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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: 811-05597
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, 2005
Date of reporting period: May 31, 2005
Item 1 - Report to Shareholders
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Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Municipal Income Opportunities Trust performed during the annual 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 year ended May 31, 2005
MARKET CONDITIONS
Consumer spending and business investment helped the U.S. economy expand at a
solid pace during the 12-month period ending May 31, 2005. However, the
direction of some economic indicators, including job growth, remained uneven and
caused uncertainty about the strength of the economy. As a result, interest
rates fluctuated, moving higher when reports were strong and lower when data was
weaker than anticipated.
The fiscal period began against the backdrop of generally rising interest rates.
Strong employment data, coupled with higher oil prices, led fixed income markets
to conclude that the Federal Open Market Committee (the "Fed") would raise
short-term interest rates. Bond yields declined during the summer and into the
fall as economic growth slowed, only to rise again as winter approached and the
economy rebounded. However, the themes of low inflation and slow growth returned
to prevalence in the spring. By the end of May, interest rates had declined to
their lowest levels of the fiscal year.
Throughout the period, the Fed reaffirmed its pledge to raise the federal funds
target rate at a "measured" pace. This policy shift began in June 2004 with the
first of eight consecutive 25-basis point rate hikes. These increases took the
federal funds target rate to 3.00 percent by the end of May 2005. At the end of
the period, the forward yield curve reflected a widespread view that the Fed
would slow the pace of future rate increases.
Against this setting, long-term municipal bond yields remained in a trading
range which moved rates lower in the summer, and higher in the fall, then lower
through the winter and higher at the end of the first quarter of 2005. The
yields of long-term bonds declined again in the spring, finishing the reporting
period at or near their lows for the fiscal year. In contrast, the yields of
shorter maturity bonds -- which were more directly influenced by the Fed's
actions -- rose. As a result, the municipal yield curve continued to flatten and
the yield spread (or differential between one-year rates and 30-year rates)
narrowed.
Investor's quest for yield favored lower-quality investment grade bonds over
high-grade issues, keeping quality spreads tight. Over the Fund's fiscal year,
the Lehman Brothers Municipal High Yield Index returned 14.40 percent versus
7.96 percent for the broader Lehman Brothers Municipal Bond Index.
Municipal underwriting volume declined by six percent in 2004, but rebounded
during the first five months of 2005 due to refunding issuance. During this
five-month period, bonds backed by insurance represented 60 percent of overall
volume. Issuers in California, Texas, New York, Florida and New Jersey accounted
for more than 40 percent of the total underwriting volume during 2005.
On the demand side, the municipal-to-Treasury yield ratio, which gauges relative
performance between the two markets, remained attractive for tax-exempt bonds.
As a result, investors that normally focus on taxable bond sectors (such as
insurance companies and hedge funds) supported municipals by "crossing over" to
purchase bonds. However, retail investors continued to experience rate shock
about the absolute level of rates and largely remained on the sidelines.
2
PERFORMANCE ANALYSIS
For the 12-month period ended May 31, 2005, the net asset value (NAV) of the
Morgan Stanley Municipal Income Opportunities Trust (OIA) increased from $7.67
to $8.00 per share. OIA declared distributions totalling $0.501881 per share
during the period. The Fund's total NAV return was 11.60 percent. OIA's value on
the New York Stock Exchange (NYSE) moved from $7.09 to $7.97 per share during
the same period. Based on this change plus reinvestment of distributions, OIA's
total market return was 20.12 percent. On May 31, 2005, OIA's NYSE market price
was at a 0.38 percent discount to its NAV. Past performance is no guarantee of
future results.
During the 12-month period ended May 31, 2005, the Fund purchased and retired
686,029 shares of common shares at a weighted average market discount of 4.79
percent.
Monthly dividends for the second quarter of 2005, declared in March, were
unchanged at $0.0425 per share. The dividend reflects the current level of the
Fund's net investment income. OIA's level of undistributed net investment income
was $0.124 per share on May 31, 2005, versus $0.093 per share twelve months
earlier.(1)
OIA is a non-leveraged closed-end fund that has historically benefited by
investing in better-than-average quality issues within the high-yield sector of
the municipal market. During the fiscal year, as quality spreads narrowed, total
return lagged. At the end of the reporting period, nearly 55 percent of the
portfolio was invested in non-rated issues. In addition, the Fund maintained a
conservative strategy in anticipation of continued Fed tightening and higher
interest rates. The Fund's duration* (a measure of interest rates sensitivity)
was 6.0 years. This positioning helped performance when rates rose, but had the
net effect of hampering total returns when rates declined later in the period.
The Fund's net assets of $158 million were diversified across 91 credits in 11
long-term sectors.
The Fund'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.
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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 be held by the fund in the future.
* 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.
(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
3
LARGEST SECTORS
Retirement & Life Care Facilities 16.2%
IDR/PCR* 15.8
Hospital 15.3
Tax Allocation 12.2
Nursing & Health Related Facilities 10.6
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 4.4%
Aa/AA 6.5
A/A 6.4
Baa/BBB 18.1
Ba/BB or Less 9.8
NR 54.8
* Industrial Development/Pollution Control Revenue.
Data as of May 31, 2005. Subject to change daily. All percentages for largest
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 May 31, 2005
WEIGHTED AVERAGE MATURITY: 19 YEARS(A)
1-5 9
5-10 16
10-15 12
15-20 12
20-25 19
25-30 27
30+ 5
(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 Total Investments
Alabama................. 0.7%
Arkansas................ 1.3
California.............. 5.4
Colorado................ 4.8
Connecticut............. 1.4
District of Columbia.... 0.2
Florida................. 10.2
Georgia................. 0.5
Hawaii.................. 2.1
Idaho................... 0.4
Illinois................ 3.1
Indiana................. 0.9
Iowa.................... 2.6
Kansas.................. 1.1
Kentucky................ 0.3
Louisiana............... 0.7
Maryland................ 2.5
Massachusetts........... 2.8
Michigan................ 0.4
Minnesota............... 2.3
Missouri................ 6.8
Nevada.................. 4.0
New Hampshire........... 7.1
New Jersey.............. 4.6
New York................ 7.5
North Carolina.......... 0.7
Ohio.................... 1.3
Pennsylvania............ 6.9
South Carolina.......... 2.9
Tennessee............... 1.2
Texas................... 3.8
Vermont................. 1.4
Virginia................ 4.1
Washington.............. 2.9
West Virginia........... 1.3
Joint exemption*........ (0.2)
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Total................... 100.0%
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* Joint exemptions have been included in each geographic location.
