<PAGE> 1
MUNICIPAL INCOME TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1997
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, 1997.
As 1997 drew to a close the securities markets were dominated by the Asian
financial crisis and its potential impact on the U.S. economy. Foreign currency
turmoil strengthened the value of the U.S. dollar and created a "flight to
quality" demand for Treasuries. Long-term interest rates fell to yields last
seen more than 20 years ago. Domestic employment conditions improved throughout
the year and the unemployment rate reached its lowest level since 1973.
Inflation remained in check despite the economy's strength. The bond market
rally was also aided by prospects of the first federal budget surplus in more
than two decades.
<TABLE>
<CAPTION>
Muni Yields Treasury Yields Ratio
<S> <C> <C> <C>
Dec '93 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%
Jun '94 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 84.80%
7 8 87.50%
Dec '94 6.75 7.88 85.66%
6.4 7.7 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%
Jun '95 6.1 6.62 92.15%
6.1 6.86 88.92%
6 6.66 90.08%
5.95 6.48 91.82%
5.75 6.33 90.84%
5.5 6.14 89.56%
Dec '95 5.35 5.94 90.07%
5.4 6.03 89.55%
5.8 6.46 86.69%
5.85 6.66 87.84%
5.95 6.89 86.36%
6.05 6.99 86.55%
Jun '96 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%
Dec '96 5.6 6.63 84.46%
5.7 6.79 83.95%
5.65 6.8 83.08%
5.9 7.1 83.10%
5.75 6.94 82.85%
5.65 6.91 81.77%
Jun '97 5.6 6.78 82.60%
5.3 6.3 84.00%
5.5 6.61 83.00%
5.4 6.4 84.40%
5.35 6.15 86.90%
5.3 6.05 87.60%
Dec '97 5.15 5.92 86.90%
</TABLE>
<PAGE> 2
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1997, continued
MUNICIPAL MARKET CONDITIONS
The long-term insured revenue index began 1997 yielding 5.60 percent. Municipal
yields rose in the first quarter but subsequently declined in a sustained rally.
The Fed tightened monetary policy in March in a preemptive move against a
possible increase in inflation. Index yields moved as high as 5.90 percent.
However, inflation remained benign and the Asian financial crisis drove
municipal yields as low as 5.15 percent by year end.
As usually happens when interest rates change rapidly, the municipal rally
lagged the rally in Treasuries. The ratio of municipal yields to Treasury yields
improved from an historically rich 83 percent of Treasuries in March to a more
attractive 87 percent in December. A rising ratio means that municipals have
underperformed Treasuries and have become relatively more attractive.
Total municipal volume increased 20 percent in 1997. New-issue supply reached
$220 billion, with half the underwritings enhanced by bond insurance. Much of
this growth came from refunding issues sold in the second half of the year.
Overall, refundings represented one-quarter of total new issues.
PERFORMANCE
The Fund's net asset value (NAV) increased from $10.11 to $10.39 per share
during the year ended December 31, 1997. Based on this NAV change plus
reinvestment of tax-free dividends of $0.56 per share and long-term capital
gains distribution of $0.08 per share, the Fund's total return based on NAV was
9.82 percent. TFB's market price on the New York Stock Exchange increased from
$9.125 to $9.625 per share during the same period. Based on this market price
change and reinvestment of dividends and distributions, TFB's total return based
on market value was 12.82 percent. On December 31, 1997 the Fund traded at a 7
percent discount to its NAV.
Monthly dividends for the fourth quarter of 1997 were declared in September.
During 1997 the level of undistributed net investment income increased from
$0.08 per share to $0.11 per share. The monthly dividend was reduced from $0.475
to $0.450 per share to adjust for the effect of anticipated bond redemptions on
the Fund's income.
PORTFOLIO STRUCTURE
In anticipation of tightening moves by the Federal Reserve Board, the Fund sold
market-sensitive issues and retained refunded bonds during the first half of
1997. These defensive actions reduced the Fund's volatility. By the end of the
summer the Fund began to extend maturity as market conditions improved.
