<PAGE> 1
MUNICIPAL INCOME OPPORTUNITIES TRUST II Two World Trade Center, New York, New
York 10048
LETTER TO THE SHAREHOLDERS August 31, 1998
DEAR SHAREHOLDER:
We are pleased to present the semi-annual report on the operations of Municipal
Income Opportunities Trust II (OIB) for the period ended August 31, 1998.
During July and August, the financial markets were battered by continued
economic turmoil in Asia and a currency crisis in Russia. This led to a
flight-to-quality rally for U.S. Treasury bonds. Yields on Treasury notes and
bonds fell to post World War II lows. Municipal bond yields followed the
downward trend of Treasury yields but at a more moderate pace.
The deflationary impact of the Asian financial crisis had begun to temper U.S.
economic growth prior to the summer's tumultuous market activity. Historically
high employment conditions were offset by improved productivity, lower prices
for oil and other commodities and cheaper imports. This held inflation in check.
On September 29, 1998, the Federal Reserve lowered the federal funds rate 25
basis points from 5.50% to 5.25%.
BOND YIELDS 1994 - 1998
<TABLE>
<CAPTION>
30-Year Insured 30-Year U.S. Insured Municipal Yields as a
Municipal Yields Treasury Yields Percentage of U.S. Treasury Yields
<S> <C> <C> <C>
1994 5.4% 6.34% 85.17%
5.4 6.24 86.54
5.8 6.66 87.09
6.4 7.09 90.27
6.35 7.32 86.75
6.25 7.43 84.12
6.5 7.61 85.41
6.25 7.39 84.57
6.3 7.45 84.56
6.55 7.81 83.87
6.75 7.96 84.8
7 8.00 87.5
6.75 7.88 85.66
1995 6.4 7.70 83.12
6.15 7.44 82.66
6.15 7.43 82.77
6.2 7.34 84.47
5.8 6.66 87.09
6.1 6.62 92.15
6.1 6.86 88.92
6 6.66 90.09
5.95 6.48 91.82
5.75 6.33 90.84
5.5 6.14 89.58
5.35 5.94 90.07
1996 5.4 6.03 89.55
5.6 6.46 86.69
5.85 6.66 87.84
5.95 6.89 86.36
6.05 6.99 86.55
5.9 6.89 85.63
5.85 6.97 83.93
5.9 7.11 82.98
5.7 6.93 82.25
5.65 6.64 85.09
5.5 6.35 86.61
5.6 6.63 84.46
1997 5.7 6.79 83.95
5.65 6.80 83.09
5.9 7.10 83.1
5.75 6.94 82.85
5.65 6.91 81.77
5.6 6.78 82.6
5.3 6.30 84.13
5.5 6.61 83.21
5.4 6.40 84.38
5.35 6.15 86.99
5.3 6.05 87.6
5.15 5.92 86.99
1998 5.15 5.80 88.79
5.2 5.92 87.84
5.25 5.93 88.53
5.35 5.95 89.92
5.2 5.80 89.66
5.2 5.65 92.04
5.03 5.27 90.72
5.03 5.27 95.45
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MUNICIPAL INCOME OPPORTUNITIES TRUST II
LETTER TO THE SHAREHOLDERS August 31, 1998, continued
MUNICIPAL MARKET CONDITIONS
At the end of August, long-term insured index yields stood at 5.05 percent,
their lowest level in the last 25 years. Index yields declined 45 basis points
from 5.50 percent over the last 12 months. In contrast, the 30-year U.S.
Treasury yield fell 130 basis points during the same period.
As municipals lagged the rally in Treasuries, the ratio of municipal yields to
Treasury yields rose to 95 percent. This ratio is at its highest level since
1986 when radical tax-reform proposals pushed it over 100 percent. A rising
ratio means that municipals have underperformed Treasuries and have become more
attractive on a relative basis.
The overall decline in interest rates led to a substantial increase in new issue
municipal volume. Municipal issuance is on a pace to challenge 1993's record of
$292 billion. For 1998 year-to-date, total municipal volume of $192 billion is
up 45 percent. Half the underwritings were enhanced with bond insurance.
