<PAGE> 1
MUNICIPAL INCOME TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS June 30, 1998
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Municipal
Income Trust II (TFB) for the period ended June 30, 1998.
The deflationary impact of the Asian financial crisis has begun to temper U.S.
economic growth. Although employment conditions strengthened in the United
States and unemployment declined to its lowest level since 1970, inflation
remained subdued. This was primarily the result of improved productivity, lower
oil costs and cheaper imports.
Foreign currency turmoil strengthened the value of the U.S. dollar and created
demand for U.S. Treasury securities. Municipal bonds followed the trend of
Treasuries, with yields declining to a range not seen in over 20 years. The bond
market rally was also aided by prospects of the first federal budget surplus in
more than two decades.
MUNICIPAL MARKET CONDITIONS
Long-term insured index yields stood at 5.20 percent at the end of June 1998.
Since the beginning of the year index yields have ranged from
BOND YIELDS 1994 - 1998
<TABLE>
<CAPTION>
30-Year Insured 30-Year U.S. Insured Municipal Yields as a
Municipal Yields Treasury Yields Percentage of U.S. Treasury Yields
<S> <C> <C> <C>
1994 5.4% 6.34% 85.17%
5.4 6.24 86.54
5.8 6.66 87.09
6.4 7.09 90.27
6.35 7.32 86.75
6.25 7.43 84.12
6.5 7.61 85.41
6.25 7.39 84.57
6.3 7.45 84.56
6.55 7.81 83.87
6.75 7.96 84.8
7 8.00 87.5
6.75 7.88 85.66
1995 6.4 7.70 83.12
6.15 7.44 82.66
6.15 7.43 82.77
6.2 7.34 84.47
5.8 6.66 87.09
6.1 6.62 92.15
6.1 6.86 88.92
6 6.66 90.09
5.95 6.48 91.82
5.75 6.33 90.84
5.5 6.14 89.58
5.35 5.94 90.07
1996 5.4 6.03 89.55
5.6 6.46 86.69
5.85 6.66 87.84
5.95 6.89 86.36
6.05 6.99 86.55
5.9 6.89 85.63
5.85 6.97 83.93
5.9 7.11 82.98
5.7 6.93 82.25
5.65 6.64 85.09
5.5 6.35 86.61
5.6 6.63 84.46
1997 5.7 6.79 83.95
5.65 6.80 83.09
5.9 7.10 83.1
5.75 6.94 82.85
5.65 6.91 81.77
5.6 6.78 82.6
5.3 6.30 84.13
5.5 6.61 83.21
5.4 6.40 84.38
5.35 6.15 86.99
5.3 6.05 87.6
5.15 5.92 86.99
1998 5.15 5.80 88.79
5.2 5.92 87.84
5.25 5.93 88.53
5.35 5.95 89.92
5.2 5.80 89.66
5.2 5.65 92.04
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS June 30, 1998, continued
a low of 5.15 percent in January to 5.35 percent in April. Insured index yields
were as high as 5.60 percent in June 1997.
The overall decline in interest rates led to an increase in new-issue municipal
volume. In contrast, U.S. Treasury borrowing needs have shrunk with the decline
in the budget deficit. Under these conditions the municipal rally lagged the
rally in Treasuries. The ratio of municipal yields to Treasury yields improved
from 83 percent in June 1997 to over 90 percent this June. A rising ratio means
that municipals have underperformed Treasuries and have become more attractive
on a relative basis.
For the year-to-date, total municipal volume of $141 billion is up 50 percent
from the same period last year. Half the underwritings were enhanced with bond
insurance. Refundings represented nearly one-third of total new issues.
PERFORMANCE
During the six-month period ended June 30, 1998, the Fund's net asset value
(NAV) moved from $10.39 to $10.36 per share. Based on this NAV change plus
reinvestment of tax-free dividends of $0.27 per share and a long-term capital
gains distribution of $0.0428 per share, the Fund's total NAV return was 3.08
percent. TFB's price on the New York Stock Exchange slipped from $9.625 to $9.50
per share. Based on this change in market price plus reinvestment of dividends
and distributions, the Fund's total market return was 1.94 percent. On June 30,
1998 TFB was trading at a 8.3 percent discount (lower than) to NAV.
Monthly dividends for the second quarter of 1998 were declared in March and
remained unchanged at $0.045 per share. The level of undistributed net
investment income remained unchanged at $0.011 per share.
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 TFB's shares. In addition, we would like to remind
you that the Trustees have approved a procedure whereby the Fund may, when
appropriate, 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.