<PAGE> 3
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1997, continued
LARGEST SECTORS as of December 31, 1997
(% of Net Assets)
Electric 12%
Hospital 10%
Refunded 10%
General Obligation 9%
Resource Recovery 8%
Transportation 8%
Education 7%
IDR/PCR* 7%
Mortgage 7%
All Others 22%
* Industrial Development/Pollution Control Revenue
Portfolio structure is subject to change.
CREDIT RATINGS as of December 31, 1997
(% of Total Long-Term Portfolio)
Aaa or AAA 46%
Aa or AA 19%
A or A 18%
Baa or BBB 12%
N/R 5%
As measured by Moody's Investor Service, Inc.
or Standard & Poor's Corp.
Portfolio structure is subject to change.
CALL STRUCTURE as of December 31, 1997
(% of Total Long-Term Portfolio)
Percent Callable
WEIGHTED AVERAGE
CALL PROTECTION: 7 YEARS
1998 13%
1999 3%
2000 3%
2001 5%
2002 3%
2003 11%
2004 8%
2005 11%
2006 14%
2007 17%
2008+ 12%
Years Bonds Callable
<PAGE> 4
MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1997, continued
At the end of 1997 the portfolio's average maturity was 20 years. The
distribution of bond call dates (illustrated in the accompanying chart) produced
an average call protection of 7 years. The Fund's net assets of $277 million
were diversified among 13 long-term sectors and 60 credits. Credit quality
improved, with nearly two-thirds of long-term holdings rated double or triple
"A."
LOOKING AHEAD
The economic fundamentals are in place for another year of solid but less
spectacular domestic growth in 1998. Events in the Far East have strengthened
the U.S. dollar and led to lower interest rates. The Asian financial crisis
seems likely to slow U.S. growth and moderate inflationary pressures in the
economy.
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 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. During the fiscal year ended December 31, 1997,
the Fund purchased and retired 863,800 shares of common stock at a weighted
average market discount of 7.00 percent.
We appreciate your ongoing support of Municipal Income Trust II and look forward
to continuing to serve your investment needs.
Very truly yours,
/S/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 5
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (95.6%)
General Obligation (8.6%)
$ 2,000 California, Various Purpose dtd 10/01/92 (MBIA)......................... 6.00% 10/01/21 $ 2,151,200
3,000 Moulton-Niguel Water District, California, Refg 1993 (MBIA)............. 5.00 09/01/19 2,937,600
5,000 Chicago, Illinois, Refg Ser 1995 A-2 (AMBAC)............................ 6.25 01/01/14 5,718,600
2,000 Rosemont, Illinois, 1993 Ser B.......................................... 5.50 12/01/07 2,092,560
3,000 Massachusetts, 1995 Ser B (AMBAC)....................................... 5.50 07/01/15 3,122,160
3,000 New York City, New York, 1995 Ser D (MBIA).............................. 6.20 02/01/07 3,359,820
4,000 New York State, Refg Ser 1995 B......................................... 5.70 08/15/10 4,340,480
- -------- ------------
22,000 23,722,420
- -------- ------------
Educational Facilities Revenue (6.6%)
5,000 Illinois Educational Facilities Authority, Northwestern University Ser
1997................................................................... 5.25 11/01/32 5,128,150
2,000 Massachusetts Health & Educational Facilities Authority, Boston College
Ser K.................................................................. 5.25 06/01/18 1,997,420
2,000 New Jersey Economic Development Authority, Educational Testing Service
Ser 1995 B (MBIA)...................................................... 6.25 05/15/25 2,220,860
New York State Dormitory Authority,
2,000 State University 1990 Ser A............................................ 7.50 05/15/13 2,529,280
2,000 State University 1993 Ser A............................................ 5.25 05/15/15 2,052,780
4,000 Delaware County Authority, Pennsylvania, Villanova University Ser 1995
(AMBAC)................................................................ 5.70 08/01/15 4,253,560
- -------- ------------
17,000 18,182,050
- -------- ------------
Electric Revenue (11.9%)
10,000 South Carolina Public Service Authority, Refg Ser 1996 A (MBIA)......... 5.75 01/01/13 10,830,100
10,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C**.................... 4.70 02/01/06 9,973,100