Refundings represented nearly one-third of total new issues.
PERFORMANCE
The Fund's net asset value (NAV) remained unchanged at $9.07 per share during
the six month period. Based on reinvestment of tax-free dividends of $0.27 per
share, the Fund's total NAV return was 3.11 percent. OIB's price on the New York
Stock Exchange declined from $9.0625 to $8.75 per share. Based on this change in
market price plus reinvestment of dividends and distributions, the Fund's total
market return was -0.45 percent. On August 31, 1998, OIB traded at a 3.5 percent
discount to its NAV. This means that the market price of the shares was below
the NAV. While the NAV return was positive, the market return was negative.
Monthly dividends for the fourth quarter of 1998 were declared in September.
Beginning with the October 1998 dividend, the monthly dividend was reduced from
$0.045 per share to $0.0425 per share, to more closely reflect the Fund's
anticipated income. The level of undistributed net investment income increased
from $0.090 to $0.098 per share over the past six months.
PORTFOLIO STRUCTURE
On August 31, 1998 OIB's investments were diversified among 15 long-term sectors
and 67 credits. As illustrated in the accompanying chart of bond calls, weighted
average call protection was 6 years. The Fund's average maturity of the
portfolio was 21 years. Non-rated securities comprised 53 percent of the Fund's
assets. The bonds of one issuer representing 2.2 percent of net assets were not
accruing
2
<PAGE> 3
MUNICIPAL INCOME OPPORTUNITIES TRUST II
LETTER TO THE SHAREHOLDERS August 31, 1998, continued
interest. Three other issues, totaling 6.7 percent of net assets were accruing
income, but may face difficulties meeting future debt service requirements.
LOOKING AHEAD
Events in Asia and elsewhere have strengthened the U.S. dollar and contributed
to lower interest rates. World economic conditions seem likely to keep
inflationary pressures under control. With the municipal relationship to
Treasuries as strong as it has been in the last 10 years, the outlook for
municipal bonds is favorable.
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is
<TABLE>
<CAPTION>
LARGEST SECTORS as of August 31, 1998 (% of Net Assets)
<S> <C>
IDR/PCR* 26%
Nursing & Health 18%
Mortgage 16%
Transportation 7%
Retirement & Life Care 6%
Hospital 6%
Education 5%
All Others 16%
* Industrial Development/Pollution Control Revenue
Portfolio structure is subject to change
</TABLE>
<TABLE>
<CAPTION>
CALL STRUCTURE as of August 31, 1998
(% of Total Long-Term Portfolio)
WEIGHTED AVERAGE
CALL PROTECTION: 6 YEARS
Years Bonds Callable Percent Callable
<S> <C>
1998 2%
1999 16%
2000 11%
2001 8%
2002 1%
2003 5%
2004 2%
2005 10%
2006 16%
2007 10%
2008 9%
2009+ 10%
Portfolio structure is subject to change.
</TABLE>
3
<PAGE> 4
MUNICIPAL INCOME OPPORTUNITIES TRUST II
LETTER TO THE SHAREHOLDERS August 31, 1998, continued
through purchases in the open market. This method helps to support the market
price 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 price or net asset value, whichever is lower at the time
of purchase. During the six-month period ended August 31, 1998, the Fund
purchased and retired 19,100 shares of common stock at a weighted average market
discount of 6.30 percent.
We appreciate your ongoing support of Municipal Income Opportunities Trust II
and look forward to continuing to serve your investment needs.
Very truly yours,
/S/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
4
<PAGE> 5
MUNICIPAL INCOME OPPORTUNITIES TRUST II
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 23, 1998, an annual meeting of the Fund's shareholders was held for the
purpose of voting on two separate matters, the results of which were as follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Wayne E. Hedien