PORTFOLIO STRUCTURE
During the past six months the portfolio's duration, a measure of sensitivity to
interest rate changes, was extended from 6.8 years to 7.9 years. This was
primarily accomplished by selling refunded bonds
2
<PAGE> 3
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS June 30, 1998, continued
<TABLE>
<CAPTION>
LARGEST SECTORS AS OF JUNE 30, 1998
(% OF NET ASSETS)
<S> <C>
ELECTRIC 15%
HOSPITAL 14%
TRANSPORTATION 10%
GENERAL OBLIGATION 9%
MORTGAGE 8%
EDUCATION 7%
REFUNDED 7%
IDR/PCR* 6%
RESOURCE RECOVERY 5%
ALL OTHERS 19%
</TABLE>
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE
<TABLE>
<CAPTION>
CREDIT RATINGS AS OF JUNE 30, 1998
(% OF TOTAL LONG-TERM PORTFOLIO)
<S> <C>
Aaa or AAA 52%
A or A 20%
Aa or AA 16%
Baa or BBB 7%
N/R 5%
</TABLE>
AS MEASURED BY MOODY'S INVESTORS SERVICES, INC. OR
STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
<TABLE>
<CAPTION>
CALL STRUCTURE AS OF JUNE 30, 1998
(% OF TOTAL LONG-TERM PORTFOLIO)
WEIGHTED AVERAGE
CALL PROTECTION: 8 YEARS
YEARS BONDS CALLABLE PERCENT CALLABLE
<S> <C>
1998 4%
1999 1%
2000 3%
2001 3%
2002 3%
2003 11%
2004 8%
2005 11%
2006 14%
2007 17%
2008 12%
2009+ 13%
</TABLE>
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
3
<PAGE> 4
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS June 30, 1998, continued
to purchase new issues. The refunded bond position was reduced from 10 percent
to 7 percent of net assets.
Investments were diversified among 14 long-term sectors and 60 credits.
Throughout the period, high credit quality was maintained with nearly 70 percent
of the portfolio's long-term holdings rated double or triple "A." The average
maturity of the portfolio was 20 years. As illustrated in the accompanying chart
the distribution of call dates produced 8 years of weighted average call
protection.
LOOKING AHEAD
The economic fundamentals are in place for another year of solid economic growth
in the United States. Events in Asia have strengthened the U.S. dollar and
contributed to lower interest rates. Furthermore, the Asian financial crisis
seems likely to continue to moderate inflationary pressures and provide a
favorable environment for municipal bonds. The Federal Reserve Board remains
sensitive to the risk of an acceleration in labor costs but has maintained its
neutral stance.
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
4
<PAGE> 5
MUNICIPAL INCOME TRUST II
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 23, 1998, an annual meeting of the Fund's shareholders was held for the
purpose of voting on two separate matters, the results of which were as follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Edwin J. Garn
For......................................................... 21,280,175
Withheld.................................................... 505,589
John R. Haire
For......................................................... 21,267,156
Withheld.................................................... 518,608
Michael E. Nugent
For......................................................... 21,308,857
Withheld.................................................... 476,907
Philip J. Purcell
For......................................................... 21,283,645
Withheld.................................................... 502,119
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Wayne E. Hedien,
Dr. Manuel H. Johnson and John L. Schroeder.