4,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA)................ 5.75 07/01/19 4,242,000
3,000 Chelan County Public Utility District #1, Washington, Hydro Ser 1997 A
(AMT).................................................................. 5.60 07/01/32 3,071,580
5,000 Washington Public Power Supply System, Proj #1 Refg Ser 1998 A (WI)..... 5.00 07/01/12 4,919,050
- -------- ------------
32,000 33,035,830
- -------- ------------
Hospital Revenue (9.8%)
10,000 University of Colorado Hospital Authority, Refg Ser 1997 A (AMBAC)...... 5.25 11/15/22 10,008,100
4,500 Lakeland, Florida, Regional Medical Center Ser 1997 (MBIA).............. 5.00 11/15/22 4,405,680
5,000 Hawaii Department of Budget & Finance, Queen's Health 1996 Ser A........ 6.00 07/01/20 5,291,500
4,000 Michigan Hospital Finance Authority, Detroit Medical Center Ser 1997 A
(AMBAC)................................................................ 5.25 08/15/27 3,987,800
2,000 University of Missouri, Health System Ser 1996 A (AMBAC)................ 5.50 11/01/16 2,068,000
1,295 Ward County, North Dakota, Trinity Crossover Refg Ser 1991 B............ 7.50 07/01/21 1,400,283
- -------- ------------
26,795 27,161,363
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Industrial Development/Pollution Control Revenue (6.7%)
$ 5,500 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA)................ 7.00% 06/01/31 $ 6,006,825
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 3,234,870
5,000 Tulsa Municipal Airport Trust, Oklahoma, American Airlines Inc Ser 1988
(AMT).................................................................. 7.375 12/01/20 5,456,250
Lexington County, South Carolina,
780 Ellett Brothers Inc Refg Ser 1988...................................... 7.50 09/01/02 795,249
1,000 Ellett Brothers Inc Refg Ser 1988...................................... 7.50 09/01/08 1,028,820
2,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995..................... 6.00 11/01/14 2,111,540
- -------- ------------
17,280 18,633,554
- -------- ------------
Mortgage Revenue - Single Family (7.4%)
5,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA)................... 6.00 06/01/27 5,209,600
2,000 Chicago, Illinois, Ser 1997 B (AMT)..................................... 6.95 09/01/28 2,216,920
905 Olathe, Kansas, GNMA Collaterized Ser 1989 A (AMT) (MBIA)............... 8.00 11/01/20 946,005
5,015 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT).................... 6.40 11/15/23 5,229,542
1,935 New Hampshire Housing Finance Authority, Residential GNMA-Backed
Ser 1988 A (AMT)....................................................... 7.70 07/01/29 2,040,651
31,885 Southeast Texas Housing Finance Corporation, GNMA-Backed Ser 1988 A..... 0.00 04/01/21 4,740,662
- -------- ------------
46,740 20,383,380
- -------- ------------
Nursing & Health Related Facilities Revenue (3.8%)
2,000 Iowa Financing Authority, Care Initiatives Ser 1996..................... 9.25 07/01/25 2,655,340
2,900 Chester County Industrial Development Authority, Pennsylvania, RHA/PA
Nursing Homes Inc Ser 1989............................................. 10.125 05/01/19 2,706,251
Kirbyville Health Facilities Development Corporation, Texas,
623 Heartway III Corp Ser 1997 B........................................... 0.00 03/20/04 489,217
3,957 Heartway III Corp Ser 1997 A........................................... 10.00 03/20/18 4,554,151
- -------- ------------
9,480 10,404,959
- -------- ------------
Public Facilities Revenue (1.1%)
3,000 New York State Dormitory Authority, Court Facilities Ser A.............. 5.625 05/15/13 3,073,350
- -------- ------------
Resource Recovery Revenue (8.1%)
1,500 Regional Waste Systems Inc, Maine, 1986 Ser D-F (AMT)................... 8.15 07/01/11 1,597,530
8,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT)....................................................... 6.30 07/01/16 8,548,800
12,000 Lancaster County Solid Waste Management Authority, Pennsylvania,
1988 Ser A (AMT)**..................................................... 8.50 12/15/10 12,408,720
- -------- ------------
21,500 22,555,050
- -------- ------------
Tax Allocation (1.8%)