For......................................................... 15,925,637
Withheld.................................................... 352,419
Manuel H. Johnson
For......................................................... 15,924,543
Withheld.................................................... 353,513
John L. Schroeder
For......................................................... 15,922,932
Withheld.................................................... 355,124
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire, Michael
E. Nugent and Philip J. Purcell.
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP (THE SUCCESSOR
FIRM TO PRICE WATERHOUSE LLP AS OF JULY 1, 1998) AS THE FUND'S INDEPENDENT
ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................... 15,851,902
Against..................................................... 98,258
Abstain..................................................... 327,896
</TABLE>
5
<PAGE> 6
MUNICIPAL INCOME OPPORTUNITIES TRUST II
PORTFOLIO OF INVESTMENTS August 31, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (97.6%)
General Obligation (1.2%)
$ 2,000 New York City, New York, 1994 Ser D......................... 5.75% 08/15/10 $ 2,120,220
- -------- -----------
Educational Facilities Revenue (4.8%)
1,600 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs....................................................... 7.50 05/01/11 1,724,464
2,000 Volusia County Educational Facilities Authority, Florida,
Embry-Riddle Aeronautical University Ser 1996 A............ 6.125 10/15/26 2,142,400
New Hampshire Higher Educational & Health Facilities
Authority,
2,000 Brewster Academy Ser 1995................................... 7.50 06/01/26 2,212,080
1,500 Colby-Sawyer College Ser 1996............................... 6.75 06/01/25 1,630,605
1,000 New York State Dormitory Authority, State University 1993
- -------- Ser A...................................................... 5.25 05/15/15 1,052,410
-----------
8,100 8,761,959
- -------- -----------
Electric Revenue (2.7%)
5,000 Intermountain Power Agency, Utah, Refg 1996 Ser D (Secondary
- -------- FSA)....................................................... 5.00 07/01/21 4,932,650
-----------
Hospital Revenue (6.0%)
Massachusetts Health & Educational Facilities Authority,
3,000 Dana Farber Cancer Institute Ser G -1....................... 6.25 12/01/22 3,294,330
2,000 Dana Farber Cancer Institute Ser G -1....................... 6.25 12/01/14 2,215,680
4,750 Michigan Hospital Finance Authority, Sinai Hospital of
- -------- Greater Detroit Refg Ser 1995.............................. 6.70 01/01/26 5,309,503
-----------
9,750 10,819,513
- -------- -----------
Industrial Development/Pollution Control Revenue (25.5%)
1,215 Metropolitan Washington Airports Authority, District of
Columbia, CaterAir International Corp Ser 1991 (AMT)++..... 10.125 09/01/11 1,268,837
2,000 Chicago, Illinois, Chicago-O'Hare Int'l Airport/American
Airlines Inc Ser 1990 A (AMT).............................. 7.875 11/01/25 2,168,800
1,500 Iowa Finance Authority, ISPCO Inc Ser 1997 (AMT)............ 6.00 06/01/27 1,588,770
2,000 Perry County, Kentucky, TJ International Inc Ser 1997
(AMT)...................................................... 6.55 04/15/27 2,213,460
2,600 Holyoke, Massachusetts, McCormack/Partyka Ser 1990 (AMT).... 4.00 08/15/10 1,959,256
3,000 Massachusetts Industrial Finance Agency, Eastern Edison Co
Refg Ser 1993.............................................. 5.875 08/01/08 3,134,820
Lapeer Economic Development Corporation, Michigan,
2,030 Dott Manufacturing Co Ser 1989 B (AMT)...................... 9.00 11/15/19 1,218,000
1,990 Dott Manufacturing Co Ser 1989 A (AMT)...................... 10.625 11/15/19 1,194,000
Michigan Strategic Fund,
1,441 Kasle Steel Corp Ser 1989 (AMT)............................. 9.375 10/01/06 1,485,891
5,207 Kasle Steel Corp Ser 1989 (AMT)............................. 9.50 10/01/14 5,370,254
1,390 Sanilac County Economic Development Corporation, Michigan,
Dott Manufacturing Co Ser 1989 (AMT)....................... 10.625 08/15/19 834,000
3,000 Claiborne County, Mississippi, Middle South Energy Inc Ser
C.......................................................... 9.875 12/01/14 3,126,390
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MUNICIPAL INCOME OPPORTUNITIES TRUST II
PORTFOLIO OF INVESTMENTS August 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,000 New Jersey Economic Development Authority, Kapkowski Road
Landfill Ser 1998 A........................................ 6.375% 04/01/31 $ 2,000,020
3,500 Cleveland, Ohio, Continental Airlines Inc Ser 1990 (AMT).... 9.00 12/01/19 3,744,475
1,500 Dayton, Ohio, Special Facilities Emery Air Freight Refg Ser
1998 A..................................................... 5.625 02/01/18 1,540,245
2,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995 B... 7.75 05/01/20 2,318,920
3,000 Pennsylvania Economic Development Financing Authority,
MacMillan Bloedel Ltd Ser 1995 (AMT)....................... 7.60 12/01/20 3,331,410
2,000 Brazos River Authority, Texas, Texas Utilities Electric Co.
