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)
522 Fifth Avenue, New York, New York 10036
(Address of principal executive offices) (Zip code)
Ronald E. Robison
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-296-6990
Date of fiscal year end: May 31, 2008
Date of reporting period: May 31, 2008
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Municipal Income Opportunities Trust performed during the 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.
INCOME EARNED BY CERTAIN SECURITIES IN THE PORTFOLIO MAY BE SUBJECT TO THE
FEDERAL ALTERNATIVE MINIMUM TAX (AMT).
FUND REPORT
For the year ended May 31, 2008
MARKET CONDITIONS
The fiscal reporting year was an extremely volatile period for the municipal
bond market, as well as all other sectors of the financial markets. The
accelerating decline in the residential housing market, fallout from the
subprime mortgage market collapse, and subsequent liquidity and credit
contraction created a very challenging environment. At the same time,
recessionary fears began to emerge as gross domestic product (GDP) growth
measured just 0.6 percent in the fourth quarter of 2007 and, based on
preliminary data, 0.9 percent in the first quarter of 2008.
The Federal Reserve (the "Fed") took various steps to ease the liquidity crisis
and boost the economy during the period. Not only did the Fed reduce the target
federal funds rate from 5.25 percent to 2.00 percent by the end of the period,
but in an unprecedented move, it granted primary brokerage firms access to its
discount window and loosened its collateral requirements, extending loans of
Treasury securities in exchange for lower quality, less liquid securities.
Finally, in the biggest headline event, the Fed arranged and supported JPMorgan
Chase's purchase of Bear Stearns, which was viewed by many as necessary to avoid
serious market repercussions had the firm failed.
Despite the Fed's efforts, however, the market remained turbulent and investor
confidence waned, fueling a prolonged flight to quality that led Treasury
securities to outperform all other sectors of the fixed income market. Although
municipal market performance improved late in the period, as cross-over buyers
began to recognize the value municipal bonds offered, the municipal sector still
lagged Treasuries for the overall reporting year. As a result, over the course
of the 12-month reporting period, the 30-year municipal-to-Treasury ratio, which
measures the relative attractiveness of these two sectors, rose from 85 percent
to 96 percent, indicating that municipals underperformed Treasuries while at the
same time becoming cheaper (i.e., more attractive) on a relative basis. The high
yield segment of the market in particular struggled as investors shunned these
riskier assets in favor of higher quality securities. This caused spreads on
high yield municipals to widen from approximately 116 basis points at the
beginning of the reporting period to 293 basis points as of the end of May.
Yields on intermediate-to-long maturity municipal bonds increased over the
course of the reporting year. Representative yields on 30-year AAA rated
municipal bonds rose from 4.25 percent at the start of the period to 4.53
percent by May 30, 2008. However, yields on the short end of the municipal curve
fell, with yields on one-year bonds declining from 3.63 percent to 1.77 percent.
Accordingly, the spread between long-term and short-term yields, which began the
period at 62 basis points, widened to 276 basis points by the end of the period,
causing the slope of the municipal yield curve to steepen considerably.
PERFORMANCE ANALYSIS
For the 12-month period ended May 31, 2008, the net asset value (NAV) of Morgan
Stanley Municipal Income Opportunities Trust (OIA) decreased from $8.28 to $7.38
per share. Based on this change plus reinvestment of tax-free dividends totaling
$0.49 per share, the Fund's total NAV return was -5.33 percent. OIA's value on
the New York Stock Exchange (NYSE) moved from $9.68 to $7.87 per share during
the
2
same period. Based on this change plus reinvestment of dividends, the Fund's
total market return was -13.65 percent. OIA's NYSE market price was at a 6.64
percent premium to its NAV. During the fiscal period, the Fund purchased and
retired 35,368 shares of common stock at a weighted average market discount of
4.70 percent. Past performance is no guarantee of future results.
Monthly dividends for the second quarter of 2008, declared in April, were
unchanged at $0.03875 per share. The dividend reflects the current level of the
Fund's net investment income. OIA's level of undistributed net investment income
was $0.047 per share on May 31, 2008 versus $0.079 per share 12 months
earlier.(1)
The Fund invests primarily in high yield municipal bonds, which represented more
than two-thirds of assets during the period. The Fund's emphasis on this segment
of the market detracted from performance as the risk-averse environment led to a
considerable downturn in the performance of high yield bonds.
In the first half of the reporting year, we maintained a slightly shorter
option-adjusted duration* for the portfolio, primarily through the use of a
Treasury futures hedge. Although this defensive duration positioning was
beneficial to performance at the beginning of the period, the flight-to-quality
Treasury market rally that ensued hindered the performance of the hedge.
Therefore, we eliminated the position, which effectively lengthened the
portfolio's duration. This relatively longer duration held back returns as
municipal rates moved higher.
The Fund's yield curve positioning had little effect on performance as a whole,
though performance varied across segments of the portfolio. We overweighted the
long end of the municipal yield curve, where the majority of new investments
were made, as well as the very short end of the curve, where most of the
portfolio's older, "seasoned" investments and pre-refunded holdings were
focused. Although the emphasis on the short end of the curve was beneficial, the
performance of holdings on the long end of the curve waned as rates there rose
over the course of the reporting period.
The Fund's pre-refunded holdings were additive to performance as these short-
term securities did not experience the sell-off that longer maturity bonds did
as long-term municipal yields rose. Additionally, a modest overweight in the
high-grade housing sector boosted performance. The Fund's holdings in tobacco
bonds, specifically zero coupon structures, however, detracted from overall
performance.
Overall, the Fund's investments remained well-diversified across a broad range
of sectors. As of the end of the period, sector exposure was relatively
unchanged with life care, special tax districts, and hospital bonds representing
the Fund's largest sector weightings.
OIA'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.
3
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 as
discussed herein or that securities in such sectors will be held by the Fund in
the future.
(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, funds with shorter durations perform better in rising-
interest-rate environments, while funds with longer durations perform better
when rates decline.
4
TOP FIVE SECTORS AS OF 05/31/08
Life Care 22.2%
Special Tax Districts 15.5
Hospital 11.4
IDR/PCR** 10.7
Mortgage-Single Family 8.7
LONG-TERM CREDIT ANALYSIS AS OF
05/31/08
Aaa/AAA 6.3%
Aa/AA 10.3
A/A 1.0
Baa/BBB 9.4
Ba/BB or Less 8.1
NR 64.9
** Industrial Development Revenue/Pollution Control Revenue.
SUMMARY OF INVESTMENTS BY STATE
CLASSIFICATION AS OF 05/31/08
Florida 17.8%
California 9.5
Pennsylvania 8.1
Texas 7.8
Missouri 6.6
Illinois 6.2
New York 6.0
New Jersey 5.6
Colorado 4.0
New Hampshire 3.8
Arizona 3.7
Ohio 3.2
Massachusetts 2.8
Michigan 2.5
SUMMARY OF INVESTMENTS BY STATE
CLASSIFICATION AS OF 05/31/08
(CONTINUED)
Hawaii 2.2%
South Carolina 2.0
Maryland 1.8
Connecticut 1.7
Virginia 1.6
Iowa 1.6
Tennessee 1.4
Georgia 1.3
North Dakota 1.2
Nevada 0.9
Louisiana 0.8
Alabama 0.7
Idaho 0.6
Washington 0.6
Kansas 0.6
Minnesota 0.5
Oklahoma 0.4
North Carolina 0.3
District of Columbia 0.2
------
Total Long-Term Investments 108.0
Short-Term Investments 0.4
Liability for Floating Rate Note
Obligations (10.1)
Other Assets in Excess of
Liabilities 1.7
------
Net Assets 100.0%
======
Subject to change daily. Provided for informational purposes only and should not
be deemed a recommendation to buy or sell the securities mentioned or securities
in the sectors shown above. Top five sectors are as a percentage of total
investments and long-term credit analysis are as a percentage of total long-term
investments. Summary of investments by state classification are as a percentage
of net assets. Securities are classified by sectors that represent broad
groupings of related industries. 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. Rating
allocations based upon ratings as issued by Standard and Poor's and Moody's,
respectively.
5
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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. 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.
