<PAGE> 1
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II Two World Trade Center
LETTER TO THE SHAREHOLDERS December 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
Interest rates rose steadily during 1999, making it the worst year for the
fixed-income markets since 1994. The 30-year Treasury bond began the year
yielding 5.1 percent amid fears of a global recession. However, the economic
problems in Asia, Europe and Latin America abated as the year progressed. The
U.S. economy, led by consumer demand, experienced robust growth. As a result,
the fixed-income markets anticipated that the Federal Reserve Board would change
monetary policy and remove the liquidity it had provided during the 1998
international economic crises. Between June and November, the Fed raised the
federal funds rate a total of 75 basis points, from 4.75 percent to 5.50
percent. At year-end, the yield on the Treasury bond was nearly 6.5 percent.
Subsequently on February 2, 2000 the fed funds rate was raised an additional 25
basis points.
MUNICIPAL MARKET CONDITIONS
The long-term insured municipal index yield began 1999 near a record low of 5.05
percent. By the end of December, this index yield had increased almost a full
percentage point, to 5.97 percent. Because bond prices move inversely to changes
in interest rates, higher yields have caused bond prices to decline
significantly. The increase in the index yield during 1999 translated into a 13
percent price decline for a generic insured municipal bond with a 30-year
maturity.
The municipal market index outperformed U.S. Treasury bonds early last year but
later gave ground as interest rates continued to rise. The ratio of the 30-year
municipal yield to the Treasury bond yield is a measure of relative performance.
The yield ratio declined from 99 percent in January to 91 percent in May 1999
and ended the year at 92 percent. A declining ratio means municipals have
outperformed Treasuries and a rising ratio indicates underperformance by
municipals. Over the past five years, the ratio has ranged from a high of 99
percent to a low of 82 percent.
Higher interest rates reduced municipal market underwriting in 1999. New-issue
volume declined 20 percent. Refunding activity, the most interest-rate-sensitive
component of supply, was down more than 50 percent.
<PAGE> 2
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1999, continued
30-YEAR BOND YIELDS 1994-1999
[BAR GRAPH]
<TABLE>
<CAPTION>
Insured 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 84.80
7 8.00 87.50
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 83.10
5.75 6.94 82.85
5.65 6.91 81.77
5.6 6.78 82.60
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 87.60
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
5.18 5.71 90.72
5.03 5.27 95.45
4.95 5.00 99.00
5.05 5.16 97.87
5 5.06 98.81
5.05 5.10 99.02
1999 5 5.09 98.23
5.10 5.58 91.40
5.15 5.63 91.47
5.2 5.66 91.87
5.3 5.83 90.91
5.47 5.96 91.78
5.55 6.10 90.98
5.75 6.06 94.88
5.85 6.05 96.69
6.03 6.16 97.89
6 6.29 95.39
5.97 6.48 92.13
</TABLE>
Source: Municipal Market Data - A Division of Thomson Financial Municipal Group
and Bloomberg L.P.
PERFORMANCE
The performance of Morgan Stanley Dean Witter Municipal Income Trust II (TFB)
was impacted by the higher interest-rate environment. For the 12-month period
ended December 31, 1999, the Fund's net asset value (NAV) declined from $10.32
to $9.42 per share. Based on this change, plus the reinvestment of tax-free
dividends totaling $0.4875 per share and a long-term capital gains distribution
of $0.02961 per share paid in June, the Fund's total NAV return was -3.08
percent. TFB's value on the New York Stock Exchange (NYSE) fell from $9.50 to
$8.0625 per share during the same period. Based on this change plus the
reinvestment of distributions, TFB's total market return was -9.88 percent. On
December 31, 1999, TFB's NYSE market price was at a 14 percent discount to its
NAV.
Monthly dividends for the fourth quarter of 1999 were declared in September.
Beginning with the October payment, the dividend per share was increased from
$0.040 to $0.0425 per share. The new dividend rate reflects the Fund's estimated
earnings over the next 6 to 12 months and the $0.112 per share cushion of
undistributed net investment income on December 31, 1999.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1999, continued
PORTFOLIO STRUCTURE
The Fund's net assets of $234 million were diversified among 16 long-term
sectors and 64 credits. Refunded bonds represented 11 percent of net assets.
