<PAGE> 1
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II Two World Trade Center
LETTER TO THE SHAREHOLDERS December 31, 1998 New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the annual report of Morgan Stanley Dean Witter
Municipal Income Trust II (TFB) for the year ended December 31, 1998.
On December 21, 1998, the Fund changed its name from Municipal Income Trust II
to Morgan Stanley Dean Witter Municipal Income Trust II. Details on the name
change were mailed to shareholders in mid-December under separate cover.
Since our last report six months ago, global financial turmoil, including the
Russian currency crisis, continued to affect the securities markets. The
resulting flight-to-quality bond rally pushed U.S. Treasury bond yields to
30-year lows. Municipal bond yields declined but lagged the downward trend of
Treasury yields.
The deflationary impact of the international financial crisis began to temper
U.S. economic growth prior to the summer's tumultuous market activity. Lower
commodity prices, cheaper imports and improved
BOND YIELDS 1994-1998
<TABLE>
<CAPTION>
Insured Municipal Yields
30-Year 30-Year Insured as a Percentage
U.S. Treasury Yields Municipal Yields of U.S. Treasury Yields
<S> <C> <C> <C>
6.34 5.40 85.17
6.24 5.40 86.54
6.66 5.80 87.09
7.09 6.40 90.27
7.32 6.35 86.75
7.43 6.25 84.12
1994 7.61 6.50 85.41
7.39 6.25 84.57
7.45 6.30 84.56
7.81 6.55 83.87
7.96 6.75 84.80
8.00 7.00 87.50
7.88 6.75 85.66
7.70 6.40 83.12
7.44 6.15 82.66
7.43 6.15 82.77
7.34 6.20 84.47
6.66 5.80 87.09
1995 6.62 6.10 92.15
6.86 6.10 88.92
6.66 6.00 90.08
6.48 5.95 91.82
6.33 5.75 90.84
6.14 5.50 89.56
5.94 5.35 90.07
6.03 5.40 89.55
6.46 5.80 86.69
6.66 5.85 87.84
6.89 5.95 86.36
6.99 6.05 86.55
1996 6.89 5.90 85.63
6.97 5.85 83.93
7.11 5.90 82.98
6.93 5.70 82.25
6.64 5.65 85.09
6.35 5.50 86.61
6.63 5.60 84.46
6.79 5.70 83.95
6.80 5.65 83.08
7.10 5.90 83.10
6.94 5.75 82.85
6.91 5.65 81.77
1997 6.78 5.60 82.60
6.30 5.30 84.00
6.61 5.50 83.00
6.40 5.40 84.40
6.15 5.35 86.90
6.05 5.30 87.60
5.92 5.15 86.90
5.80 5.15 88.80
5.92 5.20 87.80
5.93 5.25 88.50
5.95 5.35 89.90
5.80 5.20 89.66
1998 5.65 5.20 92.04
5.71 5.18 90.72
5.27 5.03 95.45
5.00 4.95 99.00
5.16 5.05 97.87
5.06 5.00 98.81
5.10 5.05 99.00
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
productivity offset the potential inflationary impact of strong domestic
employment. With inflation held in check, the Federal Reserve Board provided
liquidity to the markets by lowering short-term interest rates. Between the end
of September and the middle of November, the Federal Reserve Open Market
Committee cut the federal funds rate 75 basis points from 5.50 percent to 4.75
percent in three separate moves.
MUNICIPAL MARKET CONDITIONS
At the end of December, the long-term insured municipal bond index yield stood
at 5.05 percent. This Index declined only 10 basis points from 5.15 percent over
the last 12 months. In contrast, the 30-year U.S. Treasury yield fell 80 basis
points during the same period.
As municipals lagged the rally in Treasuries, the ratio of municipal yields to
Treasury yields rose sharply to 99 percent. A rising ratio means that the
attractiveness of municipals relative to Treasuries has improved. The rise in
this ratio is similar to the jump witnessed in 1986 when a radical legislative
tax-reform proposal threatened the favorable tax advantage of municipal bonds.
The overall decline in interest rates led to a substantial increase in new money
municipal financing and stimulated the refunding of older, high cost debt. Total
underwriting of $284 billion for 1998 approached the record set in 1993. Half
the underwriting volume was enhanced with bond insurance. Refundings represented
29 percent of total new issuance.
