<PAGE> 1
MUNICIPAL INCOME TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS June 30, 1996
DEAR SHAREHOLDER:
During the first half of 1996, the fixed income market outlook shifted from
bullishness associated with a weak economy and low inflation to bearishness
caused by strong economic growth and the potential threat of renewed inflation.
This change in market psychology began in earnest after a surprisingly large
increase in payroll employment was reported in early March. Other measures of
economic activity and rising commodity prices added to the concern. In addition,
the market began to speculate that the Federal Reserve Board would reverse its
series of interest rate reductions with a move toward higher interest rates. The
bond market reacted to these expectations by pushing long-term yields sharply
higher.
MUNICIPAL MARKET CONDITIONS
Municipal bond yields as measured by 30-year insured revenue bonds began the
year at 5.50 percent. Interest rates subsequently began to rise in mid-February
on signs of stronger economic growth and reached a high of 6.15 percent in April
and again in mid-June before finishing the first half of 1996 at 5.90 percent.
Yields on one-year municipal notes increased from 3.60 percent to 3.90 percent
over the first six months of the year. In June, the yield curve pickup for
extending maturities from 1 to 30 years was 200 basis points.
Tax-exempt bonds outperformed U.S. Treasury securities during the first half of
1996 as the risk faded that flat tax proposals would cause a radical change in
the tax code. The ratio of insured revenue bond yields to 30-year U.S. Treasury
yields, which began the year at 92 percent, declined to 85 percent by the end of
June. A declining ratio means that municipal bond prices were relatively
stronger than U.S. Treasury prices.
The municipal market also benefited from steady demand. In addition to regular
maturities and calls for redemption this year, it has been estimated that
investors also face the retirement of $66 billion of previously refunded debt.
On the supply side, new issues increased 30 percent to $90 billion during the
first six months of 1996. However, as interest rates rose, underwritings were
frequently postponed and the pace of activity slowed.
<PAGE> 2
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS June 30, 1996, continued
PERFORMANCE
The net asset value (NAV) of Municipal Income Trust II (TFB) declined from
$10.35 to $9.96 per share during the first half of 1996. Based on this NAV
change plus reinvestment of tax-free dividends of $0.32 per share and taxable
capital gains distributions of $0.05 per share, the Fund's total return was
- -0.26 percent. Over the same period, the Fund's market price on the New York
Stock Exchange declined from $10.00 to $9.625 per share. Based on this market
price change and reinvestment of tax-free dividends and taxable capital gain
distributions, the Fund's total return was -0.14 percent.
The Fund's market price on the New York Stock Exchange was trading at a 3
percent discount to NAV on June 30, 1996. Undistributed net investment income
totaled $0.09 per share on June 30, 1996, versus $0.105 per share six months
ago.
PORTFOLIO STRUCTURE
The Fund's net assets of $276 million were diversified among 14
long-term sectors and 56 credits. In response to the changing
interest rate environment in the first half of 1996, portfolio sales
shifted to more market sensitive issues. Discount and current-coupon
sales exceeded sales of defensive, higher coupon bonds with shorter
calls. The average maturity and call protection of the long-term
portfolio were 20 years and 6 years, respectively. The portfolio has
consistently maintained an upper-investment-grade quality structure
with over 80 percent of its long-term holdings rated single "A" or
better.
Minicipal Income 2
LARGEST SECTORS AS OF JUNE 30, 1996
(% OF NET ASSETS)
REFUNDED 15%
ELECTRIC 9%
IDR/PRCR* 9%
MORTGAGE 9%
RESOURCE RECOVERY 9%
TRANSPORTATION 9%
OTHER 40%
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CREDIT RATINGS AS OF JUNE 30, 1996
(% OF TOTAL LONG-TERM PORTFOLIO)
Aaa OR AAA 34%
Aa OR AA 18%
A OR A 29%
Baa OR BBB 11%
Ba OR BB 1%
NOT RATED 7%
AS MEASURED BY STANDARD & POOR'S CORP OR MOODY'S INVESTORS
SERVICE, INC.