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A................... 5.60 10/01/33 5,033,850
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Transportation Facilities Revenue (8.4%)
$ 5,000 Chicago, Illinois, Chicago-O'Hare International Airport Ser 1996 A
(AMBAC)................................................................ 5.625% 01/01/12 $ 5,304,200
5,000 Massachusetts Turnpike Authority, Metropolitan Highway 1997 Ser A
(MBIA)................................................................. 5.00 01/01/37 4,833,650
3,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)............................. 5.50 02/15/26 3,088,980
Allegheny County, Pennsylvania,
2,500 Greater Pittsburgh Int'l Airport Ser 1997 A (AMT) (MBIA)............... 5.75 01/01/13 2,701,725
3,000 Greater Pittsburgh Int'l Airport Ser 1997 B (MBIA)..................... 5.00 01/01/19 2,946,420
4,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)............... 6.125 11/15/25 4,314,640
- -------- ------------
22,500 23,189,615
- -------- ------------
Water & Sewer Revenue (6.2%)
3,000 Dade County, Florida, Ser 1995 (FGIC)................................... 5.50 10/01/18 3,093,360
2,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)........................... 6.375 01/01/24 2,220,680
3,000 Massachusetts Water Resources Authority, 1993 Ser C..................... 5.25 12/01/20 2,984,040
6,000 Prince William County Service Authority, Virginia, Refg Ser 1993
(FGIC)................................................................. 5.00 07/01/21 5,846,220
3,000 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A (MBIA).......... 5.00 07/01/25 2,925,600
- -------- ------------
17,000 17,069,900
- -------- ------------
Other Revenue (5.2%)
3,500 California Special Districts Finance Authority, 1988 Ser A COPs......... 8.50 07/01/18 3,639,580
4,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special 1997 Ser B
(a).................................................................... 5.75 09/01/27 4,087,000
4,360 Tampa, Florida, Capital Improvement Ser 1988 A.......................... 8.25 10/01/18 4,486,920
2,000 New York Local Government Assistance Corporation, Ser 1995 A............ 6.00 04/01/24 2,151,100
- -------- ------------
13,860 14,364,600
- -------- ------------
Refunded (10.0%)
5,000 El Cajon Redevelopment Agency, California, Refg Ser 1992 (AMBAC)........ 6.60 10/01/01+ 5,534,350
20,100 San Francisco Redevelopment Agency, California, George R Moscone
Convention Ctr Ser 1988................................................ 0.00# 07/01/04++ 17,132,838
1,235 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc
Refg 1990 Ser D (ETM).................................................. 9.50 11/15/15 1,457,535
3,500 New York State Medical Care Facilities Finance Agency, Montefiore
Medical Center - FHA Insured Mtge. 1989 Ser A.......................... 7.25 02/15/99+ 3,697,925
- -------- ------------
29,835 27,822,648
- -------- ------------
283,990 TOTAL MUNICIPAL BONDS (Identified Cost $245,563,598)............................................ 264,632,569
- -------- ------------
SHORT-TERM MUNICIPAL OBLIGATIONS (4.5%)
2,000 Dayton, Ohio, Emery Air Freight Corp. Ser 1988 A........................ 12.50 10/01/98++ 2,142,220
2,900 Philadelphia Hospital & Higher Educational Facilities Authority,
Pennsylvania, Children's Hospital of Philadelphia 1996 Ser A
(Demand 01/02/98)...................................................... 3.00* 03/01/27 2,900,000
7,000 Virginia Port Authority, Commonwealth Port Ser 1988 (AMT)............... 8.20 07/01/98+ 7,287,070
- -------- ------------
11,900 TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS (Identified Cost $11,883,155).... 12,329,290
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$295,890 TOTAL INVESTMENTS (Identified Cost $257,446,753) (b).................................... 100.1%
======== $276,961,859
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS......................................... (0.1) (286,404)
---- ------------
NET ASSETS.............................................................................. 100.0% $276,675,455
============
====
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Security was 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.