Ser 1995 C (AMT)........................................... 5.55 06/01/30 2,012,640
3,000 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade Ser 1994 A (AMT)..................... 7.55 01/01/19 3,326,010
2,000 Upshur County, West Virginia, TJ International Inc Ser 1995
(AMT)...................................................... 7.00 07/15/25 2,246,740
- -------- -----------
46,373 46,082,938
- -------- -----------
Mortgage Revenue - Multi-Family (5.7%)
Boulder County, Colorado,
3,065 Village Place at Longmont Ser 1989 A (AMT).................. 10.125 07/15/19 3,104,354
10,487 Village Place at Longmont Ser 1989 B (AMT).................. 0.00 07/15/19 1,273,460
2,680 San Antonio Housing Finance Corporation, Texas, La Posada
Del Rey Ser 1990 A......................................... 10.00 02/01/20 2,759,516
Alexandria Redevelopment & Housing Authority, Virginia,
2,000 Courthouse Commons Apts Ser 1990 A (AMT).................... 10.00 01/01/21 2,045,260
10,616 Courthouse Commons Apts Ser 1990 B (AMT).................... 0.00 01/01/21 1,213,149
- -------- -----------
28,848 10,395,739
- -------- -----------
Mortgage Revenue - Single Family (10.6%)
4,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA)....... 6.00 06/01/27 4,233,560
1,500 Colorado Housing Finance Authority, 1998 Ser B-3............ 6.55 05/01/25 1,653,405
1,500 Chicago, Illinois, GNMA-Backed 1998 Ser B (AMT)............. 6.45 09/01/29 1,654,155
2,515 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)........ 6.40 11/15/23 2,630,665
2,000 New Hampshire Housing Finance Authority, 1997 Ser D (AMT)... 5.90 07/01/28 2,097,620
Ohio Housing Finance Agency,
1,165 GNMA-Backed 1988 Ser B (AMT)................................ 8.25 12/15/19 1,212,264
4,990 Residential GNMA-Collateralized 1996 Ser B-2 (AMT).......... 6.10 09/01/28 5,300,078
Utah Housing Finance Agency,
215 Ser 1990 A-2 (AMT).......................................... 7.80 07/01/10 222,803
160 Ser 1990 A-2 (AMT).......................................... 7.875 07/01/22 165,446
- -------- -----------
18,045 19,169,996
- -------- -----------
Nursing & Health Related Facilities Revenue (17.9%)
2,285 Arkansas Development Finance Authority, Wynwood Nursing
Center Ser 1989 (AMT)...................................... 10.50 11/01/19 2,471,753
3,965 Monroe County Development Authority, Georgia, Health
Scholarships Inc Ser 1989 A................................ 10.125 09/01/19 4,113,806
2,410 Sterling, Illinois, Hoosier Care Inc Ser 1989 A............. 9.75 08/01/19 2,544,647
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MUNICIPAL INCOME OPPORTUNITIES TRUST II
PORTFOLIO OF INVESTMENTS August 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 3,000 Iowa Health Facilities Development Financing Authority, Care
Initiatives Ser 1996....................................... 9.25% 07/01/25 $ 4,058,580
3,240 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990................ 10.25 01/01/20 3,466,573
1,300 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993........... 8.375 10/01/13 1,463,254
1,155 Massachusetts Industrial Finance Agency, May Institute for
Autistic Children Inc 1990 Issue........................... 9.75 06/01/10 1,246,464
1,500 New Jersey Economic Development Authority, Fellowship
Village Refg Ser 1998 A.................................... 5.50 01/01/25 1,503,645
1,000 Franciscan Oaks Ser 1997.................................... 5.75 10/01/23 1,020,720
3,000 Allegheny County Hospital Development Authority,
Pennsylvania, Allegheny Valley School Ser 1990............. 8.50 02/01/15 3,165,000
4,768 Chester County Industrial Development Authority,
Pennsylvania, RHA/PA Nursing Homes Inc Ser 1989............ 10.125 05/01/19 4,481,253
Tarrant County Health Facilities Development Corporation,
Texas,
2,500 3927 Foundation Inc Ser 1989................................ 10.125 09/01/09 2,627,775
235 3927 Foundation Inc Ser 1989................................ 10.00 09/01/99 242,019
- -------- -----------
30,358 32,405,489
- -------- -----------
Public Facilities Revenue (0.6%)
1,000 Orange County, California, Community District #86-2 1998 Ser
