<PAGE> 1
MUNICIPAL INCOME TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1996
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Municipal
Income Trust II (TFB) for the year ended December 31, 1996.
After accelerating in the first half of 1996, domestic economic growth moderated
during the summer. Inflation remained under control despite full employment and
stronger growth in the fourth quarter. The need for a tightening move by the
Federal Reserve Board abated. Market confidence improved under these conditions
and fixed-income yields moved lower in the second half of the year.
MUNICIPAL MARKET CONDITIONS
Long insured revenue bond yields rose from 5.40 percent in February to reach
6.15 percent in April and again in mid-June. Subsequently, demand for municipal
bonds improved and followed the trend of U.S. Treasury securities to lower
rates. By the end of December insured bond yields stood at 5.60 percent. The
yield pickup for extending maturities from 1 to 30 years was 210 basis points at
year end.
The ratio of insured revenue bond yields to 30-year U.S. Treasury yields, fell
from 92 to 84 percent during the year. A declining ratio means that municipal
bond prices outperformed U.S. Treasury prices. The ratio's average range for the
past three years has been as low (rich) as 81 and as high (cheap) as 92 percent.
The relative improvement in municipals occurred when flat-tax proposals failed
to gain public support.
The municipal market achieved a balance between new-issue supply and maturing
securities in 1996. New-issue volume increased by 14 percent to $183 billion.
Maturities and redemptions of older issues essentially matched underwriting
volume.
<PAGE> 2
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1996, continued
PERFORMANCE
Municipal Income Trust II's net asset value (NAV) declined from $10.35 to $10.11
per share during the fiscal year ending December 31, 1996. Based on this NAV
change, plus reinvestment of tax-free dividends of $0.62 per share and taxable
capital gains distributions of $0.05 per share, the
Fund's total return was 4.60 percent. TFB's market price on the New York Stock
Exchange declined from $10.00 per share to $9.125 per share during the year.
Based on this market price change and reinvestment of tax-free dividends and
taxable capital gain distributions, the Fund's total return was -2.29 percent.
TFB's market price was trading at a 10 percent discount to NAV on December 31,
1996. Undistributed net investment income totaled $0.08 per share on December
31, 1996, versus $0.10 per share a year ago. Beginning with the November 1996
payment, the monthly dividend was reduced from $0.0525 to $0.0475 per share to
more closely reflect the Fund's anticipated income.
PORTFOLIO STRUCTURE
The Fund's net assets of $278 million were diversified among 14 long-term
sectors and 58 credits. Portfolio sales shifted to more market sensitive issues.
The sales of discount and current-coupon issues exceeded sales of defensive,
higher-coupon bonds with shorter calls. New purchases focused on securities with
15- to 25-year maturities rather than the 20- to 30-year maturities. Modest
discount or premium bonds with shorter durations were favored.
FIVE LARGEST SECTORS as of December 31, 1996
(% of Net Assets)
<TABLE>
<S> <C>
All Others 42%
Refunded 20%
Transportation 13%
Electric 9%
Resource Recovery 8%
General Obligation 8%
</TABLE>
Portfolio structure is subject to change.
CREDIT RATINGS as of December 31, 1996
(% of Total Long-Term Portfolio)
<TABLE>
<S> <C>
Aaa or AAA 40%
A or A 28%
Aa or AA 17%
Baa or BBB 8%
Not Rated 7%
</TABLE>
As measured by Moody's Investors Service, Inc. or Standard & Poor's Corp.
*Not rated at time of purchase; deemed by investment manager to be comparable
to investment-grade securities.
Portfolio structure is subject to change.
<PAGE> 3
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1996, continued
During the year the average maturity of the long-term portfolio moved from 20
years to 18 years. The portfolio's distribution of older shorter-call issues and
newer issues with longer call dates provided an average call protection of 6
years. Bonds with shorter than average call protection had book yields in excess
of 8 percent. The book yields of bonds with longer call protection averaged 6.50
percent. The portfolio has continued to maintain high-quality, with over 55
percent of its long-term holdings rated double "A" or better.
