UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05793
Morgan Stanley Municipal Income Opportunities Trust II
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: February 28, 2006
Date of reporting period: August 31, 2005
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Municipal Income Opportunities Trust II performed during the semiannual period.
We will provide an overview of the market conditions, and discuss some of the
factors that affected performance during the reporting period. In addition, this
report includes the Fund's financial statements and a list of Fund investments.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND.
FUND REPORT
For the six months ended August 31, 2005
MARKET CONDITIONS
During the six months ended August 31, 2005, the U.S. economy expanded at a
solid pace, as measured by growth of gross domestic product. However, the
direction of some indicators, including job growth, was uneven. Interest rates
fluctuated, moving higher when reports were strong and lower when reports were
weaker than anticipated. Although core inflation (which excludes energy and
food) remained benign, inflationary concerns mounted as heavy demand and
geopolitical events drove oil prices to protracted and dramatic highs. The final
days of the period brought heightened uncertainty in the wake of the
unprecedented devastation of Hurricane Katrina. While the long-term impact
remained immeasurable, the immediate economic impact was a major disruption to
the nation's energy infrastructure that sent gasoline prices soaring further.
Continuing the "measured" rate tightening cycle it began in June of 2004, the
Federal Open Market Committee raised the federal funds target rate four times
during the reporting period. As a result, the rate rose from 2.50 percent at the
start of the period to 3.50 percent at the close.
Within this context, long-term municipal bond yields moved higher through early
April but then generally declined, as investor demand for income strengthened
long-term bonds. The representative yields on 30-year AAA rated municipal bonds
declined from 4.50 percent in February to 4.20 percent by the end of August.
Meanwhile, the yields of shorter maturity bonds -- which were more directly
influenced by the Fed's actions -- rose. Overall, the municipal yield curve
continued to flatten and the yield spread (or differential between one-year
rates and 30-year rates) narrowed. Investors' quest for yield favored lower-
quality bonds over high-grade issues and kept credit spreads relatively tight.
Led by a surge in refinancing activity, municipal issuance remained strong in
2005. New issue volume increased by 13 percent to $275 billion, a record for the
first eight months of a calendar year. As issuers rushed to refinance higher
cost debt, refundings increased to 35 percent of total issuance, up from 24
percent in 2004. Bonds backed by insurance dominated issuance and increased
their market penetration to 60 percent. Issuers in California, Texas, New York,
Florida and Pennsylvania accounted for more than 40 percent of the total
underwriting volume during the year-to-date period.
The municipal-to-Treasury yield ratio, which gauges performance between the two
markets, remained attractive for tax-exempt bonds. The 30-year ratio averaged 98
percent during the period and moved as high as 101 percent in June. (Higher
ratios indicate increased relative attractiveness of municipal bonds.) As a
result, institutional investors that normally focus on taxable bond sectors
supported municipals by "crossing over" to purchase tax-exempt bonds. Despite
the low absolute level of interest rates, retail investors also continued to
reinvest proceeds from matured and called bonds.
PERFORMANCE ANALYSIS
For the six months ended August 31, 2005, Morgan Stanley Municipal Income
Opportunities Trust II's
2
(OIB's) net asset value (NAV) increased from $8.78 to $9.02 per share. Based on
this change plus reinvestment of tax-free dividends totaling $0.24 per share the
Fund's total NAV return was 5.76 percent. OIB's value on the New York Stock
Exchange (NYSE) moved from $8.00 to $8.35 per share during the same period.
Based on this change plus reinvestment of tax-free dividends, the Fund's total
market return was 7.45 percent. On August 31, 2005, OIB's NYSE market price was
at a 7.4 percent discount to its NAV. During the six-month period ended August
31, 2005, the Fund purchased and retired 250,255 shares of common stock at a
weighted average market discount of 8.76 percent.
Monthly dividends for the fourth quarter of 2005, declared in September, were
increased from $0.04 per share to $0.0425 per share. The dividend reflects the
current level of the Fund's net investment income. OIB's level of undistributed
net investment income was $0.105 per share on August 31, 2005, versus $0.093 per
share six months earlier.(1)
The Fund invests primarily in higher yielding municipal bonds. Consistent with
this focus, nearly two-thirds of the Fund is invested in below investment grade
or non-rated issues. As of the end of the reporting period, the Fund included
only one nonperforming holding which represented less than one percent of net
assets. The Fund's duration* (a measure of interest rate sensitivity) was
positioned to reduce the portfolio's interest-rate volatility. Overall, the
Fund's duration positioning helped performance through early April as rates
rose, but tempered total returns when rates declined later in the period. The
portfolio's option-adjusted duration was 5.8 years. Reflecting a commitment to
diversification, the Fund's net assets of $150 million were invested among 11
long-term sectors and 94 credits.
