Morgan Stanley Municipal Income Opportunities Trust
LETTER TO THE SHAREHOLDERS - NOVEMBER 30, 2002
Dear Shareholder:
During the six months ended November 30, 2002, U.S. economic indicators
fluctuated between stronger and weaker growth. The economy continued to recover
from recession and the aftermath of September 11. Real gross domestic product
(GDP) accelerated to an annual growth rate of 5.0 percent in the first quarter
of 2002. In the spring, the economy began to send mixed signals and the recovery
lost momentum. Weakness in manufacturing and capital spending combined with
corporate-accounting scandals and geopolitical turmoil to slow GDP to a 1.3
percent annual growth rate in the second quarter. The strongest consumer
spending of the year and the restocking of inventories led to 4.0 percent annual
GDP growth in the third quarter. The choppiness in the recovery pattern is
expected to continue.
As the economy gained strength in the first few months of 2002, a general
consensus developed that the Federal Reserve Board would begin to tighten
monetary policy and raise short-term interest rates. The bond market reacted to
these concerns in March and yields rose. By late spring, however, the consensus
shifted to favoring bonds as labor market and capital-spending indicators
remained soft and new disclosures on corporate ethics spurred a flight to
quality. Most importantly, the Federal Reserve changed its monetary policy bias
from neutral toward one of easing. The market's expectations of eventual rate
hikes were scaled back and bonds rallied. A mid-October surge in the equity
markets created a downdraft in bonds, but renewed concerns about the economy
helped bond prices improve by month-end. On November 6, 2002, the Federal
Reserve lowered the federal funds rate from 1.75 to 1.25 percent. This marked
the first change by the central bank in nearly one year.
Municipal Market Conditions
The economic environment and unsettled equity markets lowered municipal yields
to levels last seen in the 1960s. During the first 11 months of 2002, the yield
on the 30-year insured municipal bond index ranged from a high of 5.43 percent
in March to a low of 4.74 percent in September. The index yield stood at 5.10
percent at the end of November 2002. Throughout this period, the yield spread
between BBB-rated general obligation bonds and AAA-rated bonds provided an
average of 80 basis points of additional yield. At the end of November, more
than 60 percent of Morgan Stanley Municipal Income Opportunities Trust's
holdings were below low investment grade or nonrated.
The ratio of municipal yields as a percentage of U.S. Treasury yields is used as
a gauge of the relative value of municipals. A rising yield ratio indicates
weaker relative performance by
Morgan Stanley Municipal Income Opportunities Trust
LETTER TO THE SHAREHOLDERS - NOVEMBER 30, 2002 continued
municipals. The ratio of 30-year insured municipal bond yields to 30-year
Treasuries fell from 98 percent in December 2001 to 94 percent in March. As
municipals lagged the summer rally in Treasuries, the ratio jumped to 102
percent in September. The ratio remained above 100 percent during October and
November. These levels imply that municipals are cheap relative to Treasuries.