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP (THE SUCCESSOR
FIRM TO PRICE WATERHOUSE LLP AS OF JULY 1, 1998) AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................... 21,329,741
Against..................................................... 113,396
Abstain..................................................... 342,627
</TABLE>
5
<PAGE> 6
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (96.9%)
General Obligation (9.0%)
$ 3,000 Moulton-Niguel Water District, California, Refg 1993
(MBIA)..................................................... 5.00 % 09/01/19 $ 2,942,190
5,000 Chicago, Illinois, Refg Ser 1995 A-2 (AMBAC)................ 6.25 01/01/14 5,744,850
2,000 Rosemont, Illinois, 1993 Ser B.............................. 5.50 12/01/07 2,132,580
3,000 Massachusetts, 1995 Ser B (AMBAC)........................... 5.50 07/01/15 3,121,560
3,000 New York City, New York, 1995 Ser D (MBIA).................. 6.20 02/01/07 4,341,640
4,000 New York State, Refg Ser 1995 B............................. 5.70 08/15/10 3,346,650
3,175 Little Miami Local School District, Ohio, Ser 1998 (FGIC)... 4.875 12/01/23 3,060,605
- -------- -----------
23,175 24,690,075
- -------- -----------
Educational Facilities Revenue (7.4%)
5,000 Illinois Educational Facilities Authority, Northwestern
University Ser 1997........................................ 5.25 11/01/32 5,143,450
2,000 Massachusetts Health & Educational Facilities Authority,
Boston College Ser K....................................... 5.25 06/01/18 2,002,200
2,000 New Jersey Economic Development Authority, Educational
Testing Service Ser 1995 B (MBIA).......................... 6.25 05/15/25 2,216,740
New York State Dormitory Authority,
2,000 State University 1990 Ser A................................ 7.50 05/15/13 2,544,540
2,000 State University 1993 Ser A................................ 5.25 05/15/15 2,061,040
4,000 Delaware County Authority, Pennsylvania, Villanova
University Ser 1995 (AMBAC)................................ 5.70 08/01/15 4,231,000
2,000 Vermont Educational & Health Building Financing Agency,
Norwich University Ser 1998................................ 5.50 07/01/18 1,997,580
- -------- -----------
19,000 20,196,550
- -------- -----------
Electric Revenue (15.2%)
North Carolina Municipal Power Agency, #1 Catawba Electric
3,000 Ser 1998 A (MBIA).......................................... 5.50 01/01/14 3,210,780
5,000 Ser 1998 A (MBIA).......................................... 5.50 01/01/15 5,342,700
10,000 South Carolina Public Service Authority, Refg Ser 1996 A
(MBIA)..................................................... 5.75 01/01/13 10,718,100
10,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C**........ 4.70 02/01/06 10,136,900
4,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA).... 5.75 07/01/19 4,255,000
3,000 Chelan County Public Utility District #1, Washington, Hydro
Ser 1997 A (AMT)........................................... 5.60 07/01/32 3,099,570
5,000 Washington Public Power Supply System, Proj #1 Refg Ser 1998
A.......................................................... 5.00 07/01/12 4,965,200
- -------- -----------
40,000 41,728,250
- -------- -----------
Hospital Revenue (13.6%)
10,000 University of Colorado Hospital Authority, Refg Ser 1997 A
(AMBAC).................................................... 5.25 11/15/22 10,007,900
4,500 Lakeland, Florida, Regional Medical Center Ser 1997
(MBIA)..................................................... 5.00 11/15/22 4,376,160
5,000 Hawaii Department of Budget & Finance, Queen's Health 1996
Ser A...................................................... 6.00 07/01/20 5,381,650
5,000 Maine Health & Higher Educational Facilities Authority, Ser
1998 B (FSA) (WI).......................................... 4.875 07/01/23 4,780,800
4,000 Michigan Hospital Finance Authority, Detroit Medical Center
Ser 1997 A (AMBAC)......................................... 5.25 08/15/27 4,003,080
2,000 University of Missouri, Health Ser 1996 A (AMBAC)........... 5.50 11/01/16 2,066,760
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,295 Ward County, North Dakota, Trinity Crossover Refg Ser 1991
B.......................................................... 7.50 % 07/01/21 $ 1,407,328
2,500 Delaware County Authority, Catholic Health Ser 1998 A
(AMBAC).................................................... 4.875 11/15/26 2,369,375
3,000 Lehigh County General Purpose Authority, Lehigh Valley
Health Network 1998 Ser A (MBIA)........................... 5.00 07/01/28 2,891,700
- -------- -----------
37,295 37,284,753
- -------- -----------
Industrial Development/Pollution Control Revenue (6.4%)
5,500 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA).... 7.00 06/01/31 5,967,005
2,000 New York State Energy Research & Development Authority, New
York State Electric & Gas Corp 1987 Ser A (AMT) (MBIA)..... 6.15 07/01/26 2,165,260
5,000 Tulsa Municipal Airport Trust, Oklahoma, American Airlines
Inc Ser 1988 (AMT)......................................... 7.375 12/01/20 5,377,900
Lexington County, South Carolina,
780 Ellett Brothers Inc Refg Ser 1988.......................... 7.50 09/01/02 796,653
1,000 Ellett Brothers Inc Refg Ser 1988.......................... 7.50 09/01/08 1,035,210
2,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995......... 6.00 11/01/14 2,107,160
- -------- -----------
16,280 17,449,188
- -------- -----------
Mortgage Revenue - Single Family (7.6%)