- -------- A.......................................................... 5.55 08/15/17 1,010,190
-----------
Retirement & Life Care Facilities Revenue (5.9%)
2,095 Pima County Industrial Development Authority, Arizona,
Country Club La Cholla Ser 1990 (AMT)...................... 8.50 07/01/20 2,247,223
Massachusetts Industrial Finance Agency,
175 Pioneer Valley Living Care Center at Amherst 1990 Issue..... 7.00 10/01/01 169,402
77 Pioneer Valley Living Care Center at Amherst 1990 Issue..... 0.00 10/01/20 1,535
2,000 Glen Cove Housing Authority, New York, The Mayfair at Glen
Cove Ser 1996 (AMT)........................................ 8.25 10/01/26 2,244,880
2,000 Lorain County, Ohio, Laurel Lakes Ser 1993.................. 7.125 12/15/18 2,166,920
Chesterfield County Industrial Development Authority,
Virginia,
5,353 Brandermill Woods Ser 1991 A (b)............................ 10.625 07/01/16 3,854,261
797 Brandermill Woods Ser 1991 A (b)............................ 0.00 07/01/17 7,974
798 Brandermill Woods Ser 1991 A (b)............................ 0.00 07/01/18 7,977
798 Brandermill Woods Ser 1991 A (b)............................ 0.00 07/01/19 7,979
798 Brandermill Woods Ser 1991 A (b)............................ 0.00 07/01/20 7,981
798 Brandermill Woods Ser 1991 A (b)............................ 0.00 07/01/21 7,983
- -------- -----------
15,689 10,724,115
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MUNICIPAL INCOME OPPORTUNITIES TRUST II
PORTFOLIO OF INVESTMENTS August 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Tax Allocation Revenue (2.4%)
$ 1,170 Bridgeview, Illinois, Tax Increment Refg Ser 1995........... 9.00% 01/01/11 $ 1,362,793
400 Hodgkins, Illinois, Ser 1991................................ 9.50 12/01/09 471,580
520 Madison Heights Tax Increment Finance Authority, Michigan,
Ser 1991................................................... 8.50 03/15/01 554,741
1,938 Muskegon Downtown Development Authority, Michigan, 1989 Ser
- -------- A-1 (a).................................................... 9.75 06/01/18 2,127,421
-----------
4,028 4,516,535
- -------- -----------
Transportation Facilities Revenue (7.4%)
2,000 Foothills/Eastern Transportation Corridor Agency,
California, Toll Road Sr Lien Ser 1995 A................... 0.00 01/01/13 1,625,460
5,000 E-470 Public Highway Authority, Colorado, Ser 1997 B
(MBIA)..................................................... 0.00 09/01/14 2,300,950
2,000 Dade County, Florida, Seaport Refg Ser 1996 (MBIA).......... 5.125 10/01/26 2,003,820
2,000 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg
Ser 1993 A (AMBAC)......................................... 5.85 10/01/13 2,219,480
3,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)................. 5.50 02/15/26 3,148,740
2,000 Pocahontas Parkway Association, Virginia, Route 895
- -------- Connector 1998 Ser A....................................... 5.50 08/15/28 2,006,900
-----------
16,000 13,305,350
- -------- -----------
Water & Sewer Revenue (0.7%)
6,000 Pittsburgh Water & Sewer Authority, Pennsylvania, 1998 Ser B
- -------- (FGIC)..................................................... 0.00 09/01/30 1,181,880
-----------
Other Revenue (2.4%)
2,000 Northern Palm Beach County Improvement District, Florida,
Water Control & Improvement #9A Ser 1996 A................. 7.30 08/01/27 2,206,880
Mashantucket (Western) Pequot Tribe, Connecticut,
1,010 Special 1996 Ser A (a)...................................... 6.40 09/01/11 1,119,444
1,000 Special 1997 Ser B (a)...................................... 5.75 09/01/27 1,037,990
- -------- -----------
4,010 4,364,314
- -------- -----------
Refunded (3.7%)
1,700 Illinois Health Facilities Authority, Hinsdale Hospital Ser
1990 C (ETM)............................................... 9.50 11/15/19 1,936,963
4,390 Massachusetts Industrial Finance Agency, Greater Lynn
Special Needs Housing Corp & Mental Health & Retardation
- -------- Assn 1990 Issue............................................ 9.875 06/01/00+ 4,852,048
-----------
6,090 6,789,011
- -------- -----------