<TABLE>
<CAPTION>
CALL STRUCTURE as of December 31, 1996
(% of Total Long-Term Portfolio)
YEAR PERCENT CALLABLE
<S> <C>
1997 1%
1998 30%
1999 5%
2000 4%
2001 5%
2002 3%
2003 12%
2004 7%
2005 11%
2006 14%
2007-2011 4%
2012+ 4%
</TABLE>
LOOKING AHEAD
With the collapse of flat-tax proposals, municipal bonds have improved relative
to U.S. Treasury securities. Tax-free yields are currently near the "rich" end
of their average range versus Treasury yields. If municipals were to cheapen in
the future the Fund would extend maturities and call protection by selling
prerefunded and other short call bonds.
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.
<PAGE> 4
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1996, continued
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, TFB purchased and retired 272,600 shares of common stock at a
weighted average market discount of 8.26 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 FIUMEFREEDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 5
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (99.1%)
General Obligation (8.2%)
$ 2,000 California, Various Purpose dtd 10/01/92 (MBIA)......................... 6.00 % 10/01/21 $ 2,058,400
3,000 Moulton-Niguel Water District, California, Refg 1993 (MBIA)............. 5.00 09/01/19 2,748,660
5,000 Chicago, Illinois, Refg Ser 1995 A - 2 (AMBAC).......................... 6.25 01/01/14 5,445,550
2,000 Rosemont, Illinois, 1993 Ser B.......................................... 5.50 12/01/07 2,019,540
3,000 Massachusetts, 1995 Ser B (AMBAC)....................................... 5.50 07/01/15 2,986,230
3,000 New York City, New York, 1995 Ser D (MBIA).............................. 6.20 02/01/07 3,237,840
4,000 New York State, Refg Ser 1995 B......................................... 5.70 08/15/10 4,191,400
- -------- ----------
22,000 22,687,620
- -------- ----------
Educational Facilities Revenue (4.8%)
3,000 Massachusetts Health & Educational Facilities Authority, Boston College
Ser K.................................................................. 5.25 06/01/18 2,837,610
2,000 New Jersey Economic Development Authority, Educational Testing Service
Ser 1995 B (MBIA)...................................................... 6.25 05/15/25 2,145,000
New York State Dormitory Authority,
2,000 State University 1990 Ser A............................................. 7.50 05/15/13 2,410,900
2,000 State University 1993 Ser A............................................. 5.25 05/15/15 1,872,260
4,000 Delaware County Authority, Pennsylvania, Villanova University Ser 1995
(AMBAC)................................................................ 5.70 08/01/15 4,031,400
- -------- ----------
13,000 13,297,170
- -------- ----------
Electric Revenue (9.3%)
10,000 South Carolina Public Service Authority, Refg Ser 1996 A (MBIA)......... 5.75 01/01/13 10,262,400
12,000 San Antonio, Texas, Electric & Gas Refg Ser 1994........................ 4.70 02/01/06 11,536,080
4,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA) (WI)........... 5.75 07/01/19 3,922,520
- -------- ----------
26,000 25,721,000
- -------- ----------
Hospital Revenue (3.6%)
5,000 Hawaii Department of Budget & Finance, Queens Health 1996 Ser A......... 6.00 07/01/20 5,062,150
1,280 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc Refg
1990 Ser D............................................................. 9.50 11/15/15 1,457,971
2,000 University of Missouri, Health System Ser 1996 A (AMBAC)................ 5.50 11/01/16 1,976,060
1,295 Ward County, North Dakota, Trinity Obligated Group Crossover Refg Ser
1991 B................................................................. 7.50 07/01/21 1,391,646
- -------- ----------
9,575 9,887,827
- -------- ----------
Industrial Development/Pollution Control Revenue (7.4%)
5,500 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA)................ 7.00 06/01/31 6,081,570
3,000 New York State Energy Research & Development Authority, New York State
Electric & Gas Corp 1987 Ser A (AMT) (MBIA)............................ 6.15 07/01/26 3,074,610
2,000 Dayton, Ohio, Emery Air Freight Corp Ser 1988 A......................... 12.50 10/01/09 2,224,720
5,000 Tulsa Municipal Airport Trust, Oklahoma, American Airlines Inc Ser 1988
(AMT).................................................................. 7.375 12/01/20 5,336,400
Lexington County, South Carolina,
885 Ellett Brothers Inc Refg Ser 1988....................................... 10.625 09/01/02 914,479
1,000 Ellett Brothers Inc Refg Ser 1988....................................... 10.625 09/01/08 1,033,390
2,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995..................... 6.00 11/01/14 1,984,680
- -------- ----------
19,385 20,649,849
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Mortgage Revenue - Single Family (7.0%)
$ 4,000 Alaska Housing Finance Corporation Inc, 1993 1st Ser.................... 5.90 % 12/01/33 $ 3,934,760
12,580 Pinnellas County Housing Finance Authority, Florida, Ser 1983........... 0.00 01/01/15 2,028,273
1,025 Olathe, Kansas, GNMA Collateralized Ser 1989 A (AMT).................... 8.00 11/01/20 1,076,465
5,500 Maine Housing Authority, Purchase 1990 Ser A - 4 (AMT).................. 6.40 11/15/23 5,569,080
1,935 New Hampshire Housing Finance Authority, Residential GNMA-Backed Ser