30-YEAR BOND YIELDS 1997-2002
Insured U.S. Insured Municipal
Municipal Treasury Yields/U.S. Treasury
Yields Yields Yields (Ratio)
5.60% 6.63% 84.46%
1997 5.70 6.79 83.95
5.65 6.80 83.09
5.90 7.10 83.10
5.75 6.94 82.85
5.65 6.91 81.77
5.60 6.78 82.60
5.25 6.29 83.47
5.48 6.61 82.90
5.40 6.40 84.38
5.35 6.15 86.99
5.30 6.05 87.60
5.15 5.92 86.99
1998 5.15 5.80 88.79
5.20 5.92 87.84
5.25 5.93 88.53
5.35 5.95 89.92
5.20 5.80 89.66
5.20 5.65 92.04
5.18 5.71 90.72
5.03 5.27 95.45
4.95 5.00 99.00
5.05 5.16 97.87
5.00 5.06 98.81
5.05 5.10 99.02
1999 5.00 5.09 98.23
5.10 5.58 91.40
5.15 5.63 91.47
5.20 5.66 91.87
5.30 5.83 90.91
5.47 5.96 91.78
5.55 6.10 90.98
5.75 6.06 94.88
5.85 6.05 96.69
6.03 6.16 97.89
6.00 6.29 95.39
5.97 6.48 92.13
2000 6.18 6.49 95.22
6.04 6.14 98.37
5.82 5.83 99.83
5.91 5.96 99.16
5.91 6.01 98.34
5.84 5.90 98.98
5.73 5.78 99.13
5.62 5.67 99.12
5.74 5.89 97.45
5.65 5.79 97.58
5.55 5.61 98.93
5.27 5.46 96.52
2001 5.30 5.50 96.36
5.27 5.31 99.25
5.26 5.44 96.69
5.45 5.79 94.13
5.40 5.75 93.91
5.35 5.76 92.88
5.16 5.52 93.48
5.07 5.37 94.41
5.20 5.42 95.94
5.04 4.87 103.49
5.17 5.29 97.73
5.36 5.47 97.99
2002 5.22 5.43 96.13
5.14 5.42 94.83
5.43 5.80 93.62
5.30 5.59 94.81
5.29 5.62 94.13
5.27 5.51 95.64
5.12 5.30 96.60
5.00 4.93 101.42
4.74 4.67 101.50
5.01 4.99 100.40
5.10 5.04 101.19
Source: Municipal Market Data - A Division of Thomson Financial Municipal Group
and Bloomberg L.P.
State and local governments took advantage of lower interest rates to refinance
outstanding debt in a manner similar to homeowners refinancing their mortgages.
Refinancing activity contributed to a surge in municipal bond underwriting, and
long-term volume increased 27 percent to a record $328 billion in the first
eleven months of 2002. Refunding issues represented almost one-quarter of the
total. Issuance is on track to raise calendar year 2002's volume to $350
billion. In California, volume surged after the California Department of Water
Resources sold $6.3 billion of bonds to reimburse the state for electric
purchases made during the 2001 power crisis. This was the largest issue in
municipal market history and increased California's share of national volume
2
Morgan Stanley Municipal Income Opportunities Trust
LETTER TO THE SHAREHOLDERS - NOVEMBER 30, 2002 continued
to 14 percent. Florida, New York and Texas, the next largest states in terms of
issuance, represented an additional 27 percent of the national total.
Performance
During the six-month period ended November 30, 2002, the net asset value (NAV)
of Morgan Stanley Municipal Income Opportunities Trust (OIA) decreased from
$7.88 to $7.82 per share. Based on this change, plus a reinvestment of tax-free
dividends totaling $0.28 per share, the Fund's total NAV return was 2.76
percent. OIA's value on the New York Stock Exchange (NYSE) decreased from $8.08
to $7.38 per share during this period. Based on this change plus reinvestment of
tax-free dividends, OIA's total market return was -5.42 percent. As of November
30, 2002, OIA's share price was at a 5.63 percent discount to its NAV.
Monthly dividends for the fourth quarter of 2002 were declared in September.
Beginning with the October payment, the monthly dividend was decreased from
$0.0475 to $0.045 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 $0.077 per share on November
30, 2002, versus $0.085 per share six months earlier.
Portfolio Structure
The Fund's net assets of $163.3 million were diversified among 11 long-term
sectors and 70 credits. At the end of November, the portfolio's average maturity
was 18 years. Average duration, a measure of sensitivity to interest-rate
changes, was 7.4 years. Three credits, representing 3 percent of net assets,
were accruing income but may have difficulty with near term debt service
payments. The accompanying charts provide current information on the portfolio's
credit ratings, maturity distribution and sector concentrations. Optional call
provisions by year and their respective cost (book) yields are also shown.
Looking Ahead
The Federal Reserve Board's cautious approach toward assuring economic recovery
helped stabilize the fixed-income markets earlier this year. In fact, the Fed's
current willingness to be accommodative resulted in a major bond rally during
the second and third calendar quarters. We believe that the yields on tax-exempt
securities continue to favor municipal bonds as an attractive choice for
tax-conscious investors. For many investors, the taxable equivalent yields
available on municipal bonds may offer a significant advantage.