<PAGE> 3
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS June 30, 1996, continued
LOOKING AHEAD
Future tax reduction proposals may renew investor concern. However, the balance
between the supply of new issues and demand created by maturities should remain
positive for the municipal market. Long-term insured municipal securities
currently yield 85 percent to the yield on U.S. Treasury securities and may be
expected to move in tandem with the Treasury market.
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, 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 period under review, the Fund
purchased and retired 19,000 shares of common stock at a weighted average market
discount of 3.7 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> 4
MUNICIPAL INCOME TRUST II
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 27, 1996, an annual meeting of the Fund's shareholders was held for the
purpose of voting on three separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Michael Bozic
For............................................................. 20,632,892
Withheld........................................................ 234,853
Charles A. Fiumefreddo
For............................................................. 20,641,718
Withheld........................................................ 226,027
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Edwin J. Garn, John R. Haire, Dr. Manuel H. Johnson, Paul Kolton, Michael E.
Nugent, Philip J. Purcell and John L. Schroeder
(2) CONTINUANCE OF THE CURRENTLY EFFECTIVE INVESTMENT ADVISORY AGREEMENT:
<TABLE>
<S> <C>
For............................................................. 20,295,323
Against......................................................... 201,364
Abstain......................................................... 371,058
</TABLE>
(3) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For............................................................. 20,499,144
Against......................................................... 100,455
Abstain......................................................... 268,146
</TABLE>
<PAGE> 5
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (99.2%)
General Obligation (8.3%)
$ 2,250 California, Various Purpose dtd 10/01/92 (MBIA)......................... 6.00 % 10/01/21 $ 2,255,557
3,000 Moulton-Niguel Water District, California, Refg 1993 (MBIA)............. 5.00 09/01/19 2,650,710
5,250 Chicago, Illinois, Refg Ser 1995 A-2 (AMBAC)............................ 6.25 01/01/14 5,472,285
2,450 Rosemont, Illinois, 1993 Ser B.......................................... 5.50 12/01/07 2,439,612
3,000 Massachusetts, 1995 Ser B (AMBAC)....................................... 5.50 07/01/15 2,907,210
3,000 New York City, New York, 1995 Ser D (MBIA).............................. 6.20 02/01/07 3,231,660
4,000 New York State, Refg Ser 1995 B......................................... 5.70 08/15/10 4,105,880
- -------- ----------
22,950 23,062,914
- -------- ----------
Educational Facilities Revenue (5.3%)
2,000 California Public Works Board, University of California 1993 Ser A...... 5.50 06/01/21 1,839,980
3,000 Massachusetts Health & Educational Facilities Authority, Boston College
Ser K.................................................................. 5.25 06/01/18 2,744,490
2,000 New Jersey Economic Development Authority, Educational Testing Service
Ser 1995 B (MBIA)...................................................... 6.25 05/15/25 2,066,820
New York State Dormitory Authority,
2,000 State University 1990 Ser A............................................ 7.50 05/15/13 2,334,220
2,000 State University 1993 Ser A............................................ 5.25 05/15/15 1,802,500
4,000 Delaware County Authority, Pennsylvania, Villanova University
Ser 1995 (AMBAC)....................................................... 5.70 08/01/15 3,972,200
- -------- ----------
15,000 14,760,210
- -------- ----------
Electric Revenue (8.7%)