5
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of May 31, 2005
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 5 YEARS
2005(a) 18
2006 2
2007 3
2008 11
2009 12
2010 7
2011 9
2012 10
2013 9
2014 8
2015+ 11
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 7.2%
2005(a) 8.8
2006 6.5
2007 5.9
2008 6.5
2009 6.4
2010 7
2011 7
2012 6.8
2013 6.9
2014 6.3
2015+ 8.5
(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 8.8% on 18% 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 of Trustees of the Fund (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. (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 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 its performance peer group average for the one-year period, but was 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 expenses were competitive with those of the
Fund's 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 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
PORTFOLIO OF INVESTMENTS - MAY 31, 2005
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
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Tax-Exempt Municipal Bonds (97.2%)
Educational Facilities Revenue (2.7%)
$ 1,100 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs.................................................... 7.50% 05/01/11 $ 1,148,994
500 San Diego County, California, The Burnham Institute
COPs.................................................... 6.25 09/01/29 527,570
1,000 Bellalago Educational Facilities Benefits District,
Florida, Bellalago Charter School Ser 2004 B............ 5.80 05/01/34 1,032,320
500 Illinois Finance Authority, Fullerton Village Student
Housing Ser 2004 A...................................... 5.125 06/01/35 505,390
1,000 Westchester County Industrial Development Agency, New
York, Guiding Eyes for The Blind Inc Ser 2004........... 5.375 08/01/24 1,054,940
------------
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4,269,214
4,100
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Hospital Revenue (15.3%)
1,000 Colbert County - Northwest Health Care Authority, Alabama,
Helen Keller Hospital Ser 2003.......................... 5.75 06/01/27 1,043,150
2,000 Baxter County, Arkansas, Baxter County Regional Hospital
Impr & Refg Ser 1999 B.................................. 5.625 09/01/28 2,064,540
2,000 Hawaii Department of Budget & Finance, Kuakini Health 2002
Ser A................................................... 6.375 07/01/32 2,160,380
1,000 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002....................................... 6.125 08/01/31 1,084,630
2,000 Maryland Health & Higher Educational Facilities Authority,
University of Maryland Medical Center Ser 2000.......... 6.75 07/01/30 2,257,640
600 Gaylord Hospital Financing Authority, Michigan, Otsego
Memorial Hospital Ser 2004.............................. 6.50 01/01/37 611,688
3,000 Henderson, Nevada, Catholic Health West 1998 Ser A........ 5.375 07/01/26 3,091,200
1,500 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Assn Ser 1998 A........... 6.00 05/01/28 1,522,815
2,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994..................... 7.25 07/01/27 2,085,600
1,105 Nassau County Industrial Development Agency, New York,
North Shore Health Ser B................................ 5.875 11/01/11 1,217,058
1,000 Monroe County Hospital Authority, Pennsylvania, Pocono
Medical Center Ser 2003................................. 6.00 01/01/43 1,078,090
1,000 St Mary Hospital Authority, Pennsylvania, Catholic Health
East 2004 Ser B......................................... 5.375 11/15/34 1,056,350
2,000 South Carolina Jobs - Economic Development Authority,
Palmetto Health Alliance Refg Ser 2003 C................ 6.875 08/01/27 2,312,580
1,000 Knox County Health Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002.... 6.50.. 04/15/31 1,048,800
See Notes to Financial Statements
10
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 1,000 Decatur Hospital Authority, Texas, Wise Regional Health
Ser 2004 A.............................................. 7.125% 09/01/34 $ 1,086,540
350 Hidalgo County Health Services Corporation, Texas, Mission
Hospital Ser 2005....................................... 5.00 08/15/19 358,134
------------
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24,079,195
22,555
------------
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Industrial Development/Pollution Control Revenue (15.8%)
2,000 Los Angeles, California, American Airlines Inc Terminal 4
Ser 2002 C (AMT)........................................ 7.50 12/01/24 2,095,660
360 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser
1991 (AMT)++............................................ 10.125 09/01/11 360,522
2,000 Chicago, Illinois, Chicago O'Hare Int'l Airport/United
Airlines Inc Refg Ser 2001 C (a)........................ 6.30 05/01/16 299,920
1,500 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT).......... 6.00 06/01/27 1,545,030
2,000 New York City Industrial Development Agency, New York, 7
World Trade Center LLC Ser 2005 A....................... 6.50 03/01/35 2,058,740
1,500 Dayton, Ohio, Emery Air Freight Corp Refg Ser 1998 A...... 5.625 02/01/18 1,603,575
455 Zanesville-Muskingum County Port Authority, Ohio, Anchor
Glass Container Corp Ser 1989 B (AMT)................... 10.25 12/01/08 455,250
2,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995
B....................................................... 7.75 05/01/20 2,085,300
2,920 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT)................................................... 6.65 05/01/10 3,172,288