3
Morgan Stanley Municipal Income Opportunities Trust
LETTER TO THE SHAREHOLDERS - NOVEMBER 30, 2002 continued
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps support
the market value of the Fund's shares. In addition, we would like to remind you
that the Trustees have approved a procedure whereby the Fund 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.
We appreciate your ongoing support of Morgan Stanley Municipal Income
Opportunities Trust and look forward to continuing to serve your investment
needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President and CEO
4
Morgan Stanley Municipal Income Opportunities Trust
LETTER TO THE SHAREHOLDERS - NOVEMBER 30, 2002 continued
[LARGEST SECTORS BAR GRAPH]
LARGEST SECTORS AS OF NOVEMBER 30, 2002
(% OF NET ASSETS)
IDR/PCR* 16%
MORTGAGE 16%
HOSPITAL 15%
NURSING & HEALTH RELATED FACILITIES 13%
RETIREMENT & LIFE CARE FACILITIES 10%
TAX ALLOCATION 9%
RECREATIONAL FACILITIES 8%
TRANSPORTATION 5%
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
[CREDIT RATINGS PIE CHART]
CREDIT RATINGS AS OF NOVEMBER 30, 2002
(% OF LONG-TERM PORTFOLIO)
Aaa or AAA 4%
Aa or AA 10%
A or A 5%
Baa or BBB 20%
Ba or BB 7%
NR 54%
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC. OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
[DISTRIBUTION BY MATURITY BAR GRAPH]
DISTRIBUTION BY MATURITY
(% OF LONG-TERM PORTFOLIO)
WEIGHTED AVERAGE
MATURITY: 18 YEARS
1-5 Years 0.4%
5-10 Years 20.8%
10-15 Years 16.2%
15-20 Years 20.5%
20-30 Years 38.5%
30+ Years 3.6%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
Morgan Stanley Municipal Income Opportunities Trust
LETTER TO THE SHAREHOLDERS - NOVEMBER 30, 2002 continued
CALL AND COST (BOOK) YIELD STRUCTURE
(BASED ON LONG-TERM PORTFOLIO)
NOVEMBER 30, 2002
WEIGHTED AVERAGE
CALL PROTECTION: 7 YEARS
PERCENT CALLABLE
2003 10.0%
2004 6.0%
2005 10.0%
2006 6.0%
2007 3.0%
2008 14.0%
2009 11.0%
2010 9.0%
2011 9.0%
2012+ 22.0%
WEIGHTED AVERAGE
BOOK YIELD: 7.5%
COST (BOOK) YIELD*
2003 9.4%
2004 9.7%
2005 6.7%
2006 7.2%
2007 5.9%
2008 6.5%
2009 6.5%
2010 7.1%
2011 6.9%
2012+ 8.0%
COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT
BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE FUND OPERATING EXPENSES. FOR
EXAMPLE, THE FUND IS EARNING A BOOK YIELD OF 9.4% ON 10% OF THE LONG-TERM
PORTFOLIO THAT IS CALLABLE IN 2003.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
6
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2002 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
Tax-Exempt Municipal Bonds (94.4%)
Educational Facilities Revenue (1.3%)
$ 1,500 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs.................................................... 7.50% 05/01/11 $ 1,628,520
500 San Diego County, California, The Burnham Institute
COPs.................................................... 6.25 09/01/29 520,605
-------- ------------
2,000 2,149,125
-------- ------------
Hospital Revenue (14.8%)
2,000 Baxter County, Arkansas, Baxter County Regional Hospital
Impr & Refg Ser 1999 B.................................. 5.625 09/01/28 1,914,680
2,000 Hawaii Department of Budget & Finance, Kuakini Health 2002
Ser A................................................... 6.375 07/01/32 1,954,360
1,000 Illinois Health Facilities Authority, Riverside Health Ser
2000.................................................... 6.85 11/15/29 1,068,160
2,000 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002....................................... 6.125 08/01/31 1,974,520
2,000 Kentucky Economic Development Finance Authority,
Appalachian Regional Healthcare Inc Refg & Impr Ser
1997.................................................... 5.875 10/01/22 1,726,340
2,000 Maryland Health & Higher Educational Facilities Authority,
University of Maryland Medical Ser 2000................. 6.75 07/01/30 2,154,920
Massachusetts Health & Educational Facilities Authority,