10,000 South Carolina Public Service Authority, Refg Ser 1996 A (MBIA)......... 5.75 01/01/13 10,016,600
12,000 San Antonio, Texas, Electric & Gas Refg Ser 1994........................ 4.70 02/01/06 11,198,760
2,575 Washington Public Power Supply System, Nuclear Proj #2 Refg Ser 1990
B...................................................................... 7.00 07/01/12 2,724,092
- -------- ----------
24,575 23,939,452
- -------- ----------
Hospital Revenue (6.0%)
5,000 Hawaii Department of Budget & Finance, Queens Health 1996 Ser A (WI).... 6.00 07/01/20 4,968,500
1,320 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc
Refg 1990 Ser D........................................................ 9.50 11/15/15 1,507,097
4,500 Missoula County, Montana, Community Medical Center Inc Refg Ser 1988
B...................................................................... 9.00 06/01/18 4,821,120
3,500 New York State Medical Care Facilities Finance Agency, Montefiore
Medical Center - FHA Insured Mtge 1989 Ser A........................... 7.25 02/15/24 3,731,560
1,295 Ward County, North Dakota, Trinity Obligated Group Crossover
Refg Ser 1991 B........................................................ 7.50 07/01/21 1,407,186
- -------- ----------
15,615 16,435,463
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Industrial Development/Pollution Control Revenue (8.5%)
$ 5,500 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA)................ 7.00 % 06/01/31 $ 5,990,380
4,000 New York State Energy Research & Development Authority, New York State
Electric & Gas Corp 1987 Ser A (AMT) (MBIA)............................ 6.15 07/01/26 4,015,840
2,000 Dayton, Ohio, Emery Air Freight Corp Ser 1988 A......................... 12.50 10/01/09 2,258,200
5,000 Tulsa Municipal Airport Trust, Oklahoma, American Airlines Inc
Ser 1988 (AMT)......................................................... 7.375 12/01/20 5,259,100
Lexington County, South Carolina,
1,000 Ellett Brothers Inc Refg Ser 1988...................................... 10.625 09/01/02 1,033,040
1,000 Ellett Brothers Inc Refg Ser 1988...................................... 10.625 09/01/08 1,033,130
4,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995..................... 6.00 11/01/14 3,892,200
- -------- ----------
22,500 23,481,890
- -------- ----------
Mortgage Revenue - Single Family (8.5%)
5,000 Alaska Housing Finance Corporation Inc, 1993 1st Ser.................... 5.90 12/01/33 4,672,800
2,000 California Housing Finance Agency, 1995 Ser B (AMT) (AMBAC)............. 6.25 08/01/14 2,004,560
15,055 Pinnellas County Housing Finance Authority, Florida, Ser 1983........... 0.00 01/01/15 2,253,282
9,245 Illinois Housing Development Authority, Ser 1984 B...................... 0.00 02/01/16 1,115,686
1,115 Olathe, Kansas, GNMA Collateralized Ser 1989 A (AMT).................... 8.00 11/01/20 1,168,308
5,500 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT).................... 6.40 11/15/23 5,502,805
2,120 New Hampshire Housing Finance Authority, Residential GNMA-Backed
Ser A (AMT)............................................................ 7.70 07/01/29 2,228,926
34,710 Southeast Texas Housing Finance Corporation, GNMA-Backed Ser 1988 A..... 0.00 04/01/21 4,595,604
- -------- ----------
74,745 23,541,971
- -------- ----------
Nursing & Health Related Facilities Revenue (3.5%)
3,000 Iowa Financing Authority, Care Initiatives Ser 1996..................... 9.25 07/01/25 3,369,060
2,932 Chester County Industrial Development Authority, Pennsylvania, RHA/PA
Nursing Homes Inc Ser 1989............................................. 10.125 05/01/19 3,175,063
4,580 Kirbyville Health Facilities Development Corporation, Texas, Heartway
III Corp Ser 1988 A (a)................................................ 11.25 03/20/21 3,114,400
- -------- ----------
10,512 9,658,523
- -------- ----------
Public Facilities Revenue (4.1%)
4,000 New York State Dormitory Authority, Court Facilities Ser A.............. 5.625 05/15/13 3,686,400