5,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA)....... 6.00 06/01/27 5,244,800
2,000 Chicago, Illinois, Ser 1997 B (AMT)......................... 6.95 09/01/28 2,248,060
725 Olathe, Kansas, GNMA Collateralized Ser 1989 A (AMT)
(MBIA)..................................................... 8.00 11/01/20 753,848
4,025 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)........ 6.40 11/15/23 4,190,629
1,725 New Hampshire Housing Finance Authority, Residential
GNMA-Backed Ser 1988 A (AMT)............................... 7.70 07/01/29 1,805,471
27,870 Southeast Texas Housing Finance Corporation, GNMA-Backed Ser
1988 A..................................................... 0.00 04/01/21 4,295,324
2,250 Virginia Housing Development Authority, 1992 Ser A.......... 7.10 01/01/22 2,360,588
- -------- -----------
43,595 20,898,720
- -------- -----------
Nursing & Health Related Facilities Revenue (3.8%)
2,000 Iowa Financing Authority, Care Initiatives Ser 1996......... 9.25 07/01/25 2,694,880
2,861 Chester County Industrial Development Authority,
Pennsylvania, RHA/PA Nursing Homes Inc Ser 1989............ 10.125 05/01/19 2,671,945
Kirbyville Health Facilities Development Corporation, Texas,
623 Heartway III Corp Ser 1988 A............................... 0.00 03/20/04 498,687
3,927 Heartway III Corp Ser 1988 A............................... 10.00 03/20/18 4,571,542
- -------- -----------
9,411 10,437,054
- -------- -----------
Public Facilities Revenue (1.1%)
3,000 New York State Dormitory Authority, Court Facilities Ser
A.......................................................... 5.625 05/15/13 3,095,430
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Resource Recovery Revenue (5.0%)
$ 8,000 Northeast Maryland Waste Disposal Authority, Montgomery
County Ser 1993 A (AMT).................................... 6.30 % 07/01/16 $ 8,565,600
5,000 Lancaster County Solid Waste Management Authority,
Pennsylvania, 1998 Ser A (AMT) (AMBAC)..................... 5.375 12/15/15 5,107,000
- -------- -----------
13,000 13,672,600
- -------- -----------
Tax Allocation Revenue (1.9%)
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A....... 5.60 10/01/33 5,079,850
- -------- -----------
Transportation Facilities Revenue (10.2%)
5,000 Chicago, Illinois, Chicago-O'Hare International Airport Ser
1996 A (AMBAC)............................................. 5.625 01/01/12 5,284,450
7,000 Massachusetts Turnpike Authority, Metropolitan Highway 1997
Ser A (MBIA)............................................... 5.00 01/01/37 6,723,150
3,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)................. 5.50 02/15/26 3,106,350
Allegheny County, Pennsylvania,
2,500 Greater Pittsburgh Int'l Airport Ser 1997 A (AMT) (MBIA)... 5.75 01/01/13 2,702,525
3,000 Greater Pittsburgh Int'l Airport Ser 1997 B (MBIA)......... 5.00 01/01/19 2,935,980
4,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)... 6.125 11/15/25 4,327,440
3,000 Pocahontas Parkway Association, Virginia, Route 895
Connector Ser 1998 A (WI).................................. 5.50 08/15/28 2,980,560
- -------- -----------
27,500 28,060,455
- -------- -----------
Water & Sewer Revenue (4.4%)
3,000 Dade County, Florida, Ser 1995 (FGIC)....................... 5.50 10/01/18 3,105,300
3,000 Massachusetts Water Resources Authority, 1993 Ser C......... 5.25 12/01/20 2,999,850
6,000 Prince William County Service Authority, Virginia, Refg Ser
1993 (FGIC)................................................ 5.00 07/01/21 5,847,900
- -------- -----------
12,000 11,953,050
- -------- -----------
Other Revenue (4.3%)
4,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1997 Ser B (a)............................................. 5.75 09/01/27 4,065,600
4,360 Tampa, Florida, Cap Impr Ser 1988 A......................... 8.25 10/01/18 4,403,905
3,000 New York Local Government Assistance Corporation, Ser 1995
A.......................................................... 6.00 04/01/24 3,225,390
- -------- -----------
11,360 11,694,895
- -------- -----------
Refunded (7.0%)
20,100 San Francisco Redevelopment Agency, California, George R
Moscone Convention Ctr Ser 1988............................ 0.00# 07/01/04++ 17,876,538
1,235 Illinois Health Facilities Authority, Glen Oaks Medical
Center Inc Refg 1990 Ser D (ETM)........................... 9.50 11/15/15 1,436,157
- -------- -----------
21,335 19,312,695
- -------- -----------
281,951 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $248,352,737)................. 265,553,565
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (1.1%)
$ 2,000 Dayton, Ohio, Emery Air Freight Corp Ser 1988 A............. 12.50 % 10/01/98++ $ 2,088,080
1,000 Missouri Health & Educational Facilities Authority,
- -------- Washington University Ser C (Demand 07/01/98).............. 3.80 09/01/30 1,000,000
-----------
3,000 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (Identified Cost
$3,000,622).................................................................... 3,088,080
- -------- -----------
$284,951 TOTAL INVESTMENTS (Identified Cost $251,353,359) (b)................... 98.0% 268,641,645
========
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS........................... 2.0 5,452,939
----- -----------
NET ASSETS.............................................................. 100.0% $274,094,584
===== ===========
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
ETM Escrowed to maturity.
