<PAGE> 15
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1995, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR EXCESS OF
SHARES VALUE PAR VALUE
---------- -------- ------------
<S> <C> <C> <C>
Balance, 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
Treasury shares purchased and retired (weighted average discount 5.78%)*........ (217,150) (2,172) (2,067,758)
-------- ------- ----------
Balance, December 31, 1995...................................................... 27,757,966 $277,579 $263,534,997
-------- ------- ----------
-------- ------- ----------
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. DIVIDENDS
The Fund has declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ----------------- ---------- ----------------- ------------------
<S> <C> <C> <C>
January 2, 1996 $0.0525 January 12, 1996 January 26, 1996
January 30, 1996 $0.0525 February 9, 1996 February 23, 1996
</TABLE>
7. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------
12/31/95 9/30/95 6/30/95 3/31/95
--------------- ------------- -------------- ---------------
PER PER PER PER
TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE
-------- ------ ------ ------ ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income.............. $ 5,037 $0.18 $4,964 $0.18 $ 5,117 $0.18 $ 5,076 $0.18
Net investment income................ 4,503 0.16 4,448 0.16 4,597 0.17 4,568 0.16
Net realized and unrealized gain..... 6,963 0.25 2,035 0.08 1,252 0.04 9,093 0.33
</TABLE>
<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 $0.18
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>
- ---------------------
* Amounts in thousands.
<PAGE> 16
MUNICIPAL INCOME TRUST II
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
-----------------------------------------------
1995* 1994* 1993* 1992* 1991*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 9.75 $10.81 $ 10.46 $10.34 $ 9.79
----- ----- ------ ----- -----
Net investment income............................................ 0.65 0.66 0.69 0.70 0.71
Net realized and unrealized gain (loss).......................... 0.70 (0.94) 0.35 0.12 0.54
----- ----- ------ ----- -----
Total from investment operations................................. 1.35 (0.28) 1.04 0.82 1.25
----- ----- ------ ----- -----
Less dividends and distributions from:
Net investment income......................................... (0.63) (0.64) (0.69) (0.69) (0.67)
Net realized gain............................................. (0.12) (0.14) --** (0.01) (0.03)
----- ----- ------ ----- -----
Total dividends and distributions................................ (0.75) (0.78) (0.69) (0.70) (0.70)
----- ----- ------ ----- -----
Net asset value, end of period................................... $10.35 $ 9.75 $ 10.81 $10.46 $10.34
----- ----- ------ ----- -----
----- ----- ------ ----- -----
Market value, end of period...................................... $10.00 $9.125 $10.875 $10.50 $10.00
----- ----- ------ ----- -----
----- ----- ------ ----- -----
TOTAL INVESTMENT RETURN+......................................... 18.34% (9.61)% 10.32% 12.23% 16.12%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................................... 0.74% 0.76% 0.75% 0.86% 0.86%
Net investment income............................................ 6.41% 6.48% 6.46% 6.70% 7.05%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......................... $287,244 $272,647 $310,180 $300,173 $296,554
Portfolio turnover rate.......................................... 19% 10% 12% 7% 15%
</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 brokerage commissions.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 17
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, 1995, 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 at
December 31, 1995 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 7, 1996
--------------------------------------------------------------------
1995 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1995, the Fund paid to the
shareholders $0.63 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, 1995, the
Fund paid to shareholders $0.12 per share from long-term
capital gains.
<PAGE> 18
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<PAGE> 19
(This page has been left blank intentionally.)
<PAGE> 20
<TABLE>
<S> <C>
TRUSTEES
- -------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo MUNICIPAL
Edwin J. Garn INCOME
John R. Haire TRUST II
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip 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
ANNUAL REPORT
DECEMBER 31, 1995
</TABLE>