Refunded issues have been refinanced and are generally defensive portfolio
holdings. At the end of December, the portfolio's average maturity was 18 years.
Average duration, a measure of sensitivity to interest-rate changes, was 8.5
years. The accompanying charts provide current information on the portfolio's
credit quality, sector distribution and geographic diversification. Optional
call provisions by year and their respective cost (book) yields are also
charted.
LOOKING AHEAD
The Federal Reserve Board raised the fed funds rates twice last summer and once
more in November. These actions confirmed its previously disclosed bias of
becoming less accommodative in the face of continued strong domestic economic
growth. It is anticipated that the central bank may raise short-term interest
rates further in 2000, again influencing long-term rates. However, we believe
municipal bonds continue to offer tax-conscious investors good long-term value
relative to Treasuries. We continue to stress credit quality and a conservative
portfolio management profile.
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps support
the market value of the Fund's shares. In addition, we would like to remind you
that the Trustees have approved a procedure whereby the Fund, when appropriate,
may purchase shares in the open market or in privately negotiated transactions
at a price not above market value or net asset value, whichever is lower at the
time of purchase. During the fiscal year ended December 31, 1999 the Fund
purchased and retired 1,316,200 shares of common stock at a weighted average
market discount of 13.98 percent.
We appreciate your ongoing support of Morgan Stanley Dean Witter Municipal
Income Trust II and look forward to continuing to serve your investment needs.
<TABLE>
<S> <C>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1999, continued
[LARGEST SECTORS BAR CHART]
LARGEST SECTORS AS OF DECEMBER 31, 1999
(% OF NET ASSETS)
<TABLE>
<CAPTION>
GENERAL
ELECTRIC OBLIGATION REFUNDED EDUCATION HOSPITAL IDR/PCR* TRANSPORTATION MORTGAGE
-------- ---------- -------- --------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
16.00% 13.00% 11.00% 8.00% 8.00% 7.00% 7.00% 6.00%
<CAPTION>
RESOURCE WATER &
RECOVERY SEWER
-------- -------
<S> <C> <C>
6.00% 6.00%
</TABLE>
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
[CREDIT RATINGS PIE CHART]
<TABLE>
<CAPTION>
CREDIT RATINGS AS OF
DECEMBER 31, 1999 (% OF TOTAL
LONG-TERM PORTFOLIO)
<S> <C> <C> <C> <C> <C>
AAA OR AAA AA OR AA A OR A BAA OR BBB NR
50.00% 16.00% 21.00% 8.00% 5.00%
</TABLE>
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC. OR
STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
GEOGRAPHIC SUMMARY OF INVESTMENTS
BASED ON MARKET VALUE AS A PERCENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<S> <C>
ALASKA.................. 2.0%
CALIFORNIA.............. 10.5
CONNECTICUT............. 1.5
DELAWARE................ 1.7
DISTRICT OF COLUMBIA.... 0.8
FLORIDA................. 4.8
HAWAII.................. 3.6
ILLINOIS................ 9.0
IOWA.................... 1.0
KANSAS.................. 2.4
LOUISIANA............... 0.5
MAINE................... 2.3
MARYLAND................ 3.4
MASSACHUSETTS........... 4.6
MICHIGAN................ 0.7
MISSOURI................ 1.3
NEW HAMPSHIRE........... 0.4
NEW JERSEY.............. 0.7
NEW YORK................ 8.3
NORTH CAROLINA.......... 6.5
NORTH DAKOTA............ 0.6
OHIO.................... 1.1
OKLAHOMA................ 2.2
PENNSYLVANIA............ 4.1
SOUTH CAROLINA.......... 6.6
TEXAS................... 9.7
UTAH.................... 1.6
VERMONT................. 0.8
VIRGINIA................ 2.4
WASHINGTON.............. 3.2
------
TOTAL................... 98.3%
======
</TABLE>
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
LETTER TO THE SHAREHOLDERS December 31, 1999, continued
CALL AND COST (BOOK) YIELD STRUCTURE
DECEMBER 31, 1999
[LINE GRAPH]
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
CALL PROTECTION: 7 YEARS
YEARS BONDS CALLABLE PERCENT CALLABLE*
- -------------------- -----------------
<S> <C>
2000 4%
2001 5%
2002 2%
2003 8%
2004 9%
2005 11%
2006 14%
2007 8%
2008 13%
2009 11%
2010+ 15%
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
BOOK YIELD: 6.1%
COST (BOOK) YIELD **
--------------------
<S> <C>
2000 8.1%
2001 6.0%
2002 6.3%
2003 6.0%
2004 8.2%
2005 6.0%
2006 5.6%
2007 6.0%
2008 5.3%
2009 5.2%
2010+ 6.5%
</TABLE>
* % BASED ON LONG-TERM PORTFOLIO.
** COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT
BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE FUND OPERATING EXPENSES. FOR
EXAMPLE, THE FUND EARNED A BOOK YIELD OF 6.0% ON 5% OF THE BONDS IN THE
LONG-TERM PORTFOLIO THAT ARE CALLABLE IN 2001.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (96.7%)
General Obligation (13.0%)
$ 2,000 District of Columbia, Ser 1999 A (FSA)...................... 5.375% 06/01/24 $ 1,766,280
Florida Board of Education, Capital Outlay
2,000 Refg Ser 1999 B (MBIA)..................................... 4.50 06/01/24 1,570,800
3,000 Ser 1998 A................................................. 4.75 06/01/28 2,405,100
2,000 Hawaii, 1999 Ser CT (FSA)................................... 5.875 09/01/16 2,002,820
2,000 Honolulu City & County, Hawaii, Ser 1999 B (FGIC)........... 5.00 07/01/22 1,708,740
5,000 Chicago, Illinois, Refg Ser 1995 A-2 (AMBAC)................ 6.25 01/01/14 5,287,600
2,000 Berkley School District, Michigan, Refg Ser 1999 (FGIC)..... 4.75 01/01/19 1,667,120
3,000 New York City, New York, 1995 Ser D (MBIA).................. 6.20 02/01/07 3,197,280
4,000 New York State, Refg Ser 1995 B............................. 5.70 08/15/10 4,094,960
5,000 North Carolina, Public School Building Ser 1999............. 4.60 04/01/17 4,239,350
3,000 Little Miami Local School District, Ohio, Ser 1998 (FGIC)... 4.875 12/01/23 2,510,820
- -------- -----------
33,000 30,450,870
- -------- -----------
Educational Facilities Revenue (7.8%)
5,000 Illinois Educational Facilities Authority, Northwestern
University Ser 1997........................................ 5.25 11/01/32 4,717,200
2,000 Massachusetts Health & Educational Facilities Authority,
Boston College Ser K....................................... 5.25 06/01/18 1,825,740
2,000 New Jersey Economic Development Authority, Educational
Testing Service Ser 1998 A (MBIA).......................... 4.75 05/15/18 1,704,000
New York State Dormitory Authority,
2,000 State University 1990 Ser A................................ 7.50 05/15/13 2,352,080
2,000 State University 1993 Ser A................................ 5.25 05/15/15 1,879,280
4,000 Delaware County Authority, Pennsylvania, Villanova
University Ser 1995 (AMBAC)................................ 5.70 08/01/15 3,953,440
2,000 Vermont Educational & Health Building Financing Agency,
Norwich University Ser 1998................................ 5.50 07/01/18 1,802,840
- -------- -----------
19,000 18,234,580
- -------- -----------
Electric Revenue (15.8%)
North Carolina Municipal Power Agency #1,
3,000 Catawba Ser 1998 A (MBIA).................................. 5.50 01/01/14 2,948,340
5,000 Catawba Ser 1998 A (MBIA).................................. 5.50 01/01/15 4,865,700
10,000 South Carolina Public Service Authority, Refg Ser 1996 A
(MBIA)..................................................... 5.75 01/01/13 10,102,100
8,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C.......... 4.70 02/01/06 7,850,400
4,000 Intermountain Power Agency, Utah, Refg 1997 Ser B (MBIA).... 5.75 07/01/19 3,872,560
3,000 Chelan County Public Utility District #1, Washington, Hydro
Ser 1997 A (AMT)........................................... 5.60 07/01/32 2,767,590
5,000 Washington Public Power Supply System, Proj #1 Refg Ser 1998
A.......................................................... 5.00 07/01/12 4,660,450
- -------- -----------
38,000 37,067,140
- -------- -----------
Hospital Revenue (8.4%)
5,000 Hawaii Department of Budget & Finance, Queen's Health 1996
Ser A...................................................... 6.00 07/01/20 4,697,500
5,000 Maine Health & Higher Educational Facilities Authority, Ser
1998 B (FSA)............................................... 4.875 07/01/23 4,064,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,300 Massachusetts Health & Educational Facilities Authority, St