6
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
Tax-Exempt Municipal Bonds (108.0%)
Alabama (0.7%)
$ 1,000 Colbert County - Northwest Health Care
Authority, Helen Keller Hospital Ser
2003..................................... 5.75 % 06/01/27 $ 977,420
------------
Arizona (3.7%)
800 Pima County Industrial Development
Authority, Water & Wastewater Ser 2007
(AMT).................................... 6.55 12/01/37 747,144
1,225 Pima County Industrial Development
Authority, Constellation Schools Ser
2008..................................... 7.00 01/01/38 1,188,507
2,900 Salt Verde Financial Corporation Ser 2007
(a)...................................... 5.25 12/01/24 2,831,255
600 Scottsdale Industrial Development
Authority, Scottsdale Healthcare Ser 2008
A (WI)................................... 5.25 09/01/30 587,610
------------
5,354,516
------------
California (9.5%)
1,935 California County Tobacco Securitization
Agency, Gold County Settlement Funding
Corp Ser 2006............................ 0.00 06/01/33 307,026
2,000 California Housing Finance Agency, 2006 Ser
K (AMT).................................. 4.75 08/01/36 1,799,460
335 California Municipal Finance Authority
Educational Facility, Ser 2008........... 5.875 07/01/28 335,231
1,000 California Statewide Communities
Development Authority, California Baptist
University Ser 2007 A.................... 5.50 11/01/38 906,560
600 California Statewide Communities
Development Authority, Daughters of
Charity Health Ser 2005 A................ 5.00 07/01/39 536,730
1,000 Daly City Housing Development Finance
Agency, Franciscan Mobile Home Park Third
Tier Refg Ser 2007 C..................... 6.50 12/15/47 903,290
4,000 Golden State Tobacco Securitization
Corporation, Asset Backed Ser 2007 A-1
(a)...................................... 5.125 06/01/47 3,130,595
800 Quechan Indian Tribe FT Yuma Indian
Reservation Ser 2008..................... 7.00 12/01/27 793,120
2,000 Sacramento Financing Authority, Convention
Center Hotel Ser 1999 A.................. 6.25 01/01/30 2,112,540
1,000 San Diego County, San Diego Natural History
Museum (COPs)............................ 5.70 02/01/28 925,250
1,000 San Marcos Community Facilities District
#2002-01, University Commons Ser 2004.... 5.95 09/01/35 965,290
1,000 Santa Ana Unified School District Community
Facilities, District #2004-1, Central
Park Ser 2005............................ 5.10 09/01/35 836,060
13,000 Silicon Valley Tobacco Securitization
Authority, Santa Clara Tobacco
Securitization Corp Ser 2007 C........... 0.00 06/01/56 275,730
------------
13,826,882
------------
See Notes to Financial Statements
7
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
Colorado (4.0%)
$ 1,000 Colorado Health Facilities Authority,
Christian Living Communities Ser 2006 A.. 5.75 % 01/01/37 $ 897,150
10 Colorado Housing Finance Authority, 1996
Ser B-1 (AMT)............................ 7.65 11/01/26 10,191
305 Colorado Housing Finance Authority, 1998
Ser B-3.................................. 6.35 11/01/29 320,110
1,000 Copperleaf Metropolitan District #2 Ser
2006..................................... 5.95 12/01/36 804,410
2,000 Elk Valley Public Improvement Corporation
Ser 2001 A............................... 7.35 09/01/31 2,015,300
2,000 Northwest Metropolitan District #3 Ser
2005..................................... 6.25 12/01/35 1,703,520
------------
5,750,681
------------
Connecticut (1.7%)
2,000 Georgetown Special Taxing District Ser 2006
A (b).................................... 5.125 10/01/36 1,555,480
1,000 Mashantucket (Western) Pequot Tribe,
Special Ser 1997 B (b)................... 5.75 09/01/27 944,890
------------
2,500,370
------------
District of Columbia (0.2%)
260 Metropolitan Washington Airports Authority,
District of Columbia & Virginia, CaterAir
International Corp Ser 1991 (AMT) (c).... 10.125 09/01/11 260,182
------------
Florida (17.8%)
500 Alachua County Industrial Development,
North Florida Retirement Village Ser
2007..................................... 5.25 11/15/17 474,945
800 Alachua County Florida Industrial
Development, North Florida Retirement
Village Ser 2007......................... 5.875 11/15/36 724,800
2,000 Beacon Lakes, Community Development
District Ser 2003 A...................... 6.90 05/01/35 1,934,680
950 Bellalago Educational Facilities Benefits
District, Bellalago Chapter School Ser
2004 B................................... 5.80 05/01/34 924,512
650 Brevard County Health Facilities Authority,
Buena Vida Estates, Inc Ser 2007......... 6.75 01/01/37 646,282
2,960 Broward County Professional Sports
Facilities, Civic Arena Refg Ser 2006 A
(FSA Insd) (a)........................... 5.00 09/01/23 3,077,438
3,550 Escambia County, Pensacola Care Development
Centers Ser 1989......................... 10.25 07/01/11 3,559,265
820 Escambia County, Pensacola Care Development
Centers Ser 1989 A....................... 10.25 07/01/11 822,140
1,000 Fiddlers Creek Community Development
District # 1 Ser 2005.................... 6.00 05/01/38 861,470
500 Fountainbleau Lakes Community Development
District Ser 2007 B (b).................. 6.00 05/01/15 460,425
750 Grand Bay at Doral Community Development
District Ser 2007 A...................... 6.00 05/01/39 588,473
1,000 Lee County Florida Industrial Development
Authority Ser 2007 A..................... 5.375 06/15/37 817,770
1,000 Midtown Miami Community Development
District, Parking Garage Ser 2004 A...... 6.25 05/01/37 931,340
500 Orange County Health Facilities Authority,
Orlando Lutheran Towers, Inc Ser 2005.... 5.70 07/01/26 457,435
See Notes to Financial Statements
8
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
$ 2,000 Orange County Health Facilities Authority,
Orlando Lutheran Towers, Inc Ser 2007.... 5.50 % 07/01/32 $ 1,741,720
1,000 Orange County Health Facilities Authority,
Westminister Community Care Services Inc
Ser 1999................................. 6.75 04/01/34 1,013,840
1,000 Pinellas County Health Facilities
Authority, Oaks of Clearwater Ser 2004... 6.25 06/01/34 1,015,300
965 Renaissance Commons Community Development
District, Ser 2005 A..................... 5.60 05/01/36 802,755
500 Split Pine Community Development District,
Ser 2007 A............................... 5.25 05/01/39 399,610
2,860 South Miami Health Facilities Authority,
Baptist Health South Florida Obligated
Group Ser 2007 (a)....................... 5.00 08/15/32 2,820,317
1,000 St Johns County Industrial Development
Authority, Glenmoor Ser 1999 A........... 8.00 01/01/10(d) 1,106,620
600 Tolomato Community Development District,
Special Assessment Ser 2007.............. 6.55 05/01/27 589,440
------------
25,770,577
------------
Georgia (1.3%)
2,000 Atlanta Eastside Ser 2005 B................ 5.60 01/01/30 1,826,460
------------
Hawaii (2.2%)
1,000 Hawaii Department of Budget & Finance,
Kahala Nui Ser 2003 A.................... 8.00 11/15/33 1,095,350
2,000 Hawaii Department of Budget & Finance,
Kuakini Health 2002 Ser A................ 6.375 07/01/32 2,035,360
------------
3,130,710
------------
Idaho (0.6%)
1,000 Idaho Health Facilities Authority - Valley
Vista Care Corp Refg Ser 2007............ 6.125 11/15/27 947,290
------------
Illinois (6.2%)
1,000 Bolingbrook Sales Tax Ser 2005............. 6.25 01/01/24 988,370
2,000 Chicago Lake Shore East Ser 2002........... 6.75 12/01/32 2,027,760
1,000 Illinois Finance Authority, Landing at
Plymouth Ser 2005 A...................... 6.00 05/15/37 909,210
1,000 Illinois Finance Authority, Luther Oaks Ser
2006 A................................... 6.00 08/15/39 917,880
1,650 Illinois Finance Authority, Montgomery
Place Ser 2006 A......................... 5.75 05/15/38 1,446,555
725 Lincolnshire, Service Area #1-Sedgebrook
Ser 2004................................. 6.25 03/01/34 703,714
500 Village of Hampshire, Kane County Special
Service Area # 18 Crown Development Tamms
Farm Ser 2007 A.......................... 6.00 03/01/44 423,525
See Notes to Financial Statements
9
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
$ 650 Will-Kankakee Regional Development
Authority, Senior Estates Supportive
Living Ser 2007 (AMT).................... 7.00 % 12/01/42 $ 639,613
1,000 Yorkville Special Service Area #2006-113,
Cannonball/Beecher Road Ser 2007......... 5.75 03/01/28 878,320
------------
8,934,947
------------
Iowa (1.6%)
785 Jefferson County Hospital Ser 2007 C....... 5.95 08/01/37 763,546
1,000 Iowa Finance Authority, Bethany Life
Communities Refg Ser 2006 A.............. 5.55 11/01/41 847,500
750 Iowa Finance Authority Health Care
Facilities, Madrid Homes Ser 2007........ 5.90 11/15/37 670,725
------------
2,281,771
------------
Kansas (0.6%)
900 Olathe Catholic Care Ser 2006 A............ 6.00 11/15/38 821,277
------------
Louisiana (0.8%)
800 Lakeshore Villages Master Community
Development District, Special Assessment
Ser 2007................................. 5.25 07/01/17 720,736
400 Louisiana Public Facilities Authority, Lake
Charles Memorial Hospital Refg Ser 2007.. 6.375 12/01/34 382,552
------------
1,103,288
------------
Maryland (1.8%)
1,000 Maryland Economic Development Corporation,
Chesapeake Bay Conference Center Ser 2006
A........................................ 5.00 12/01/31 779,100
800 Maryland Health & Higher Educational
Facilities Authority, Washington
Christian Academy Ser 2006............... 5.50 07/01/38 664,376
500 Maryland Industrial Development Financing
Authority, Our Lady of Good Counsel High
School Ser 2005 A........................ 6.00 05/01/35 501,510
750 Maryland State Health & Higher Educational
Facilities Authority, King Farm
Presbyterian Community 2007 Ser A........ 5.30 01/01/37 621,413
------------
2,566,399
------------
Massachusetts (2.8%)
1,500 Massachusetts Development Finance Agency,
Loomis Communities Ser 1999 A............ 5.75 07/01/23 1,509,585
1,625 Massachusetts Development Finance Agency,
New England Center for Children Ser
1998..................................... 5.875 11/01/18 1,587,852
1,000 Massachusetts Health & Educational
Facilities Authority, The Learning Center
for Deaf Children Ser 1999 C............. 6.125 07/01/29 977,390
------------
4,074,827
------------
See Notes to Financial Statements
10
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
Michigan (2.5%)
$ 1,230 Detroit Sewage Disposal, Senior Lien Refg
Ser 2001 C-2 (BHAC FGIC Insd) (a)........ 5.25 % 07/01/29 $ 1,305,116
600 Gaylord Hospital Financing Authority,
Otsego Memorial Hospital Ser 2004........ 6.50 01/01/37 585,138
2,000 Michigan Tobacco Settlement Finance