2,000 Dana Farber Cancer Institute Ser G-1.................... 6.25 12/01/14 2,106,320
3,000 Dana Farber Cancer Institute Ser G-1.................... 6.25 12/01/22 3,095,970
3,000 Henderson, Nevada, Catholic Health West 1998 Ser A........ 5.375 07/01/26 2,619,840
1,500 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Association Ser 1998 A.... 6.00 05/01/28 1,183,740
2,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994..................... 7.25 07/01/27 2,001,060
1,330 Nassau County Industrial Development Agency, New York,
North Shore Health Ser B................................ 5.875 11/01/11 1,315,583
1,000 Knox County Health, Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002.... 6.50 04/15/31 1,012,700
-------- ------------
24,830 24,128,193
-------- ------------
Industrial Development/Pollution Control Revenue (15.9%)
2,000 Los Angeles, California, American Airlines Inc Terminal 4
Ser 2002 C (AMT)........................................ 7.50 12/01/24 1,540,180
360 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser
1991 (AMT)++............................................ 10.125 09/01/11 357,102
2,000 Chicago, Illinois, Chicago O'Hare Int'l Airport/United
Airlines Inc Refg Ser 2001 C (c)........................ 6.30 05/01/16 380,000
1,500 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT).......... 6.00 06/01/27 1,321,665
561 Michigan Strategic Fund, Kasle Steel Corp Ser 1989
(AMT)................................................... 9.375 10/01/06 562,415
1,500 Dayton, Ohio, Emery Air Freight Corp Refg Ser 1998 A...... 5.625 02/01/18 1,094,010
See Notes to Financial Statements
7
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
$ 650 Zanesville-Muskingum County Port Authority, Ohio, Anchor
Glass Container Corp Ser 1989 B (AMT)................... 10.25% 12/01/08 $ 649,994
2,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995
B....................................................... 7.75 05/01/20 2,150,860
4,000 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT)................................................... 6.65 05/01/10 4,186,040
3,825 Lexington County, South Carolina, Ellett Brothers Inc Refg
Ser 1988................................................ 7.50 09/01/08 3,729,069
1,000 Brazos River Authority, Texas, TXU Electric Co Refg Ser
2001 C (AMT)............................................ 5.75 05/01/36 902,510
1,000 Chesterfield County Industrial Development Authority,
Virginia, Virginia Electric & Power Co Ser 1985......... 5.50 10/01/09 1,032,080
Pittsylvania County Industrial Development Authority,
Virginia,
4,500 Multi-Trade of Pittsylvania County Ser 1994 A (AMT)..... 7.45 01/01/09 4,467,960
1,500 Multi-Trade of Pittsylvania County Ser 1994 A (AMT)..... 7.50 01/01/14 1,487,520
2,000 Upshur County, West Virginia, TJ International Inc Ser
1995 (AMT).............................................. 7.00 07/15/25 2,083,260
-------- ------------
28,396 25,944,665
-------- ------------
Mortgage Revenue -- Multi-Family (6.8%)
Washington County Housing & Redevelopment Authority,
Minnesota,
3,885 Courtly Park Ser 1989 A................................. 9.75 06/15/19 3,122,180
1,165 Courtly Park Ser 1989 A (AMT)........................... 10.25 06/15/19 935,903
24,080 Courtly Park Ser 1989 B................................. 0.00 06/15/19 361,200
8,678 Courtly Park Ser 1989 B (AMT)........................... 0.00 06/15/19 130,168
White Bear Lake, Minnesota,
3,715 White Bear Woods Apts Phase II Refg 1989 Ser A.......... 9.75 06/15/19 3,338,410
19,812 White Bear Woods Apts Phase II Refg 1989 Ser B.......... 0.00 06/15/19 297,173
3,000 Brookhaven Industrial Development Agency, New York,
Woodcrest Estates Ser 1998 A (AMT)...................... 6.375 12/01/37 2,836,230
-------- ------------
64,335 11,021,264
-------- ------------