1,000 Pennsylvania Economic Development Financing Authority,
Reliant Energy Inc Ser 2001 A (AMT)..................... 6.75 12/01/36 1,076,530
2,125 Lexington County, South Carolina, Ellett Brothers Inc Refg
Ser 1988................................................ 7.50 09/01/08 2,096,568
1,000 Brazos River Authority, Texas, TXU Electric Refg Ser 1999
A (AMT)................................................. 7.70 04/01/33 1,189,740
1,000 Chesterfield County Industrial Development Authority,
Virginia, Virginia Electric & Power Co Ser 1985......... 5.50 10/01/09 1,042,300
3,700 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade Pittsylvania County Ser 1994 A
(AMT)................................................... 7.45 01/01/09 3,793,055
2,000 Upshur County, West Virginia, TJ International Inc Ser
1995 (AMT).............................................. 7.00 07/15/25 2,053,180
------------
--------
24,927,658
25,560
------------
--------
Mortgage Revenue - Multi-Family (7.0%)
Washington County Housing & Redevelopment Authority,
3,885 Courtly Park Ser 1989 A................................. 9.75 06/15/19 3,026,765
1,165 Courtly Park Ser 1989 A (AMT)........................... 10.25 06/15/19 907,954
24,080 Courtly Park Ser 1989 B................................. 0.00.. 06/15/19 408,155
8,678 Courtly Park Ser 1989 B (AMT)........................... 0.00 06/15/19 147,090
See Notes to Financial Statements
11
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
White Bear Lake, Minnesota,
$ 3,715 White Bear Woods Apts Phase II Refg 1989 Ser A.......... 9.75% 06/15/19 $ 3,208,460
19,771 White Bear Woods Apts Phase II Refg 1989 Ser B.......... 0.00 06/15/19 335,126
3,000 Brookhaven Industrial Development Agency, New York,
Woodcrest Estates Ser 1998 A (AMT)...................... 6.375 12/01/37 3,001,380
------------
--------
11,034,930
64,294
------------
--------
Mortgage Revenue - Single Family (6.5%)
Colorado Housing & Finance Authority,
155 1996 Ser B (AMT)........................................ 7.65 11/01/26 157,528
625 Ser 1998 D-2 (AMT)...................................... 6.35 11/01/29 640,119
25,155 New Hampshire Housing Finance Authority, Residential 1983
Ser B................................................... 0.00 01/01/15 9,395,644
------------
--------
10,193,291
25,935
------------
--------
Nursing & Health Related Facilities Revenue (10.6%)
Escambia County, Florida,
4,885 Pensacola Care Development Centers Ser 1989............. 10.25 07/01/11 4,897,408
1,125 Pensacola Care Development Centers Ser 1989 A........... 10.25 07/01/11 1,127,858
1,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999....... 6.75 04/01/34 988,610
1,000 Pinellas County Health Facilities Authority, Florida, Oaks
of Clearwater Ser 2004.................................. 6.25 06/01/34 1,056,910
1,965 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996............................... 9.25 07/01/25 2,405,710
515 Kentucky Economic Development Financing Authority,
AHF/Kentucky-Iowa Inc Ser 2003.......................... 6.50# 01/01/29 519,594
1,000 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993........ 8.375 10/01/13 1,011,430
1,775 Massachusetts Development Finance Agency, New England
Center for Children Ser 1998............................ 5.875 11/01/18 1,796,140
1,000 Massachusetts Health & Educational Facilities Authority,
The Learning Center for Deaf Children Ser C............. 6.125 07/01/29 1,022,050
1,000 St Louis County Industrial Development Authority,
Missouri, Pediatric Rehabilitation Center Ser 2003 A.... 6.625 11/15/35 1,023,310
780 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999..................... 6.00 06/01/09 800,296
------------
--------
16,649,316
16,045
------------
--------
Recreational Facilities Revenue (5.6%)
2,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A................................. 6.25 01/01/30 2,119,400
1,000 San Diego County, San Diego Natural History Museum COPs... 5.70 02/01/28 979,980
See Notes to Financial Statements
12
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Mashantucket (Western) Pequot Tribe, Connecticut,
$ 1,010 Special 1996 Ser A (b).................................. 6.40% 09/01/11 $ 1,063,530
1,000 Special 1997 Ser B (b).................................. 5.75 09/01/27 1,036,630
2,000 St Louis Industrial Development Authority, Missouri, St
Louis Convention Center Headquarters Hotel Ser 2000
(AMT)................................................... 6.875 12/15/20 1,524,540
2,000 Austin Convention Enterprises Inc, Texas, Convention
Center Hotel Ser 2000 A................................. 6.70 01/01/32 2,131,200
------------
--------
8,855,280
9,010
------------
--------
Retirement & Life Care Facilities Revenue (16.2%)
500 Orange County Health Facilities Authority, Florida,
Orlando Lutheran Towers Inc. Ser 2005 (WI).............. 5.70 07/01/26 503,020
1,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A..................................... 8.00 01/01/30 1,083,820
1,000 Hawaii Department of Budget & Finance, Kahala Nui, 2003
Ser A................................................... 8.00 11/15/33 1,150,430
1,500 Lenexa, Kansas, Lakeview Village - Southridge Ser 2002
C....................................................... 6.875 05/15/32 1,630,830
1,500 Maryland Health & Higher Educational Facilities Authority,
Mercy Ridge 2003 Ser A.................................. 6.00 04/01/35 1,587,270
1,500 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A.................................. 5.75 07/01/23 1,474,290
1,500 Kansas City Industrial Development Agency, Missouri,