201,291 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $167,539,221)................. 176,579,899
- -------- -----------
SHORT TERM TAX-EXEMPT MUNICIPAL OBLIGATION (0.4%)
Missouri Health & Educational Facilities Authority,
700 Washington University Ser D (Demand 09/01/98) (Identified
- -------- Cost $700,000)............................................. 3.35* 09/01/30 700,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MUNICIPAL INCOME OPPORTUNITIES TRUST II
PORTFOLIO OF INVESTMENTS August 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$201,991 TOTAL INVESTMENTS (Identified Cost $168,239,221) (c)................... 97.9% $177,279,899
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................... 2.1 3,715,228
----- -----------
NET ASSETS.............................................................. 100.0% $180,995,127
===== ===========
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
++ Joint exemption in the District of Columbia and Virginia.
+ Prerefunded to call date shown.
* Current coupon of variable rate demand obligation.
(a) Resale is restricted to qualified institutional investors.
(b) Non-income producing security; bond in default.
(c) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $12,357,734 and the aggregate gross
unrealized depreciation is $3,317,056, resulting in net
unrealized appreciation of $9,040,678.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
August 31, 1998
<TABLE>
<S> <C>
Alaska................... 2.3%
Arizona.................. 1.2
Arkansas................. 1.4
California............... 2.4
Colorado................. 4.6
Connecticut.............. 1.2
District of Columbia..... 0.7
Florida.................. 4.8
Georgia.................. 2.3
Illinois................. 5.6
Iowa..................... 5.0%
Kentucky................. 1.2
Louisiana................ 0.8
Maine.................... 1.5
Massachusetts............ 9.3
Michigan................. 10.0
Mississippi.............. 1.7
Missouri................. 0.4
New Hampshire............ 3.3
New Jersey............... 2.5
New York................. 3.0%
Ohio..................... 9.5
Pennsylvania............. 8.0
Texas.................... 4.2
Utah..................... 2.9
Virginia................. 7.6
West Virginia............ 1.2
Joint Exemption*......... (0.7)
----
Total.................... 97.9%
====
</TABLE>
- ---------------------
* Joint exemption has been included in each location.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MUNICIPAL INCOME OPPORTUNITIES TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $168,239,221)............................. $177,279,899
Cash........................................................ 177,278
Receivable for:
Interest................................................ 3,371,170
Investments sold........................................ 395,413
Prepaid expenses and other assets........................... 14,541
------------
TOTAL ASSETS............................................ 181,238,301
------------
LIABILITIES:
Payable for:
Investment advisory fee................................. 76,607
Administration fee...................................... 45,964
Accrued expenses and other payables......................... 120,603
------------
TOTAL LIABILITIES....................................... 243,174
------------
NET ASSETS.............................................. $180,995,127
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $186,891,156
Net unrealized appreciation................................. 9,040,678
Accumulated undistributed net investment income............. 1,958,697
Accumulated net realized loss............................... (16,895,404)
------------
NET ASSETS.............................................. $180,995,127
============
NET ASSET VALUE PER SHARE,
19,952,507 shares outstanding
(unlimited shares authorized of $.01 par value)............ $9.07
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MUNICIPAL INCOME OPPORTUNITIES TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended August 31, 1998 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 6,437,387
-----------
EXPENSES