Authority, Asset Backed Ser 2007 A....... 6.00 06/01/48 1,783,400
------------
3,673,654
------------
Minnesota (0.5%)
750 North Oaks Senior Housing Presbyterian
Homes Ser 2007........................... 6.125 10/01/39 730,072
------------
Missouri (6.6%)
750 Branson Hills Community Improvement
District Ser 2007 A...................... 5.50 04/01/27 669,503
500 Branson Regional Airport Transportation
Development District Ser 2007 B (AMT).... 6.00 07/01/37 434,045
2,000 Des Peres, West County Center Ser 2002..... 5.75 04/15/20 1,945,420
3,850 Fenton, Gravois Bluffs Redevelopment Refg
Ser 2001 A............................... 7.00 10/01/11(d) 4,379,952
1,500 Kansas City Industrial Development Agency,
Bishop Spencer 2004 Ser A................ 6.50 01/01/35 1,474,755
750 St. Louis Industrial Development Authority,
St. Andrews Resources for Seniors Ser
2007 A................................... 6.375 12/01/41 711,413
------------
9,615,088
------------
Nevada (0.9%)
1,050 Mesquite Nevada Special Improvement
District # 07-01 Local Improvement-Anthem
at Mesquite Ser 2007..................... 6.00 08/01/23 1,000,209
1,000 Nevada Department of Business & Industry,
Las Vegas Monorail 2nd Tier Ser 2000..... 7.375 01/01/40 317,080
------------
1,317,289
------------
New Hampshire (3.8%)
10,735 New Hampshire Housing Finance Authority,
Single Family Residential 1983 Ser B..... 0.00 01/01/15 5,445,651
------------
New Jersey (5.6%)
1,000 New Jersey Economic Development Authority,
Cedar Crest Village Inc Ser 2001 A....... 7.25 11/15/11(d) 1,149,410
1,000 New Jersey Economic Development Authority,
Franciscan Oaks Ser 1997................. 5.70 10/01/17 1,011,650
730 New Jersey Economic Development Authority,
Lions Gate Ser 2005 A.................... 5.875 01/01/37 646,831
See Notes to Financial Statements
11
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
$ 700 New Jersey Economic Development Authority,
Seashore Gardens Living Center Ser 2006.. 5.375 % 11/01/36 $ 594,104
1,000 New Jersey Economic Development Authority,
The Presbyterian Home at Montgomery Ser
2001 A................................... 6.375 11/01/31 985,000
2,000 New Jersey Economic Development Authority,
United Methodist Homes of New Jersey Ser
1998..................................... 5.125 07/01/25 1,716,420
2,000 New Jersey Health Care Facilities Financing
Authority, Raritan Bay Medical Center Ser
1994..................................... 7.25 07/01/27 1,980,480
------------
8,083,895
------------
New York (6.0%)
3,000 Brookhaven Industrial Development Agency,
Woodcrest Estates Ser 1998 A (AMT)....... 6.375 12/01/37 3,008,550
235 Mount Vernon Industrial Development Agency,
Meadowview at the Wartburg Ser 1999...... 6.00 06/01/09 235,056
2,000 New York City Industrial Development
Agency, 7 World Trade Center LLC Ser 2005
A........................................ 6.50 03/01/35 2,023,900
1,000 New York Liberty Development Corporation,
National Sports Museum, Ser 2006 A....... 6.125 02/15/19 1,005,920
1,500 Suffolk County Industrial Development
Agency, Medford Hamlet Ser 2006.......... 6.375 01/01/39 1,410,945
1,000 Westchester County Industrial Development
Agency, Guiding Eyes for The Blind Inc
Ser 2004................................. 5.375 08/01/24 1,004,840
------------
8,689,211
------------
North Carolina (0.3%)
500 North Carolina Medical Care Commission
Healthcare Facilities, Southminster Ser
2007 A................................... 5.75 10/01/37 500,315
------------
North Dakota (1.2%)
1,500 Grand Forks 4000 Valley Square Ser 2006.... 5.30 12/01/34 1,257,885
500 Ward County, Trinity Ser 2006.............. 5.125 07/01/29 471,390
------------
1,729,275
------------
Ohio (3.2%)
3,300 Buckeye Tobacco Settlement Financing
Authority, Asset Backed Ser 2007 A-2..... 5.875 06/01/30 2,996,004
600 Centerville Health Care, Bethany Lutheran
Village Continuing Care Facility, Ser
2007 A................................... 6.00 11/01/38 540,366
850 Cuyahoga County Health Care and Independent
Living Facilities, Eliza Jennings Senior
Care Ser 2007 A.......................... 5.75 05/15/27 778,897
450 Tuscarawas County Hospital Facilities, Twin
City Hospital Ser 2007................... 6.35 11/01/37 427,028
------------
4,742,295
------------
See Notes to Financial Statements
12
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
Oklahoma (0.4%)
$ 650 Chickasaw Nation Health Systems Ser 2007... 6.25 % 12/01/32 $ 653,224
------------
Pennsylvania (8.1%)
2,300 Allegheny County Hospital Development
Authority, West Penn Allegheny Health Ser
2007 A................................... 5.375 11/15/40 1,961,302
1,500 Bucks County Industrial Development
Authority, Ann's Choice Ser 2005 A....... 6.125 01/01/25 1,503,765
1,000 Chester County Health & Educational
Facilities Authority, Jenner's Pond Inc
Ser 2002................................. 7.625 07/01/12(d) 1,184,910
500 Fulton County Industrial Development
Authority, Fulton County Medical Center
Ser 2006................................. 5.875 07/01/31 466,710
1,000 Harrisburg Authority, Harrisburg University
of Science & Technology Ser 2007 B....... 6.00 09/01/36 954,820
1,000 Montgomery County Industrial Development
Authority, Whitemarsh Community Ser
2005..................................... 6.25 02/01/35 927,400
1,000 Pennsylvania Economic Development Financing
Authority, Reliant Energy Inc Ser 2001 A
(AMT).................................... 6.75 12/01/36 1,010,530
2,860 Pennsylvania Housing Finance Agency Ser
2007-100A (AMT) (a)...................... 5.10 10/01/22 2,846,873
1,000 Washington County, Victory Centre/Tanger
Outlet Redevelopment Authority Ser 2006
A........................................ 5.45 07/01/35 869,810
------------
11,726,120
------------
South Carolina (2.0%)
1,000 Myrtle Beach, Air Force Base Redevelopment
Ser 2006 A............................... 5.30 11/01/35 822,750
1,000 South Carolina Jobs - Economic Development
Authority, Lutheran Homes Ser 2007....... 5.625 05/01/42 835,010
750 South Carolina Jobs - Economic Development
Authority, Westley Commons Ser 2006...... 5.30 10/01/36 620,288
625 South Carolina Jobs - Economic Development
Authority, Woodlands At Furman Ser 2007
A........................................ 6.00 11/15/37 567,937
------------
2,845,985
------------
Tennessee (1.4%)
525 Chattanooga Health, Educational & Housing
Facilities Board, Student Housing Refg
Ser 2005 A............................... 5.00 10/01/25 473,834
500 Shelby County Health, Educational & Housing
Facilities Board, Trezevant Manor Ser
2006 A................................... 5.75 09/01/37 473,600
750 Shelby County Health, Educational & Housing
Facilities Board, Village at Germantown
Ser 2003 A............................... 7.25 12/01/34 739,920
500 Shelby County Health, Educational & Housing
Facilities Board, Village at Germantown
Ser 2006................................. 6.25 12/01/34 416,365
------------
2,103,719
------------
See Notes to Financial Statements
13
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------
Texas (7.8%)
$ 2,000 Austin Convention Enterprises Inc,
Convention Center Hotel Ser 2001 A....... 6.70 % 01/01/11(d)$ 2,192,440
2,000 Austin Convention Enterprises Inc,
Convention Center Hotel Ser 2006 B....... 5.75 01/01/34 1,773,480
1,000 Brazos River Authority, Texas Utilities
Electric Co Refg Ser 1999 A (AMT)........ 7.70 04/01/33 997,750
1,000 Decatur Hospital Authority, Wise Regional
Health Ser 2004 A........................ 7.125 09/01/34 1,028,720
1,250 HFDC Central Texas Inc, Legacy at Willow
Bend, Ser 2006 A......................... 5.75 11/01/36 1,078,787
1,000 Lubbock Health Facilities Development
Corporation, Carillon Senior Lifecare Ser
2005 A................................... 6.50 07/01/26 984,790
3,375 Texas Department of Housing and Community
Affairs 2007 Ser B (AMT) (a)............. 5.15 09/01/27 3,316,036
------------
11,372,003
------------
Virginia (1.6%)
2,000 Peninsula Ports Authority of Virginia,
Baptist Homes Ser 2006 C................. 5.40 12/01/33 1,705,560
700 Peninsula Town Center Community Development
Authority Ser 2007....................... 6.45 09/01/37 649,397
------------
2,354,957
------------
Washington (0.6%)
1,000 Washington Housing Finance Commission,
Skyline at First Hill Ser 2007 A......... 5.625 01/01/38 859,140
------------
Total Tax-Exempt Municipal Bonds (Cost $163,583,478)............. 156,569,490
------------
Short-Term Tax-Exempt Municipal Obligations
(0.4%)
California (0.3%)
500 Westminster Redevelopment Agency, Tax
Allocation Refg Ser 1997 (AMBAC Insd)
(Called for redemption 06/11/08)......... 4.00(e) 08/01/27 500,000
------------
Ohio (0.1%)
75 Zanesville-Muskingum County Port Authority,
Anchor Glass Container Corp Ser 1989 B
(AMT).................................... 10.25 12/01/08 75,169
------------
Total Short-Term Tax-Exempt Municipal Obligations (Cost
$575,000)......................................................... 575,169
------------
Total Investments (Cost $164,158,478)............................. 157,144,659
------------
See Notes to Financial Statements
14
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 continued
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
-------------------------------------------------------------------------------------------
Floating Rate Note and Dealer Trust Obligations Related to
Securities Held (-10.1%)
$(14,700) Notes with interest rates ranging from 1.61% to 1.82% at May 31,
2008 and contractual maturities of collateral ranging from
10/01/22 to 06/01/47 (See Note 1D) (f) (Cost $(14,700,000)).... $(14,700,000)
------------
Total Net Investments (Cost $149,458,478) (g)......... 98.3% 142,444,659
Other Assets in Excess of Liabilities................. 1.7 2,515,534
----- ------------
Net Assets............................................ 100.0% $144,960,193
===== ============
----------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when-issued basis.
(a) Underlying security related to inverse floater entered into by
the Fund.
(b) Resale is restricted to qualified institutional investors.
(c) Joint exemption.
(d) Prerefunded to call date shown.
(e) Current coupon of variable rate demand obligation.
(f) Floating rate note obligations related to securities held. The
interest rates shown reflect the rates in effect at May 31,
2008.
(g) The aggregate cost for federal income tax purposes is
$149,381,884. The aggregate gross unrealized appreciation is
$2,411,526 and the aggregate gross unrealized depreciation is
$9,348,751 resulting in net unrealized depreciation of
$6,937,225.