++ Refunded on call date shown by forward delivery contract or crossover refunded.
* Current coupon of variable rate demand obligation.
** All of these securities are segregrated in connection with the purchase of when issued securities.
(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 $19,735,754 and the aggregate gross unrealized depreciation is $220,648,
resulting in net unrealized appreciation of $19,515,106.
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, 1997
<TABLE>
<S> <C>
Alaska.................. 1.9%
California.............. 13.2
Colorado................ 3.6
Connecticut............. 1.5
Florida................. 4.3
Hawaii.................. 1.9
Illinois................ 8.7
Iowa.................... 1.0
Kansas.................. 2.5
Maine................... 2.5
Maryland................ 3.1%
Massachusetts........... 4.7
Michigan................ 1.4
Missouri................ 0.7
New Hampshire........... 0.7
New Jersey.............. 0.8
New York................ 8.8
North Dakota............ 0.5
Ohio.................... 1.9
Oklahoma................ 2.0
Pennsylvania............ 10.1%
South Carolina.......... 4.6
Texas................... 9.5
Utah.................... 1.5
Virginia................ 5.8
Washington.............. 2.9
----
Total................... 100.1%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
ASSETS:
Investments in securities, at value
(identified cost $257,446,753)....................................... $276,961,859
Cash.................................................................. 467,572
Receivable for:
Interest.......................................................... 4,429,073
Investments sold.................................................. 203,414
Prepaid expenses and other assets..................................... 41,408
------------
TOTAL ASSETS...................................................... 282,103,326
------------
LIABILITIES:
Payable for:
Investments purchased............................................. 5,140,765
Investment advisory fee........................................... 97,343
Administration fee................................................ 61,118
Accrued expenses and other payables................................... 128,645
------------
TOTAL LIABILITIES................................................. 5,427,871
------------
NET ASSETS........................................................ $276,675,455
============
COMPOSITION OF NET ASSETS:
Paid-in-capital....................................................... $253,156,591
Net unrealized appreciation........................................... 19,515,106
Accumulated undistributed net investment income....................... 2,870,720
Accumulated undistributed net realized gain........................... 1,133,038
------------
NET ASSETS........................................................ $276,675,455
============
NET ASSET VALUE PER SHARE
26,621,566 shares outstanding (unlimited shares authorized of $.01
par value)........................................................... $10.39
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $17,895,329
-----------
EXPENSES
Investment management fee.............................................. 1,074,903
Administration fee..................................................... 674,821
Professional fees...................................................... 89,220
Shareholder reports and notices........................................ 66,333
Transfer agent fees and expenses....................................... 63,516
Registration fees...................................................... 32,294
Custodian fees......................................................... 14,157
Trustees' fees and expenses............................................ 12,587
Other.................................................................. 15,570
-----------
TOTAL EXPENSES..................................................... 2,043,401
Less: expense offset................................................... (12,845)
-----------
NET EXPENSES....................................................... 2,030,556
-----------
NET INVESTMENT INCOME.............................................. 15,864,773
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain...................................................... 3,505,748
Net change in unrealized appreciation.................................. 4,887,429
-----------
NET GAIN........................................................... 8,393,177
-----------
NET INCREASE........................................................... $24,257,950
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 15,864,773 $ 16,487,955
Net realized gain (loss).......................... 3,505,748 (218,829)
Net change in unrealized appreciation............. 4,887,429 (4,563,939)
----------- -----------
NET INCREASE.................................. 24,257,950 11,705,187
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. (15,192,789) (17,197,100)