Bishop Spencer 2004 Ser A............................... 6.50 01/01/35 1,539,345
New Jersey Economic Development Authority,
1,000 Cedar Crest Village Inc Ser 2001 A...................... 7.25.. 11/15/31 1,073,320
1,000 Franciscan Oaks Ser 1997................................ 5.70 10/01/17 1,006,200
1,000 The Presbyterian Home at Montgomery Ser 2001 A.......... 6.375. 11/01/31 1,036,640
2,000 United Methodist Homes of New Jersey Ser 1998........... 5.125 07/01/25 1,900,080
3,250 Suffolk County Industrial Development Agency, New York,
Jefferson's Ferry Ser 1999.............................. 7.25 11/01/28 3,471,877
1,000 North Carolina Medical Care Commission, The Given Estate,
Ser 2003 A.............................................. 6.50 07/01/32 1,080,110
1,000 Chester County Health & Education Facilities Authority,
Pennsylvania, Jenner's Pond Inc Ser 2002................ 7.625 07/01/34 1,099,460
1,000 Montgomery County Industry Development Authority,
Pennsylvania, Whitemarsh Community Ser 2005............. 6.25 02/01/35 1,041,860
750 Shelby County Health, Educational & Housing Facilities
Board, Tennessee, Village at Germantown Ser 2003 A...... 7.25 12/01/34 782,715
1,000 Houston Health Facilities Authority, Texas, Buckingham
Senior Living Community Ser 2003 A...................... 7.125 02/15/34 1,080,570
2,100 Vermont Economic Development Authority, Wake Robin Corp
Ser 1999 A.............................................. 6.75 03/01/29 2,100,693
See Notes to Financial Statements
13
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 1,000 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes Ser 2003 A........................................ 7.375% 12/01/32 $ 1,099,170
------------
--------
25,741,700
24,600
------------
--------
Tax Allocation Revenue (12.2%)
500 Carlsbad, California, Assessment District # 2002-01
Poinsetta Lane East Ser 2005 A.......................... 5.20 09/02/35 505,165
1,000 San Marcos Community Facilities District # 2002-01,
California, University Commons Ser 2004................. 5.95 09/01/35 1,037,700
2,000 Elk Valley Public Improvement Corporation, Colorado, Ser
2001 A.................................................. 7.35 09/01/31 2,145,540
1,000 Southlands Metropolitan District #1, Colorado, Ser 2004... 7.125 12/01/34 1,103,120
2,000 Beacon Lakes, Community Development District, Florida, Ser
2003 A.................................................. 6.90 05/01/35 2,120,640
1,000 Midtown Miami Community Development District, Florida, Ser
2004 A.................................................. 6.25 05/01/37 1,059,830
2,000 Chicago, Illinois, Lake Shore East, Ser 2002.............. 6.75 12/01/32 2,087,560
725 Lincolnshire, Illinois, Special Service Area # 1 Ser
2004.................................................... 6.25 03/01/34 773,539
2,000 Des Peres, Missouri, West County Center Ser 2002.......... 5.75 04/15/20 2,077,360
4,000 Fenton, Missouri, Gravois Bluffs Redevelopment Ser 2001 A
Refg.................................................... 7.00 10/01/21 4,335,160
1,980 Las Vegas District # 808, Nevada, Summerlin Ser 2001...... 6.75 06/01/21 2,056,111
------------
--------
19,301,725
18,205
------------
--------
Transportation Facilities Revenue (4.5%)
5,000 E-470 Public Highway Authority, Colorado, Ser 1997 B
(MBIA).................................................. 0.00 09/01/15 3,289,150
1,780 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg
Ser 1993 A (Ambac)...................................... 5.85 10/01/13 1,944,792
750 Augusta, Georgia, Airport Passenger Facility Charge Ser
2005 A.................................................. 5.15 01/01/35 768,435
1,000 Nevada Department of Business & Industry, Las Vegas
Monorail 2nd Tier Ser 2000.............................. 7.375 01/01/40 1,048,470
------------
--------
7,050,847
8,530
------------
--------
Refunded (0.8%)
1,000 Illinois Health Facilities Authority, Riverside Health Ser
2000.................................................... 6.85 11/15/10+ 1,185,530
------------
--------
219,834 Total Tax-Exempt Municipal Bonds (Cost $160,453,758)......................... 153,288,686
------------
--------
See Notes to Financial Statements
14
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Short-Term Tax-Exempt Municipal Obligations (0.7%)
$ 680 Idaho Health Facilities Authority, St Luke's Regional
Medical Center Ser 2000 (FSA) (Demand 06/01/05)......... 2.86*% 07/01/30 $ 680,000
370 Indiana Health Facility Financing Authority, Clarian
Health Ser 2000 B (Demand 06/01/05)..................... 2.91* 03/01/30 370,000
------------
--------
1,050 Total Short-Term Tax-Exempt Municipal Obligations (Cost $1,050,000).......... 1,050,000
------------
--------
$220,884 Total Investments (Cost $161,503,758) (c)(d)....................... 97.9% 154,338,686
========
Other Assets in Excess of Liabilities.............................. 2.1 3,255,602
----- ------------
Net Assets......................................................... 100.0% $157,594,288
===== ============
---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when-issued basis.
* Current coupon of variable rate demand obligation.
++ Joint exemption in locations shown.
+ Prerefunded to call date 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 $500,000 in connection with the purchase of a
when-issued security.
(d) The aggregate cost for federal income tax purposes is
$161,411,008. The aggregate gross unrealized appreciation is
$8,388,758 and the aggregate gross unrealized depreciation
is $15,461,080, resulting in net unrealized depreciation of
$7,072,322.