Bond Insurance:
---------------
AMBAC AMBAC Assurance Corporation.
BHAC Berkshire Hathaway Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
See Notes to Financial Statements
15
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
May 31, 2008
Assets:
Investments in securities, at value (cost
$164,158,478).............................. $157,144,659
Cash......................................... 112,984
Receivable for:
Interest.................................. 2,951,028
Investments sold.......................... 234,769
Dividends from affiliate.................. 603
Prepaid expenses and other assets............ 17,617
------------
Total Assets.............................. 160,461,660
------------
Liabilities:
Floating rate note and dealer trust
obligations................................ 14,700,000
Payable for:
Investments purchased..................... 579,336
Investment advisory fee................... 71,023
Administration fee........................ 11,376
Transfer agent fee........................ 2,941
Accrued expenses and other payables.......... 136,791
------------
Total Liabilities......................... 15,501,467
------------
Net Assets................................ $144,960,193
============
Composition of Net Assets:
Paid-in-capital.............................. $173,752,952
Net unrealized depreciation.................. (7,013,819)
Accumulated undistributed net investment
income..................................... 926,585
Accumulated net realized loss................ (22,705,525)
------------
Net Assets................................ $144,960,193
============
Net Asset Value Per Share
19,649,675 shares outstanding (unlimited
shares authorized of $.01 par value)......... $7.38
=====
Statement of Operations
For the year ended May 31, 2008
Net Investment Income:
Income
Interest..................................... $ 10,353,640
Dividends from affiliate..................... 44,540
------------
Total Income.............................. 10,398,180
------------
Expenses
Investment advisory fee...................... 763,502
Interest and residual trust expenses......... 352,358
Administration fee........................... 122,160
Professional fees............................ 61,984
Shareholder reports and notices.............. 49,833
Listing fees................................. 18,949
Transfer agent fees and expenses............. 18,380
Trustees' fees and expenses.................. 8,516
Custodian fees............................... 8,501
Other........................................ 43,048
------------
Total Expenses............................ 1,447,231
Less: expense offset......................... (8,364)
Less: rebate from Morgan Stanley affiliated
cash sweep (Note 3)........................ (1,373)
------------
Net Expenses.............................. 1,437,494
------------
Net Investment Income..................... 8,960,686
------------
Realized and Unrealized Gain (Loss):
Realized Gain (Loss) on:
Investments.................................. (1,965,259)
Futures contracts............................ (559,283)
Swap contracts............................... 148,154
------------
Net Realized Loss......................... (2,376,388)
------------
Change in Unrealized
Appreciation/Depreciation on:
Investments.................................. (14,645,497)
Futures contracts............................ (33,391)
Swap contracts............................... (50,854)
------------
Net Change in Unrealized
Appreciation/Depreciation.................. (14,729,742)
------------
Net Loss.................................. (17,106,130)
------------
Net Decrease................................. $ (8,145,444)
============
See Notes to Financial Statements
16
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2008 MAY 31, 2007
------------ ------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income................................. $ 8,960,686 $ 9,524,302
Net realized loss..................................... (2,376,388) (8,551,492)
Net change in unrealized appreciation/depreciation.... (14,729,742) 14,749,972
------------ ------------
Net Increase (Decrease)............................ (8,145,444) 15,722,782
Dividends to shareholders from net investment income.. (9,638,541) (10,648,870)
Decrease from transactions in shares of beneficial
interest............................................ (257,624) --
------------ ------------
Net Increase (Decrease)............................ (18,041,609) 5,073,912
Net Assets:
Beginning of period................................... 163,001,802 157,927,890
------------ ------------
End of Period
(Including accumulated undistributed net investment
income of $926,585 and $1,550,877, respectively)...... $144,960,193 $163,001,802
============ ============
See Notes to Financial Statements
17
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statement of Cash Flows
For the year ended May 31, 2008
Increase (Decrease) in cash:
Cash Flows Provided by Operating Activities:
Net decrease in net assets from operations...................... $ (8,145,444)
------------
Adjustments to reconcile net decrease in net assets from
operations to net cash provided by operating activities:
Net Realized Loss on Investments................................ 2,376,388
Net Change in Unrealized Depreciation on Investments............ 14,729,742
Amortization of Premium......................................... 40,418
Accretion of Discount........................................... (763,618)
Cost of Purchases of Investments................................ (63,702,003)
Proceeds from Sales of Investments.............................. 59,900,630
Net Sale of Short-Term Investments.............................. 3,000,000
Increase in Interest Receivables and Other Assets............... (210,994)
Increase in Accrued Expenses and Other Payables................. 20,509
------------
Total Adjustments............................................ 15,391,072
------------
Net Cash Provided by Operating Activities.................... 7,245,628
------------
Cash Flows from Financing Activities
Repurchased Shares.............................................. (257,624)
Dividends Paid.................................................. (9,638,541)
Net Change in Proceeds from Floating Rate Note Obligations...... 2,700,000
------------
Net Cash Used for Financing Activities....................... (7,196,165)
------------
Net Increase in Cash............................................ 49,463
Cash at the Beginning of the Period............................. 63,521
------------
Cash at the End of the Period................................... $ 112,984
============
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest....................... $ 352,358
============
See Notes to Financial Statements
18
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008
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; (3) interest rate
swaps are marked-to-market daily based upon quotations from market makers; (4)
investments in open-end mutual funds, including the Morgan Stanley Institutional
Liquidity Funds, are valued at the net asset value as of the close of each
business day; and (5) 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 and are included in interest income. Interest income is
accrued daily except where collection is not expected.
19
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 continued
C. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable and non taxable income to its shareholders. Therefore, no provision for
federal income taxes is required. The Fund files tax returns with the U.S.
Internal Revenue Service, New York State and New York City. The Fund adopted the
provisions of the Financial Accounting Standards Board ("FASB") Interpretation
No. 48 ("Fin 48") Accounting for Uncertainty in Income Taxes, on November 29,
2007. Fin 48 sets forth a minimum threshold for financial statement recognition
of the benefit of a tax position taken or expected to be taken in a tax return.
The implementation of Fin 48 did not result in any unrecognized tax benefits in
the accompanying financial statements. If applicable, the Fund recognizes the
interest accrued related to unrecognized tax benefits in the interest expense
and penalties in other expenses in the Statement of Operations. Each of the tax
years in the four year period ended May 31, 2008, remains subject to examination
by the taxing authorities.
D. Floating Rate Note and Dealer Trusts Obligations Related to Securities
Held -- The Fund enters into transactions in which it transfers to Dealer Trusts
("Dealer Trusts"), fixed rate bonds in exchange for cash and residual interests
in the Dealer Trusts' assets and cash flows, which are in the form of inverse
floating rate investments. The Dealer Trusts fund the purchases of the fixed
rate bonds by issuing floating rate notes to third parties and allowing the Fund
to retain residual interest in the bonds. The Fund enters into shortfall
agreements with the Dealer Trusts which commit the Fund to pay the Dealer
Trusts, in certain circumstances, the difference between the liquidation value
of the fixed rate bonds held by the Dealer Trusts and the liquidation value of
the floating rate notes held by third parties, as well as any shortfalls in
interest cash flows. The residual interests held by the Fund (inverse floating
rate investments) include the right of the Fund (1) to cause the holders of the
floating rate notes to tender their notes at par at the next interest rate reset
date, and (2) to transfer the municipal bond from the Dealer Trusts to the Fund,
thereby collapsing the Dealer Trusts. The Fund accounts for the transfer of
bonds to the Dealer Trusts as secured borrowings, with the securities
transferred remaining in the Fund's investment assets, and the related floating
rate notes reflected as Fund liabilities under the caption "Floating rate note
and dealer trust obligations" on the Statement of Assets and Liabilities. The
Fund records the interest income from the fixed rate bonds under the caption
"Interest Income" and records the expenses related to floating rate note
obligations and any administrative expenses of the Dealer Trusts under the
caption "Interest and residual trust expenses" in the Fund's Statement of
Operations. The notes issued by the Dealer Trusts have interest rates that reset
weekly and the floating rate note holders have the option to tender their notes
to the Dealer Trusts for redemption at par at each reset date. At May 31, 2008,
Fund investments with a value of $19,327,630 are held by the Dealer Trusts and
serve as collateral for the $14,700,000 in floating
20
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 continued
rate note obligations outstanding at that date. Contractual maturities of the
floating rate note obligations and interest rates in effect at May 31, 2008 are
presented in the Portfolio of Investments.
E. Interest Rate Swaps -- Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal amount.
Net periodic interest payments to be received or paid are accrued daily and are
recorded as realized gains or losses in the Statement of Operations. The Fund
may pay or receive cash to collateralize interest rate swap contracts. This cash
collateral is recorded as assets/liabilities on the Fund's books. Any cash
received may be invested in Morgan Stanley Institutional Liquidity Funds.
F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. 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.
H. 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 average 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 average weekly net assets.
21
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 continued
Under an agreement between the Administrator and State Street Bank and Trust
Company ("State Street"), State Street provides certain administrative services
to the Fund. For such services, the Administrator pays State Street a portion of
the fee the Administrator receives from the Fund.
3. Security Transactions and Transactions with Affiliates
The Fund invests in Morgan Stanley Institutional Liquidity Tax-Exempt
Portfolio -- Institutional Class, an open-end management investment company
managed by the Investment Adviser. Investment advisory fees paid by the Fund are
reduced by an amount equal to the advisory and administrative service fees paid
by Morgan Stanley Institutional Liquidity Tax-Exempt Portfolio -- Institutional
Class with respect to assets invested by the Fund in Morgan Stanley
Institutional Liquidity Tax-Exempt Portfolio -- Institutional Class. For the
year ended May 31, 2008, advisory fees paid were reduced by $1,373 relating to
the Fund's investment in Morgan Stanley Institutional Liquidity Tax-Exempt
Portfolio -- Institutional Class. Income distributions earned by the Fund are
recorded as dividends from affiliate in the Statement of Operations and totaled
$44,540 for the year ended May 31, 2008. During the year ended May 31, 2008,
cost of purchases and sales of investments in Morgan Stanley Institutional
Liquidity Tax-Exempt Portfolio -- Institutional Class aggregated $40,650,335 and
$40,650,335, respectively.