OIB's procedure for reinvesting all dividends and distributions in 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 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.
- ----------------------------------------------------
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. Investment return, net asset value and common share market price will
fluctuate and Fund shares, when sold, may be worth more or less than their
original cost.
There is no guarantee that any sectors mentioned will continue to perform well
or that securities in such sectors will be held by the Fund in the future.
(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, funds with shorter durations perform better in
rising-interest-rate environments, while funds with longer durations perform
better when rates decline.
3
<Table>
<Caption>
TOP FIVE SECTORS
Hospital 22.9%
Retirement & Life Care Facilities 17.1%
IDR/PCR* 17.0%
Nursing & Health Related Facilities 10.8%
Recreational Facilities 8.8%
</Table>
<Table>
<Caption>
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 2.3%
Aa/AA 0.3%
A/A 4.9%
Baa/BBB 27.6%
Ba/BB 9.9%
Non-Rated 55.0%
</Table>
* Industrial Development/Pollution Control Revenue
Data as of August 31, 2005. Subject to change daily. All percentages for top
five sectors are as a percentage of net assets and all percentages for long-term
credit analysis are as a percentage of total long-term investments. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102.
4
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of August 31, 2005
WEIGHTED AVERAGE MATURITY: 21 YEARS(A)
<Table>
0-5 3
6-10 7
11-15 11
16-20 18
21-25 25
26-30 32
30+ 4
</Table>
(a) Where applicable maturities reflect mandatory tenders, puts and call dates.
Portfolio structure is subject to change.
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
<Table>
Alabama................ 1.4%
Arizona................ 1.1
Arkansas............... 1.4
California............. 6.4
Colorado............... 3.8
Connecticut............ 2.5
District of Columbia... 0.5
Florida................ 3.8
Georgia................ 1.0
Hawaii................. 1.1
Illinois............... 4.5
Indiana................ 1.1
Iowa................... 3.9
Kansas................. 1.5
Kentucky............... 1.4
Louisiana.............. 0.6
Maine.................. 0.3
Maryland............... 3.5
Massachusetts.......... 2.5
Michigan............... 0.4
Missouri............... 5.0
Nevada................. 4.9
New Hampshire.......... 4.5
New Jersey............. 6.7
New York............... 6.4
North Carolina......... 0.7
Ohio................... 0.9
Oklahoma............... 0.8
Pennsylvania........... 6.8
South Carolina......... 1.5
Tennessee.............. 1.4
Texas.................. 4.4
Vermont................ 1.4
Virginia............... 8.7
Wisconsin.............. 1.3
Joint exemptions*...... (0.5)
-----
Total+................. 97.6%
=====
</Table>
- ---------------
* Joint exemptions have been included in each geographic location.
+ Does not include open short futures contracts with an underlying face amount
of $6,539,531 with unrealized depreciation of $54,399.
5
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of August 31, 2005
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
<Table>
2005(a).................................................... 11
2006....................................................... 5
2007....................................................... 5
2008....................................................... 10
2009....................................................... 11
2010....................................................... 4
2011....................................................... 9
2012....................................................... 9
2013....................................................... 14
2014....................................................... 10
2015+...................................................... 12
</Table>
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 6.7%
<Table>
2005(a)................................................... 7.4
2006...................................................... 7.0
2007...................................................... 6.1
2008...................................................... 6.0
2009...................................................... 6.4
2010...................................................... 6.8
2011...................................................... 7.7
2012...................................................... 6.6
2013...................................................... 6.8
2014...................................................... 6.5
2015+..................................................... 6.2
</Table>
(a) May include issues callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Fund's operating expenses.
For example, the Fund is earning a book yield of 7.4% on 11% of the
long-term portfolio that is callable in 2005.
Portfolio structure is subject to change.
6
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Fund's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Adviser's expense. (The
Investment Adviser and the Administrator together are referred to as the
"Adviser" and the Advisory and Administration Agreements together are referred
to as the "Management Agreement.") The Board also compared the nature of the
services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2004, as shown in reports provided by Lipper (the
"Lipper Reports"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"), and noted that the Fund's performance was
lower than, but close to, its performance peer group average for the one-year
period and better than average for the three- and five-year periods. The Board
concluded that the Fund's overall performance was satisfactory.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.
7
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Fund.