WI Security was purchased on a "when-issued" basis.
++ Refunded on call date shown by forward contract or crossover
refunded.
** A portion of this security is segregated in connection with
the purchase of "when-issued" securities.
# Currently a zero coupon; will convert to 8.50% on July 1,
2002.
(a) Sale is restricted to qualified institutional investors.
(b) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $17,564,309 and the aggregate gross
unrealized depreciation is $276,023, resulting in net
unrealized appreciation of $17,288,286.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS June 30, 1998 (unaudited) continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
June 30, 1998
<TABLE>
<S> <C>
Alaska................... 1.9%
California............... 9.4
Colorado................. 3.7
Connecticut.............. 1.5
Delaware................. 0.9
Florida.................. 4.3
Hawaii................... 2.0
Illinois................. 8.0
Iowa..................... 1.0
Kansas................... 2.4
Maine.................... 3.3
Maryland................. 3.1
Massachusetts............ 5.4
Michigan................. 1.5
Missouri................. 1.1
New Hampshire............ 0.7
New Jersey............... 0.8
New York................. 7.6
North Carolina........... 3.1
North Dakota............. 0.5
Ohio..................... 3.0
Oklahoma................. 2.0
Pennsylvania............. 7.5
South Carolina........... 4.6
Texas.................... 9.5
Utah..................... 1.6
Vermont.................. 0.7
Virginia................. 4.0
Washington............... 2.9
----
Total.................... 98.0%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $251,353,359)............................ $268,641,645
Cash........................................................ 629,568
Receivable for:
Investments sold........................................ 8,428,389
Interest................................................ 4,375,806
Prepaid expenses and other assets........................... 46,523
------------
TOTAL ASSETS............................................ 282,121,931
------------
LIABILITIES:
Payable for:
Investments purchased................................... 7,774,776
Investment advisory fee................................. 94,262
Administration fee...................................... 59,178
Accrued expenses and other payables......................... 99,131
------------
TOTAL LIABILITIES....................................... 8,027,347
------------
NET ASSETS.............................................. $274,094,584
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $251,627,809
Net unrealized appreciation................................. 17,288,286
Accumulated undistributed net investment income............. 2,810,822
Accumulated undistributed net realized gain................. 2,367,667
------------
NET ASSETS.............................................. $274,094,584
============
NET ASSET VALUE PER SHARE,
26,464,466 shares outstanding
(unlimited shares authorized of $.01 par value)........... $10.36
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended June 30, 1998 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 8,119,393
-----------
EXPENSES
Investment management fee................................... 534,460
Administration fee.......................................... 335,587
Professional fees........................................... 64,997
Transfer agent fees and expenses............................ 37,486
Registration fees........................................... 15,993
Shareholder reports and notices............................. 13,869
Trustees' fees and expenses................................. 9,690
Custodian fees.............................................. 7,032
Other....................................................... 5,589
-----------
TOTAL EXPENSES.......................................... 1,024,703
Less: expense offset........................................ (7,012)
-----------
NET EXPENSES............................................ 1,017,691
-----------
NET INVESTMENT INCOME................................... 7,101,702
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 2,367,670
Net change in unrealized appreciation....................... (2,226,820)
-----------
NET GAIN................................................ 140,850
-----------
NET INCREASE................................................ $ 7,242,552
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
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
1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................... $ 7,101,702 $ 15,864,773
Net realized gain................................... 2,367,670 3,505,748
Net change in unrealized appreciation............... (2,226,820) 4,887,429
------------ ------------
NET INCREASE.................................... 7,242,552 24,257,950
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (7,161,600) (15,192,789)
Net realized gain................................... (1,133,041) (2,153,881)
------------ ------------
TOTAL........................................... (8,294,641) (17,346,670)
------------ ------------
Decrease from transactions in shares of beneficial
interest........................................... (1,528,782) (8,137,220)
------------ ------------
NET DECREASE.................................... (2,580,871) (1,225,940)
NET ASSETS:
Beginning of period................................. 276,675,455 277,901,395
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $2,810,822 and $2,870,720, respectively)... $274,094,584 $276,675,455
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS June 30, 1998 (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 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
14
<PAGE> 15
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS June 30, 1998 (unaudited) continued
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 Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Advisor"), formerly Dean Witter InterCapital
Inc., an affiliate of Morgan Stanley Dean Witter Services Company Inc. (the
"Administrator"), the Fund pays the Investment Advisor 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 Advisor 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
Advisor. The Investment Advisor 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.