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended May 31, 2008 aggregated $58,136,064
and $55,797,285, respectively. Included in the aforementioned transactions is a
purchase and sales of $537,510 and $2,006,865, respectively, with other Morgan
Stanley funds including net realized losses of $301,672.
Effective September 28, 2007, the transfer agent services previously provided to
the Fund by Morgan Stanley Trust was assumed by Computershare Trust Company,
N.A. (the "Transfer Agent").
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the year ended May 31, 2008 included in Trustees' fees and
expenses in the Statement of Operations amounted to $6,002. At May 31, 2008, the
Fund had an accrued pension liability of $61,126 which is included in accrued
expenses in the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he or she receives for serving
22
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 continued
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, 2006........................... 19,685,043 $196,850 $173,789,330
Reclassification due to permanent book/tax
differences................................... -- -- 28,177
---------- -------- ------------
Balance May 31, 2007............................ 19,685,043 196,850 173,817,507
Treasury shares purchased and retired (weighted
average discount 4.70%)+...................... (35,368) (354) (257,270)
Reclassification due to permanent book/tax
differences................................... -- -- (3,781)
---------- -------- ------------
Balance May 31, 2008............................ 19,649,675 $196,496 $173,556,456
========== ======== ============
----------
+ The Trustees have voted to retire the shares purchased.
5. Dividends
The Fund declared the following dividends from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
------------- --------- ------------------ ------------------
April 8, 2008 $0.03875 June 20, 2008 June 27, 2008
July 8, 2008 $0.03875 July 18, 2008 July 25, 2008
July 8, 2008 $0.03875 August 22, 2008 August 29, 2008
July 8, 2008 $0.03875 September 19, 2008 September 26, 2008
6. 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
23
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 continued
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.
The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 2008 MAY 31, 2007
------------ ------------
Tax-exempt income...................................... $9,638,541 $10,629,071
Ordinary income........................................ -- 19,799
---------- -----------
Total distributions.................................... $9,638,541 $10,648,870
========== ===========
As of May 31, 2008, the tax-basis components of accumulated losses were as
follows:
Undistributed tax-exempt income.................... $ 808,898
Undistributed ordinary income...................... 103,417
Undistributed long-term gains...................... --
------------
Net accumulated earnings........................... 912,315
Capital loss carryforward*......................... (20,057,497)
Post-October losses................................ (2,647,916)
Temporary differences.............................. (62,436)
Net unrealized depreciation........................ (6,937,225)
------------
Total accumulated losses........................... $(28,792,759)
============
----------
* As of May 31, 2008, the Fund had a net capital loss carryforward of
$20,057,497, to offset future capital gains to the extent provided by
regulations, which will expire according to the following schedule.
AMOUNT EXPIRATION
$3,930,059 May 31, 2009
1,864,080 May 31, 2011
4,876,449 May 31, 2013
9,386,909 May 31, 2016
As of May 31, 2008, the Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year) and book amortization of discounts on debt
securities.
24
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 continued
Permanent differences, due to a nondeductible expense and tax adjustments on
debt securities sold by the Fund, resulted in the following reclassifications
among the Fund's components of net assets at May 31, 2008:
ACCUMULATED
UNDISTRIBUTED
NET INVESTMENT ACCUMULATED
INCOME NET REALIZED LOSS PAID-IN-CAPITAL
$53,563 $(49,782) $(3,781)
======= ======== =======
7. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent and
custodian.
8. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may invest a portion of its assets in inverse floating rate
instruments, either through outright purchases of inverse floating rate
securities or through the transfer of bonds to a Dealer Trust in exchange for
cash and residual interests in the Dealer Trust. These investments are typically
used by the Fund in seeking to enhance the yield of the portfolio. These
instruments typically involve greater risks than a fixed rate municipal bond. In
particular, these instruments are acquired through leverage or may have leverage
embedded in them and therefore involve many of the risks associated with
leverage. Leverage is a speculative technique that may expose the Fund to
greater risk and increased costs. Leverage may cause the Fund's net asset value
to be more volatile than if it had not been leveraged because leverage tends to
magnify the effect of any increases or decreases in the value of the Fund's
portfolio securities. The use of leverage may also cause the Fund to liquidate
portfolio positions when it may not be advantageous to do so in order to satisfy
its obligations with respect to inverse floating rate instruments.
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.
The Fund may enter into interest rate swaps and may purchase or sell interest
rate caps, floors and collars. The Fund expects to enter into these transactions
primarily to manage interest rate risk,
25
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 continued
hedge portfolio positions and preserve a return or spread on a particular
investment or portion of its portfolio. The Fund may also enter into these
transactions to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. Interest rate swap transactions are
subject to market risk, risk of default by the other party to the transaction,
risk of imperfect correlation and manager risk. Such risks may exceed the
related amounts shown in the Statement of Assets and Liabilities.
9. Accounting Pronouncements
On March 19, 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities ("SFAS
161"). SFAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of
gains and losses on derivative instruments, and disclosures about credit-risk-
related contingent features in derivative agreements. The application of SFAS
161 is required for fiscal year after November 15, 2008 and interim periods
within those fiscal years. At this time, management is evaluating the
implications of SFAS 161 and its impact on the financial statements has not been
determined.
In September 2006, Statement of Financial Accounting Standards No. 157, Fair
Value Measurements ("SFAS 157"), was issued and is effective for fiscal years
beginning after November 15, 2007. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. Management is currently evaluating the impact the adoption of SFAS
157 will have on the Fund's financial statement disclosures.
26
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,
------------------------------------------------------------------
2008 2007 2006 2005 2004
---------------- -------------- -------- -------- --------
Selected Per Share Data:
Net asset value, beginning of the period..... $8.28 $8.02 $8.00 $7.67 $7.91
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income(1).................. 0.46 0.48 0.54 0.53 0.52
Net realized and unrealized gain (loss)... (0.87) 0.32 0.01 0.29 (0.26)
------ ----- ----- ----- ------
Total income (loss) from investment
operations.................................. (0.41) 0.80 0.55 0.82 0.26
------ ----- ----- ----- -----
Less dividends from net investment income.... (0.49) (0.54) (0.53) (0.50) (0.50)
------ ------ ------ ------ ------
Anti-dilutive effect of acquiring treasury
shares(1)................................... 0.00(5) -- -- 0.01 --
----- ----- ----- ----- -----
Net asset value, end of period............... $7.38 $8.28 $8.02 $8.00 $7.67
===== ===== ===== ===== =====
Market value, end of period.................. $7.87 $9.68 $8.76 $7.97 $7.09
===== ===== ===== ===== =====
Total Return(2).............................. (13.65)% 16.99% 17.04% 20.12% (2.34)%
Ratios to Average Net Assets:
Total expenses (before expense offset)....... 0.95 %(3)(4) 0.80%(4) 0.71% 0.83% 0.94 %
Total expenses (before expense offset,
exclusive of interest and residual trust
expenses)................................... 0.72 %(3)(4) 0.72%(4) 0.71% 0.83% 0.94 %
Net investment income........................ 5.89 % 5.88% 6.78% 6.76% 6.63 %
Supplemental Data:
Net assets, end of period, in thousands...... $144,960 $163,002 $157,928 $157,594 $156,265
Portfolio turnover rate...................... 35 % 26% 19% 12% 10 %
----------
(1) The per share amounts were computed using an average number of shares
outstanding during the period.
(2) 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. Total return does
not reflect brokerage commissions.
(3) Reflects rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Tax-Exempt
Portfolio -- Institutional Class during the period. As a result of such
rebate, the expenses as a percentage of its new assets had an effect of
less than 0.005%.
(4) Does not reflect the effect of expenses offset of 0.01%.
(5) Includes anti-dilutive effect of acquiring treasury shares of less than
$0.005.
See Notes to Financial Statements
27
Morgan Stanley Municipal Income Opportunities Trust
INDEPENDENT AUDITORS' REPORT
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, 2008, and the related statements of
operations for the year then ended, changes in cash flows 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, 2008, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. 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, 2008, the results of
its operations for the year then ended, the changes in its cash flows 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 28, 2008
28
Morgan Stanley Municipal Income Opportunities Trust
SHAREHOLDER VOTING RESULTS (UNAUDITED)
On December 12, 2007, 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:
FOR WITHHELD ABSTAIN
---------------------------------------
Michael F. Klein............................. 17,950,049 637,223 0
Michael E. Nugent............................ 17,931,732 655,540 0
W. Allen Reed................................ 17,921,899 665,373 0
29
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO MANAGEMENT/REVISED INVESTMENT POLICY (UNAUDITED)
Portfolio Management
As of the date of this report, the Fund is managed within the Morgan Stanley
Municipals team. The team consists of portfolio managers and analysts. Current
members of the team jointly and primarily responsible for the day-to-day
management of the Fund's portfolio are Wayne Godlin, a Managing Director of the
Investment Adviser, Gerald J. Lian, an Executive Director of the Investment
Adviser, and Robert Stryker, a Vice President of the Investment Adviser.
Mr. Godlin has been associated with the investment Adviser in an investment
management capacity since July 2001 and began managing the Fund in October 2001.
Mr. Lian has been associated with the Investment Adviser in an investment
management capacity since December 1991 and began managing the Fund in May 2003.
Mr. Stryker has been associated with the Adviser in an investment management
capacity since February 1994 and began managing the Fund in September 2007.
Revised Investment Policy
To the extent permitted by applicable law and the Fund's investment objectives,
policies, and restrictions, the Fund may invest all or some of its short-term
cash investments in any money market fund advised or managed by the Investment
Adviser or its affiliates. In connection with any such investments, the Fund, to
the extent permitted by the Investment Company Act, will pay its share of all
expenses (other than advisory and administrative fees) of a money market fund in
which it invests which may result in the Fund bearing some additional expenses.
The Board of Trustees Approved a Clarification in the Investment Policies
Discussed Below
The Fund may invest in put and call options and futures on its portfolio
securities. The Fund may use options and futures to protect against a decline in
the Fund's securities or an increase in prices of securities that may be
purchased or to adjust the Fund's yield curve exposure.