The Board noted that: (i) the Fund's management fee rate was lower than the
average management fee rate for funds, selected by Lipper (the "expense peer
group"), managed by other advisers, with investment strategies comparable to
those of the Fund, as shown in the Lipper Report for this Fund; and (ii) the
Fund's total expense ratio was also lower than the average total expense ratio
of the funds included in the Fund's expense peer group. The Board concluded that
the Fund's management fee and total expense ratio were competitive with those of
its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it does not include any breakpoints. The
Board considered that the Fund is closed-end and is not a growth fund and,
therefore, that the Fund's assets are not likely to grow with new sales or grow
significantly as a result of capital appreciation. The Board concluded that
economies of scale for this Fund were not a factor that needed to be considered.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as "float" benefits derived from handling of checks for purchases
and sales of Fund shares through a broker-dealer affiliate of the Adviser. The
Board considered the float benefits and concluded that they were relatively
small.
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Fund ("soft
dollars"). The Board noted that the Fund invests only in fixed income
securities, which do not generate soft dollars.
8
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.
9
Morgan Stanley Municipal Income Opportunities Trust II
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
Tax-Exempt Municipal Bonds (96.9%)
Educational Facilities Revenue (6.0%)
$ 1,200 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs.................................................... 7.50 % 05/01/11 $ 1,244,916
2,000 San Diego County, California, The Burnham Institute
COPs.................................................... 6.25 09/01/29 2,109,380
1,000 Illinois Finance Authority, Fullerton Village Student
Housing Ser 2004 A...................................... 5.125 06/01/35 1,016,130
500 South Berwick, Maine, Berwick Academy Ser 1998............ 5.55 08/01/23 510,065
500 Maryland Industrial Development Financing Authority, Our
Lady of Good Counsel High School Ser 2005 A............. 6.00 05/01/35 520,330
New Hampshire Higher Educational & Health Facilities
Authority,
2,000 Brewster Academy Ser 1995............................... 7.50 06/01/26 2,075,800
1,500 Colby-Sawyer College Ser 1996........................... 6.75 06/01/25 1,539,195
------------
- --------
9,015,816
8,700
------------
- --------
Hospital Revenue (22.9%)
2,000 Colbert County - Northwest Health Care Authority, Alabama,
Helen Keller Hospital Ser 2003.......................... 5.75 06/01/27 2,091,380
1,500 Arizona Health Facilities Authority, John C Lincoln Health
Ser 2002................................................ 6.375 12/01/37 1,668,810
2,000 Baxter County, Arkansas, Baxter County Regional Hospital
Impr & Refg Ser 1999 B.................................. 5.625 09/01/28 2,070,060
3,000 Colorado Health Facilities Authority, Poudre Valley Health
Ser 2005 F.............................................. 5.00 03/01/25 3,113,760
1,500 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002....................................... 6.125 08/01/31 1,630,230
1,000 Maryland Health & Higher Educational Facilities Authority,
University of Maryland Medical Center Ser 2000.......... 6.75 07/01/30 1,123,970
600 Gaylord Hospital Financing Authority, Michigan, Otsego
Memorial Hospital Ser 2004.............................. 6.50 01/01/37 625,842
1,000 Nevada, Missouri, Nevada Regional Medical Center Ser
2001.................................................... 6.75 10/01/31 1,069,410
Henderson, Nevada,
3,000 Catholic Health West Ser 2004 Ser A..................... 5.625 07/01/24 3,260,670
2,000 Catholic Health West Ser 1998 Ser A..................... 5.125 07/01/28 2,043,620
New Hampshire Higher Educational & Health Facilities
Authority,
1,000 Littleton Hospital Association Ser 1998 B............... 5.80 05/01/18 1,045,380
2,000 Littleton Hospital Association Ser 1998 B............... 5.90 05/01/28 2,048,880
2,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994..................... 7.25 07/01/27 2,059,600
2,000 Dutchess County Development Agency, New York, St Francis
Hospital Refg Ser 2004 A................................ 7.50 03/01/29 2,205,800
720 Nassau County Industrial Development Agency, New York,
North Shore Health Ser C**.............................. 5.625 11/01/10 775,195
</Table>
10
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust II
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
$ 1,000 Oklahoma Development Finance Authority, Comanche County
Hospital 2000 Ser B..................................... 6.60 % 07/01/31 $ 1,123,990
2,000 South Carolina Jobs Economic Development Authority,
Palmetto Health Refg & Impr Ser 2003 C.................. 6.875 08/01/27 2,311,880
1,000 Knox County Health, Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002.... 6.50 04/15/31 1,074,150
1,000 Decatur Hospital Authority, Texas, Wise Regional Health
Ser 2004 A.............................................. 7.125 09/01/34 1,109,200
1,750 Wisconsin Health & Educational Facilities Authority,
Beaver Dam Community Hospital Ser 2004 A................ 6.75 08/15/34 1,879,955