Mortgage Revenue -- Single Family (9.6%)
Colorado Housing & Finance Authority,
645 1996 Ser B (AMT)........................................ 7.65 11/01/26 672,548
2,265 Ser 1998 D-2 (AMT)...................................... 6.35 11/01/29 2,396,098
41,925 New Hampshire Housing Finance Authority, Residential 1983
Ser B................................................... 0.00 01/01/15 12,652,126
-------- ------------
44,835 15,720,772
-------- ------------
Nursing & Health Related Facilities Revenue (12.7%)
Escambia County, Florida,
6,475 Pensacola Care Development Centers Ser 1989............. 10.25 07/01/11 6,485,425
1,485 Pensacola Care Development Centers Ser 1989 A........... 10.25 07/01/11 1,487,391
1,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999....... 6.75 04/01/34 750,200
See Notes to Financial Statements
8
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
$ 2,000 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996............................... 9.25% 07/01/25 $ 2,365,320
2,330 Jefferson County, Kentucky, AHF/Kentucky-Iowa Inc Ser
1990**.................................................. 10.25 01/01/20 1,397,301
1,400 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993........ 8.375 10/01/13 1,454,264
1,900 Massachusetts Development Finance Agency, New England
Center for Children Ser 1998............................ 5.875 11/01/18 1,679,657
1,000 Massachusetts Health & Educational Facilities Authority,
The Learning Center for Deaf Children Ser C............. 6.125 07/01/29 899,520
1,040 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999..................... 6.00 06/01/09 1,024,098
Kirbyville Health Facilities Development Authority, Texas,
3,686 Heartway III Corp Ser 1998 A............................ 10.00 03/20/18 3,158,483
642 Heartway III Corp Ser 1998 B (a)........................ 6.00 03/20/04 32,100
-------- ------------
22,958 20,733,759
-------- ------------
Recreational Facilities Revenue (7.9%)
2,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A................................. 6.25 01/01/30 1,938,760
1,000 San Diego County, California, San Diego Natural History
Museum COPs............................................. 5.70 02/01/28 1,013,200
2,000 Elk Valley Public Improvement Corporation, Colorado, Ser
2001 A.................................................. 7.35 09/01/31 2,021,880
Mashantucket (Western) Pequot Tribe, Connecticut,
1,010 Special 1996 Ser A (b).................................. 6.40 09/01/11 1,078,145
1,000 Special 1997 Ser B (b).................................. 5.75 09/01/27 987,290
2,000 American National Fish & Wildlife Museum District,
Missouri, Ser 1999...................................... 7.00 09/01/19 1,894,980
2,000 St Louis Industrial Development Authority, Missouri, St
Louis Convention Center Headquarters Hotel Ser 2000
(AMT)................................................... 6.875 12/15/20 1,960,080
2,000 Austin Convention Enterprises, Texas, Convention Center
Hotel Senior Ser 2000 A................................. 6.70 01/01/32 2,049,300
-------- ------------
13,010 12,943,635
-------- ------------
Retirement & Life Care Facilities Revenue (10.4%)
1,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A..................................... 8.00 01/01/30 978,470
1,500 Lenexa, Kansas, Lakeview Village -- Southridge Ser 2002
C....................................................... 6.875 05/15/32 1,510,275
1,500 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A.................................. 5.75 07/01/23 1,319,355
New Jersey Economic Development Authority,
1,000 Cedar Crest Village Inc Ser 2001 A...................... 7.25 11/15/31 988,380
1,000 Franciscan Oaks Ser 1997................................ 5.70 10/01/17 897,240
1,000 The Presbyterian Home at Montgomery Ser 2001 A.......... 6.375 11/01/31 1,001,170