Elizabeth Hospital of Boston Ser D & E (FSA)............... 6.70% 08/15/21 $ 4,465,034
2,000 University of Missouri, Health Ser 1996 A (AMBAC)........... 5.50 11/01/16 1,915,180
4,000 North Carolina Medical Care Commission, Pitt County Memorial
Hospital Ser 1998 A........................................ 4.75 12/01/28 3,122,320
1,295 Ward County, North Dakota, Trinity Crossover Refg Ser 1991
B.......................................................... 7.50 07/01/21 1,342,773
- -------- -----------
21,595 19,606,907
- -------- -----------
Industrial Development/Pollution Control Revenue (6.7%)
5,000 Wamego, Kansas, Kansas Gas & Electric Co Ser 1991 (MBIA).... 7.00 06/01/31 5,230,100
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 1,977,080
5,000 Tulsa Municipal Airport Trust, Oklahoma, American Airlines
Inc Ser 1988 (AMT)......................................... 7.375 12/01/20 5,152,750
Lexington County, South Carolina,
535 Ellett Brothers Inc Refg Ser 1988.......................... 7.50 09/01/02 530,035
1,000 Ellett Brothers Inc Refg Ser 1988.......................... 7.50 09/01/08 974,100
2,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995......... 6.00 11/01/14 1,895,500
- -------- -----------
15,535 15,759,565
- -------- -----------
Mortgage Revenue - Single Family (5.6%)
5,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA)....... 6.00 06/01/27 4,779,949
1,865 Chicago, Illinois, Ser 1997 B (AMT)......................... 6.95 09/01/28 1,934,826
450 Olathe, Kansas, GNMA Collateralized Ser 1989 A (AMT)
(MBIA)..................................................... 8.00 11/01/20 458,181
1,295 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)........ 6.40 11/15/23 1,299,144
1,145 Missouri Housing Development Commission, Home Ownership 1998
Ser D-2 (AMT).............................................. 6.30 03/01/29 1,141,840
1,025 New Hampshire Housing Finance Authority, Residential
GNMA-Backed Ser 1988 A (AMT)............................... 7.70 07/01/29 1,046,300
2,355 Virginia Housing Development Authority, 1992 Ser A.......... 7.10 01/01/22 2,399,109
- -------- -----------
13,135 13,059,349
- -------- -----------
Nursing & Health Related Facilities (4.0%)
2,000 Iowa Financing Authority, Care Initiatives Ser 1996......... 9.25 07/01/25 2,418,940
2,861 Chester County Industrial Development Authority,
Pennsylvania, RHA/PA Nursing Homes Inc Ser 1989 (a)........ 10.125 05/01/19 2,304,507
Kirbyville Health Facilities Development Authority, Texas,
623 Heartway III Corp Ser 1997 B............................... 6.00 03/20/04 594,585
3,824 Heartway III Corp Ser 1997 A............................... 10.00 03/20/18 4,035,683
- -------- -----------
9,308 9,353,715
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Public Facilities Revenue (1.2%)
$ 3,000 New York State Dormitory Authority, Court Facilities Ser
1993 A..................................................... 5.625% 05/15/13 $ 2,932,320
- -------- -----------
Recreational Facilities Revenue (1.5%)
4,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1997 Ser B (a)............................................. 5.75 09/01/27 3,554,640
- -------- -----------
Resource Recovery Revenue (5.5%)
8,000 Northeast Maryland Waste Disposal Authority, Montgomery
County Ser 1993 A (AMT).................................... 6.30 07/01/16 8,093,120
5,000 Lancaster County Solid Waste Management Authority,
Pennsylvania, 1998 Ser B (AMBAC)........................... 5.375 12/15/15 4,730,850
- -------- -----------
13,000 12,823,970
- -------- -----------
Retirement & Life Care Facilities Revenue (0.8%)
2,100 Riverside County Public Financing Authority, California, Air