------------
- --------
34,331,782
32,070
------------
- --------
Industrial Development/Pollution Control Revenue (17.0%)
2,000 Los Angeles, California, American Airlines Inc Terminal 4
Ser 2002 C (AMT)........................................ 7.50 12/01/24 2,134,960
815 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser
1991 (AMT)+............................................. 10.125 09/01/11 816,198
2,000 Chicago, Illinois, United Airlines Inc Refg Ser 2001 C
(a)..................................................... 6.30 05/01/16 320,420
1,500 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT).......... 6.00 06/01/27 1,541,415
2,000 Perry County, Kentucky, TJ International Inc Ser 1997
(AMT)................................................... 6.55 04/15/27 2,111,800
1,000 New Jersey Economic Development Authority, Continental
Airlines Inc Ser 1999 (AMT)............................. 6.625 09/15/12 972,650
New York City Industrial Development Agency, New York,
2,000 Brooklyn Navy Yard Cogeneration Partners LP Ser 1997.... 5.65 10/01/28 2,010,320
2,000 7 World Trade Center LLC Ser A.......................... 6.50 03/01/35 2,153,100
1,500 New York Counties Tobacco Trust IV, New York, Ser 2005
A....................................................... 5.00 06/01/45 1,480,740
1,250 Dayton, Ohio, Emery Air Freight Corp Refg Ser 1998 A...... 5.625 02/01/18 1,332,338
2,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995
B....................................................... 7.75 05/01/20 2,058,160
1,600 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT)................................................... 6.65 05/01/10 1,739,920
Pennsylvania Economic Development Financing Authority,
750 Colver Refg Ser 2005 G (AMT)............................ 5.125 12/01/15 760,395
1,000 Reliant Energy Inc Ser 2001 A (AMT)..................... 6.75 12/01/36 1,079,480
1,000 Brazos River Authority, Texas, TXU Electric Co Refg Ser
1999 A (AMT)............................................ 7.70 04/01/33 1,205,170
Pittsylvania County Industrial Development Authority,
Virginia,
600 Multi-Trade LP Ser 1994 A (AMT)......................... 7.45 01/01/09 622,332
3,000 Multi-Trade LP Ser 1994 A (AMT)......................... 7.55 01/01/19 3,109,560
------------
- --------
25,448,958
26,015
------------
- --------
</Table>
11
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust II
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
Mortgage Revenue - Multi-Family (2.3%)
$ 500 Honolulu, Hawaii, Waipahu Towers GNMA Collateralized 1995
Ser A (AMT)............................................. 6.90 % 06/20/35 $ 510,640
Alexandria Redevelopment & Housing Authority, Virginia,
2,000 Courthouse Commons Apts Ser 1990 A (AMT)................ 10.00 01/01/21 1,832,880
9,481 Courthouse Commons Apts Ser 1990 B (AMT)................ 0.00 01/01/21 1,065,711
------------
- --------
3,409,231
11,981
------------
- --------
Mortgage Revenue - Single Family (0.7%)
450 Colorado Housing Finance Authority, 1998 Ser B-3.......... 6.55 05/01/25 452,920
270 Chicago, Illinois, GNMA-Collateralized Ser 1998 A-1
(AMT)................................................... 6.45 09/01/29 273,783
265 Missouri Housing Development Commission, Homeownership
GNMA/FNMA Collateralized 2000 Ser A-1 (AMT)............. 7.50 03/01/31 277,100
------------
- --------
1,003,803
985
------------
- --------
Nursing & Health Related Facilities Revenue (10.8%)
2,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999....... 6.75 04/01/34 1,994,820
1,000 Pinellas County Health Facilities Authority, Florida, Oaks
of Clearwater Ser 2004.................................. 6.25 06/01/34 1,060,870
2,895 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996............................... 9.25 07/01/25 3,573,993
675 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 2003.............. 6.50 ++ 01/01/29 677,072
900 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993........ 8.375 10/01/13 907,578
Massachusetts Development Finance Authority,
750 Evergreen Center Ser 2005............................... 5.50 01/01/35 765,855
1,375 New England Center for Children Ser 1998................ 5.875 11/01/18 1,410,200
1,000 St Louis County Industrial Development Authority,
Missouri, Pediatric Rehabilitation Center Ser 2003 A.... 6.625 11/15/35 1,044,200
710 New Jersey Economic Development Authority, Lions Gate Ser
2005 A.................................................. 5.75 01/01/25 729,546
1,000 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999..................... 6.15 06/01/19 1,034,060
2,940 Chester County Industrial Development Authority,
Pennsylvania, RHA/PA Nursing Home Inc Ser 1989.......... 8.50 05/01/32 2,985,982
------------
- --------
16,184,176
15,245
------------
- --------
Recreational Facilities Revenue (8.8%)
2,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser 2000 A............................ 6.25 01/01/30 2,109,460
Mashantucket (Western) Pequot Tribe, Connecticut,
1,010 Special 1996 Ser A (b).................................. 6.40 09/01/11 1,056,601
1,000 Special 1997 Ser B (b).................................. 5.75 09/01/27 1,037,700
</Table>
12
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust II
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
$ 1,500 Mohegan Tribe of Indians, Connecticut, Gaming Authority