2,000 United Methodist Homes of New Jersey Ser 1998........... 5.125 07/01/25 1,645,880
See Notes to Financial Statements
9
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
$ 1,980 Glen Cove Housing Authority, New York, Mayfair at Glen
Cove Ser 1996 (AMT)..................................... 8.25% 10/01/26 $ 2,117,768
3,250 Suffolk County Industrial Development Agency, New York,
Jefferson's Ferry Ser 1999.............................. 7.25 11/01/28 3,390,498
1,000 Chester County Health & Education Facilities Authority,
Pennsylvania, Jenner's Pond Inc Ser 2002................ 7.625 07/01/34 983,370
2,100 Vermont Economic Development Authority, Wake Robin Corp
Ser 1999 A.............................................. 6.75 03/01/29 2,056,761
-------- ------------
17,330 16,889,167
-------- ------------
Tax Allocation Revenue (8.5%)
3,350 Crestwood, Illinois, Refg Ser 1994........................ 7.25 12/01/08 3,564,568
2,000 Anne Arundel County, Maryland, National Business Park
Ser 2000................................................ 7.375 07/01/28 2,173,180
2,000 Des Peres, Missouri, West County Center Ser 2002.......... 5.75 04/15/20 1,973,920
4,000 Fenton, Missouri, Gravois Bluffs Redevelopment Ser 2001 A
Refg.................................................... 7.00 10/01/21 4,193,600
2,000 Las Vegas, Nevada, District No. 808 Summerlin Area Ser
2001.................................................... 6.75 06/01/21 2,049,140
-------- ------------
13,350 13,954,408
-------- ------------
Transportation Facilities Revenue (5.2%)
7,500 E-470 Public Highway Authority, Colorado, Ser 1997 B
(MBIA).................................................. 0.00 09/01/15 4,059,900
1,935 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg
Ser 1993 A (Ambac)...................................... 5.85 10/01/13 2,213,079
1,000 Nevada Department of Business & Industry, Las Vegas
Monorail 2nd Tier Ser 2000.............................. 7.375 01/01/40 955,560
2,000 Pocahontas Parkway Association, Virginia, Route 895
Connector Ser 1998 A.................................... 5.50 08/15/28 1,337,540
-------- ------------
12,435 8,566,079
-------- ------------
Water & Sewer Revenue (1.3%)
2,000 Northern Palm Beach County Improvement District, Florida,
Water Control & Improvement #9A Ser 1996 A.............. 7.30 08/01/27 2,130,560
-------- ------------
245,479 Total Tax-Exempt Municipal Bonds (Cost $168,042,790).......................... 154,181,627
-------- ------------
See Notes to Financial Statements
10
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
Short Term Tax-Exempt Municipal Obligations (3.7%)
$ 3,100 Idaho Health Facilities Authority, St Lukes Regional
Medical Center Ser 2000 (FSA) (Demand 12/02/02)......... 1.13*% 07/01/30 $ 3,100,000
3,000 University of North Carolina, Hospitals at Chapel Hill Ser
2001 A (Demand 12/02/02)................................ 1.13* 02/15/31 3,000,000
-------- ------------
6,100 Total Short-Term Tax-Exempt Municipal Obligations (Cost $6,100,000)........... 6,100,000
-------- ------------
$251,579 Total Investments (Cost $174,142,790) (d)................... 98.1% 160,281,627
========
Other Assets in Excess of Liabilities....................... 1.9 3,037,653
----- ------------
Net Assets.................................................. 100.0% $163,319,280
===== ============
---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate demand obligation.
** Issuer has entered into a forbearance agreement for partial
payment of debt service.
++ Joint exemption in locations shown.
(a) Bond in default; non-income producing security.
(b) Resale is restricted to qualified institutional investors.
(c) Issuer in bankruptcy.
(d) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is $3,946,263
and the aggregate gross unrealized depreciation is
$17,807,426, resulting in net unrealized depreciation of
$13,861,163.