Investment advisory fee..................................... 455,030
Administration fee.......................................... 273,018
Professional fees........................................... 57,535
Shareholder reports and notices............................. 23,204
Transfer agent fees and expenses............................ 22,774
Registration fees........................................... 12,402
Trustees' fees and expenses................................. 9,572
Custodian fees.............................................. 4,653
Other....................................................... 9,902
-----------
TOTAL EXPENSES.......................................... 868,090
Less: expense offset........................................ (4,567)
-----------
NET EXPENSES............................................ 863,523
-----------
NET INVESTMENT INCOME................................... 5,573,864
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 915,129
Net change in unrealized appreciation....................... (1,162,956)
-----------
NET LOSS................................................ (247,827)
-----------
NET INCREASE................................................ $ 5,326,037
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MUNICIPAL INCOME OPPORTUNITIES TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
AUGUST 31, ENDED
1998 FEBRUARY 28, 1998
- ---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 5,573,864 $ 11,308,439
Net realized gain.................................... 915,129 1,366,225
Net change in unrealized appreciation................ (1,162,956) 4,521,426
----------- ------------
NET INCREASE..................................... 5,326,037 17,196,090
Dividends from net investment income................. (5,389,657) (11,486,315)
Net decrease from transactions in shares of
beneficial interest................................. (163,917) (60,210)
----------- ------------
NET INCREASE (DECREASE).......................... (227,537) 5,649,565
NET ASSETS:
Beginning of period.................................. 181,222,664 175,573,099
----------- ------------
END OF PERIOD
(Including undistributed net investment income of
$1,958,697 and $1,774,490, respectively)......... $180,995,127 $181,222,664
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MUNICIPAL INCOME OPPORTUNITIES TRUST II
NOTES TO FINANCIAL STATEMENTS August 31, 1988 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Municipal Income Opportunities 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 exempt from federal income tax. The Fund was organized as a
Massachusetts business trust on March 8, 1989 and commenced operations on June
30, 1989.
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 portfolio
securities are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment
14
<PAGE> 15
MUNICIPAL INCOME OPPORTUNITIES TRUST II
NOTES TO FINANCIAL STATEMENTS August 31, 1998 (unaudited) continued
income and net realized capital gains are determined in accordance with federal
income tax regulations which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent they exceed net investment
income and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Advisor"), formerly Dean Witter InterCapital
Inc., the Fund pays the Investment Advisor an advisory fee, calculated weekly
and payable monthly, by applying the annual rate of 0.50% to the Fund's weekly
net assets.
Under the terms of the Advisory 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 Morgan Stanley Dean Witter Services
Company Inc. (the "Administrator"), the Fund pays an administration fee,
calculated weekly and payable monthly, by applying the annual rate of 0.30% to
the Fund's weekly net assets.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Fund's books and records and furnishes, at its own expense,
office space, facilities, equipment, clerical, bookkeeping and certain legal
services and pays the salaries of all personnel, including officers of the Fund
who are employees of the Administrator. The Administrator also bears the cost of
telephone services, heat, light, power and other utilities provided to the Fund.