If the Fund invests in options and/or futures, its participation in these
markets would subject the Fund's portfolio to certain risks. If the Investment
Adviser's predictions of movements in the direction of the markets are
inaccurate, the adverse consequences to the Fund (e.g., a reduction in the
Fund's net asset value or a reduction in the amount of income available for
distribution) may leave the Fund in a worse position than if these strategies
were not used. Other risks inherent in the use of options and futures include,
for example, the possible imperfect correlation between the price of options and
futures contracts and movements in the prices of the securities being hedged.
With respect to futures contracts, this correlation may be further distorted
since the futures contracts that are being used to hedge are not based on
municipal obligations. There is also the possibility of an absence of a liquid
30
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO MANAGEMENT/REVISED INVESTMENT POLICY (UNAUDITED) continued
secondary market for any particular instrument. Certain options may be over-the-
counter options which are options negotiated with dealers; there is no secondary
market for these investments and therefore may be difficult to value. If the
Fund uses an option or futures transaction as an alternative to purchasing or
selling an underlying instrument in order to obtain desired exposure, the Fund
will be exposed to the same risks as are incurred in purchasing and selling the
underlying instrument directly.
31
Morgan Stanley Municipal Income Opportunities Trust
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
The dividend reinvestment plan (the "Plan") offers you a prompt and simple way
to reinvest your dividends and capital gains distributions into additional
shares of the Fund. Under the Plan, the money you earn from dividends and
capital gains distributions will be reinvested automatically in more shares of
the Fund, allowing you to potentially increase your investment over time. All
shareholders in the Fund are automatically enrolled in the Plan when shares are
purchased.
PLAN BENEFITS
- ADD TO YOUR ACCOUNT
You may increase your shares in the Fund easily and automatically with the Plan.
- LOW TRANSACTION COSTS
Transaction costs are low because the new shares are bought in blocks and the
brokerage commission is shared among all participants.
- CONVENIENCE
You will receive a detailed account statement from Computershare Trust Company,
N.A., which administers the Plan, whenever shares are reinvested for you. The
statement shows your total distributions, date of investment, shares acquired,
and price per share, as well as the total number of shares in your reinvestment
account. You can also access your account via the Internet. To do this, please
go to morganstanley.com.
- SAFEKEEPING
Computershare Trust Company, N.A. will hold the shares it has acquired for you
in safekeeping.
HOW TO PARTICIPATE IN THE PLAN
If you own shares in your own name, you can participate directly in the Plan. If
your shares are held in "street name" -- in the name of your brokerage firm,
bank, or other financial institution -- you must instruct that entity to
participate on your behalf. If they are unable to participate on your behalf,
you may request that they reregister your shares in your own name so that you
may enroll in the Plan.
If you choose to participate in the Plan, whenever the Fund declares a dividend
or capital gains distributions, it will be invested in additional shares of your
Fund that are purchased in the open market.
HOW TO ENROLL
To enroll in the Plan, please read the Terms and Conditions in the Plan
brochure. You can obtain a copy of the Plan Brochure and enroll in the Plan by
visiting morganstanley.com, calling toll-free (888) 421-4015 or notifying us in
writing at Morgan Stanley Closed-End Funds, Computershare Trust Company, N.A.,
P.O. Box 43078, Providence, RI 02940-3078. Please include the Fund name and
32
Morgan Stanley Municipal Income Opportunities Trust
DIVIDEND REINVESTMENT PLAN (UNAUDITED) continued
account number and ensure that all shareholders listed on the account sign these
written instructions. Your participation in the Plan will begin with the next
dividend or capital gains distribution payable after Computershare Trust
Company, N.A. receives your authorization, as long as they receive it before the
"record date," which is generally ten business days before the dividend is paid.
If your authorization arrives after such record date, your participation in the
Plan will begin with the following dividend or distribution.
COSTS OF THE PLAN
There is no direct charge to you for reinvesting dividends and capital gains
distributions because the Plan's fees are paid by the Fund. However, when
applicable, you will pay your portion of any brokerage commissions incurred when
the new shares are purchased on the open market. These brokerage commissions are
typically less than the standard brokerage charges for individual transactions,
because shares are purchased for all participants in blocks, resulting in lower
commissions for each individual participant. Any brokerage commissions or
service fees are averaged into the purchase price.
TAX IMPLICATIONS
The automatic reinvestment of dividends and capital gains distributions does not
relieve you of any income tax that may be due on dividends or distributions. You
will receive tax information annually to help you prepare your federal and state
income tax returns.
Morgan Stanley does not offer tax advice. The tax information contained herein
is general and is not exhaustive by nature. It was not intended or written to be
used, and it cannot be used by any taxpayer, for avoiding penalties that may be
imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws
are complex and constantly changing. Shareholders should always consult a legal
or tax advisor for information concerning their individual situation.
HOW TO WITHDRAW FROM THE PLAN
To withdraw from the Plan, please visit morganstanley.com or call (888) 421-4015
or notify us in writing at the address below.
Morgan Stanley Closed-End Funds
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
33
Morgan Stanley Municipal Income Opportunities Trust
DIVIDEND REINVESTMENT PLAN (UNAUDITED) continued
All shareholders listed on the account must sign any written withdrawal
instructions. If you withdraw, you have three options with regard to the shares
held in your account:
1. If you opt to continue to hold your non-certificated shares, they will be
held by Computershare Trust Company, N.A.
2. If you opt to sell your shares through Morgan Stanley, we will sell all full
and fractional shares and send the proceeds via check to your address of
record after deducting brokerage commissions.
3. You may sell your shares through your financial advisor through the Direct
Registration System ("DRS"). DRS is a service within the securities industry
that allows Fund shares to be held in your name in electronic format. You
retain full ownership of your shares, without having to hold a stock
certificate.
The Fund and Computershare Trust Company, N.A. may amend or terminate the Plan.
Participants will receive written notice at least 30 days before the effective
date of any amendment. In the case of termination, Participants will receive
written notice at least 30 days before the record date for the payment of any
dividend or capital gains distribution by the Fund. In the case of amendment or
termination necessary or appropriate to comply with applicable law or the rules
and policies of the Securities and Exchange Commission or any other regulatory
authority, such written notice will not be required.
TO OBTAIN A COMPLETE COPY OF THE DIVIDEND REINVESTMENT PLAN, PLEASE CALL OUR
CLIENT RELATIONS DEPARTMENT AT 888-421-4015 OR VISIT MORGANSTANLEY.COM.
34
Morgan Stanley Municipal Income Opportunities Trust
MORGAN STANLEY ADVISOR CLOSED END FUNDS
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY (UNAUDITED)
We are required by federal law to provide you with a copy of our Privacy Policy
annually.
The following Policy applies to current and former individual investors in
Morgan Stanley Advisor closed end funds. This Policy is not applicable to
partnerships, corporations, trusts or other non-individual clients or account
holders. Please note that we may amend this Policy at any time, and will inform
you of any changes to this Policy as required by law.
WE RESPECT YOUR PRIVACY
We appreciate that you have provided us with your personal financial
information. We strive to maintain the privacy of such information while we help
you achieve your financial objectives. This Policy describes what non-public
personal information we collect about you, why we collect it, and when we may
share it with others. We hope this Policy will help you understand how we
collect and share non-public personal information that we gather about you.
Throughout this Policy, we refer to the non-public information that personally
identifies you or your accounts as "personal information."
1. WHAT PERSONAL INFORMATION DO WE COLLECT ABOUT YOU?
To serve you better and manage our business, it is important that we collect and
maintain accurate information about you. We may obtain this information from
applications and other forms you submit to us, from your dealings with us, from
consumer reporting agencies, from our Web sites and from third parties and other
sources.
FOR EXAMPLE:
- We may collect information such as your name, address, e-mail address,
telephone/fax numbers, assets, income and investment objectives through
applications and other forms you submit to us.
- We may obtain information about account balances, your use of account(s) and
the types of products and services you prefer to receive from us through your
dealings and transactions with us and other sources.
- We may obtain information about your creditworthiness and credit history from
consumer reporting agencies.
- We may collect background information from and through third-party vendors to
verify representations you have made and to comply with various regulatory
requirements.
- If you interact with us through our public and private Web sites, we may
collect information that you provide directly through online communications
(such as an e-mail address). We may also collect information about your
Internet service provider, your domain name, your computer's operating system
and Web browser, your use of our Web sites and your product and service
preferences,
35
through the use of "cookies." "Cookies" recognize your computer each time you
return to one of our sites, and help to improve our sites' content and
personalize your experience on our sites by, for example, suggesting offerings
that may interest you. Please consult the Terms of Use of these sites for more
details on our use of cookies.
2. WHEN DO WE DISCLOSE PERSONAL INFORMATION WE COLLECT ABOUT YOU?
To provide you with the products and services you request, to serve you better
and to manage our business, we may disclose personal information we collect
about you to our affiliated companies and to non-affiliated third parties as
required or permitted by law.
A. INFORMATION WE DISCLOSE TO OUR AFFILIATED COMPANIES. We do not disclose
personal information that we collect about you to our affiliated companies
except to enable them to provide services on our behalf or as otherwise required
or permitted by law.
B. INFORMATION WE DISCLOSE TO THIRD PARTIES. We do not disclose personal
information that we collect about you to non-affiliated third parties except to
enable them to provide services on our behalf, to perform joint marketing
agreements with other financial institutions, or as otherwise required or
permitted by law. For example, some instances where we may disclose information
about you to nonaffiliated third parties include: for servicing and processing
transactions, to offer our own products and services, to protect against fraud,
for institutional risk control, to respond to judicial process or to perform
services on our behalf. When we share personal information with these companies,
they are required to limit their use of personal information to the particular
purpose for which it was shared and they are not allowed to share personal
information with others except to fulfill that limited purpose.
3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE
COLLECT ABOUT YOU?
We maintain physical, electronic and procedural security measures to help
safeguard the personal information we collect about you. We have internal
policies governing the proper handling of client information. Third parties that
provide support or marketing services on our behalf may also receive personal
information, and we require them to adhere to confidentiality standards with
respect to such information.
