UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05597
Morgan Stanley Municipal Income Opportunities Trust
(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: May 31, 2004
Date of reporting period: November 30, 2003
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Municipal Income Opportunities Trust 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
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 November 30, 2003
MARKET OVERVIEW
Over the past six months, the U.S. economy showed increasing strength,
culminating in 8.2 percent GDP growth in the third quarter of 2003. Some of the
most closely watched indicators, such as employment growth, improved but
remained below potential. The Federal Reserve Board continued its stimulative
monetary policy by keeping the federal funds target rate at a record low of 1.0
percent.
The municipal market began the period with yields near 40-year lows. By
mid-June, yields began to climb as investors shifted their attention to the
improving equity market. At the same time, municipal market participation by
institutional taxable investors subsided as taxable yields rose faster than
tax-exempt yields. Ongoing budgetary and fiscal difficulties at the state and
local levels contributed to ratings downgrades for many municipal issues.
Municipal issuance remained strong through July, but slowed over the last few
months of the period. Overall, these forces combined to push municipal-bond
yields higher than where they began the period.
PERFORMANCE ANALYSIS
The net asset value (NAV) of Morgan Stanley Municipal Income Opportunities Trust
(OIA) decreased from $7.91 to $7.73 per share for the six months ended November
30, 2003. Based on this change plus reinvestment of tax-free dividends totaling
$0.26 per share the Fund's total NAV return was 0.97 percent. OIA's value on the
New York Stock Exchange (NYSE) decreased from $7.76 to $7.19 per share during
the same period. Based on this change plus reinvestment of tax-free dividends,
the Fund's total market return was -4.14 percent. On November 30, 2003, OIA's
NYSE market price was at a 7.0 percent discount to its NAV. (Past performance is
no guarantee of future results.)
Monthly dividends for the fourth quarter of 2003, declared in September, were
decreased from $0.045 to $0.04 per share. The new dividend reflects the level of
the Fund's undistributed net investment income and projected earnings power. The
Fund's level of undistributed net investment income was $0.074 per share on
November 30, 2003, versus $0.075 per share six months earlier.*
From a strategic point of view, with interest rates at or near multi-decade
lows, we have become increasingly cautious. As a result, we began to establish a
hedge position by selling Treasury futures to reduce the portfolio's duration+
which has been shorter than its benchmark index. The portfolio's duration was
7.5 years. More than 50 percent of OIA's assets are in the non-rated sector. The
prices of these securities are typically less sensitive than are those of
investment-grade bonds to movements in interest rates. Purchases during the
period focused on
* Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
+ Duration: 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 one percent change in the price of a bond for every one 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-rate environments, while funds with longer
durations perform better when rates decline.
2
health care issues, to take advantage of supply and attractive yield
opportunities. Three issues, representing 1.5 percent of net assets, are non-
income producing. The Fund's net assets of $159.7 million were diversified
across 78 credits in 10 long-term sectors.
The Fund's procedure for reinvesting all dividends and distributions on common
shares is through purchases in the open market. This method helps support the
market value of the Fund's shares. In addition, we would like to remind you that
the Trustees have approved a procedure whereby the Fund 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.
LARGEST SECTORS
Hospital 17.0%
IDR/PCR* 16.2
Mortgage 15.2
Nursing & Health Related Facilities 10.9
Tax Allocation 9.1
CREDIT ANALYSIS
Aaa/AAA 3.8%
Aa/AA 8.5
A/A 5.7
Baa/BBB 21.3
Ba/BB or Less 8.4
NR 52.3
* Industrial Development/Pollution Control Revenue
Subject to change daily. Largest Sectors are as a percentage of net assets, and
Credit Analysis is a percentage of total long-term investments. Morgan Stanley
is a full-service firm engaged in securities trading and brokerage activities,
investment banking, research and analysis, financing and financial advisory
services.
3
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of November 30, 2003
WEIGHTED AVERAGE MATURITY: 19 YEARS
1-5 2.00
5-10 17.00
10-20 33.00
20-30 41.00
30+ 7.00
Portfolio structure is subject to change.