1988 A (AMT)........................................................... 7.70 07/01/29 2,031,905
34,240 Southeast Texas Housing Finance Corporation, GNMA-Backed Ser 1988 A..... 0.00 04/01/21 4,726,490
- -------- ----------
59,280 19,366,973
- -------- ----------
Nursing & Health Related Facilities Revenue (3.5%)
3,000 Iowa Financing Authority, Care Initiatives Ser 1996..................... 9.25 07/01/25 3,521,370
2,932 Chester County Industrial Development Authority, Pennsylvania, RHA/PA
Nursing Homes Inc Ser 1989............................................. 10.125 05/01/19 3,162,045
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 9,797,815
- -------- ----------
Public Facilities Revenue (1.0%)
3,000 New York State Dormitory Authority, Court Facilities Ser A.............. 5.625 05/15/13 2,913,900
- -------- ----------
Resource Recovery Revenue (8.0%)
1,500 Regional Waste Systems Inc, Maine, 1986 Ser D - F (AMT)................. 8.15 07/01/11 1,626,645
8,000 Northeast Maryland Waste Disposal Authority, Montgomery County Ser 1993
A (AMT)................................................................ 6.30 07/01/16 8,158,000
12,000 Lancaster County Solid Waste Management Authority, Pennsylvania, 1988
Ser A (AMT)............................................................ 8.50 12/15/10 12,605,400
- -------- ----------
21,500 22,390,045
- -------- ----------
Tax Allocation (3.6%)
5,000 El Cajon Redevelopment Agency, California, Refg Ser 1992 (AMBAC)........ 6.60 10/01/22 5,457,600
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A................... 5.60 10/01/33 4,580,350
- -------- ----------
10,000 10,037,950
- -------- ----------
Transportation Facilities Revenue (13.1%)
5,000 Chicago, Illinois, Chicago-O'Hare International Airport Ser 1996 A
(AMBAC)................................................................ 5.625 01/01/12 5,034,650
3,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)............................. 5.50 02/15/26 2,948,490
Allegheny County, Pennsylvania,
5,500 Greater Pittsburgh Int'l Airport Ser 1988 C (AMT) (MBIA).............. 8.25 01/01/16 5,811,960
10,500 Greater Pittsburgh Int'l Airport Ser 1988 D (AMT) (FGIC).............. 7.75 01/01/19 10,843,560
4,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)............... 6.125 11/15/25 4,136,040
7,000 Virginia Port Authority, Commonwealth Port Ser 1988 (AMT)............... 8.20 07/01/08 7,469,840
- -------- ----------
35,000 36,244,540
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Water & Sewer Revenue (6.4%)
$ 3,000 Dade County, Florida, Ser 1995 (FGIC)................................... 5.50 % 10/01/18 $ 2,962,260
2,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)........................... 6.375 01/01/24 2,138,000
4,000 Massachusetts Water Resources Authority, 1993 Ser C..................... 5.25 12/01/20 3,741,600
6,800 Prince William County Service Authority, Virginia, Refg Ser 1993
(FGIC)................................................................. 5.00 07/01/21 6,175,624
3,000 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A (MBIA).......... 5.00 07/01/25 2,769,180
- -------- ----------
18,800 17,786,664
- -------- ----------
Other Revenue (3.7%)
3,500 California Special Districts Finance Authority, 1988 Ser A COPs......... 8.50 07/01/18 3,739,925
4,360 Tampa, Florida, Cap Impr Ser 1988 A..................................... 8.25 10/01/18 4,633,983
2,000 New York Local Government Assistance Corporation, Ser 1995 A............ 6.00 04/01/24 2,042,760
- -------- ----------
9,860 10,416,668
- -------- ----------
Refunded (19.5%)
20,100 San Francisco Redevelopment Agency, California, George R Moscone
Convention Ctr Ser 1988 (Crossover 07/01/04)........................... 0.00+ 07/01/14 15,965,631
19,580 Boulder County, Colorado, National Center for Atmospheric Research Ser
1988 (Crossover 12/01/98).............................................. 8.25 12/01/13 21,122,512
30,000 Indianapolis, Local Public Improvement Bond Bank, Indiana, Ser 1988 D... 0.00 02/01/98++ 5,479,500
4,500 Missoula County, Montana, Community Medical Center Inc Refg Ser 1988
B...................................................................... 9.00 06/01/98++ 4,899,780
3,500 New York State Medical Care Facilities Finance Agency, Montefiore
Medical Center - FHA Insured Mtge 1989 Ser A........................... 7.25 02/15/99++ 3,785,075
2,575 Washington Public Power Supply System, Nuclear Proj #2 Refg Ser 1990
B...................................................................... 7.00 07/01/00++ 2,833,324
- -------- ----------
80,255 54,085,822
- -------- ----------
338,167 TOTAL MUNICIPAL BONDS (Identified Cost $260,656,166)........................................... 275,283,843
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM MUNICIPAL OBLIGATION (0.2%)
$ 600 Platte County, Wyoming, Tri-State Generation & Transportation
- -------- Association Inc Ser 1984 A (Demand 01/02/97) (Identified Cost
$600,000).............................................................. 5.05*% 07/01/14 $ 600,000
----------
$338,767 TOTAL INVESTMENTS (Identified Cost $261,256,166) (b)................................... 99.3% 275,883,843
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................................... 0.7 2,017,552
---- ----------