- -------- Force Village West Inc COPs................................ 5.75 05/15/19 1,815,723
-----------
Tax Allocation Revenue (1.9%)
5,000 Rosemead Redevelopment Agency, California, 1993 Ser A....... 5.60 10/01/33 4,421,600
- -------- -----------
Transportation Facilities Revenue (6.8%)
5,000 Chicago, Illinois, Chicago-O'Hare International Airport Ser
1996 A (AMBAC)............................................. 5.625 01/01/12 5,017,550
3,000 Regional Transportation Authority, Illinois, Refg Ser 1999
(FSA)...................................................... 5.75 06/01/21 2,906,550
2,500 Allegheny County, Pennsylvania, Greater Pittsburgh Int'l
Airport Ser 1997 A (AMT) (MBIA)............................ 5.75 01/01/13 2,518,225
4,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)... 6.125 11/15/25 3,915,840
2,000 Pocahontas Parkway Association, Virginia, Route 895
Connector 1998 Ser A....................................... 5.50 08/15/28 1,631,060
- -------- -----------
16,500 15,989,225
- -------- -----------
Water & Sewer Revenue (6.0%)
3,000 Dade County, Florida, Ser 1995 (FGIC)....................... 5.50 10/01/18 2,867,940
2,000 Florida Governmental Utility Authority, Sarasota Utility Ser
1999 (AMBAC)............................................... 5.25 10/01/18 1,847,140
3,000 Lee County, Florida, Water & Sewer 1999 Ser A (AMBAC)....... 4.75 10/01/23 2,465,880
1,570 Massachusetts Water Resources Authority, 1993 Ser C......... 5.25 12/01/20 1,388,053
5,000 Charleston, South Carolina, Refg Cap Impr Ser 1998
(Secondary FGIC)........................................... 4.50 01/01/24 3,873,350
2,000 Loudoun County Sanitation Authority, Virginia, Ser 1998
(MBIA)..................................................... 4.75 01/01/21 1,649,780
- -------- -----------
16,570 14,092,143
- -------- -----------
Other Revenue (1.2%)
3,000 New York Local Government Assistance Corporation, Ser 1995
A.......................................................... 6.00 04/01/24 2,943,330
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS December 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Refunded (10.5%)
$ 20,100 San Francisco Redevelopment Agency, California, George R
Moscone Convention Ctr Ser 1988............................ 0.00#% 07/01/04++ $18,292,608
1,110 Illinois Health Facilities Authority, Glen Oaks Medical
Center Inc Refg 1990 Ser D (ETM)........................... 9.50 11/15/15 1,182,172
3,000 Massachusetts, 1995 Ser B (AMBAC)........................... 5.50 07/01/05+ 3,113,250
2,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C (ETM).... 4.70 02/01/06 1,948,320
- -------- ------------
26,210 24,536,350
- -------- ------------
238,953 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $232,584,512)................. 226,641,427
- -------- ------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (1.6%)
1,200 East Baton Rouge Parish, Louisiana, Exxon Co Ser 1993
(Demand 01/03/00).......................................... 4.80* 03/01/22 1,200,000
2,600 Harris County Health Facilities Development Corporation,
- -------- Texas, St Luke's Episcopal Hospital Ser 1997 (Demand
01/03/00).................................................. 4.80* 02/15/27 2,600,000
------------
3,800 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (Identified Cost
- -------- $3,800,000)..................................................................... 3,800,000
------------
$242,753 TOTAL INVESTMENTS (Identified Cost $236,384,512) (b).................. 98.3% 230,441,427
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.......................... 1.7 3,936,652
----- ------------
NET ASSETS............................................................. 100.0% $234,378,079
===== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
+ Prerefunded to call date shown.