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
Alabama................ 0.6%
Arkansas............... 1.3
California............. 4.2
Colorado............... 4.8
Connecticut............ 2.6
District of Columbia... 0.2
Florida................ 8.3
Hawaii................. 1.9
Illinois............... 2.2
Indiana................ 2.1
Iowa................... 2.3
Kansas................. 1.0
Kentucky............... 0.7%
Louisiana.............. 0.8
Maryland............... 3.7
Massachusetts.......... 5.7
Michigan............... 0.2
Minnesota.............. 5.1
Missouri............... 6.2
Nevada................. 3.7
New Hampshire.......... 8.1
New Jersey............. 4.2
New York............... 6.7
North Carolina......... 0.6
Ohio................... 1.1%
Pennsylvania........... 5.2
South Carolina......... 3.2
Tennessee.............. 0.6
Texas.................. 2.6
Vermont................ 1.3
Virginia............... 7.0
West Virginia.......... 1.3
Joint exemption*....... (0.2)
-----
Total.................. 99.3%
=====
---------------------
* Joint exemptions have been included in each geographic location.
4
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of November 30, 2003
PERCENT OF BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
2004 14.00
2005 10.00
2006 4.00
2007 3.00
2008 12.00
2009 10.00
2010 9.00
2011 8.00
2012 9.00
2013+ 21.00
COST (BOOK) YIELD(A) -- WEIGHTED AVERAGE BOOK YIELD: 7.4%
2004 9.80
2005 6.70
2006 7.20
2007 5.90
2008 6.40
2009 6.50
2010 7.10
2011 7.00
2012 6.90
2013+ 7.80
(a) 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 9.8% on 14% of the
long-term portfolio that is callable in 2004.
Portfolio structure is subject to change.
5
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2003 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Tax-Exempt Municipal Bonds (97.1%)
Educational Facilities Revenue (1.1%)
$ 1,200 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs.................................................... 7.50% 05/01/11 $ 1,292,232
500 San Diego County, California, The Burnham Institute
COPs.................................................... 6.25 09/01/29 518,270
------------
--------
1,810,502
1,700
------------
--------
Hospital Revenue (17.0%)
1,000 Colbert County-Northwest Health Care Authority, Alabama,
Helen Keller Hospital Ser 2003.......................... 5.75 06/01/27 953,590
2,000 Baxter County, Arkansas, Baxter County Regional Hospital
Impr & Refg Ser 1999 B.................................. 5.625 09/01/28 2,000,780
2,000 Hawaii Department of Budget & Finance, Kuakini Health 2002
Ser A................................................... 6.375 07/01/32 2,051,660
1,000 Illinois Health Facilities Authority, Riverside Health Ser
2000.................................................... 6.85 11/15/29 1,084,600
1,000 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002....................................... 6.125 08/01/31 1,030,050
2,000 Maryland Health & Higher Educational Facilities Authority,
University of Maryland Medical Center Ser 2000.......... 6.75 07/01/30 2,201,140
Massachusetts Health & Educational Facilities Authority,
2,000 Dana Farber Cancer Institute Ser G-1.................... 6.25 12/01/14 2,111,180
3,000 Dana Farber Cancer Institute Ser G-1.................... 6.25 12/01/22 3,151,919
1,000 St Louis County Industrial Development Authority,
Missouri, Pediatric Rehabilitation Center Ser 2003 A.... 6.625 11/15/35 994,180
3,000 Henderson, Nevada, Catholic Health West 1998 Ser A........ 5.375 07/01/26 2,820,660
1,500 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Assn Ser 1998 A........... 6.00 05/01/28 1,213,785
2,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994..................... 7.25 07/01/27 2,057,220
1,230 Nassau County Industrial Development Agency, New York,
North Shore Health Ser B+............................... 5.875 11/01/11 1,343,185
1,000 Monroe County, Hospital Authority, Pennsylvania, Pocono
Medical Center Ser 2003................................. 6.00 01/01/43 1,008,820