Ser 2001................................................ 6.25 % 01/01/31 $ 1,622,355
2,000 Overland Park Development Corporation, Kansas, Convention
Center Hotel Ser 2000 A................................. 7.375 01/01/32 2,195,680
3,000 St Louis Industrial Development Authority, Missouri, Kiel
Center Refg Ser 1992 (AMT).............................. 7.75 12/01/13 3,054,300
2,000 Austin, Texas, Convention Center Hotel Ser 2000 A......... 6.70 01/01/32 2,134,160
------------
- --------
13,210,256
12,510
------------
- --------
Retirement & Life Care Facilities Revenue (17.1%)
500 Orange County Health Facilities Authority, Florida,
Orlando Lutheran Towers Inc Ser 2005.................... 5.70 07/01/26 509,260
1,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A..................................... 8.00 01/01/30 1,083,110
1,000 Hawaii Department of Budget & Finance, Kahala Nui 2003 Ser
A....................................................... 8.00 11/15/33 1,160,120
Illinois Health Facilities Authority,
2,000 Smith Crossing Ser 2003 A............................... 7.00 11/15/32 2,094,900
1,000 Villa St Benedict Ser 2003 A-1.......................... 6.90 11/15/33 1,062,180
1,500 Westminster, Maryland, Caroll Lutheran Village Inc 2004
Ser A................................................... 6.25 05/01/34 1,604,745
1,500 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A.................................. 5.75 07/01/23 1,515,015
New Jersey Economic Development Authority,
1,000 Cedar Crest Village Inc Ser 2001 A...................... 7.25 11/15/31 1,095,660
2,000 Franciscan Oaks Ser 1997................................ 5.75 10/01/23 2,035,280
500 The Presbyterian Home at Montgomery Ser 2001 A.......... 6.375 11/01/31 520,175
1,000 United Methodist Homes of New Jersey Ser 1998........... 5.125 07/01/25 1,004,390
1,000 North Carolina Medical Care Commission, Given Estate Ser
2003 A.................................................. 6.50 07/01/32 1,078,660
1,000 Montgomery County Industry Development Authority,
Pennsylvania, Whitemarsh Community Ser 2005............. 6.25 02/01/35 1,060,530
1,000 Shelby County Health, Educational & Housing Facilities
Board, Tennessee, Village at Germantown Ser 2003 A...... 7.25 12/01/34 1,057,490
1,000 Houston Health Facilities Development Corporation, Texas,
Buckingham Senior Living Community Ser 2004 A........... 7.125 02/15/34 1,110,260
2,000 Vermont Economic Development Authority, Wake Robin Corp
Ser 1999 A.............................................. 6.75 03/01/29 2,111,560
4,590 Chesterfield County Industrial Development Authority,
Virginia, Brandermill Woods Ser 1998.................... 6.50 01/01/28 4,484,270
1,000 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes Ser 2003 A........................................ 7.375 12/01/32 1,119,660
------------
- --------
25,707,265
24,590
------------
- --------
</Table>
13
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust II
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
Tax Allocation Revenue (7.7%)
$ 1,000 Orange County Community Facilities District #86-2,
California, 1998 Ser A.................................. 5.55 % 08/15/17 $ 1,040,570
2,000 Elk Valley Public Improvement Corporation, Colorado, Ser
2001 A.................................................. 7.30 09/01/22 2,163,880
Atlanta, Georgia,
500 Eastside Ser 2005 A (AMT)............................... 5.625 01/01/16 511,365
1,000 Eastside Ser 2005 B..................................... 5.40 01/01/20 1,015,400
1,000 Chicago, Illinois, Lake Shore East Ser 2002............... 6.75 12/01/32 1,098,850
2,000 Annapolis, Maryland, Park Place Ser 2005 A................ 5.35 07/01/34 2,043,020
2,000 Des Peres, Missouri, West County Center Ser 2002.......... 5.75 04/15/20 2,077,280
1,000 Clark County, Nevada, Special Impr District, 142-Mountains
Edge Ser 2003........................................... 6.375 08/01/23 1,035,100
500 Allegheny County Redevelopment Authority, Pennsylvania,
Pittsburgh Mills Ser 2004............................... 5.60 07/01/23 527,950
------------
- --------
11,513,415
11,000
------------
- --------
Transportation Facilities Revenue (1.3%)
895 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg
Ser 1993 A (Ambac)...................................... 5.85 10/01/13 973,196
1,000 Nevada Department of Business & Industry, Las Vegas
Monorail 2nd Tier Ser 2000.............................. 7.375 01/01/40 1,051,160
------------
- --------
2,024,356
1,895
------------
- --------
Other Revenue (2.3%)
1,000 Carlsbad Assessment District No 2002-2001, California,
Poinsettia Lane East Ser 2005 A......................... 5.20 09/02/35 1,012,460
750 Lincolnshire, Illinois, Special Service Area #1-Sedgebrook
Ser 2004................................................ 6.25 03/01/34 810,443
1,500 New Jersey Economic Development Authority, Cigarette Tax
Ser 2004................................................ 5.75 06/15/34 1,613,895
------------
- --------
3,436,798
3,250
------------
- --------
148,241 Total Tax-Exempt Municipal Bonds (Cost $139,275,077).......................... 145,285,856
------------
- --------
Short Term Tax-Exempt Municipal Obligation (0.7%)
1,000 Harris County Health Facilities Development Corporation,
Texas, Methodist Hospital Ser 2005 B (Demand 09/01/05)
(Cost $1,000,000)....................................... 2.34* 12/01/32 1,000,000