Bond Insurance:
---------------
Ambac Ambac Assurance Corporation.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements
15
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
May 31, 2005
Assets:
Investments in securities, at value
(cost $161,503,758)....................................... $154,338,686
Cash........................................................ 77,194
Receivable for:
Interest................................................ 3,027,538
Investments sold........................................ 845,450
Prepaid expenses and other assets........................... 11,901
------------
Total Assets............................................ 158,300,769
------------
Liabilities:
Payable for:
Investments purchased................................... 500,000
Investment advisory fee................................. 68,841
Administration fee...................................... 11,015
Accrued expenses and other payables......................... 126,625
------------
Total Liabilities....................................... 706,481
------------
Net Assets.............................................. $157,594,288
============
Composition of Net Assets:
Paid-in-capital............................................. $174,464,154
Net unrealized depreciation................................. (7,165,072)
Accumulated undistributed net investment income............. 2,451,611
Accumulated net realized loss............................... (12,156,405)
------------
Net Assets.............................................. $157,594,288
============
Net Asset Value Per Share,
19,693,243 shares outstanding (unlimited shares authorized
of $.01 par value).......................................... $8.00
============
See Notes to Financial Statements
16
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the year ended May 31, 2005
Net Investment Income:
Interest Income............................................. $11,906,003
-----------
Expenses
Investment advisory fee..................................... 787,354
Administration fee.......................................... 271,183
Transfer agent fees and expenses............................ 80,048
Professional fees........................................... 66,059
Shareholder reports and notices............................. 38,372
Registration fees........................................... 17,884
Custodian fees.............................................. 10,614
Trustees' fees and expenses................................. 9,752
Other....................................................... 25,023
-----------
Total Expenses.......................................... 1,306,289
Less: expense offset........................................ (10,524)
-----------
Net Expenses............................................ 1,295,765
-----------
Net Investment Income................................... 10,610,238
-----------
Net Realized and Unrealized Gain (Loss):
Net realized loss........................................... (1,978,394)
Net change in unrealized depreciation....................... 7,868,814
-----------
Net Gain................................................ 5,890,420
-----------
Net Increase................................................ $16,500,658
===========
See Notes to Financial Statements
17
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2005 MAY 31, 2004
------------ ------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 10,610,238 $ 10,642,996
Net realized loss........................................... (1,978,394) (2,478,163)
Net change in unrealized depreciation....................... 7,868,814 (3,072,450)
------------ ------------
Net Increase............................................ 16,500,658 5,092,383
Dividends to shareholders from net investment income........ (10,055,170) (10,327,443)
Decrease from transactions in shares of beneficial
interest.................................................. (5,116,505) (2,707,158)
------------ ------------
Net Increase (Decrease)................................. 1,328,983 (7,942,218)
Net Assets:
Beginning of period......................................... 156,265,305 164,207,523
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $2,451,611 and $1,895,566, respectively)................. $157,594,288 $156,265,305
============ ============
See Notes to Financial Statements
18
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005
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.
19
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 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 Adviser"), 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 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. Prior to November 1,
2004, the annual rate was 0.30%.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended May 31, 2005 aggregated $18,056,691
and $23,034,801, respectively. Included in the aforementioned transactions are
purchases of $1,751,103 with other Morgan Stanley funds.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent. At May 31, 2005, the Fund had transfer agent fees
and expenses payable of approximately $9,400.
20
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 continued
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.
Aggregate pension costs for the year ended May 31, 2005 included in Trustees'
fees and expenses in the Statement of Operations amounted to $7,493. At May 31,
2005, the Fund had an accrued pension liability of $62,516 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 and eliminate the
future benefits growth due to increases to compensation after July 31, 2003.
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:
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
Balance, May 31, 2003....................................... 20,756,472 $207,564 $186,928,771
Treasury shares purchased and retired (weighted average
discount 6.73%*).......................................... (377,200) (3,772) (2,703,386)
Reclassification due to permanent book/tax differences...... -- -- (4,848,518)
---------- -------- ------------
Balance, May 31, 2004....................................... 20,379,272 203,792 179,376,867
Treasury shares purchased and retired (weighted average
discount 4.79%*).......................................... (686,029) (6,860) (5,109,645)
---------- -------- ------------
Balance, May 31, 2005....................................... 19,693,243 $196,932 $174,267,222
========== ======== ============
---------------------
* The Trustees have voted to retire the shares purchased.
21
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 continued
5. Dividends
The Fund declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
-------------- --------- ------------------ ------------------
March 29,
2005 $0.0425 June 3, 2005 June 17, 2005
June 28,
2005 $0.0425 July 8, 2005 July 22, 2005
June 28,
2005 $0.0425 August 5, 2005 August 19, 2005
June 28,
2005 $0.0425 September 9, 2005 September 23, 2005
6. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
7. 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.
8. 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.
22
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 continued
The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2005 MAY 31, 2004
------------ ------------
Tax-exempt income........................................... $10,017,495 $10,327,443
Ordinary income............................................. 37,675 --
----------- -----------
Total distributions......................................... $10,055,170 $10,327,443
=========== ===========
As of May 31, 2005, the tax-basis components of accumulated losses were as
follows:
Undistributed tax-exempt income............................. $ 2,482,520
Undistributed ordinary income............................... --
------------
Net accumulated earnings.................................... 2,482,520
Capital loss carryforward*.................................. (12,156,403)
Temporary differences....................................... (123,661)
Net unrealized depreciation................................. (7,072,322)
------------
Total accumulated losses.................................... $(16,869,866)
============
* As of May 31, 2005, the Fund had a net capital loss carryforward of
$12,156,403 of which $700,037 will expire on May 31, 2006, $87,017 will expire
on May 31, 2008, $4,628,820 will expire on May 31, 2009, $1,864,080 will expire
on May 31, 2011 and $4,876,449 will expire on May 31, 2013 to offset future
capital gains to the extent provided by regulations.
As of May 31, 2005, the Fund had temporary book/tax differences primarily
attributable to book amortization of discounts on debt securities and interest
on bonds in default and permanent book/tax differences attributable to tax
adjustments on debt securities sold by the Fund. To reflect reclassifications
arising from the permanent differences, accumulated net realized loss was
charged and accumulated undistributed net investment income was credited $977.