36
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED)
Independent Trustees:
Number of
Portfolios in
Fund Complex
Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships
Address of Held with and Length of During Independent Held by
Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee
-------------------- ----------- ---------------- ------------------------- --------------- --------------------
Frank L. Bowman (63) Trustee Since August President and Chief 180 Director of the
c/o Kramer Levin 2006 Executive Officer of the National Energy
Naftalis & Frankel Nuclear Energy Institute Foundation, the U.S.
LLP (policy organization) Energy Association,
Counsel to the (since February 2005); the American Council
Independent Trustees Director or Trustee of for Capital
1177 Avenue of the various Retail Funds and Formation and the
Americas Institutional Funds Armed Services YMCA
New York, NY 10036 (since August 2006); of the USA.
Chairperson of the
Insurance Sub-Committee
of the Insurance,
Valuation and Compliance
Committee (since February
2007); formerly
variously, Admiral in the
U.S. Navy, Director of
Naval Nuclear Propulsion
Program and Deputy
Administrator-Naval
Reactors in the National
Nuclear Security
Administration at the
U.S. Department of Energy
(1996-2004). Honorary
Knight Commander of the
Most Excellent Order of
the British Empire.
Michael Bozic (67) Trustee Since April 1994 Private investor; 182 Director of various
c/o Kramer Levin Chairperson of the business
Naftalis & Frankel Insurance, Valuation and organizations.
LLP Compliance Committee
Counsel to the (since October 2006);
Independent Trustees Director or Trustee of
1177 Avenue of the the Retail Funds (since
Americas April 1994) and the
New York, NY 10036 Institutional Funds
(since July 2003);
formerly Chairperson of
the Insurance Committee
(July 2006-September
2006); 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);
variously Chairman, Chief
Executive Officer,
President and Chief
Operating Officer (1987-
1991) of the Sears
Merchandise Group of
Sears, Roebuck & Co.
37
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of
Portfolios in
Fund Complex
Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships
Address of Held with and Length of During Independent Held by
Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee
-------------------- ----------- ---------------- ------------------------- --------------- --------------------
Kathleen A. Dennis Trustee Since August President, Cedarwood 180 Director of various
(54) 2006 Associates (mutual fund non-profit
c/o Kramer Levin and investment organizations.
Naftalis & Frankel management) (since July
LLP 2006); Chairperson of the
Counsel to the Money Market and
Independent Trustees Alternatives Sub-
1177 Avenue of the Committee of the
Americas Investment Committee
New York, NY 10036 (since October 2006) and
Director or Trustee of
various Retail Funds and
Institutional Funds
(since August 2006);
formerly, Senior Managing
Director of Victory
Capital Management (1993-
2006).
Dr. Manuel H. Trustee Since July 1991 Senior Partner, Johnson 182 Director of NVR,
Johnson (59) Smick International, Inc. (home
c/o Johnson Smick Inc., (consulting firm); construction);
Group, Inc. Chairperson of the Director of
888 16th Street, Investment Committee Evergreen Energy.
N.W. (since October 2006) and
Suite 740 Director or Trustee of
Washington, D.C. the Retail Funds (since
20006 July 1991) and the
Institutional Funds
(since July 2003); Co-
Chairman and a founder of
the Group of Seven
Council (G7C),
(international economic
commission); formerly
Chairperson of the Audit
Committee (July 1991-
September 2006); Vice
Chairman of the Board of
Governors of the Federal
Reserve System and
Assistant Secretary of
the U.S. Treasury.
38
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of
Portfolios in
Fund Complex
Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships
Address of Held with and Length of During Independent Held by
Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee
-------------------- ----------- ---------------- ------------------------- --------------- --------------------
Joseph J. Kearns Trustee Since August President, Kearns & 183 Director of Electro
(65) 1994 Associates LLC Rent Corporation
c/o Kearns & (investment consulting); (equipment leasing)
Associates LLC Chairperson of the Audit and The Ford Family
PMB754 Committee (since October Foundation.
23852 Pacific Coast 2006) and Director or
Highway Trustee of the Retail
Malibu, CA 90265 Funds (since July 2003)
and the Institutional
Funds (since August
1994); formerly, Deputy
Chairperson of the Audit
Committee (July 2003-
September 2006) and
Chairperson of the Audit
Committee of the
Institutional Funds
(October 2001-July 2003);
formerly CFO of the J.
Paul Getty Trust.
Michael F. Klein Trustee Since August Managing Director, Aetos 180 Director of certain
(49) 2006 Capital, LLC (since March investment funds
c/o Kramer Levin 2000) and Co-President, managed or sponsored
Naftalis & Frankel Aetos Alternatives by Aetos Capital,
LLP Management, LLC (since LLC. Director of
Counsel to the January 2004); Sanitized AG and
Independent Trustees Chairperson of the Fixed- Sanitized Marketing
1177 Avenue of the Income Sub-Committee of AG (specialty
Americas the Investment Committee chemicals).
New York, NY 10036 (since October 2006) and
Director or Trustee of
various Retail Funds and
Institutional Funds
(since August 2006);
formerly Managing
Director, Morgan Stanley
& Co. Inc. and Morgan
Stanley Dean Witter
Investment Management,
President, Morgan Stanley
Institutional Funds (June
1998-March 2000) and
Principal, Morgan Stanley
& Co. Inc. and Morgan
Stanley Dean Witter
Investment Management
(August 1997-December
1999).
39
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Number of
Portfolios in
Fund Complex
Name, Age and Position(s) Term of Office Principal Occupation(s) Overseen by Other Directorships
Address of Held with and Length of During Independent Held by
Independent Trustee Registrant Time Served* Past 5 Years Trustee** Independent Trustee
-------------------- ----------- ---------------- ------------------------- --------------- --------------------
Michael E. Nugent Chairperson Chairperson of General Partner of 182 None.
(72) of the the Boards since Triumph Capital, L.P.
c/o Triumph Capital, Board and July 2006 and (private investment
L.P. Trustee Trustee since partnership); Chairperson
445 Park Avenue July 1991 of the Boards of the
New York, NY 10022 Retail Funds and
Institutional Funds
(since July 2006) and
Director or Trustee of
the Retail Funds (since
July 1991) and the
Institutional Funds
(since July 2001);
formerly Chairperson of
the Insurance Committee
(until July 2006).
W. Allen Reed (61) Trustee Since August Chairperson of the Equity 180 Director of Temple-
c/o Kramer Levin 2006 Sub-Committee of the Inland Industries
Naftalis & Frankel Investment Committee (packaging, and
LLP (since October 2006) and forest products);
Counsel to the Director or Trustee of Director of Legg
Independent Trustees various Retail Funds and Mason, Inc. and
1177 Avenue of the Institutional Funds Director of the
Americas (since August 2006); Auburn University
New York, NY 10036 President and CEO of Foundation.
General Motors Asset
Management; formerly,
Chairman and Chief
Executive Officer of the
GM Trust Bank and
Corporate Vice President
of General Motors
Corporation (August 1994-
December 2005).
Fergus Reid (75) Trustee Since June 1992 Chairman of Lumelite 183 Trustee and Director
c/o Lumelite Plastics Corporation; of certain
Plastics Corporation Chairperson of the investment companies
85 Charles Colman Governance Committee and in the JPMorgan
Blvd. Director or Trustee of Funds complex
Pawling, NY 12564 the Retail Funds (since managed by J.P.
July 2003) and the Morgan Investment
Institutional Funds Management Inc.
(since June 1992).
40
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Interested Trustee:
Number of
Portfolios in
Fund Complex
Position(s) Term of Office Principal Occupation(s) Overseen by
Name, Age and Address of Held with and Length of During Interested Other Directorships Held by
Interested Trustee Registrant Time Served* Past 5 Years Trustee** Interested Trustee
--------------------------- ----------- --------------- --------------------------- ------------- ---------------------------
James F. Higgins (60) Trustee Since June 2000 Director or Trustee of the 181 Director of AXA Financial,
c/o Morgan Stanley Trust Retail Funds (since June Inc. and The Equitable Life
Harborside Financial Center 2000) and the Institutional Assurance Society of the
Plaza Two Funds (since July 2003); United States (financial
Jersey City, NJ 07311 Senior Advisor of Morgan services).
Stanley (since August
2000).
----------
* This is the earliest date the Trustee began serving the funds advised by
Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the
"Retail Funds") or the funds advised by Morgan Stanley Investment Management
Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds").
** 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.).
41
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) continued
Executive 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
------------------------------ -------------- -------------- -----------------------------------------------
Ronald E. Robison (69) President and President President (since September 2005) and Principal
1221 Avenue of the Americas Principal since Executive Officer (since May 2003) of funds in
New York, NY 10020 Executive September 2005 the Fund Complex; President (since September
Officer and Principal 2005) and Principal Executive Officer (since
Executive May 2003) of the Van Kampen Funds; Managing
Officer since Director, Director and/or Officer of the
May 2003 Investment Adviser and various entities
affiliated with the Investment Adviser;
Director of Morgan Stanley SICAV (since May
2004). Formerly, Executive Vice President (July
2003 to September 2005) of funds in the Fund
Complex and the Van Kampen Funds; President and
Director of the Institutional Funds (March 2001
to July 2003); Chief Administrative Officer of
the Investment Adviser; Chief Administrative
Officer of Morgan Stanley Services Company Inc.
Kevin Klingert (45) Vice President Since June Chief Operating Officer of the Global Fixed
522 Fifth Avenue 2008 Income Group of Morgan Stanley Investment
New York, NY 10036 Management Inc. and Morgan Stanley Investment
Advisors Inc. (since March 2008). Head of
Global Liquidity Portfolio Management and co-
Head of Liquidity Credit Research of Morgan
Stanley Investment Management (since December
2007). Managing Director of Morgan Stanley
Investment Management Inc. and Morgan Stanley
Investment Advisors Inc. (since December 2007).
Previously, Managing Director on the Management
Committee and head of Municipal Portfolio
Management and Liquidity at BlackRock (October
1991 to January 2007).