2,000 South Carolina Jobs - Economic Development Authority,
Palmetto Health Alliance Refg Ser 2003 C................ 6.875 08/01/27 2,151,140
1,000 Knox County Health, Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002.... 6.50 04/15/31 1,036,470
------------
--------
27,210,379
26,730
------------
--------
6
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Industrial Development/Pollution Control Revenue (16.2%)
$ 2,000 Los Angeles, California, American Airlines Inc Terminal 4
Ser 2002 C (AMT)........................................ 7.50% 12/01/24 $ 1,970,100
360 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser
1991 (AMT)++............................................ 10.125 09/01/11 355,432
2,000 Chicago, Illinois, Chicago O'Hare Int'l Airport/United
Airlines Inc Refg Ser 2001 C (a)........................ 6.30 05/01/16 441,000
1,500 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT).......... 6.00 06/01/27 1,397,025
380 Michigan Strategic Fund, Kasle Steel Corp Ser 1989
(AMT)................................................... 9.375 10/01/06 380,663
1,500 Dayton, Ohio, Emery Air Freight Corp Refg Ser 1998 A...... 5.625 02/01/18 1,234,785
555 Zanesville-Muskingum County Port Authority, Ohio, Anchor
Glass Container Corp Ser 1989 B (AMT)................... 10.25 12/01/08 554,950
2,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995
B....................................................... 7.75 05/01/20 2,223,120
3,745 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT)................................................... 6.65 05/01/10 4,062,202
2,995 Lexington County, South Carolina, Ellett Brothers Inc
Refg Ser 1988........................................... 7.50 09/01/08 2,919,017
1,000 Brazos River Authority, Texas, TXU Electric Co
Refg Ser 1999 A (AMT)................................... 7.70 04/01/33 1,124,720
1,000 Chesterfield County Industrial Development Authority,
Virginia, Virginia Electric & Power Company Ser 1985.... 5.50 10/01/09 1,088,230
Pittsylvania County Industrial Development Authority,
Virginia,
4,500 Multi-Trade of Pittsylvania County Ser 1994 A (AMT)..... 7.45 01/01/09 4,453,604
1,500 Multi-Trade of Pittsylvania County Ser 1994 A (AMT)..... 7.50 01/01/14 1,477,920
2,000 Upshur County, West Virginia, TJ International Inc Ser
1995 (AMT).............................................. 7.00 07/15/25 2,158,020
------------
--------
25,840,788
27,035
------------
--------
Mortgage Revenue - Multi-Family (6.8%)
Washington County Housing & Redevelopment Authority,
Minnesota,
3,885 Courtly Park Ser 1989 A................................. 9.75 06/15/19 3,084,612
1,165 Courtly Park Ser 1989 A (AMT)........................... 10.25 06/15/19 924,917
24,080 Courtly Park Ser 1989 B................................. 0.00 06/15/19 353,976
8,678 Courtly Park Ser 1989 B (AMT)........................... 0.00 06/15/19 127,565
White Bear Lake, Minnesota,
3,715 White Bear Woods Apts Phase II Refg 1989 Ser A.......... 9.75 06/15/19 3,287,441
19,771 White Bear Woods Apts Phase II Refg 1989 Ser B.......... 0.00 06/15/19 290,640
3,000 Brookhaven Industrial Development Agency, New York,
Woodcrest Estates Ser 1998 A (AMT)...................... 6.375 12/01/37 2,785,230
------------
--------
10,854,381
64,294
------------
--------
7
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Mortgage Revenue - Single Family (8.4%)
Colorado Housing & Finance Authority,
$ 335 1996 Ser B (AMT)........................................ 7.65% 11/01/26 $ 342,430
1,345 Ser 1998 D-2 (AMT)...................................... 6.35 11/01/29 1,394,805
35,865 New Hampshire Housing Finance Authority, Residential 1983
Ser B................................................... 0.00 01/01/15 11,685,893
------------
--------
13,423,128
37,545
------------
--------
Nursing & Health Related Facilities Revenue (10.9%)
Escambia County, Florida,
6,000 Pensacola Care Development Centers Ser 1989............. 10.25 07/01/11 6,009,659