15
<PAGE> 16
MUNICIPAL INCOME OPPORTUNITIES TRUST II
NOTES TO FINANCIAL STATEMENTS August 31, 1998 (unaudited) continued
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended August 31, 1998 aggregated
$11,726,935 and $11,477,184, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor and
Administrator, is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended August 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,236. At August 31, 1998, the Fund had an accrued pension liability of
$49,877 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
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, February 28, 1997.................................. 19,978,607 $199,787 $186,915,496
Treasury shares purchased and retired (weighted average
discount 3.71%)*........................................... (7,000) (70) (60,140)
---------- -------- ------------
Balance, February 28, 1998.................................. 19,971,607 199,717 186,855,356
Treasury shares purchased and retired (weighted average
discount 6.30%)*........................................... (19,100) (191) (163,726)
---------- -------- ------------
Balance, August 31, 1998.................................... 19,952,507 $199,526 $186,691,630
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
16
<PAGE> 17
MUNICIPAL INCOME OPPORTUNITIES TRUST II
NOTES TO FINANCIAL STATEMENTS August 31, 1998 (unaudited) continued
6. DIVIDENDS
The Fund declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------ --------- ----------------- ------------------
<S> <C> <C> <C>
June 30, 1998 $0.045 September 4, 1998 September 18, 1998
September 29, 1998 $0.0425 October 9, 1998 October 23, 1998
September 29, 1998 $0.0425 November 6, 1998 November 20, 1998
September 29, 1998 $0.0425 December 4, 1998 December 18, 1998
</TABLE>
7. FEDERAL INCOME TAX STATUS
At February 28, 1998, the Fund had a net capital loss carryover of approximately
$18,260,000, to offset future capital gains to the extent provided by
regulations through February 28 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- --------------------------------------------
2002 2003 2004 2005 2006
- ---- -------- -------- -------- ----
<S> <C> <C> <C> <C>
4$ $10,485 $2,826 $4,292 $653
== ======= ====== ====== ====
</TABLE>
8. LITIGATION
On July 23, 1997, an action against the Fund and the Investment Advisor was
commenced in Supreme Court of the State of New York, County of Suffolk. The
complaint alleges that the Fund and the Investment Advisor tortiously interfered
with the plaintiff's subordinate interests in a project for which the Fund holds
senior defaulted bonds. Since July 1997, the action has been essentially
dormant. Should it proceed, the Fund and the Investment Advisor intend to defend
vigorously.
The ultimate outcome of this matter is not presently determinable, and no
provision has been made in the Fund's financial statements for the effect, if
any, of such matter.
17
<PAGE> 18
MUNICIPAL INCOME OPPORTUNITIES TRUST II
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28*
MONTHS ENDED ----------------------------------------------------------------
AUGUST 31, 1998* 1998 1997 1996** 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 9.07 $ 8.79 $ 8.88 $ 8.66 $ 8.74 $ 9.13
------ ------ ------ ------ ------ ------
Net investment income.................... 0.28 0.57 0.60 0.66 0.64 0.63
Net realized and unrealized gain
(loss).................................. (0.01) 0.29 (0.05) 0.18 (0.12) (0.42)
------ ------ ------ ------ ------ ------
Total from investment operations......... 0.27 0.86 0.55 0.84 0.52 0.21
------ ------ ------ ------ ------ ------
Less dividends from net investment
income.................................. (0.27) (0.58) (0.64) (0.62) (0.60) (0.60)
------ ------ ------ ------ ------ ------
Net asset value, end of period........... $ 9.07 $ 9.07 $ 8.79 $ 8.88 $ 8.66 $ 8.74
====== ====== ====== ====== ====== ======
Market value, end of period.............. $ 8.75 $9.063 $8.625 $ 8.75 $ 8.00 $8.125
====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+................. (0.45)%(1) 12.08% 5.94% 17.87% 6.36% (0.36)%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................. 0.95%(2)(3) 0.95%(3) 1.01%(3) 1.01%(3) 1.01% 1.01%
Net investment income.................... 6.12%(2) 6.37% 6.87% 7.50% 7.60% 7.13%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands............................... $180,995 $181,223 $175,573 $177,447 $175,038 $181,336
Portfolio turnover rate.................. 8%(1) 12% 21% 18% 5% 6%
</TABLE>
- ---------------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
** For the year ended February 29.
+ 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 prices obtained under the Fund's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
- ---------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
- ---------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ---------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISOR
- ---------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
MUNICIPAL
INCOME
OPPORTUNITIES
TRUST II
SEMIANNUAL REPORT
AUGUST 31, 1998