NET ASSETS............................................................................. 100.0% $277,901,395
==== ==========
</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
++ 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 is $17,058,948, and the aggregate gross unrealized depreciation is $2,431,271,
resulting in net unrealized appreciation of $14,627,677.
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, 1996
<TABLE>
<S> <C>
Alaska................... 1.4%
California............... 12.4
Colorado................. 7.6
Florida.................. 3.5
Hawaii................... 1.8
Illinois................. 5.8
Indiana.................. 2.0
Iowa..................... 1.3
Kansas................... 2.6
Maine.................... 2.6
Maryland................. 2.9%
Massachusetts............ 3.4
Missouri................. 0.7
Montana.................. 1.8
New Hampshire............ 0.7
New Jersey............... 0.8
New York................. 8.5
North Dakota............. 0.5
Ohio..................... 1.9
Oklahoma................. 1.9
Pennsylvania............. 13.1%
South Carolina........... 4.4
Texas.................... 9.2
Utah..................... 1.4
Virginia................. 5.9
Washington............... 1.0
Wyoming.................. 0.2
---
Total.................... 99.3%
===
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
ASSETS:
Investments in securities, at value
(identified cost $261,256,166).......... $275,883,843
Cash..................................... 837,483
Receivable for:
Interest............................. 5,024,303
Investments sold..................... 450,934
Prepaid expenses and other assets........ 7,134
------------
TOTAL ASSETS......................... 282,203,697
------------
LIABILITIES:
Payable for:
Investments purchased................ 3,800,000
Shares of beneficial interest
repurchased......................... 223,737
Investment advisory fee.............. 95,498
Administration fee................... 60,002
Accrued expenses and other payables...... 123,065
------------
TOTAL LIABILITIES.................... 4,302,302
------------
NET ASSETS:
Paid-in-capital.......................... 261,293,861
Net unrealized appreciation.............. 14,627,677
Accumulated undistributed net investment
income.................................. 2,198,686
Accumulated net realized loss............ (218,829)
------------
NET ASSETS........................... $277,901,395
============
NET ASSET VALUE PER SHARE
27,485,366 shares outstanding (unlimited
shares authorized of $.01 par value).... $10.11
=====
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
NET INVESTMENT INCOME:
INTEREST INCOME.......................... $ 18,581,556
------------
EXPENSES
Investment management fee................ 1,091,899
Administration fee....................... 686,036
Transfer agent fees and expenses......... 117,898
Professional fees........................ 81,785
Shareholder reports and notices.......... 42,674
Registration fees........................ 32,790
Custodian fees........................... 28,087
Trustees' fees and expenses.............. 16,900
Other.................................... 11,991
------------
TOTAL EXPENSES....................... 2,110,060
LESS: EXPENSE OFFSET................. (16,459)
------------
NET EXPENSES......................... 2,093,601
------------
NET INVESTMENT INCOME................ 16,487,955
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................ (218,829)
Net change in unrealized appreciation.... (4,563,939)
------------
NET LOSS............................. (4,782,768)
------------
NET INCREASE............................. $ 11,705,187
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
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, 1996 DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 16,487,955 $ 18,115,918
Net realized gain (loss).......................... (218,829) 4,656,870
Net change in unrealized appreciation............. (4,563,939) 14,686,044
----------- -----------
NET INCREASE.................................. 11,705,187 37,458,832
----------- -----------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income............................. (17,197,100) (17,553,203)
Net realized gain................................. (1,332,341) (3,238,189)
----------- -----------
TOTAL......................................... (18,529,441) (20,791,392)
----------- -----------
Net decrease from transactions in shares of
beneficial interest.............................. (2,518,715) (2,069,930)
----------- -----------
NET INCREASE (DECREASE)....................... (9,342,969) 14,597,510
NET ASSETS:
Beginning of period............................... 287,244,364 272,646,854
----------- -----------
END OF PERIOD
(Including undistributed net investment income
of $2,198,686 and $2,907,831, respectively)... $ 277,901,395 $ 287,244,364
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1996
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 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 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
<PAGE> 12
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
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 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 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.