1,375 Pensacola Care Development Centers Ser 1989 A........... 10.25 07/01/11 1,377,214
1,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999....... 6.75 04/01/34 771,620
1,985 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996............................... 9.25 07/01/25 2,311,394
2,330 Jefferson County, Kentucky, AHF/Kentucky-Iowa Inc Ser 1990
(a)..................................................... 10.25 01/01/20 1,048,617
1,300 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993........ 8.375 10/01/13 1,330,459
1,850 Massachusetts Development Finance Agency, New England
Center for Children Ser 1998............................ 5.875 11/01/18 1,666,628
1,000 Massachusetts Health & Educational Facilities Authority,
The Learning Center for Deaf Children Ser C............. 6.125 07/01/29 914,090
1,040 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999..................... 6.00 06/01/09 1,043,370
Kirbyville Health Facilities Development Authority, Texas,
3,661 Heartway III Corp Ser 1998 A (b)........................ 10.00 03/20/18 918,142
642 Heartway III Corp Ser 1998 B (b)........................ 6.00 03/20/04 642
------------
--------
17,391,835
22,183
------------
--------
Recreational Facilities Revenue (8.6%)
2,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A................................. 6.25 01/01/30 2,011,600
1,000 San Diego County, California, San Diego Natural History
Museum COPs............................................. 5.70 02/01/28 869,190
2,000 Elk Valley Public Improvement Corporation, Colorado, Ser
2001 A.................................................. 7.35 09/01/31 2,059,260
Mashantucket (Western) Pequot Tribe, Connecticut,
1,010 Special 1996 Ser A (c).................................. 6.40 09/01/11 1,095,951
1,000 Special 1997 Ser B (c).................................. 5.75 09/01/27 1,023,730
2,000 Mohegan Tribe of Indians of Connecticut, Gaming Authority
Ser 2003 (WI)........................................... 5.25 01/01/33 1,963,620
1,750 American National Fish & Wildlife Museum District,
Missouri, Ser 1999...................................... 7.00 09/01/19 636,563
8
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 2,000 St Louis Industrial Development Authority, Missouri, St
Louis Convention Center Headquarters Hotel Ser 2000
(AMT)................................................... 6.875% 12/15/20 $ 1,948,880
2,000 Austin Convention Enterprises, Texas, Convention Center
Hotel Ser 2000 A........................................ 6.70 01/01/32 2,120,580
------------
--------
13,729,374
14,760
------------
--------
Retirement & Life Care Facilities Revenue (13.6%)
1,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A..................................... 8.00 01/01/30 960,160
1,000 Hawaii Department of Budget & Finance, Kahala Nui, 2003
Ser A................................................... 8.00 11/15/33 995,440
1,500 Lenexa, Kansas, Lakeview Village - Southridge Ser 2002
C....................................................... 6.875 05/15/32 1,565,730
1,500 Maryland Health & Higher Educational Facilities Authority,
Mercy Ridge 2003 Ser A.................................. 6.00 04/01/35 1,493,970
1,500 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A.................................. 5.75 07/01/23 1,341,030
New Jersey Economic Development Authority,
1,000 Cedar Crest Village Inc Ser 2001 A...................... 7.25 11/15/31 1,021,730
1,000 Franciscan Oaks Ser 1997................................ 5.70 10/01/17 913,960
1,000 The Presbyterian Home at Montgomery Ser 2001 A.......... 6.375 11/01/31 993,100
2,000 United Methodist Homes of New Jersey Ser 1998........... 5.125 07/01/25 1,766,460
1,980 Glen Cove Housing Authority, New York, Mayfair at Glen
Cove Ser 1996 (AMT)..................................... 8.25 10/01/26 2,088,702
3,250 Suffolk County Industrial Development Agency, New York,
Jefferson's Ferry Ser 1999.............................. 7.25 11/01/28 3,396,835