++ Crossover refunded to call date shown.
# Currently a zero coupon; will convert to 8.50% on July 1,
2002.
* Current coupon of variable rate demand obligation.
(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 $5,235,661 and the aggregate gross
unrealized depreciation is $11,178,746, resulting in net
unrealized depreciation of $5,943,085.
Bond Insurance:
- ------------------------------------------------------------------------
AMBAC AMBAC Assurance 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
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
ASSETS:
Investments in securities, at value
(identified cost $236,384,512)............................. $230,441,427
Cash........................................................ 165,374
Receivable for:
Interest................................................ 3,902,963
Investments sold........................................ 120,608
Prepaid expenses and other assets........................... 4,852
------------
TOTAL ASSETS............................................ 234,635,224
------------
LIABILITIES:
Payable for:
Investment advisory fee................................. 91,407
Administration fee...................................... 57,130
Accrued expenses and other payables......................... 108,608
------------
TOTAL LIABILITIES....................................... 257,145
------------
NET ASSETS.............................................. $234,378,079
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $238,097,352
Net unrealized depreciation................................. (5,943,085)
Accumulated undistributed net investment income............. 2,787,645
Accumulated net realized loss............................... (563,833)
------------
NET ASSETS.............................................. $234,378,079
============
NET ASSET VALUE PER SHARE,
24,882,166 shares outstanding
(unlimited shares authorized $.01 par value)............... $9.42
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended December 31, 1999
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 14,524,476
------------
EXPENSES
Investment advisory fee..................................... 1,016,758
Administration fee.......................................... 636,540
Transfer agent fees and expenses............................ 77,645
Professional fees........................................... 57,754
Shareholder reports and notices............................. 52,860
Registration fees........................................... 32,259
Trustees' fees and expenses................................. 18,252
Custodian fees.............................................. 14,069
Other....................................................... 14,616
------------
TOTAL EXPENSES.......................................... 1,920,753
Less: expense offset........................................ (14,043)
------------
NET EXPENSES............................................ 1,906,710
------------
NET INVESTMENT INCOME................................... 12,617,766
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (563,833)
Net change in unrealized appreciation....................... (23,587,933)
------------
NET LOSS................................................ (24,151,766)
------------
NET DECREASE................................................ $(11,534,000)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
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, 1999 DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 12,617,766 $ 13,779,848
Net realized gain (loss).......................... (563,833) 4,509,561
Net change in unrealized appreciation............. (23,587,933) (1,870,258)
------------ ------------
NET INCREASE (DECREASE)....................... (11,534,000) 16,419,151
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. (12,581,467) (13,897,862)
Net realized gain................................. (769,729) (4,872,870)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS............. (13,351,196) (18,770,732)
------------ ------------
Net decrease from transactions in shares of
beneficial interest.............................. (11,007,759) (4,052,840)
------------ ------------
NET DECREASE.................................. (35,892,955) (6,404,421)
NET ASSETS:
Beginning of period............................... 270,271,034 276,675,455
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $2,787,645 and $2,751,346, respectively)... $234,378,079 $270,271,034
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter 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
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1999, 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"), 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 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
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1999, 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, 1999 aggregated
$32,356,390 and $47,772,566, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor and
Administrator, is the Fund's transfer agent. At December 31, 1999, the Fund had
transfer agent fees and expenses payable of approximately $700.