Bond Insurance:
--------------
Ambac Ambac Assurance Corporation.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements
11
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
Arkansas................ 1.2%
California.............. 4.1
Colorado................ 5.6
Connecticut............. 1.3
District of Columbia.... 0.2
Florida................. 8.6
Hawaii.................. 1.2
Idaho................... 1.9
Illinois................ 3.1
Indiana................. 1.2
Iowa.................... 2.3
Kansas.................. 0.9
Kentucky................ 1.9
Louisiana............... 0.9
Maryland................ 2.6
Massachusetts........... 5.6
Michigan................ 0.3
Minnesota............... 5.0
Missouri................ 6.1
Nevada.................. 3.4
New Hampshire........... 8.5
New Jersey.............. 4.0
New York................ 6.5
North Carolina.......... 1.8
Ohio.................... 1.1
Pennsylvania............ 4.5
South Carolina.......... 2.3
Tennessee............... 0.6
Texas................... 3.8
Vermont................. 1.2
Virginia................ 5.3
West Virginia........... 1.3
Joint Exemption*........ (0.2)
----
Total................... 98.1%
====
---------------------
* Joint exemptions have been included in each geographic location.
See Notes to Financial Statements
12
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
November 30, 2002 (unaudited)
Assets:
Investments in securities, at value
(cost $174,142,790)............... $160,281,627
Cash................................ 56,586
Receivable for:
Interest........................ 3,166,725
Investments sold................ 57,715
Prepaid expenses and other assets... 6,031
------------
Total Assets.................... 163,568,684
------------
Liabilities:
Payable for:
Investments advisory fee........ 81,011
Administration fee.............. 48,607
Shares of beneficial interest
repurchased................... 4,421
Accrued expenses.................... 115,365
------------
Total Liabilities............... 249,404
------------
Net Assets...................... $163,319,280
============
Composition of Net Assets:
Paid-in-capital..................... $198,248,583
Net unrealized depreciation......... (13,861,163)
Accumulated undistributed net
investment income................. 1,612,316
Accumulated net realized loss....... (22,680,456)
------------
Net Assets...................... $163,319,280
============
Net Assets Value Per Share,
20,888,972 shares outstanding
(unlimited shares authorized of
$.01 par value)................... $7.82
============
Statement of Operations
For the six months ended November 30, 2002
(unaudited)
Net Investment Income:
Interest Income....................... $ 6,458,369
-----------
Expenses
Investment advisory fee............... 415,020
Administration fee.................... 249,012
Transfer agent fees and expenses...... 39,397
Professional fees..................... 16,622
Shareholder reports and notices....... 14,517
Trustees' fees and expenses........... 9,249
Registration fees..................... 6,355
Custodian fees........................ 3,838
Other................................. 6,697
-----------
Total Expenses.................... 760,707
Less: expense offset.................. (3,818)
-----------
Net Expenses...................... 756,889
-----------
Net Investment Income............. 5,701,480
-----------
Net Realized and Unrealized Loss:
Net realized loss..................... (767,183)
Net change in unrealized
depreciation........................ (452,002)
-----------
Net Loss.......................... (1,219,185)
-----------
Net Increase.......................... $ 4,482,295
===========
See Notes to Financial Statements
13
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, 2002 MAY 31, 2002
------------ ------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 5,701,480 $ 11,589,419
Net realized loss........................................... (767,183) (734,744)
Net change in unrealized depreciation....................... (452,002) (1,966,899)
------------ ------------
Net Increase............................................ 4,482,295 8,887,776
Dividends to shareholders from net investment income........ (5,860,912) (11,931,193)
Decrease from transactions in shares of beneficial
interest.................................................. (320,710) --
------------ ------------
Net Decrease............................................ (1,699,327) (3,043,417)
Net Assets:
Beginning of period......................................... 165,018,607 168,062,024
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $1,612,316 and $1,771,748, respectively)................. $163,319,280 $165,018,607
============ ============
See Notes to Financial Statements
14
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2002 (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 -- Portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.
C. Federal Income Tax 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.
D. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date. 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
15
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
these differences are permanent in nature, such amounts are reclassified within
the capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
E. 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, 2002 aggregated
$7,921,260 and $12,823,348, respectively.
Morgan Stanley Trust, an affiliate of the Investment Advisor and Administrator,
is the Fund's transfer agent. At November 30, 2002, the Fund had transfer agent
fees and expenses payable of approximately $1,100.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended November 30, 2002
included in Trustees' fees and expenses in the Statement of Operations
16
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
amounted to $3,687. At November 30, 2002, the Fund had an accrued pension
liability of $58,579 which is included in accrued expenses in the Statement of
Assets and Liabilities.