1,000 North Carolina Medical Care Commission, The Givens Estate
Ser 2003 A.............................................. 6.50 07/01/32 1,017,450
1,000 Chester County Health & Education Facilities Authority,
Pennsylvania, Jenner's Pond Inc Ser 2002................ 7.625 07/01/34 998,010
2,100 Vermont Economic Development Authority, Wake Robin Corp
Ser 1999 A.............................................. 6.75 03/01/29 2,040,297
1,000 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes Ser 2003 A........................................ 7.375 12/01/32 1,028,830
------------
--------
21,621,704
21,830
------------
--------
Tax Allocation Revenue (9.1%)
2,000 Beacon Lakes Community Development District, Florida, Ser
2003 A.................................................. 6.90 05/01/35 2,018,340
2,000 Chicago, Illinois, Lake Shore East Ser 2002............... 6.75 12/01/32 2,002,280
2,000 Anne Arundel County, Maryland, National Business Park Ser
2000.................................................... 7.375 07/01/28 2,161,760
2,000 Des Peres, Missouri, West County Center Ser 2002.......... 5.75 04/15/20 2,011,080
4,000 Fenton, Missouri, Gravois Bluffs Redevelopment Ser 2001 A
Refg.................................................... 7.00 10/01/21 4,317,560
1,995 Las Vegas, Nevada, District No 808 Summerlin Area Ser
2001.................................................... 6.75 06/01/21 2,067,438
------------
--------
14,578,458
13,995
------------
--------
9
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Transportation Facilities Revenue (5.4%)
$ 6,500 E-470 Public Highway Authority, Colorado, Ser 1997 B
(MBIA).................................................. 0.00% 09/01/15 $ 3,877,575
1,865 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover
Refg Ser 1993 A (Ambac)................................. 5.85 10/01/13 2,164,090
1,000 Nevada Department of Business & Industry, Las Vegas
Monorail 2nd Tier Ser 2000.............................. 7.375 01/01/40 986,240
2,000 Pocahontas Parkway Association, Virginia, Route 895
Connector Ser 1998 A.................................... 5.50 08/15/28 1,543,860
------------
--------
8,571,765
11,365
------------
--------
241,437 Total Tax-Exempt Municipal Bonds (Cost $171,278,017)......................... 155,032,314
------------
--------
Short-Term Tax-Exempt Municipal Obligations (2.2%)
2,300 Indiana Health Facility Financing Authority, Clarian
Health Ser 2000 B (Demand 12/01/03)..................... 1.06* 03/01/30 2,300,000
1,300 Washington Health Care Facilities Authority, Virginia
Mason Medical Center Ser 1997 B (MBIA) (Demand
12/01/03)............................................... 1.06* 02/15/27 1,300,000
------------
--------
3,600 Total Short-Term Tax-Exempt Municipal Obligations (Cost $3,600,000).......... 3,600,000
-------- ------------
$245,037 Total Investments (Cost $174,878,017) (d) (e)........................ 99.3% 158,632,314
========
Other Assets in Excess of Liabilities................................ 0.7 1,070,921
----- ------------
Net Assets........................................................... 100.0% $159,703,235
===== ============
---------------------
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.
++ Joint exemption in locations shown.
WI Security purchased on a "when-issued basis".
(a) Issuer in bankruptcy; non-income producing security.
(b) Bond in default; non-income producing security.
(c) Resale is restricted to qualified institutional investors.
(d) Securities have been designated as collateral in an amount
equal to $1,957,304 in connection with open futures
contracts and securities purchased on a when-issued basis.
(e) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $5,277,603 and
the aggregate gross unrealized depreciation is $21,523,306,
resulting in net unrealized depreciation of $16,245,703.
Bond Insurance:
---------------
Ambac Ambac Assurance Corporation.
MBIA Municipal Bond Investors Assurance Corporation.