------------
- --------
$149,241 Total Investments (Cost $140,275,077) (c) (d)............. 97.6% 146,285,856
========
Other Assets in Excess of Liabilities..................... 2.4 3,645,499
------ ------------
Net Assets................................................ 100.0% $149,931,355
====== ============
</Table>
14
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust II
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2005 (UNAUDITED) continued
- ---------------------
<Table>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate demand obligation.
** A portion of this security has been physically segregated in
connection with open futures contracts in an amount equal to
$32,500.
+ Joint exemption in locations shown.
++ Currently a 6.50% coupon; increases to 8.00% on January 1,
2009.
(a) Bond in default; issuer in bankruptcy.
(b) Resale is restricted to qualified institutional investors.
(c) Securities have been designated as collateral in an amount
equal to $6,452,797 in connection with open futures
contracts.
(d) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $8,987,957 and
the aggregate gross unrealized depreciation is $2,897,077,
resulting in net unrealized appreciation of $6,090,880.
Bond Insurance:
- ---------------
Ambac Ambac Assurance Corporation.
</Table>
FUTURES CONTRACTS OPEN AT AUGUST 31, 2005:
<Table>
<Caption>
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
- ------------------------------------------------------------------------------------------
50 Short U.S. Treasury Notes 5 $(5,418,750) $(43,653)
yr December 2005
10 Short U.S. Treasury Notes 10 (1,120,781) (10,746)
yr December 2005
--------
Total unrealized depreciation................... $(54,399)
========
</Table>
See Notes to Financial Statements
15
Morgan Stanley Municipal Income Opportunities Trust II
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
August 31, 2005 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $140,275,077)............... $146,285,856
Cash................................ 1,172,232
Receivable for:
Interest........................ 2,488,385
Investments sold................ 230,000
Prepaid expenses and other assets... 15,293
------------
Total Assets.................... 150,191,766
------------
Liabilities:
Payable for:
Investment advisory fee......... 67,617
Shares of beneficial interest
repurchased................... 43,851
Variation margin................ 28,437
Transfer agent fee.............. 13,822
Administration fee.............. 10,819
Accrued expenses and other
payables.......................... 95,865
------------
Total Liabilities............... 260,411
------------
Net Assets...................... $149,931,355
============
Composition of Net Assets:
Paid-in-capital..................... $148,976,892
Net unrealized appreciation......... 5,956,380
Accumulated undistributed net
investment income................. 1,737,842
Accumulated net realized loss....... (6,739,759)
------------
Net Assets...................... $149,931,355
============
Net Asset Value Per Share,
16,618,590 shares outstanding
(unlimited shares authorized of $.01
par value).......................... $9.02
============
</Table>
Statement of Operations
For the six months ended August 31, 2005 (unaudited)
<Table>
Net Investment Income:
Interest Income....................... $4,725,558
----------
Expenses
Investment advisory fee............... 375,548
Administration fee.................... 60,088
Transfer agent fees and expenses...... 33,952
Professional fees..................... 28,868
Shareholder reports and notices....... 17,929
Registration fees..................... 8,194
Custodian fees........................ 5,802
Trustees' fees and expenses........... 4,615
Other................................. 10,302
----------
Total Expenses.................... 545,298
Less: expense offset.................. (5,599)
----------
Net Expenses...................... 539,699
----------
Net Investment Income............. 4,185,859
----------
Net Realized and Unrealized Gain
(Loss):
Net Realized Gain (Loss) on:
Investments........................... 714,742
Futures contracts..................... (8,091)
----------
Net Realized Gain................. 706,651
----------
Net Change in Unrealized
Appreciation/Depreciation on:
Investments........................... 3,027,187
Futures contracts..................... (98,724)
----------
Net Appreciation.................. 2,928,463
----------
Net Gain.......................... 3,635,114
----------
Net Increase.......................... $7,820,973
==========
</Table>
See Notes to Financial Statements
16
Morgan Stanley Municipal Income Opportunities Trust II
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
AUGUST 31, 2005 FEBRUARY 28, 2005
--------------- -----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 4,185,859 $ 8,290,269
Net realized gain........................................... 706,651 1,214,223
Net change in unrealized appreciation/depreciation.......... 2,928,463 1,236,801
------------ ------------
Net Increase............................................ 7,820,973 10,741,293
Dividends to shareholders from net investment income........ (4,021,086) (8,550,219)
Decrease from transactions in shares of beneficial
interest.................................................. (2,037,263) (4,443,612)
------------ ------------