PERFORMANCE
The Fund's net asset value (NAV) declined from $10.39 to $10.32 per share during
the year ended December 31, 1998. Based on this NAV change plus reinvestment of
tax-free dividends of $0.53 per share and taxable capital gains distributions of
$0.1856, the Fund's total NAV return was 7 percent. The Fund's price on the New
York Stock Exchange fell from $9.625 to $9.50 per share. Based on this change in
market price plus reinvestment of dividends and capital gains distributions the
Fund's total market return was 6.23 percent. On December 31, 1998, TFB traded at
a 8 percent discount to NAV.
Monthly dividends for the first quarter of 1999 were declared in December.
During 1998 the level of undistributed net investment income remained unchanged
at $0.11 per share. Beginning with the October 1998 dividend, the monthly
dividend was reduced from $0.045 per share to $0.04 per share, to more closely
reflect the Fund's anticipated income.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
[LONG-TERM SECTORS PIE CHART]
<TABLE>
<CAPTION>
LONG-TERM SECTORS as of December 31, 1998
(% of Net Assets)
<S> <C>
Hospital 16%
Electric 16%
Refunded 9%
Transportation 9%
General Obligation 8%
Education 8%
Water & Sewer 7%
IDR/PCR* 6%
Mortgage 6%
All Others 15%
* Industrial Development/Pollution Control Revenue
Portfolio structure is subject to change.
</TABLE>
[CREDIT RATINGS PIE CHART]
<TABLE>
<CAPTION>
CREDIT RATINGS as of December 31, 1998
(% of Total Long-Term Portfolio)
<S> <C>
Aaa or AAA 51%
Aa or AA 17%
A or A 20%
Baa or BBB 7%
NR 5%
As measured by Moody's Investors Service, Inc. or
Standard & Poor's Corp.
Portfolio structure is subject to change.
</TABLE>
[CALL STRUCTURE BAR CHART]
<TABLE>
<CAPTION>
CALL STRUCTURE as of December 31, 1998
(% of Total Long-Term Portfolio)
WEIGHTED AVERAGE
CALL PROTECTION: 8 YEARS
Years Bonds Callable Percent Callable
<S> <C>
1999 1%
2000 3%
2001 4%
2002 2%
2003 9%
2004 8%
2005 10%
2006 13%
2007 16%
2008 17%
2009+ 17%
Portfolio structure is subject to change.
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
PORTFOLIO STRUCTURE
Morgan Stanley Dean Witter Municipal Income Trust II remained fully invested in
long-term municipal bonds during the year. Investments were diversified among 14
long-term sectors and 64 credits. As illustrated in the accompanying chart of
bond calls, weighted average call protection was 8 years.
At the time of issuance, municipal bonds generally have 10 years of protection
from the municipality's option to call bonds for redemption. Interest rates have
declined since the Fund's inception and we anticipate that most municipal
issuers will use their optional call provisions to refinance portfolio holdings
at lower yields. In fact, the bonds in the refunded category have been
refinanced and the call dates announced.
The average maturity of the portfolio was 20 years. Average duration (a measure
of sensitivity to interest rate changes) was 7.8 years. High grade credit
quality was maintained with over two-thirds of long-term holdings rated double
or triple "A."
LOOKING AHEAD
Global economic conditions seem likely to keep inflationary pressures under
control and have contributed to lower interest rates. The fixed income markets
appear concerned about the risk of reflation as countries seek to stimulate
economic growth. However, the ability of the Fed to maintain stability by
responding with appropriate monetary policy is encouraging. With the municipal
relationship to Treasuries more favorable than it has been in the last 10 years,
the outlook for municipal bonds is positive.
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, the Fund purchased and
retired 423,200 shares of common stock at a weighted average discount of 8.00
percent.