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, 1996 aggregated
$30,228,662 and $49,811,931 respectively.
<PAGE> 13
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At December 31, 1996, the Fund had
transfer agent fees and expenses payable of approximately $24,000.
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, 1996
included in Trustees' fees and expenses in the Statement of Operations amounted
to $1,247. At December 31, 1996, the Fund had an accrued pension liability of
$48,503 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 8.26%)*........ (272,600) (2,726) (2,515,989)
--------- ------- -----------
Balance, December 31, 1996...................................................... 27,485,366 $274,853 $261,019,008
========= ======= ===========
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
At December 31, 1996, the Fund had a net capital loss carryover of approximately
$199,000 which will be available through December 31, 2004 to offset future
capital gains to the extent provided by regulations. 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 $20,000
during fiscal 1996.
7. 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>
December 31, 1996 $0.0475 January 10, 1997 January 24, 1997
January 28, 1997 $0.0475 February 7, 1997 February 21, 1997
</TABLE>
<PAGE> 14
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*
--------------------------------------------------------------
1996 1995 1994++ 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $10.35 $ 9.75 $ 10.81 $ 10.46 $10.34
----- ----- ----- ------ -----
Net investment income.......................................... 0.59 0.65 0.66 0.69 0.70
Net realized and unrealized gain (loss)........................ (0.17) 0.70 (0.96) 0.35 0.12
----- ----- ----- ------ -----
Total from investment operations............................... 0.42 1.35 (0.30) 1.04 0.82
----- ----- ----- ------ -----
Less dividends and distributions from:
Net investment income....................................... (0.62) (0.63) (0.64) (0.69) (0.69)
Net realized gain........................................... (0.05) (0.12) (0.14) --** (0.01)
----- ----- ----- ------ -----
Total dividends and distributions.............................. (0.67) (0.75) (0.78) (0.69) (0.70)
----- ----- ----- ------ -----
Anti-dilutive effect of acquiring treasury shares.............. 0.01 -- 0.02 -- --
----- ----- ----- ------ -----
Net asset value, end of period................................. $10.11 $10.35 $ 9.75 $ 10.81 $10.46
===== ===== ===== ====== =====
Market value, end of period.................................... $9.125 $10.00 $9.125 $10.875 $10.50
===== ===== ===== ====== =====
TOTAL INVESTMENT RETURN+....................................... (2.29)% 18.34% (9.61)% 10.32% 12.23%
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................................... 0.76%(1) 0.74% 0.76% 0.75% 0.86%
Net investment income.......................................... 5.91% 6.41% 6.48% 6.46% 6.70%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........................ $277,901 $287,244 $272,647 $310,180 $300,173
Portfolio turnover rate........................................ 11% 19% 10% 12% 7%
</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.
++ Restated for comparative purposes.
(1) The above ratio does not reflect the effect of expense offsets of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 15
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, 1996, 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, 1996 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, 1997
--------------------------------------------------------------------
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1996, the Fund paid to the
shareholders $0.62 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, 1996, the
Fund paid to shareholders $0.05 per share from long-term
capital gains.
<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
Barry Fink
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, 1996