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, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,888. At December 31, 1999, the Fund had an accrued pension liability of
$52,587 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, 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
Treasury shares purchased and retired (weighted average
discount 13.98%)*.......................................... (1,316,200) (13,162) (10,994,597)
---------- -------- ------------
Balance, December 31, 1999.................................. 24,882,166 $248,821 $237,848,531
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS December 31, 1999, continued
6. DIVIDENDS
On December 28, 1999, the Fund declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ---------------- -----------------
<S> <C> <C>
$0.0425 January 7, 2000 January 21, 2000
$0.0425 February 4, 2000 February 18, 2000
$0.0425 March 3, 2000 March 17, 2000
</TABLE>
7. FEDERAL INCOME TAX STATUS
At December 31, 1999, the Fund had a net capital loss carryover of approximately
$375,000 which will be available through December 31, 2007 to offset future
capital gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $189,000 during fiscal 1999.
16
<PAGE> 17
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*
------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period........................ $10.32 $10.39 10.11 $10.35 $ 9.75
------ ------ ----- ------ ------
Income (loss) from investment operations:
Net investment income...................................... 0.49 0.53 0.59 0.59 0.65
Net realized and unrealized gain (loss).................... (0.94) 0.11 0.31 (0.17) 0.70
------ ------ ----- ------ ------
Total income (loss) from investment operations.............. (0.45) 0.64 0.90 0.42 1.35
------ ------ ----- ------ ------
Less dividends and distributions from:
Net investment income...................................... (0.49) (0.53) (0.56) (0.62) (0.63)
Net realized gain.......................................... (0.03) (0.19) (0.08) (0.05) (0.12)
------ ------ ----- ------ ------
Total dividends and distributions........................... (0.52) (0.72) (0.64) (0.67) (0.75)
------ ------ ----- ------ ------
Anti-dilutive effect of acquiring treasury shares........... 0.07 0.01 0.02 0.01 --
------ ------ ----- ------ ------
Net asset value, end of period.............................. $ 9.42 $10.32 $10.39 $10.11 $10.35
====== ====== ===== ====== ======
Market value, end of period................................. $8.063 $ 9.50 $9.625 $9.125 $10.00
====== ====== ===== ====== ======
TOTAL RETURN+............................................... (9.88)% 6.23% 12.82% (2.29)% 18.34%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.75%(1) 0.76%(1) 0.75%(1) 0.76%(1) 0.74%
Net investment income....................................... 4.92% 5.00% 5.79% 5.91% 6.41%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $234,378 $270,271 $276,675 $277,901 $287,244
Portfolio turnover rate..................................... 13% 22% 21% 11% 19%
</TABLE>
- ---------------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total 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 price obtained under the Fund's dividend reinvestment plan. Total return
does not reflect brokerage commissions.
(1) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 18
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") at December 31, 1999, 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 accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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, 1999 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, 2000
--------------------------------------------------------------------
1999 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1999, the Fund paid to
shareholders $0.49 per share from tax-exempt income.
For the year ended December 31, 1999, the Fund paid to
shareholders $0.03 per share from long-term capital gains.
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST II
REVISED INVESTMENT POLICY
On January 26, 2000, the Trustees of Morgan Stanley Dean Witter Municipal Income
Trust II (the "Fund") approved an investment policy whereby the Fund would be
permitted to invest up to 10% of its assets in inverse floating rate municipal
obligations. The inverse floating rate municipal obligations in which the Fund
will invest are typically created through a division of a fixed rate municipal
obligation into two separate instruments, a short-term obligation and a
long-term obligation. The interest rate on the short-term obligation is set at
periodic auctions. The interest rate on the long-term obligation is the rate the
issuer would have paid on the fixed income obligation: (i) plus the difference
between such fixed rate and the rate on the short-term obligation, if the
short-term rate is lower than the fixed rate; or (ii) minus such difference if
the interest rate on the short-term obligation is higher than the fixed rate.
The interest rates on these obligations generally move in the reverse direction
of market interest rates. If market interest rates fall, the interest rate on
the obligation will increase and if market interest rates increase, the interest
rate on the obligation will fall. Inverse floating rate municipal obligations
offer the potential for higher income than is available from fixed rate
obligations of comparable maturity and credit rating. They also carry greater
risks. In particular, the prices of inverse floating rate municipal obligations
are more volatile, i.e., they increase and decrease in response to changes in
interest rates to a greater extent than comparable fixed rate obligations.
19
<PAGE> 20
TRUSTEES
- ----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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, 1999