Net Increase (Decrease)................................. 1,762,624 (2,252,538)
Net Assets:
Beginning of period......................................... 148,168,731 150,421,269
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $1,737,842 and $1,573,069, respectively)................. $149,931,355 $148,168,731
============ ============
</Table>
See Notes to Financial Statements
17
Morgan Stanley Municipal Income Opportunities Trust II
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2005 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley 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 following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) Portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid 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 mean between the last reported bid and
asked price. 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.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; and (3) 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. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the
18
Morgan Stanley Municipal Income Opportunities Trust II
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2005 (UNAUDITED) continued
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments known as variation margin are recorded by
the Fund as unrealized gains and losses. Upon closing of the contract, the Fund
realizes a gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
D. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
E. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
F. Use of Estimates -- 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.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser
an advisory fee, calculated weekly and payable monthly, by applying the annual
rate of 0.50% to the Fund's weekly net assets.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, calculated weekly and payable monthly, by applying
the annual rate of 0.08% to the Fund's weekly net assets.
3. 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, 2005 aggregated
$10,420,465 and $12,688,204, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain 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 factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future
19
Morgan Stanley Municipal Income Opportunities Trust II
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2005 (UNAUDITED) continued
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the six months ended August 31, 2005 included in Trustees'
fees and expenses in the Statement of Operations amounted to $3,757. At August
31, 2005, the Fund had an accrued pension liability of $62,582 which is included
in accrued expenses in the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund.
4. 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
---------- --------- ------------
Balance, February 29, 2004.................................. 17,440,745 $174,408 $159,575,531
Treasury shares purchased and retired (weighted average
discount 9.55%)*.......................................... (571,900) (5,719) (4,437,893)
Reclassification due to permanent book/tax differences...... -- -- (4,292,172)
---------- -------- ------------
Balance, February 28, 2005.................................. 16,868,845 168,689 150,845,466
Treasury shares purchased and retired (weighted average
discount 8.76%)*.......................................... (250,255) (2,503) (2,034,760)
---------- -------- ------------
Balance, August 31, 2005.................................... 16,618,590 $166,186 $148,810,706
========== ======== ============
</Table>
- ---------------------
* The Trustees have voted to retire the shares purchased.
5. Dividends
The Fund declared the following dividends from net investment income:
<Table>
<Caption>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------ --------- ------------------ ------------------
June 28, 2005 $0.04 September 9, 2005 September 23, 2005
September 27, 2005 $0.0425 October 7, 2005 October 21, 2005
September 27, 2005 $0.0425 November 4, 2005 November 18, 2005
September 27, 2005 $0.0425 December 9, 2005 December 23, 2005
</Table>
20
Morgan Stanley Municipal Income Opportunities Trust II
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2005 (UNAUDITED) continued
6. Risks Relating to Certain Financial Instruments
The Fund may invest a portion of its assets in residual interest bonds, which
are inverse floating rate municipal obligations. The prices of these securities
are subject to greater market fluctuations during periods of changing prevailing
interest rates than are comparable fixed rate obligations.
To hedge against adverse interest rate changes, the Fund may invest in financial
futures contracts or municipal bond index futures contracts ("futures
contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
7. Federal Income Tax Status
The amount of dividends and distributions from net investment 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 tax purposes are reported as distributions of paid-in-capital.
As of February 28, 2005, the Fund had a net capital loss carryforward of
$7,402,084 of which $801,428 will expire on February 28, 2006, $261,877 will
expire on February 28, 2009, $4,854,343 will expire on February 28, 2011 and
$1,484,436 will expire on February 28, 2013 to offset future capital gains to
the extent provided by regulations.