15
<PAGE> 16
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS June 30, 1998 (unaudited) continued
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 six months ended June 30, 1998 aggregated
$37,212,439 and $44,603,327, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor and
Administrator, is the Fund's transfer agent.
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, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,968. At June 30, 1998, the Fund had an accrued pension liability of
$48,810 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, 1996.................................. 27,485,366 $274,853 $261,019,008
Treasury shares purchased and retired (weighted average
discount 7.00%)*........................................... (863,800) (8,638) (8,128,582)
---------- -------- ------------
Balance, December 31, 1997.................................. 26,621,566 266,215 252,890,426
Treasury shares purchased and retired (weighted average
discount 6.39%)*........................................... (157,100) (1,571) (1,527,211)
---------- -------- ------------
Balance, June 30, 1998...................................... 26,464,466 $264,644 $251,363,215
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
16
<PAGE> 17
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS June 30, 1998 (unaudited) continued
6. DIVIDENDS
On June 30, 1998, the Fund declared the following dividends from net investment
income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ----------------- ------------------
<S> <C> <C>
$0.045 July 10, 1998 July 24, 1998
$0.045 August 7, 1998 August 21, 1998
$0.045 September 4, 1998 September 18, 1998
</TABLE>
17
<PAGE> 18
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 FOR THE YEAR ENDED DECEMBER 31*
MONTHS ENDED -------------------------------------------------------
JUNE 30, 1998* 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $10.39 $10.11 $10.35 $ 9.75 $10.81 $ 10.46
------ ------ ------ ------ ------ -------
Net investment income............................... 0.27 0.59 0.59 0.65 0.66 0.69
Net realized and unrealized gain (loss)............. 0.01 0.31 (0.17) 0.70 (0.96) 0.35
------ ------ ------ ------ ------ -------
Total from investment operations.................... 0.28 0.90 0.42 1.35 (0.30) 1.04
------ ------ ------ ------ ------ -------
Less dividends and distributions from:
Net investment income.............................. (0.27) (0.56) (0.62) (0.63) (0.64) (0.69)
Net realized gain.................................. (0.04) (0.08) (0.05) (0.12) (0.14) -- **
------ ------ ------ ------ ------ -------
Total dividends and distributions................... (0.31) (0.64) (0.67) (0.75) (0.78) (0.69)
------ ------ ------ ------ ------ -------
Anti-dilutive effect of acquiring treasury shares... -- 0.02 0.01 -- 0.02 --
------ ------ ------ ------ ------ -------
Net asset value, end of period...................... $10.36 $10.39 $10.11 $10.35 $ 9.75 $ 10.81
====== ====== ====== ====== ====== =======
Market value, end of period......................... $ 9.50 $9.625 $9.125 $10.00 $9.125 $10.875
====== ====== ====== ====== ====== =======
TOTAL INVESTMENT RETURN+............................ 1.94%(1) 12.82% (2.29)% 18.34% (9.61)% 10.32%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 0.75%(2) 0.75%(3) 0.76 %(3) 0.74% 0.76 % 0.75%
Net investment income............................... 5.19%(2) 5.79% 5.91 % 6.41% 6.48 % 6.46%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............. $274,095 $276,675 $277,901 $287,244 $272,647 $310,180
Portfolio turnover rate............................. 14%(1) 21% 11 % 19% 10 % 12%
</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.
(3) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
- -------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn MUNICIPAL
John R. Haire INCOME
Wayne E. Hedien TRUST II
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
- -------------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center-Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- -------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISOR
- -------------------------------------------------
Morgan Stanley Dean Witter Advisors 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.
SEMIANNUAL REPORT JUNE 30, 1998