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
We appreciate your ongoing support of Morgan Stanley Dean Witter 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
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (98.0%)
General Obligation (7.7%)
$ 5,000 Chicago, Illinois, Refg Ser 1995 A-2 (AMBAC)................ 6.25% 01/01/14 $ 5,851,150
2,000 Rosemont, Illinois, 1993 Ser B.............................. 5.50 12/01/07 2,180,540
2,000 Michigan Municipal Bond Authority, School Ser 1998.......... 5.25 12/01/13 2,099,100
3,000 New York City, New York, 1995 Ser D (MBIA).................. 6.20 02/01/07 3,403,140
4,000 New York State, Refg Ser 1995 B............................. 5.70 08/15/10 4,371,000
3,000 Little Miami Local School District, Ohio, Ser 1998 (FGIC)... 4.875 12/01/23 2,913,510
- -------- -----------
19,000 20,818,440
- -------- -----------
Educational Facilities Revenue (7.5%)
5,000 Illinois Educational Facilities Authority, Northwestern
University Ser 1997........................................ 5.25 11/01/32 5,281,200
2,000 Massachusetts Health & Educational Facilities Authority,
Boston College Ser K....................................... 5.25 06/01/18 2,023,780
2,000 New Jersey Economic Development Authority, Educational
Testing Service Ser 1998 A (MBIA).......................... 4.75 05/15/18 1,956,760
New York State Dormitory Authority,
2,000 State University 1990 Ser A................................ 7.50 05/15/13 2,565,560
2,000 State University 1993 Ser A................................ 5.25 05/15/15 2,102,540
4,000 Delaware County Authority, Pennsylvania, Villanova
University Ser 1995 (AMBAC)................................ 5.70 08/01/15 4,303,280
2,000 Vermont Educational & Health Building Financing Agency,
Norwich University Ser 1998................................ 5.50 07/01/18 2,022,100
- -------- -----------
19,000 20,255,220
- -------- -----------
Electric Revenue (15.7%)
North Carolina Municipal Power Agency,
3,000 #1 Catawba Electric Ser 1998 A (MBIA)...................... 5.50 01/01/14 3,276,600
5,000 #1 Catawba Electric Ser 1998 A (MBIA)...................... 5.50 01/01/15 5,434,550
10,000 South Carolina Public Service Authority, Refg Ser 1996 A
(MBIA)..................................................... 5.75 01/01/13 10,921,600
10,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C.......... 4.70 02/01/06 10,321,400
4,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA).... 5.75 07/01/19 4,286,680
3,000 Chelan County Public Utility District #1, Washington, Hydro
Ser 1997 A (AMT)........................................... 5.60 07/01/32 3,118,320
5,000 Washington Public Power Supply System, Proj #1 Refg Ser 1998
A.......................................................... 5.00 07/01/12 5,080,950
- -------- -----------
40,000 42,440,100
- -------- -----------
Hospital Revenue (15.7%)
10,000 University of Colorado Hospital Authority, Refg Ser 1997 A
(AMBAC).................................................... 5.25 11/15/22 10,090,100
5,000 Hawaii Department of Budget & Finance, Queen's Health 1996
Ser A...................................................... 6.00 07/01/20 5,424,450
5,000 Maine Health & Higher Educational Facilities Authority, Ser
1998 B (FSA)............................................... 4.875 07/01/23 4,776,350
4,300 Massachusetts Health & Educational Facilities Authority,
Saint Elizabeth Hospital of Boston Ser D & E (FSA)......... 6.70 08/15/21 4,655,739
4,000 Michigan Hospital Finance Authority, Detroit Medical Center
Ser 1997 A (AMBAC)......................................... 5.25 08/15/27 3,993,880
2,000 University of Missouri, Health Ser 1996 A (AMBAC)........... 5.50 11/01/16 2,096,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 5,000 North Carolina Medical Care Commission, Pitt County Memorial
Hospital Ser 1998 A........................................ 4.75% 12/01/28 $ 4,660,250
1,295 Ward County, North Dakota, Trinity Crossover Refg Ser 1991
B.......................................................... 7.50 07/01/21 1,394,689
2,500 Delaware County Authority, Catholic Health Ser 1998 A
(AMBAC).................................................... 4.875 11/15/26 2,379,200
3,000 Lehigh County General Purpose Authority, Lehigh Valley
Health 1998 Ser A (MBIA)................................... 5.00 07/01/28 2,927,670
- -------- -----------
42,095 42,398,428
- -------- -----------
Industrial Development/Pollution Control Revenue (6.2%)
5,000 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA).... 7.00 06/01/31 5,419,500
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 2,189,220
5,000 Tulsa Municipal Airport Trust, Oklahoma, American Airlines
Inc Ser 1988 (AMT)......................................... 7.375 12/01/20 5,359,400
Lexington County, South Carolina,
685 Ellett Brothers Inc Refg Ser 1988.......................... 7.50 09/01/02 697,508
1,000 Ellett Brothers Inc Refg Ser 1988.......................... 7.50 09/01/08 1,032,220
2,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995......... 6.00 11/01/14 2,082,540
- -------- -----------
15,685 16,780,388
- -------- -----------
Mortgage Revenue - Single Family (6.1%)
5,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA)....... 6.00 06/01/27 5,297,699