7,000 Virginia Port Authority, Commonwealth Port Ser 1988 (AMT)............... 8.20 07/01/08 7,538,580
- -------- ----------
11,000 11,224,980
- -------- ----------
Resource Recovery Revenue (8.8%)
1,500 Regional Waste Systems Inc, Maine, 1986 Ser D-F (AMT)................... 8.15 07/01/11 1,619,805
8,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT)....................................................... 6.30 07/01/16 8,010,800
14,000 Lancaster County Solid Waste Management Authority, Pennsylvania,
1988 Ser A (AMT)....................................................... 8.50 12/15/10 14,847,700
- -------- ----------
23,500 24,478,305
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Tax Allocation (3.5%)
$ 5,000 El Cajon Redevelopment Agency, California, Refg Ser 1992 (AMBAC)........ 6.60 % 10/01/22 $ 5,301,600
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A................... 5.60 10/01/33 4,327,650
- -------- ----------
10,000 9,629,250
- -------- ----------
Transportation Facilities Revenue (8.6%)
3,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)............................. 5.50 02/15/26 2,860,890
Allegheny County, Pennsylvania,
5,500 Greater Pittsburgh Int'l Airport Ser 1988 C (AMT) (MBIA)............... 8.25 01/01/16 5,861,185
10,500 Greater Pittsburgh Int'l Airport Ser 1988 D (AMT) (FGIC)............... 7.75 01/01/19 10,939,215
4,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)............... 6.125 11/15/25 4,014,280
- -------- ----------
23,000 23,675,570
- -------- ----------
Water & Sewer Revenue (6.6%)
4,000 Dade County, Florida, Ser 1995 (FGIC)................................... 5.50 10/01/18 3,855,520
2,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)........................... 6.375 01/01/24 2,062,540
Massachusetts Water Resources Authority,
4,000 1993 Ser C............................................................. 5.25 12/01/20 3,603,640
5,000 1995 Ser B (MBIA)...................................................... 5.00 12/01/25 4,387,450
5,000 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A (MBIA).......... 5.00 07/01/25 4,366,000
- -------- ----------
20,000 18,275,150
- -------- ----------
Other Revenue (3.8%)
3,500 California Special Districts Finance Authority, 1988 Ser A COPs......... 8.50 07/01/18 3,766,070
4,360 Tampa, Florida, Cap Impr Ser 1988 A..................................... 8.25 10/01/18 4,658,529
2,000 New York Local Government Assistance Corporation, Ser 1995 A............ 6.00 04/01/24 2,001,341
- -------- ----------
9,860 10,425,940
- -------- ----------
Refunded (15.0%)
20,100 San Francisco Redevelopment Agency, California, George R Moscone
Convention Ctr Ser 1988 (Crossover 07/01/04)........................... 0.00+ 07/01/14 14,500,944
19,580 Boulder County, Colorado, National Center for Atmospheric Research Ser
1988 (Crossover 12/01/98).............................................. 8.25 12/01/13 21,447,345
30,000 Indianapolis Local Public Improvement Bond Bank, Indiana, Ser 1988 D.... 0.00 02/01/18++ 5,352,000
- -------- ----------
69,680 41,300,289
- -------- ----------
352,937 TOTAL MUNICIPAL BONDS (Identified Cost $264,421,713)........................................... 273,889,907
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM MUNICIPAL OBLIGATION (0.8%)
$ 2,300 Louisiana Offshore Terminal Authority, Loop Inc Ser 1992 A (Demand
- -------- 07/01/96) (Identified Cost $2,300,000)................................. 3.50*% 09/01/08 $ 2,300,000
----------
$355,237 TOTAL INVESTMENTS (Identified Cost $266,721,713) (b)................................... 100.0% 276,189,907
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................ -- 25,529
---- ----------
NET ASSETS............................................................................. 100.0% $276,215,436
==== ==========
</TABLE>
- ---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when issued basis.
+ Zero coupon; will convert to 8.50% on July 1, 2002.
++ Prerefunded to call date shown.
* Current coupon of variable rate security.