Net realized gain................................. (2,153,881) (1,332,341)
----------- -----------
TOTAL......................................... (17,346,670) (18,529,441)
----------- -----------
Decrease from transactions in shares of beneficial
interest......................................... (8,137,220) (2,518,715)
----------- -----------
NET DECREASE.................................. (1,225,940) (9,342,969)
NET ASSETS:
Beginning of period............................... 277,901,395 287,244,364
----------- -----------
END OF PERIOD
(Including undistributed net investment income
of $2,870,720 and $2,198,686, respectively)... $ 276,675,455 $ 277,901,395
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1997
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
<PAGE> 13
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1997, 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 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,
<PAGE> 14
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
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, 1997 aggregated
$56,439,425 and $67,880,026, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent. At December 31, 1997, the Fund had transfer agent
fees and expenses payable of approximately $3,000.
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, 1997
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,814. At December 31, 1997, the Fund had an accrued pension liability of
$48,189 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, 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
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
========== ======= ===========
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
<PAGE> 15
MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
6. FEDERAL INCOME TAX STATUS
During the year ended December 31, 1997, the Fund utilized its net capital loss
carryover of approximately $199,000.
7. DIVIDENDS
On December 30, 1997, the Fund declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ----------------- ------------------
<S> <C> <C>
$ 0.045 January 9, 1998 January 23, 1998
$ 0.045 February 6, 1998 February 20, 1998
$ 0.045 March 6, 1998 March 20, 1998
</TABLE>
<PAGE> 16
MUNICIPAL INCOME TRUST II
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31*
------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............................. $ 10.11 $ 10.35 $ 9.75 $ 10.81 $ 10.46
------ ------ ------ ------ ------
Net investment income............................................ 0.59 0.59 0.65 0.66 0.69
Net realized and unrealized gain (loss).......................... 0.31 (0.17) 0.70 (0.96) 0.35
------ ------ ------ ------ ------
Total from investment operations................................. 0.90 0.42 1.35 (0.30) 1.04
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income......................................... (0.56) (0.62) (0.63) (0.64) (0.69)
Net realized gain............................................. (0.08) (0.05) (0.12) (0.14) --**
------ ------ ------ ------ ------
Total dividends and distributions................................ (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................................... $ 10.39 $ 10.11 $ 10.35 $ 9.75 $ 10.81
====== ====== ====== ====== ======
Market value, end of period...................................... $ 9.625 $ 9.125 $ 10.00 $ 9.125 $ 10.875
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+......................................... 12.82% (2.29)% 18.34% (9.61)% 10.32%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................................... 0.75%(1) 0.76%(1) 0.74% 0.76% 0.75%
Net investment income............................................ 5.79% 5.91% 6.41% 6.48% 6.46%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......................... $276,675 $277,901 $287,244 $272,647 $310,180
Portfolio turnover rate.......................................... 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) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 17
MUNICIPAL INCOME TRUST II
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MUNICIPAL INCOME TRUST II
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Municipal Income Trust II (the
"Fund") at December 31, 1997, 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, 1997 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 9, 1998
1997 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1997, the Fund paid to
shareholders $0.56 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, 1997, the Fund paid to
shareholders $0.08 per share from long-term capital gains. Of
this $0.08 distribution, $0.03 is taxable as 28% rate gain and
$0.05 is taxable as 20% rate gain.
<PAGE> 18
(This Page Intentionally Left Blank)
<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
- -------------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
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 FSB
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, 1997