1,895 Chicago, Illinois, Ser 1997 B (AMT)......................... 6.95 09/01/28 2,148,115
575 Olathe, Kansas, GNMA Collateralized Ser 1989 A (AMT)
(MBIA)..................................................... 8.00 11/01/20 594,746
3,100 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)........ 6.40 11/15/23 3,243,158
1,150 Missouri Housing Development Commission, Home Ownership 1998
Ser D-2 (AMT).............................................. 6.30 03/01/29 1,271,716
1,540 New Hampshire Housing Finance Authority, Residential
GNMA-Backed Ser 1988 A (AMT)............................... 7.70 07/01/29 1,600,938
2,355 Virginia Housing Development Authority, 1992 Ser A.......... 7.10 01/01/22 2,439,427
- -------- -----------
15,615 16,595,799
- -------- -----------
Nursing & Health Related Facilities Revenue (3.9%)
2,000 Iowa Financing Authority, Care Initiatives Ser 1996......... 9.25 07/01/25 2,684,440
2,861 Chester County Industrial Development Authority,
Pennsylvania, RHA/PA Nursing Homes Inc Ser 1989............ 10.125 05/01/19 2,679,784
Kirbyville Health Facilities Development Corporation, Texas,
623 Heartway III Corp Ser 1997 B................................ 0.00# 03/20/04 506,655
3,894 Heartway III Corp Ser 1997 A................................ 10.00 03/20/18 4,520,761
- -------- -----------
9,378 10,391,640
- -------- -----------
Public Facilities Revenue (1.2%)
3,000 New York State Dormitory Authority, Court Facilities Ser
A.......................................................... 5.625 05/15/13 3,125,280
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Resource Recovery Revenue (5.1%)
$ 8,000 Northeast Maryland Waste Disposal Authority, Montgomery
County Ser 1993 A (AMT).................................... 6.30% 07/01/16 $ 8,566,000
5,000 Lancaster County Solid Waste Management Authority,
Pennsylvania, 1998 Ser A (AMT) (AMBAC)..................... 5.375 12/15/15 5,222,050
- -------- -----------
13,000 13,788,050
- -------- -----------
Tax Allocation Revenue (1.9%)
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A....... 5.60 10/01/33 5,195,750
- -------- -----------
Transportation Facilities Revenue (8.6%)
5,000 Chicago, Illinois, Chicago-O'Hare International Airport Ser
1996 A (AMBAC)............................................. 5.625 01/01/12 5,401,550
5,000 Massachusetts Turnpike Authority, Metropolitan 1997 Ser A
(MBIA)..................................................... 5.00 01/01/37 4,859,200
3,000 Ohio Turnpike Commission, Ser 1998 B (FGIC)................. 4.50 02/15/24 2,770,470
2,500 Allegheny County, Pennsylvania, Greater Pittsburgh Int'l
Airport Ser 1997 A (AMT) (MBIA)............................ 5.75 01/01/13 2,764,350
4,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)... 6.125 11/15/25 4,376,960
3,000 Pocahontas Parkway Association, Virginia, Route 895
Connector Ser 1998 A....................................... 5.50 08/15/28 2,995,440
- -------- -----------
22,500 23,167,970
- -------- -----------
Water & Sewer Revenue (7.2%)
3,000 Dade County, Florida, Ser 1995 (FGIC)....................... 5.50 10/01/18 3,146,190
3,000 Tampa Bay Water, Florida, Utility Ser 1998 B (FGIC)......... 4.75 10/01/27 2,859,690
3,000 Massachusetts Water Resources Authority, 1993 Ser C......... 5.25 12/01/20 3,019,170
5,000 Charleston, South Carolina, Refg Cap Impr Ser 1998
(Secondary FGIC)........................................... 4.50 01/01/24 4,592,000
2,000 Loudoun County Sanitation Authority, Virginia, Ser 1998
(MBIA)..................................................... 4.75 01/01/21 1,913,160
4,000 Prince William County Service Authority, Virginia, Refg Ser
1993 (FGIC)................................................ 5.00 07/01/21 3,936,320
- -------- -----------
20,000 19,466,530
- -------- -----------
Other Revenue (2.7%)
4,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1997 Ser B (a)............................................. 5.75 09/01/27 4,151,520
3,000 New York Local Government Assistance Corporation, Ser 1995
A.......................................................... 6.00 04/01/24 3,262,260
- -------- -----------
7,000 7,413,780
- -------- -----------
Refunded (8.5%)
20,100 San Francisco Redevelopment Agency, California, George R
Moscone Convention Ctr Ser 1988............................ 0.00## 07/01/04++ 18,416,223
1,170 Illinois Health Facilities Authority, Glen Oaks Medical
Center Inc
Refg 1990 Ser D (ETM)...................................... 9.50 11/15/15 1,317,993
3,000 Massachusetts, 1995 Ser B (AMBAC)........................... 5.50 07/01/05+ 3,282,120
- -------- -----------
24,270 23,016,336
- -------- -----------
255,543 TOTAL TAX- EXEMPT MUNICIPAL BONDS (Identified Cost $247,208,863)................ 264,853,711
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATION (0.4%)
$ 1,200 East Baton Rouge Parish, Louisiana, Exxon Corp Ser 1989
- -------- (Demand 01/04/99) (Identified Cost $1,200,000)............. 5.05*% 11/01/19 $ 1,200,000
------------
$256,743 TOTAL INVESTMENTS (Identified Cost $248,408,863) (b)........ 98.4% 266,053,711
=========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.............. 1.6 4,217,323
------- ------------
NET ASSETS.................................................. 100.0% $270,271,034
======= ============
</TABLE>
- ---------------------
<TABLE>
<S> <C>
AMT Alternative Minimum Tax.