(a) Bond in default; non-income producing.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation was
$14,323,078 and the aggregate gross unrealized depreciation was
$4,854,884, resulting in net unrealized appreciation of
$9,468,194.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
June 30, 1996
<TABLE>
<S> <C>
Alaska.................. 1.7%
California.............. 13.3
Colorado................ 7.8
Florida................. 3.9
Hawaii.................. 1.8
Illinois................ 4.6
Indiana................. 1.9
Iowa.................... 1.2
Kansas.................. 2.6
Louisiana............... 0.8%
Maine................... 2.6
Maryland................ 2.9
Massachusetts........... 4.9
Montana................. 1.7
New Hampshire........... 0.8
New Jersey.............. 0.8
New York................ 9.0
North Dakota............ 0.5
Ohio.................... 1.9%
Oklahoma................ 1.9
Pennsylvania............ 14.0
South Carolina.......... 4.4
Texas................... 9.7
Virginia................ 4.3
Washington.............. 1.0
----
Total................... 100.0%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $266,721,713)....................................... $276,189,907
Cash.................................................................. 97,749
Receivable for:
Interest.......................................................... 4,431,325
Investments sold.................................................. 637,687
Prepaid expenses...................................................... 21,000
------------
TOTAL ASSETS...................................................... 281,377,668
------------
LIABILITIES:
Payable for:
Investments purchased............................................. 4,932,867
Investment advisory fee........................................... 88,314
Administration fee................................................ 55,442
Accrued expenses...................................................... 85,609
------------
TOTAL LIABILITIES................................................. 5,162,232
------------
NET ASSETS:
Paid-in-capital....................................................... 263,630,506
Net unrealized appreciation........................................... 9,468,194
Accumulated undistributed net investment income....................... 2,595,071
Accumulated undistributed net realized gain........................... 521,665
------------
NET ASSETS........................................................ $276,215,436
============
NET ASSET VALUE PER SHARE
27,738,966 shares outstanding
(unlimited shares authorized of $.01 par value)...................... $9.96
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended June 30, 1996 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $ 9,448,833
-----------
EXPENSES
Investment advisory fee................................................ 544,928
Administration fee..................................................... 342,452
Transfer agent fees and expenses....................................... 46,050
Professional fees...................................................... 40,151
Registration fees...................................................... 16,451
Shareholder reports and notices........................................ 13,929
Trustees' fees and expenses............................................ 8,736
Custodian fees......................................................... 6,093
Other.................................................................. 6,793
-----------
TOTAL EXPENSES BEFORE EXPENSE OFFSET............................... 1,025,583
LESS: EXPENSE OFFSET............................................... (6,081)
-----------
TOTAL EXPENSES AFTER EXPENSE OFFSET................................ 1,019,502
-----------
NET INVESTMENT INCOME.............................................. 8,429,331
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain...................................................... 521,654
Net change in unrealized appreciation.................................. (9,723,422)
-----------
NET LOSS........................................................... (9,201,768)
-----------
NET DECREASE........................................................... $ (772,437)
===========
</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 SIX
MONTHS ENDED FOR THE YEAR
JUNE 30, ENDED
1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................... $ 8,429,331 $ 18,115,918
Net realized gain................................... 521,654 4,656,870
Net change in unrealized appreciation............... (9,723,422) 14,686,044
------------ ------------
NET INCREASE (DECREASE)......................... (772,437) 37,458,832
------------ ------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income............................... (8,742,091) (17,553,203)
Net realized gain................................... (1,332,330) (3,238,189)
------------ ------------
TOTAL........................................... (10,074,421) (20,791,392)
------------ ------------
Net decrease from transactions in shares of
beneficial interest................................ (182,070) (2,069,930)
------------ ------------
TOTAL INCREASE (DECREASE)....................... (11,028,928) 14,597,510
NET ASSETS:
Beginning of period................................. 287,244,364 272,646,854
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $2,595,071 and $2,907,831, respectively)..... $276,215,436 $ 287,244,364
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS June 30, 1996 (unaudited)
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 by an outside
independent pricing service approved by the Trustees. The pricing service has
informed the Fund that in valuing the 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 except where collection
is not expected.