As of February 28, 2005, the Fund had temporary book/tax differences primarily
attributable to mark-to-market of open futures contracts, interest on bonds in
default and book amortization of discounts on debt securities.
8. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
21
Morgan Stanley 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, 2005 2005 2004** 2003 2002 2001
--------------- --------- --------- --------- --------- ---------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of period... $8.78 $8.62 $8.37 $8.44 $8.46 $8.30
----- ----- ----- ----- ----- -----
Income (loss) from investment
operations:
Net investment income*............. 0.25 0.48 0.49 0.51 0.51 0.52
Net realized and unrealized gain
(loss)............................. 0.22 0.15 0.25 (0.06) (0.02) 0.12
----- ----- ----- ----- ----- -----
Total income from investment
operations............................ 0.47 0.63 0.74 0.45 0.49 0.64
----- ----- ----- ----- ----- -----
Less dividends from net investment
income................................ (0.24) (0.50) (0.51) (0.53) (0.52) (0.51)
----- ----- ----- ----- ----- -----
Anti-dilutive effect of acquiring
treasury shares*...................... 0.01 0.03 0.02 0.01 0.01 0.03
----- ----- ----- ----- ----- -----
Net asset value, end of period......... $9.02 $8.78 $8.62 $8.37 $8.44 $8.46
===== ===== ===== ===== ===== =====
Market value, end of period............ $8.35 $8.00 $8.09 $7.51 $8.04 $8.00
===== ===== ===== ===== ===== =====
Total Return+.......................... 7.45%(1) 5.38% 14.90% (0.13)% 7.13% 18.10%
Ratios to Average Net Assets:
Expenses............................... 0.73%(2)(3) 0.89%(3) 0.96%(3) 0.94%(3) 0.95%(3) 0.92%(3)
Net investment income.................. 5.57%(2) 5.62% 5.87% 6.09% 5.94% 6.23%
Supplemental Data:
Net assets, end of period, in
thousands............................. $149,931 $148,169 $150,421 $150,510 $154,088 $156,751
Portfolio turnover rate................ 7%(1) 16% 11% 8% 11% 10%
</Table>
- ---------------------
<Table>
* The per share amounts were computed using an average number
of shares outstanding during the period.
** For the year ended February 29.
+ 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 prices
obtained under the Fund's dividend reinvestment plan. Total
return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
</Table>
22
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust II
SHAREHOLDER VOTING RESULTS
On June 21, 2005, an annual meeting of the Fund's shareholders was held for the
purpose of voting on the following matter, the results of which were as follows:
Election of Trustees:
<Table>
<Caption>
# OF SHARES
------------------------------
FOR WITHHELD
- --------------------------------------------------------------------------------------------
Edwin J. Garn............................................... 12,399,126 421,722
Michael E. Nugent........................................... 12,403,161 417,687
</Table>
The following Trustees were not standing for reelection at this meeting: Michael
Bozic, Charles A. Fiumefreddo, Wayne E. Hedien, James F. Higgins, Dr. Manuel H.
Johnson, Joseph J. Kearns, and Fergus Reid.
23
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Ronald E. Robison
President and Principal Executive Officer
Joseph J. McAlinden
Vice President
Barry Fink
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Thomas F. Caloia
Vice President
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
(c) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Municipal Income
Opportunities Trust II
Semiannual Report
August 31, 2005
[MORGAN STANLEY LOGO]
38554RPT-RA05-00841P-Y08/05
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports covering periods ending on or after December 31,
2005.
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
(d) Maximum Number (or
(c) Total Number of Shares Approximate Dollar Value)
(a) Total Number of (or Units) Purchased as of Shares (or Units) that
Shares (or Units) (b) Average Price Paid per Part of Publicly Announced May Yet Be Purchased Under
Period Purchased Share (or Unit) Plans or Programs the Plans or Programs
- ------------------ ------------------- -------------------------- -------------------------- --------------------------
March 1, 2005 - 52,035 $7.8372 N/A N/A
March-31, 2005
April 1, 2005 - 41,900 $7.9527 N/A N/A
April 31, 2005 -
May 1, 2005 - 35,820 $8.1263 N/A N/A
May 31, 2005
June 1, 2005 42,900 $8.1991 N/A N/A
- - June 30, 2005 -
July 1, 2005 44,000 $8.4028 N/A N/A
- -July 31, 2005
August 1, 2005 33,600 $8.4293 N/A N/A
- August 31, 2005
Total 250,255 $8.1579 N/A N/A
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities
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and Exchange Commission's rules and forms, based upon such officers' evaluation
of these controls and procedures as of a date within 90 days of the filing date
of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Municipal Income Opportunities Trust II
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
October 20, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
October 20, 2005
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
October 20, 2005
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