ETM Escrowed to maturity.
+ Prerefunded to call date shown.
* Current coupon of variable rate demand obligation.
++ Crossover refunded to call date shown.
# Currently a zero coupon; will convert to 6% on March 20,
2000.
## 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 $18,009,563 and the aggregate gross
unrealized depreciation is $364,715, resulting in net
unrealized appreciation of $17,644,848.
<CAPTION>
Bond Insurance:
- ---------------
<S> <C>
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
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
December 31, 1998
<TABLE>
<S> <C>
Alaska................... 2.0%
California............... 8.7
Colorado................. 3.7
Connecticut.............. 1.5
Florida.................. 2.2
Hawaii................... 2.0
Illinois................. 8.2
Iowa..................... 1.0
Kansas................... 2.2
Louisiana................ 0.4
Maine.................... 3.0
Maryland................. 3.2%
Massachusetts............ 6.6
Michigan................. 2.3
Missouri................. 1.3
New Hampshire............ 0.6
New Jersey............... 0.7
New York................. 7.8
North Carolina........... 4.9
North Dakota............. 0.5
Ohio..................... 2.1
Oklahoma................. 2.0
Pennsylvania............. 7.5%
South Carolina........... 6.4
Texas.................... 8.1
Utah..................... 1.6
Vermont.................. 0.7
Virginia................. 4.2
Washington............... 3.0
------
Total.................... 98.4%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS:
Investments in securities, at value
(identified cost $248,408,863)............................. $266,053,711
Cash........................................................ 232,638
Interest receivable......................................... 4,259,995
Prepaid expenses and other assets........................... 4,519
-----------
TOTAL ASSETS............................................ 270,550,863
-----------
LIABILITIES:
Payable for:
Investment advisory fee................................. 99,404
Administration fee...................................... 62,378
Accrued expenses and other payables......................... 118,047
-----------
TOTAL LIABILITIES....................................... 279,829
-----------
NET ASSETS.............................................. $270,271,034
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $249,105,111
Net unrealized appreciation................................. 17,644,848
Accumulated undistributed net investment income............. 2,751,346
Accumulated undistributed net realized gain................. 769,729
-----------
NET ASSETS.............................................. $270,271,034
===========
NET ASSET VALUE PER SHARE,
26,198,366 shares outstanding
(unlimited shares authorized of $.01 par value)............ $10.32
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $15,847,836
-----------
EXPENSES
Investment advisory fee..................................... 1,076,673
Administration fee.......................................... 676,000
Transfer agent fees and expenses............................ 107,832
Professional fees........................................... 83,182
Shareholder reports and notices............................. 55,610
Registration fees........................................... 32,251
Trustees' fees and expenses................................. 19,247
Custodian fees.............................................. 14,474
Other....................................................... 17,159
-----------
TOTAL EXPENSES.......................................... 2,082,428
Less: expense offset........................................ (14,440)
-----------
NET EXPENSES............................................ 2,067,988
-----------
NET INVESTMENT INCOME................................... 13,779,848
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 4,509,561
Net change in unrealized appreciation....................... (1,870,258)
-----------
NET GAIN................................................ 2,639,303
-----------
NET INCREASE................................................ $16,419,151
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER 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, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 13,779,848 $ 15,864,773
Net realized gain................................. 4,509,561 3,505,748
Net change in unrealized appreciation............. (1,870,258) 4,887,429
------------ ------------
NET INCREASE.................................. 16,419,151 24,257,950
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. (13,897,862) (15,192,789)
Net realized gain................................. (4,872,870) (2,153,881)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS............. (18,770,732) (17,346,670)
------------ ------------
Net decrease from transactions in shares of
beneficial interest.............................. (4,052,840) (8,137,220)
------------ ------------
NET DECREASE.................................. (6,404,421) (1,225,940)
NET ASSETS:
Beginning of period............................... 276,675,455 277,901,395
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $2,751,346 and $2,870,720, respectively)... $270,271,034 $276,675,455
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Municipal Income Trust II (the "Fund"), formerly
Municipal Income Trust II, 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
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1998, 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 pays the salaries of all personnel,
including officers of the Fund, who are employees of the Investment Advisor.