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
<PAGE> 13
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS June 30, 1996 (unaudited) continued
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 the 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 weekly
net assets not exceeding $250 million and 0.30% to the portion of the Fund's
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 weekly net assets not exceeding $250 million; 0.20% to the
portion of the Fund's weekly net assets exceeding $250 million but not exceeding
$500 million; 0.167% of the portion to the Fund's weekly net assets exceeding
$500 million but not exceeding $750 million; and 0.133% to the portion of the
Fund's 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.
<PAGE> 14
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS June 30, 1996 (unaudited) continued
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended June 30, 1996 aggregated
$11,675,350 and $27,159,694, respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At June 30, 1996, the Fund had
transfer agent fees and expenses payable of approximately $9,000.
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 six months ended June 30, 1996
included in Trustees' fees and expenses in the Statement of Operations amounted
to $818. At June 30, 1996, the Fund had an accrued pension liability of $48,856
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 IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
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
Treasury shares purchased and retired (weighted average discount 3.73%)*........ (19,000) (190) (181,880)
---------- ------- ------------
Balance, June 30, 1996.......................................................... 27,738,966 $277,389 $263,353,117
========== ======= ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. DIVIDENDS
The Fund declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------- --------- --------------- ----------------
<S> <C> <C> <C>
June 25, 1996 $0.0525 July 5, 1996 July 19, 1996
July 30, 1996 $0.0525 August 9, 1996 August 23, 1996
</TABLE>
<PAGE> 15
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 SIX
MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31*
JUNE 30, ----------------------------------------------
1996* 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $10.35 $ 9.75 $10.81 $ 10.46
------- ----- ----- ------
Net investment income........................................ 0.30 0.65 0.66 0.69
Net realized and unrealized gain (loss)...................... (0.32) 0.70 (0.94) 0.35
------- ----- ----- ------
Total from investment operations............................. (0.02) 1.35 (0.28) 1.04
------- ----- ----- ------
Less dividends and distributions from:
Net investment income..................................... (0.32) (0.63) (0.64) (0.69)
Net realized gain......................................... (0.05) (0.12) (0.14) --**
------- ----- ----- ------
Total dividends and distributions............................ (0.37) (0.75) (0.78) (0.69)
------- ----- ----- ------
Net asset value, end of period............................... $ 9.96 $10.35 $ 9.75 $ 10.81
======= ===== ===== ======
Market value, end of period.................................. $9.625 $10.00 $9.125 $10.875
======= ===== ===== ======
TOTAL INVESTMENT RETURN+..................................... (0.14)%(1) 18.34% (9.61)% 10.32%
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................................... 0.73%(2) 0.74% 0.76% 0.75%
Net investment income........................................ 6.02%(2) 6.41% 6.48% 6.46%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands...................... $276,215 $287,244 $272,647 $310,180
Portfolio turnover rate...................................... 4%(1) 19% 10% 12%
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31*
----------------------------
1992 1991
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $10.34 $ 9.79
----- -----
Net investment income........................................ 0.70 0.71
Net realized and unrealized gain (loss)...................... 0.12 0.54
----- -----
Total from investment operations............................. 0.82 1.25
----- -----
Less dividends and distributions from:
Net investment income..................................... (0.69) (0.67)
Net realized gain......................................... (0.01) (0.03)
----- -----
Total dividends and distributions............................ (0.70) (0.70)
----- -----
Net asset value, end of period............................... $10.46 $10.34
===== =====
Market value, end of period.................................. $10.50 $10.00
===== =====
TOTAL INVESTMENT RETURN+..................................... 12.23% 16.12%
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................................... 0.86% 0.86%
Net investment income........................................ 6.70% 7.05%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands...................... $300,173 $296,554
Portfolio turnover rate...................................... 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.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 16
TRUSTEES
- -------------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
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 MANAGER
- -------------------------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they do
not express an opinion thereon.
MUNICIPAL
INCOME
TRUST II
SEMIANNUAL REPORT
JUNE 30, 1996