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, 2001....................................... 20,932,272 $209,322 $198,360,115
Reclassification due to permanent book/tax differences...... -- -- (144)
---------- -------- ------------
Balance, May 31, 2002....................................... 20,932,272 209,322 198,359,971
Treasury shares purchased and retired (weighted average
discount 5.72%)*.......................................... (43,300) (433) (320,277)
---------- -------- ------------
Balance, November 30, 2002.................................. 20,888,972 $208,889 $198,039,694
========== ======== ============
---------------------
* The Trustees have voted to retire the shares purchased.
5. FEDERAL INCOME TAX STATUS
At May 31, 2002, the Fund had a net capital loss carryover of approximately
$20,796,000, which may be used to offset future capital gains to the extent
provided by regulations, which is available through May 31 of the following
years:
AMOUNT IN THOUSANDS
-----------------------------------------------------
2003 2004 2006 2008 2009
--------------------- ------ ---- ---- ------
$10,137 $5,243 $700 $87 $4,629
======= ====== ==== === ======
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $1,117,000 during fiscal 2002.
As of May 31, 2002, the Fund had temporary book/tax differences primarily
attributable to post-October losses and book amortization of discounts on debt
securities.
17
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2002 (UNAUDITED) continued
6. DIVIDENDS
The Fund declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
--------------------- --------- ---------------- ------------------
September 24, 2002 $0.045 December 6, 2002 December 20, 2002
December 31, 2002 $0.045 January 10, 2003 January 24, 2003
December 31, 2002 $0.045 February 7, 2003 February 21, 2003
December 31, 2002 $0.045 March 7, 2003 March 21, 2003
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 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.
At November 30, 2002, the Fund did not hold positions in residual interest
bonds.
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, 2002 2002 2001 2000 1999 1998
----------------- -------- -------- -------- -------- --------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of the period... $7.88 $8.03 $7.79 $8.69 $ 8.80 $ 8.47
----- ----- ----- ----- ------ ------
Income (loss) from investment operations:
Net investment income*................. 0.27 0.55 0.55 0.57 0.61 0.60
Net realized and unrealized gain
(loss)............................... (0.05) (0.13) 0.28 (0.85) (0.13) 0.31
----- ----- ----- ----- ------ ------
Total income (loss) from investment
operations............................... 0.22 0.42 0.83 (0.28) 0.48 0.91
----- ----- ----- ----- ------ ------
Less dividends from net investment
income................................... (0.28) (0.57) (0.59) (0.62) (0.59) (0.58)
----- ----- ----- ----- ------ ------
Net asset value, end of period............. $7.82 $7.88 $8.03 $7.79 $ 8.69 $ 8.80
===== ===== ===== ===== ====== ======
Market value, end of period................ $7.38 $8.08 $8.53 $8.25 $9.438 $8.688
===== ===== ===== ===== ====== ======
Total Return+.............................. (5.42)%(1) 1.42% 10.78% (5.94)% 15.65% 5.87%
Ratios to Average Net Assets:
Expenses (before expense offset)........... 0.92 %(2) 0.92% 0.93% 0.93% 0.96%(3) 1.04%
Net investment income...................... 6.87 %(2) 6.92% 6.95% 6.95% 6.89% 6.98%
Supplemental Data:
Net assets, end of period, in thousands.... $163,319 $165,019 $168,062 $163,910 $183,200 $185,496
Portfolio turnover rate.................... 5 %(1) 7% 16% 13% 16% 20%
---------------------
* 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%.
See Notes to Financial Statements
19
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President and Chief Execution Officer
Barry Fink
Vice President, Secretary and General Counsel
Joseph J. McAlinden
Vice President
Ronald E. Robison
Vice President
Thomas F. Caloia
Treasurer
Francis Smith
Vice President and Chief Financial Officer
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 ADVISOR
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.
38538RPT - 9372L02 - AS - 12/02
MORGAN STANLEY
MUNICIPAL INCOME
OPPORTUNITIES TRUST
Semiannual Report
November 30, 2002