10
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
Futures Contracts Open at November 30, 2003:
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
--------- ---------- ------------------------- ------------------------ --------------
10 Short U.S. Treasury Notes 5 Yr $(1,103,750) $6,506
March 2004
11
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
November 30, 2003 (unaudited)
Assets:
Investments in securities, at value
(cost $174,878,017)....................................... $158,632,314
Cash........................................................ 7,070
Receivable for:
Interest................................................ 3,124,554
Investments sold........................................ 163,461
Variation margin........................................ 5,000
Prepaid expenses and other assets........................... 5,644
------------
Total Assets............................................ 161,938,043
------------
Liabilities:
Payable for:
Investments purchased................................... 1,939,040
Shares of beneficial interest repurchased............... 69,337
Investment advisory fee................................. 65,534
Administration fee...................................... 39,320
Accrued expenses............................................ 121,577
------------
Total Liabilities....................................... 2,234,808
------------
Net Assets.............................................. $159,703,235
============
Composition of Net Assets:
Paid-in-capital............................................. $186,531,458
Net unrealized depreciation................................. (16,239,197)
Accumulated undistributed net investment income............. 1,522,926
Accumulated net realized loss............................... (12,111,952)
------------
Net Assets.............................................. $159,703,235
============
Net Asset Value Per Share,
20,673,272 shares outstanding (unlimited shares authorized
of $.01 par value).......................................... $7.73
============
12
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended November 30, 2003 (unaudited)
Net Investment Income:
Interest Income............................................. $ 6,106,794
-----------
Expenses
Investment advisory fee..................................... 402,725
Administration fee.......................................... 241,635
Transfer agent fees and expenses............................ 40,864
Professional fees........................................... 17,157
Shareholder reports and notices............................. 15,304
Registration fees........................................... 9,542
Trustees' fees and expenses................................. 8,838
Custodian fees.............................................. 4,097
Other....................................................... 8,277
-----------
Total Expenses.......................................... 748,439
Less: expense offset........................................ (4,023)
-----------
Net Expenses............................................ 744,416
-----------
Net Investment Income................................... 5,362,378
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain/Loss on:
Investments............................................... 418,869
Futures contracts......................................... (7,461)
-----------
Net Realized Gain....................................... 411,408
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments............................................... (4,284,267)
Futures contracts......................................... 6,506
-----------
Net Depreciation........................................ (4,277,761)
-----------
Net Loss................................................ (3,866,353)
-----------
Net Increase................................................ $ 1,496,025
===========
13
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
NOVEMBER 30, 2003 MAY 31, 2003
----------------- ------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 5,362,378 $ 11,261,555
Net realized gain (loss).................................... 411,408 (746,486)
Net change in unrealized depreciation....................... (4,277,761) 1,447,725
------------ ------------
Net Increase............................................ 1,496,025 11,962,794
Dividends to shareholders from net investment income........ (5,395,436) (11,477,477)
Decrease from transactions in shares of beneficial
interest.................................................. (604,877) (1,296,401)
------------ ------------
Net Decrease............................................ (4,504,288) (811,084)
Net Assets:
Beginning of period......................................... 164,207,523 165,018,607
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $1,522,926 and $1,555,984, respectively)................. $159,703,235 $164,207,523
============ ============
14
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2003 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Municipal Income Opportunities Trust (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 a high level of current income which is exempt from federal income tax.
The Fund was organized as a Massachusetts business trust on June 22, 1988 and
commenced operations on September 19, 1988.
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. 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.
15
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
D. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
E. 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 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.
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 Advisor"), the Fund pays 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 Advisor, 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.
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 November 30, 2003 aggregated
$11,405,070 and $11,450,212, respectively.
Morgan Stanley Trust, an affiliate of the Investment Advisor and Administrator,
is the Fund's transfer agent. At November 30, 2003, the Fund had transfer agent
fees and expenses payable of approximately $14,800.
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
16
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
of retirement. Benefits under this plan are based on factors which include years
of service and compensation. Aggregate pension costs for the six months ended
November 30, 2003 included in Trustees' fees and expenses in the Statement of
Operations amounted to $3,720. At November 30, 2003, the Fund had an accrued
pension liability of $60,091 which is included in accrued expenses in the
Statement of Assets and Liabilities.
On December 2, 2003, the Trustees voted to close the plan to new participants,
eliminate the future benefits growth due to increases to compensation after July
31, 2003 and effective April 1, 2004, establish an unfunded deferred
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
throughout the year.
4. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
Balance, May 31, 2002....................................... 20,932,272 $209,322 $198,359,971
Treasury shares purchased and retired (weighted average
discount 5.83%)*.......................................... (175,800) (1,758) (1,294,643)
Reclassification due to permanent book/tax differences...... -- -- (10,136,557)
---------- -------- ------------
Balance, May 31, 2003....................................... 20,756,472 207,564 186,928,771
Treasury shares purchased and retired (weighted average
discount 5.20%)*.......................................... (83,200) (832) (604,045)
---------- -------- ------------
Balance, November 30, 2003.................................. 20,673,272 $206,732 $186,324,726
========== ======== ============
---------------------
* The Trustees have voted to retire the shares purchased.
5. 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 May 31, 2003, the Fund had a net capital loss carryforward of $12,523,360
of which $5,243,406 will expire on May 31, 2004, $700,037 will expire on May 31,
2006, $87,017 will
17
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2003 (UNAUDITED) continued
expire on May 31, 2008, $4,628,820 will expire on May 31, 2009 and $1,864,080
will expire on May 31, 2011 to offset future capital gains to the extent
provided by regulations.
As of May 31, 2003, the Fund had temporary book/tax differences attributable to
book amortization of discount on debt securities and a non-deductible expense.
6. Dividends
The Fund declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
------------------ --------- ----------------- -----------------
September 23, 2003 $0.04 December 5, 2003 December 19, 2003
December 30, 2003 $0.04 January 9, 2004 January 23, 2004
December 30, 2003 $0.04 February 6, 2004 February 20, 2004
December 30, 2003 $0.04 March 5, 2004 March 19, 2004
7. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
8. Risks Relating to Certain Financial Instruments
The Fund may invest a portion of its assets in 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.
18
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED MAY 31
MONTHS ENDED ----------------------------------------------------
NOVEMBER 30, 2003 2003 2002 2001 2000 1999
----------------- -------- -------- -------- -------- --------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of the
period.................................. $7.91 $7.88 $8.03 $7.79 $8.69 $ 8.80
----- ----- ----- ----- ----- ------
Income (loss) from investment operations:
Net investment income*............... 0.26 0.54 0.55 0.55 0.57 0.61
Net realized and unrealized gain
(loss)............................... (0.18) 0.04 (0.13) 0.28 (0.85) (0.13)
----- ----- ----- ----- ----- ------
Total income (loss) from investment
operations.............................. 0.08 0.58 0.42 0.83 (0.28) 0.48
----- ----- ----- ----- ----- ------
Less dividends from net investment
income.................................. (0.26) (0.55) (0.57) (0.59) (0.62) (0.59)
----- ----- ----- ----- ----- ------
Net asset value, end of period........... $7.73 $7.91 $7.88 $8.03 $7.79 $ 8.69
===== ===== ===== ===== ===== ======
Market value, end of period.............. $7.19 $7.76 $8.08 $8.53 $8.25 $9.438
===== ===== ===== ===== ===== ======
Total Return+............................ (4.14)%(1) 3.09% 1.42% 10.78% (5.94)% 15.65%
Ratios to Average Net Assets:
Expenses (before expense offset)......... 0.93 %(2) 0.93%(3) 0.92% 0.93% 0.93% 0.96%(3)
Net investment income.................... 6.66 %(2) 6.85% 6.92% 6.95% 6.95% 6.89%
Supplemental Data:
Net assets, end of period, in
thousands............................... $159,703 $164,208 $165,019 $168,062 $163,910 $183,200
Portfolio turnover rate.................. 7 %(1) 8% 7% 16% 13% 16%
---------------------
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends are assumed to
be reinvested at the prices obtained under the Fund's
dividend reinvestment plan.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
19
See Notes to Financial Statements
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
Philip J. Purcell
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Barry Fink
Vice President and General Counsel
Joseph J. McAlinden
Vice President
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 AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
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) 2003 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Municipal Income
Opportunities Trust
Semiannual Report
November 30, 2003
[MORGAN STANLEY LOGO]
38538RPT-00-13347A04-OP-1/04
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. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. [Reserved.]
Item 9 - 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 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.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(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 10 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.
2
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
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
January 22, 2004
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
January 22, 2004
/s/ Francis Smith
--------------------------
Francis Smith
Principal Financial Officer
January 22, 2004
3