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
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
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, 1998 aggregated
$59,553,986 and $77,661,315, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor and
Administrator, is the Fund's transfer agent. At December 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $12,000.
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, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,984. At December 31, 1998, the Fund had an accrued pension liability of
$51,044 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. DIVIDENDS
On December 29, 1998, the Fund declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ---------------- -----------------
<S> <C> <C>
$0.04 January 8, 1999 January 22, 1999
$0.04 February 5, 1999 February 19, 1999
$0.04 March 5, 1999 March 19, 1999
</TABLE>
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
6. 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) (8,128,632)
---------- -------- ------------
Balance, December 31, 1997.................................. 26,621,566 266,215 252,890,376
Treasury shares purchased and retired (weighted average
discount 8.00%)*........................................... (423,200) (4,232) (4,048,608)
Reclassification due to permanent book/tax differences...... -- -- 1,360
---------- -------- ------------
Balance, December 31, 1998.................................. 26,198,366 $261,983 $248,843,128
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER 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*
-------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 10.39 $ 10.11 $ 10.35 $ 9.75 $ 10.81
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income...................................... 0.53 0.59 0.59 0.65 0.66
Net realized and unrealized gain (loss).................... 0.11 0.31 (0.17) 0.70 (0.96)
-------- -------- -------- -------- --------
Total income (loss) from investment operations.............. 0.64 0.90 0.42 1.35 (0.30)
-------- -------- -------- -------- --------
Less dividends and distributions from:
Net investment income...................................... (0.53) (0.56) (0.62) (0.63) (0.64)
Net realized gain.......................................... (0.19) (0.08) (0.05) (0.12) (0.14)
-------- -------- -------- -------- --------
Total dividends and distributions........................... (0.72) (0.64) (0.67) (0.75) (0.78)
-------- -------- -------- -------- --------
Anti-dilutive effect of acquiring treasury shares........... 0.01 0.02 0.01 -- 0.02
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 10.32 $ 10.39 $ 10.11 $ 10.35 $ 9.75
======== ======== ======== ======== ========
Market value, end of period................................. $ 9.50 $ 9.625 $ 9.125 $ 10.00 $ 9.125
======== ======== ======== ======== ========
TOTAL RETURN+............................................... 6.23% 12.82% (2.29)% 18.34% (9.61)%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.76%(1) 0.75%(1) 0.76%(1) 0.74% 0.76%
Net investment income....................................... 5.00% 5.79% 5.91% 6.41% 6.48%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $270,271 $276,675 $277,901 $287,244 $272,647
Portfolio turnover rate..................................... 22% 21% 11% 19% 10%
</TABLE>
- ---------------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
+ 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
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER 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 Morgan Stanley Dean Witter
Municipal Income Trust II (the "Fund"), formerly Municipal Income Trust II, at
December 31, 1998, 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, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
--------------------------------------------------------------------
1998 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1998, the Fund paid to
shareholders $0.53 per share from net investment income. All
of these dividends from net investment income were exempt
interest dividends, excludable from gross income for Federal
income tax purposes.
For the year ended December 31, 1998, the Fund paid to
shareholders $0.18 per share from long-term capital gains.
This capital gain distribution, is taxable as 20% rate gain.
19
<PAGE> 20
TRUSTEES
- ------------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Phillip 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
MORGAN STANLEY
DEAN WITTER
MUNICIPAL
INCOME TRUST II
Annual Report
December 31, 1998