Dennis F. Shea (55) Vice President Since February Managing Director and (since February 2006)
1221 Avenue of the Americas 2006 Chief Investment Officer -- Global Equity of
New York, NY 10020 Morgan Stanley Investment Management; Vice
President of the Retail and Institutional Funds
(since February 2006). Formerly, Managing
Director and Director of Global Equity Research
at Morgan Stanley.
Amy R. Doberman (46) Vice President Since July Managing Director and General Counsel, U.S.
1221 Avenue of the Americas 2004 Investment Management of Morgan Stanley
New York, NY 10020 Investment Management (since July 2004); Vice
President of the Retail Funds and the
Institutional Funds (since July 2004); Vice
President of the Van Kampen Funds (since August
2004); Secretary (since February 2006) and
Managing Director (since July 2004) of the
Investment Adviser and various entities
affiliated with the Investment Adviser.
Formerly, Managing Director and General
Counsel -- Americas, UBS Global Asset
Management (July 2000 to July 2004).
Carsten Otto (44) Chief Since October Managing Director and U.S. Director of
1221 Avenue of the Americas Compliance 2004 Compliance for Morgan Stanley Investment
New York, NY 10020 Officer Management (since October 2004); Managing
Director and Chief Compliance Officer of Morgan
Stanley Investment Management. Formerly,
Assistant Secretary and Assistant General
Counsel of the Retail Funds.
Stefanie V. Chang Yu (41) Vice President Since December Managing Director of the Investment Adviser and
1221 Avenue of the Americas 1997 various entities affiliated with the Investment
New York, NY 10020 Adviser; Vice President of the Retail Funds
(since July 2002) and the Institutional Funds
(since December 1997). Formerly, Secretary of
various entities affiliated with the Investment
Adviser.
42
Morgan Stanley Municipal Income Opportunities Trust
TRUSTEE AND OFFICER INFORMATION (UNAUDITED) 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
--------------------------- ----------------- -------------- ------------------------------------------------
Francis J. Smith (42) Treasurer and Treasurer Executive Director of the Investment Adviser and
c/o Morgan Stanley Trust Chief Financial since July various entities affiliated with the Investment
Harborside Financial Center Officer 2003 and Chief Adviser; Treasurer and Chief Financial Officer
Plaza Two Financial of the Retail Funds (since July 2003). Formerly,
Jersey City, NJ 07311 Officer since Vice President of the Retail Funds (September
September 2002 2002 to July 2003).
Mary E. Mullin (41) Secretary Since June Executive Director of the Investment Adviser and
1221 Avenue of the Americas 1999 various entities affiliated with the Investment
New York, NY 10020 Adviser; Secretary of the Retail Funds (since
July 2003) and the Institutional Funds (since
June 1999).
----------
* This is the earliest date the Officer began serving the Retail Funds or the
Institutional Funds.
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 1, 2008.
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.
2008 FEDERAL TAX NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is
furnished with respect to the distributions paid by the Fund
during its taxable year ended May 31, 2008. The Fund designated
100% of its income dividends as tax exempt income dividends.
In January, the Fund provides tax information to shareholders for
the preceding calendar year.
43
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
Kevin Klingert
Vice President
Dennis F. Shea
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
TRANSFER AGENT
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
COUNSEL TO THE INDEPENDENT TRUSTEES
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue
New York, New York 10036
(c) 2008 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Municipal Income
Opportunities Trust
NYSE: OIA
Annual Report
May 31, 2008
OIAANN
IU08-03903P-Y05/08
Item 2. Code of Ethics.
(a) The Trust/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) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Trust/Fund's Code of Ethics is attached hereto as Exhibit 12 A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that Joseph J. Kearns, an
"independent" Trustee, is an "audit committee financial expert" serving on its
audit committee. 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:
2
2008
REGISTRANT COVERED ENTITIES(1)
---------- -------------------
AUDIT FEES............. $32,375 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES... $______(2) $4,336,000(2)
TAX FEES............. $ 4,738(3) $ 762,000(3)
ALL OTHER FEES....... $______ $_________
TOTAL NON-AUDIT FEES... $ 4,738 $5,098,000
TOTAL.................. $37,113 $5,098,000
2007
REGISTRANT COVERED ENTITIES(1)
---------- -------------------
AUDIT FEES............. $32,000 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES... $ 531(2) $4,836,000(2)
TAX FEES............. $ 4,600(3) $ 621,000(3)
ALL OTHER FEES....... $ -- $_________(5)
TOTAL NON-AUDIT FEES... $ 5,131 $5,457,000
TOTAL.................. $37,131 $5,457,000
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.
3
(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.
4
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
5
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
6
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
7
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 Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Joseph Kearns, Michael Nugent and Allen Reed.
(b) Not applicable.
Item 6.
See Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
8
The Fund/Trust 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.
MORGAN STANLEY MUNICIPAL INCOME OPPORTUNITIES TRUST I
PORTFOLIO MANAGEMENT. As of the date of this report, the Fund is managed by
members within the Municipal Fixed Income team. The team consists of portfolio
managers and analysts. Current members of the team jointly and primarily
responsible for the day-to-day management of the Fund's portfolio are Wayne
Godlin, a Managing Director of the Investment Adviser and Gerard J. Lian, an
Executive Director of the Investment Adviser.
Mr. Godlin has been associated with the Investment Adviser in an investment
management capacity since May 1988 and began managing the Fund in October 2001.
Mr. Lian has been associated with the Investment Adviser in an investment
management capacity since December 1991 and began managing the Fund in May 2003.
Mr. Stryker has been associated with the Investment Adviser in an investment
management capacity since February 1994 and began managing the Fund in September
2007.
The composition of the team may change from time to time.
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
The following information is as of May 31, 2008:
Mr. Godlin managed eight registered investment companies with a total of
approximately $7.5 billion in assets; no pooled investment vehicles other than
mutual funds; and no other accounts.
Mr. Lian managed three registered investment companies with a total of
approximately $354.9 million in assets; no pooled investment vehicles other than
mutual funds; and no other accounts.
Mr. Stryker managed 11 registered investment companies with a total of
approximately $3.9 billion in assets; no pooled investment vehicles other than
mutual funds; and no other accounts.
Because the portfolio managers may manage assets for other investment companies,
pooled investment vehicles and/or other accounts (including institutional
clients, pension plans and certain high net worth individuals), there may be an
incentive to favor one client over another resulting in conflicts of interest.
For instance, the Investment Adviser may receive fees from certain accounts that
are higher than the fee it receives from the Fund, or it may receive a
performance-based fee on certain accounts. In those instances, the portfolio
managers may have an incentive to favor the higher and/or performance-based fee
accounts over the Fund. In addition, a conflict of interest could exist to the
extent the Investment Adviser has proprietary investments in certain accounts,
where portfolio managers have personal investments in certain accounts or when
certain accounts are investment options in the Investment Adviser's employee
benefits and/or deferred compensation plans. The portfolio manager may have an
incentive to favor these accounts over others. If the Investment Adviser manages
accounts that engage in short sales of securities of the type in which the Fund
invests, the Investment Adviser could be seen as harming the performance of the
Fund for the benefit of the accounts engaging in short sales if the short sales
cause the market value of the securities to fall. The Investment Adviser has
adopted trade allocation and other policies and procedures that it believes are
reasonably designed to address these and other conflicts of interest.
PORTFOLIO MANAGER COMPENSATION STRUCTURE
Portfolio managers receive a combination of base compensation and
discretionary compensation, comprising a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all funds/accounts managed by
the portfolio managers.
BASE SALARY COMPENSATION. Generally, portfolio managers receive base salary
compensation based on the level of their position with the Investment Adviser.
DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio
managers may receive discretionary compensation.
Discretionary compensation can include:
- Cash Bonus.
- Morgan Stanley's Long Term Incentive Compensation awards - a
mandatory program that defers a portion of discretionary year-end
compensation into restricted stock units or other awards based on
Morgan Stanley common stock or other investments that are subject
to vesting and other conditions.
- Investment Management Alignment Plan (IMAP) awards - a mandatory
program that defers a portion of discretionary year-end
compensation and notionally invests it in designated funds
advised by the Investment Adviser or its affiliates. The award is
subject to vesting and other conditions. Portfolio managers must
notionally invest a minimum of 25% to a maximum of 100% of the
IMAP deferral into a combination of the designated funds they
manage that are included in the IMAP fund menu, which may or may
not include the Fund.
- Voluntary Deferred Compensation Plans - voluntary programs that
permit certain employees to elect to defer a portion of their
discretionary year-end compensation and directly or notionally
invest the deferred amount: (1) across a range of designated
investment funds, including funds advised by the Investment
Adviser or its affiliates; and/or (2) in Morgan Stanley stock
units.
Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include:
- Investment performance. A portfolio manager's compensation is
linked to the pre-tax investment performance of the
funds/accounts managed by the portfolio manager. Investment
performance is calculated for one-, three- and five-year periods
measured against a fund's/account's primary benchmark (as set
forth in the fund's prospectus), indices and/or peer groups where
applicable. Generally, the greatest weight is placed on the
three- and five-year periods.
- Revenues generated by the investment companies, pooled investment
vehicles and other accounts managed by the portfolio manager.
- Contribution to the business objectives of the Investment
Adviser.
- The dollar amount of assets managed by the portfolio manager.
- Market compensation survey research by independent third parties.
- Other qualitative factors, such as contributions to client
objectives.
- Performance of Morgan Stanley and Morgan Stanley Investment
Management, and the overall performance of the investment team(s)
of which the portfolio manager is a member.
SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS
As of May 31, 2008, the portfolio managers did not own any share of the
Fund.
9
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
-------------- ---------- --------------- ---------------- ---------------
November 2007 --- 6,400 7.4042 N/A N/A
December 2007 ---
December 2007 24,867 7.2493 N/A N/A
January 2008 --- 4,101 7.2910 N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
mo-da-year ---
mo-da-year N/A N/A
Total 35,368 7.3148 N/A N/A
10
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Trust's/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 Trust/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 second fiscal quarter of the period covered
by this 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.
11
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 17, 2008
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 17, 2008
/s/ Francis Smith
-----------------------------------
Francis Smith
Principal Financial Officer
July 17, 2008
12