23
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 YEAR ENDED MAY 31
---------------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Selected Per Share Data:
Net asset value, beginning of the period.................. $7.67 $7.91 $7.88 $8.03 $7.79
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income*................................ 0.53 0.52 0.54 0.55 0.55
Net realized and unrealized gain (loss)............... 0.29 (0.26) 0.04 (0.13) 0.28
----- ----- ----- ----- -----
Total income from investment operations................... 0.82 0.26 0.58 0.42 0.83
----- ----- ----- ----- -----
Less dividends from net investment income................. (0.50) (0.50) (0.55) (0.57) (0.59)
----- ----- ----- ----- -----
Anti-dilutive effect of acquiring treasury shares*........ 0.01 -- -- -- --
----- ----- ----- ----- -----
Net asset value, end of period............................ $8.00 $7.67 $7.91 $7.88 $8.03
===== ===== ===== ===== =====
Market value, end of period............................... $7.97 $7.09 $7.76 $8.08 $8.53
===== ===== ===== ===== =====
Total Return+............................................. 20.12% (2.34)% 3.09% 1.42% 10.78%
Ratios to Average Net Assets:
Total expenses (before expense offset).................... 0.83% 0.94% 0.93%(1) 0.92% 0.93%
Net investment income..................................... 6.76% 6.63% 6.85% 6.92% 6.95%
Supplemental Data:
Net assets, end of period, in thousands................... $157,594 $156,265 $164,208 $165,019 $168,062
Portfolio turnover rate................................... 12% 10% 8% 7% 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) Does not reflect the effect of expense offset of 0.01%.
See Notes to Financial Statements
24
Morgan Stanley Municipal Income Opportunities Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Morgan Stanley Municipal Income Opportunities Trust:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Municipal Income Opportunities Trust (the "Fund"), including the
portfolio of investments, as of May 31, 2005, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2005, by correspondence with the custodian and
brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Municipal Income Opportunities Trust as of May 31, 2005, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
July 15, 2005
25
Morgan Stanley Municipal Income Opportunities Trust
SHAREHOLDER VOTING RESULTS
On December 15, 2004, 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:
# OF SHARES
-----------------------------
FOR WITHHELD
-------------------------------------------------------------------------------------------
Edwin J. Garn............................................... 16,451,281 362,769
Michael E. Nugent........................................... 16,473,055 340,995
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.
26
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION
Independent Trustees:
Number of
Portfolios in
Position(s) Term of Office Fund Complex
Name, Age and Address of Held with and Length of Principal Occupation(s) During Overseen by
Independent Trustee Registrant Time Served* Past 5 Years** Trustee***
--------------------------------------- ----------- -------------- ------------------------------ -------------
Michael Bozic (64) Trustee Since April Private Investor; Director or 197
c/o Kramer Levin Naftalis & Frankel LLP 1994 Trustee of the Retail Funds
Counsel to the Independent Trustees (since April 1994) and the
1177 Avenue of the Americas Institutional Funds (since
New York, NY 10036 July 2003); formerly Vice
Chairman of Kmart Corporation
(December 1998-October 2000),
Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief Executive
Officer of Hills Department
Stores (May 1991-July 1995);
formerly variously Chairman,
Chief Executive Officer,
President and Chief Operating
Officer (1987-1991) of the
Sears Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (72) Trustee Since January Consultant; Director or 197
1031 N. Chartwell Court 1993 Trustee of the Retail Funds
Salt Lake City, UT 84103 (since January 1993) and the
Institutional Funds (since
July 2003); member of the Utah
Regional Advisory Board of
Pacific Corp.; formerly
Managing Director of Summit
Ventures LLC (2000-2004);
United States Senator (R-Utah)
(1974-1992) and Chairman,
Senate Banking Committee
(1980-1986), Mayor of Salt
Lake City, Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19, 1985),
and Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197
c/o Kramer Levin Naftalis & Frankel LLP September 1997 of the Retail Funds (since
Counsel to the Independent Trustees September 1997) and the
1177 Avenue of the Americas Institutional Funds (since
New York, NY 10036 July 2003); formerly
associated with the Allstate
Companies (1966-1994), most
recently as Chairman of The
Allstate Corporation (March
1993-December 1994) and
Chairman and Chief Executive
Officer of its wholly-owned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
Name, Age and Address of
Independent Trustee Other Directorships Held by Trustee
--------------------------------------- -----------------------------------
Michael Bozic (64) Director of various business
c/o Kramer Levin Naftalis & Frankel LLP organizations.
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036
Edwin J. Garn (72) Director of Franklin Covey (time
1031 N. Chartwell Court management systems), BMW Bank of
Salt Lake City, UT 84103 North America, Inc. (industrial
loan corporation), Escrow Bank USA
(industrial loan corporation);
United Space Alliance (joint
venture between Lockheed Martin and
the Boeing Company) and Nuskin Asia
Pacific (multilevel marketing);
member of the board of various
civic and charitable organizations.
Wayne E. Hedien (71) Director of The PMI Group Inc.
c/o Kramer Levin Naftalis & Frankel LLP (private mortgage insurance);
Counsel to the Independent Trustees Trustee and Vice Chairman of The
1177 Avenue of the Americas Field Museum of Natural History;
New York, NY 10036 director of various other business
and charitable organizations.
27
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION continued
Number of
Portfolios in
Position(s) Term of Office Fund Complex
Name, Age and Address of Held with and Length of Principal Occupation(s) During Overseen by
Independent Trustee Registrant Time Served* Past 5 Years** Trustee***
--------------------------------------- ----------- -------------- ------------------------------ -------------
Dr. Manuel H. Johnson (56) Trustee Since July Senior Partner, Johnson Smick 197
c/o Johnson Smick Group, Inc. 1991 International, Inc., a
888 16th Street, NW consulting firm; Chairman of
Suite 740 the Audit Committee and
Washington, D.C. 20006 Director or Trustee of the
Retail Funds (since July 1991)
and the Institutional Funds
(since July 2003); Co-
Chairman and a founder of the
Group of Seven Council (G7C),
an international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (62) Trustee Since July President, Kearns & Associates 198
c/o Kearns & Associates LLC 2003 LLC (investment consulting);
PMB754 Deputy Chairman of the Audit
23852 Pacific Coast Highway Committee and Director or
Malibu, CA 90265 Trustee of the Retail Funds
(since July 2003) and the
Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (69) Trustee Since July General Partner of Triumph 197
c/o Triumph Capital, L.P. 1991 Capital, L.P., a private
445 Park Avenue investment partnership;
New York, NY 10022 Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (72) Trustee Since July Chairman of Lumelite Plastics 198
c/o Lumelite Plastics Corporation 2003 Corporation; Chairman of the
85 Charles Colman Blvd. Governance Committee and
Pawling, NY 12564 Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since June 1992).
Name, Age and Address of
Independent Trustee Other Directorships Held by Trustee
--------------------------------------- -----------------------------------
Dr. Manuel H. Johnson (56) Director of NVR, Inc. (home
c/o Johnson Smick Group, Inc. construction); Director of KFX
888 16th Street, NW Energy; Director of RBS Greenwich
Suite 740 Capital Holdings (financial holding
Washington, D.C. 20006 company).
Joseph J. Kearns (62) Director of Electro Rent
c/o Kearns & Associates LLC Corporation (equipment leasing),
PMB754 The Ford Family Foundation, and the
23852 Pacific Coast Highway UCLA Foundation.
Malibu, CA 90265
Michael E. Nugent (69) Director of various business
c/o Triumph Capital, L.P. organizations.
445 Park Avenue
New York, NY 10022
Fergus Reid (72) Trustee and Director of certain
c/o Lumelite Plastics Corporation investment companies in the
85 Charles Colman Blvd. JPMorgan Funds complex managed by
Pawling, NY 12564 J.P. Morgan Investment Management
Inc.
28
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION continued
Interested Trustees:
Number of
Portfolios in
Position(s) Term of Office Fund Complex
Name, Age and Address of Held with and Length of Principal Occupation(s) During Overseen by
Interested Trustee Registrant Time Served* Past 5 Years** Trustee***
------------------------------------- ----------- -------------- ------------------------------ -------------
Charles A. Fiumefreddo (72) Chairman of Since July Chairman and Director or 197
c/o Morgan Stanley Trust the Board 1991 Trustee of the Retail Funds
Harborside Financial Center, and Trustee (since July 1991) and the
Plaza Two, Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (57) Trustee Since June Director or Trustee of the 197
c/o Morgan Stanley Trust 2000 Retail Funds (since June 2000)
Harborside Financial Center, and the Institutional Funds
Plaza Two, (since July 2003); Senior
Jersey City, NJ 07311 Advisor of Morgan Stanley
(since August 2000); Director
of the Distributor and Dean
Witter Realty Inc.; previously
President and Chief Operating
Officer of the Private Client
Group of Morgan Stanley (May
1999-August 2000), and
President and Chief Operating
Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).
Name, Age and Address of
Interested Trustee Other Directorships Held by Trustee
------------------------------------- -----------------------------------
Charles A. Fiumefreddo (72) None.
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ 07311
James F. Higgins (57) Director of AXA Financial, Inc. and
c/o Morgan Stanley Trust The Equitable Life Assurance
Harborside Financial Center, Society of the United States
Plaza Two, (financial services).
Jersey City, NJ 07311
---------------------
* This is the earliest date the Trustee began serving the funds advised by
Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the
"Retail Funds").
** The dates referenced below indicating commencement of services as
Director/Trustee for the Retail Funds and the funds advised by Morgan
Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the
"Institutional Funds") reflect the earliest date the Director/Trustee began
serving the Retail or Institutional Funds, as applicable.
*** The Fund Complex includes all open-end and closed-end funds (including all
of their portfolios) advised by the Investment Adviser and any funds that
have an investment adviser that is an affiliated person of the Investment
Adviser (including, but not limited to, Morgan Stanley Investment Management
Inc.).
29
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION continued
Officers:
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years**
----------------------------- --------------- -------------- ------------------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief
New York, NY 10020 Executive Officer of the Investment Adviser and the
Administrator; Chairman and Director of the Distributor;
Chairman and Director of the Transfer Agent; Director of
various Morgan Stanley subsidiaries; President of the
Institutional Funds (since July 2003) and President of the
Retail Funds (since May 1999); Trustee (since July 2003) and
President (since December 2002) of the Van Kampen Closed-End
Funds; Trustee (since May 1999) and President (since October
2002) of the Van Kampen Open-End Funds.
Ronald E. Robison (66) Executive Vice Since April Principal Executive Officer of Funds in the Fund Complex
1221 Avenue of the Americas President and 2003 (since May 2003); Managing Director of Morgan Stanley & Co.
New York, NY 10020 Principal Incorporated, Morgan Stanley Investment Management Inc. and
Executive Morgan Stanley; Managing Director, Chief Administrative
Officer Officer and Director of the Investment Adviser and the
Administrator; Director of the Transfer Agent; Managing
Director and Director of the Distributor; Executive Vice
President and Principal Executive Officer of the
Institutional Funds (since July 2003) and the Retail Funds
(since April 2003); Director of Morgan Stanley SICAV (since
May 2004); previously, President and Director of the
Institutional Funds (March 2001-July 2003) and Chief Global
Operations Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden (62) Vice President Since July Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas 1995 Investment Adviser and Morgan Stanley Investment Management
New York, NY 10020 Inc.; Chief Investment Officer of the Van Kampen Funds; Vice
President of the Institutional Funds (since July 2003) and
the Retail Funds (since July 1995).
Barry Fink (50) Vice President Since February General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas 1997 (since December 2000) of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director (since July
1998) of the Investment Adviser and the Administrator; Vice
President of the Retail Funds; Assistant Secretary of Morgan
Stanley DW; Vice President of the Institutional Funds (since
July 2003); Managing Director, Secretary and Director of the
Distributor; previously Secretary (February 1997-July 2003)
and General Counsel (February 1997-April 2004) of the Retail
Funds; Vice President and Assistant General Counsel of the
Investment Adviser and the Administrator (February
1997-December 2001).
Amy R. Doberman (43) Vice President Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, Vice President
of the Institutional and Retail Funds (since July 2004);
Vice President of the Van Kampen Funds (since August 2004);
previously, Managing Director and General
Counsel -- Americas, UBS Global Asset Management (July
2000-July 2004) and General Counsel, Aeltus Investment
Management, Inc. (January 1997-July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October 2004);
New York, NY 10020 Officer Executive Director of the Investment Adviser and Morgan
Stanley Investment Management Inc.; formerly Assistant
Secretary and Assistant General Counsel of the Morgan
Stanley Retail Funds.
30
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION continued
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years**
----------------------------- --------------- -------------- ------------------------------------------------------------
Stefanie V. Chang (38) Vice President Since July Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas 2003 Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Vice President of the Institutional Funds (since
December 1997) and the Retail Funds (since July 2003);
formerly practiced law with the New York law firm of Rogers
& Wells (now Clifford Chance US LLP).
Francis J. Smith (39) Treasurer and Treasurer Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial since July Administration (since December 2001); previously, Vice
Harborside Financial Center, Officer 2003 and Chief President of the Retail Funds (September 2002-July 2003);
Plaza Two, Financial Vice President of the Investment Adviser and the
Jersey City, NJ 07311 Officer since Administrator (August 2000- November 2001) and Senior
September 2002 Manager at PricewaterhouseCoopers LLP (January 1998- August
2000).
Thomas F. Caloia (59) Vice President Since July Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust 2003 Treasurer of the Investment Adviser, the Distributor and the
Harborside Financial Center, Administrator; previously Treasurer of the Retail Funds
Plaza Two, (April 1989-July 2003); formerly First Vice President of the
Jersey City, NJ 07311 Investment Adviser, the Distributor and the Administrator.
Mary E. Mullin (38) Secretary Since July Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas 2003 Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Secretary of the Institutional Funds (since June
1999) and the Retail Funds (since July 2003); formerly
practiced law with the New York law firms of McDermott, Will
& Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
---------------------
* This is the earliest date the Officer began serving the Retail Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as an Officer
for the Retail and Institutional Funds reflect the earliest date the Officer
began serving the Retail or Institutional Funds, as applicable.
In accordance with Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual, the Fund's Annual CEO Certification certifying as to compliance
with NYSE's Corporate Governance Listing Standards was submitted to the Exchange
on January 7, 2005.
The Fund's Principal Executive Officer and Principal Financial Officer
Certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 were
filed with the Fund's N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
2005 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended May 31, 2005, the Fund paid to its
shareholders $0.50 per share from tax-exempt income.
31
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
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice 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
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
Annual Report
May 31, 2005
[MORGAN STANLEY LOGO]
38532RPT-RA05-00546P-Y05/05
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Trust/Fund or a
third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2005 REGISTRANT COVERED ENTITIES(1)
AUDIT FEES...................... $ 30,048 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES.... $ 540 (2) $ 3,215,745 (2)
TAX FEES.............. $ 4,585 (3) $ 24,000 (4)
ALL OTHER FEES........ $ - $ -
TOTAL NON-AUDIT FEES............ $ 5,125 $ 3,239,745
TOTAL........................... $ 35,173 $ 3,239,745
2004 REGISTRANT COVERED ENTITIES(1)
AUDIT FEES...................... $ 28,990 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES.... $ 452 (2) $ 3,364,576 (2)
TAX FEES.............. $ 4,134 (3) $ 652,431 (4)
ALL OTHER FEES........ $ - $ - (5)
TOTAL NON-AUDIT FEES............ $ 4,586 $ 4,017,007
TOTAL........................... $ 33,576 $ 4,017,007
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the Adviser
that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided that
are reasonably related to the performance of the audit of the financial
statements of the Covered Entities' and funds advised by the Adviser or
its affiliates, specifically data verification and agreed-upon procedures
related to asset securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the preparation and review of the Registrant's
tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice services
provided in connection with the review of Covered Entities' tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
2
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("general pre-approval"); or require the specific pre-approval of the Audit
Committee or its delegate ("specific pre-approval"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
-------------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "Policy"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
3
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
4
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
5
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
Morgan Stanley Retail Funds
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
6
Morgan Stanley Institutional Funds
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Trust/Fund has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act whose
members are: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson,
Joseph J. Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6.
See Item 1.
7
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
The Fund invests in exclusively non-voting securities and therefore this
item is not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports covering periods ending on or after December 31,
2005.
8
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
(d) Maximum
(c) Total Number (or
Number of Approximate
Shares (or Dollar Value)
Units) of Shares (or
(a) Total Purchased as Units) that May
Number of Part of Publicly Yet Be
Shares (or (b) Average Announced Purchased
Units) Price Paid per Plans or Under the Plans
Period Purchased Share (or Unit) Programs or Programs
-------------------------- ---------- --------------- ---------------- ---------------
June 1, 2004 --
June 30, 2004 78,600 $7.0099 N/A N/A
July 1, 2004--
July 31, 2004 67,100 $7.1206 N/A N/A
August 1, 2004-
August 31, 2004 60,900 $7.2194 N/A N/A
September 1, 2004--
September 30, 2004 40,700 $7.3497 N/A N/A
October 1, 2004--
October 31, 2004 55,900 $7.5383 N/A N/A
November 1, 2004 --
November 31, 2004 57,200 $7.5301 N/A N/A
December 1, 2004 --
December 31, 2004 51,800 $7.6013 N/A N/A
January 1, 2005--
January 31, 2005 60,300 $7.6396 N/A N/A
February 1, 2005 -
February 28, 2005 56,200 $7.7126 N/A N/A
March 1, 2005 -
March 31, 2005 68,685 $7.6433 N/A N/A
April 1, 2005 -
April 30, 2005 63,000 $7.6914 N/A N/A
May 1, 2005 -
May 31, 2005 25,644 $7.8179 N/A N/A
------- ------- --- ---
Total 686,029 $7.4895 N/A N/A
------- ------- --- ---
9
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 Trust's/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.
(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) The Code of Ethics for Principal Executive and Senior Financial Officers
is attached hereto.
(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.
10
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
July 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
July 20, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
July 20, 2005
11