<PAGE> 1
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
Two World Trade Center
New York, New York 10048
DEAR SHAREHOLDER:
- --------------------------------------------------------------------------------
Strong economic growth in the fourth quarter of 1993 and a shift in Federal
Reserve Board monetary policy in February of 1994 caused the fixed-income
markets to reverse direction and led to the sharpest increase in interest rates
in more than six years. At the beginning of the year, market concerns about
inflation developed as the economy approached full employment and commodity
prices moved upward. The Federal Reserve Board responded by tightening monetary
policy. Since early February, the central bank has raised the federal-funds
rate -- the interest rate banks charge each other for overnight loans -- 250
basis points from 3.00 percent to 5.50 percent in six separate moves through
November. Between May and November, the discount rate -- the interest rate the
Federal Reserve charges member banks for loans -- increased 175 basis points to
4.75 percent.
During InterCapital Quality Municipal Income Trust's (NYSE symbol: IQI)
fiscal year ended October 31, 1994, long-term municipal bond yields, as
measured by The Bond Buyer Revenue Bond Index,* rose 139 basis points from 5.56
percent to 6.95 percent. In February and March yields jumped 89 basis points
from 5.50 percent to 6.39 percent in response to the Federal Reserve Board's
initial tightening and subsequent municipal bond selling pressure. A semblance
of stability returned to the market between June and August. After Labor Day,
however, continued economic growth, aggressive tax-loss selling, heavy
mutual-fund redemptions and excessive dealer inventory led to further municipal
market deterioration. The total yield increase of 139 basis points during the
fiscal year was equivalent to a 17 percent price decline for a 30-year
municipal bond. One-third of this price decline occurred in September and
October.
The municipal market continues to be influenced by supply and demand
conditions. New-issue underwriting totaled a record $290 billion in 1993. The
pace of new-issue activity over the first 10 months of 1994, however, slowed 44
percent. The estimated issuance for 1994 is $160 billion. By way of comparison,
bond maturities and calls for redemption are expected to reach $190 billion this
year resulting in a reduction in the amount of municipal debt outstanding. This
scarcity would normally be expected to improve the relative performance of
municipal bonds under stable-to-improving interest rate conditions.
PERFORMANCE
The Trust's net asset value (NAV) declined from $16.34 to $13.62 per share
during the fiscal year ended October 31, 1994. Based on this change and
reinvestment of tax-free dividends totaling $1.04 per share, the Trust's total
return for the fiscal year was -10.08 percent. Concurrently, the Trust's market
price on the New York Stock Exchange declined from $15.875 to $11.875 per share.
Based on this market change and reinvestment of dividends, the Trust's total
return for the fiscal year was -19.30 percent. The Trust began the fiscal year
trading at a 2.85 percent discount to NAV and closed at a 12.81 percent discount
to NAV.
- ---------------
* The Bond Buyer Revenue Bond Index is an arithmetic average of the yields of 25
selected municipal revenue bonds with 30-year maturities. Credit ratings of
these bonds range from Aa1 to Baa1 by Moody's and AA+ to A- by Standard &
Poor's.
<PAGE> 2
PORTFOLIO STRUCTURE
As of October 31, 1994, the portfolio's long-term investments were
diversified among 13 municipal sectors and 70 credits. The three largest sectors
were transportation revenue, general obligation, and water and sewer revenue
bonds, representing 37 percent of net assets. The average maturity and call
protection of the Trust's long-term holdings was 21 years and 8 years,
respectively. Bonds subject to the alternative minimum tax (AMT) represented
approximately 14 percent of net assets. At the end of the period, the Trust had
net assets in excess of $752 million.
The credit-quality ratings of the Trust's long-term portfolio as of October
31, 1994 are summarized below:
<TABLE>
<CAPTION>
Moody's or Standard & Poor's Rating Percent
------------------------------------------------------------ ------
<S> <C>
Aaa or AAA.................................................. 38%
Aa or AA.................................................... 27
A or A...................................................... 35
</TABLE>
THE IMPACT OF LEVERAGING
As reported previously, the Trust's common shares are leveraged. Leverage
is created through the issuance of auction rate preferred shares (ARPS). The
ARPS's auction periods normally range between one week and one year. Proceeds
from ARPS underwritings were used to purchase additional long-term municipal
bonds. Following the payment of ARPS dividends, the common shares earn
incremental income when the portfolio yield is higher than the costs of the ARPS
(yield plus operating and remarketing expenses). Although rising short-term
interest rates have narrowed the yield spread this year, the ARPS continue to
provide positive incremental income to common shareholders.
The leveraged capital structure of closed-end municipal bond funds
additionally impacts NAV. ARPS normally account for one-third of a fund's
underwritten capital structure. This produces a volatility factor for common
shares of 1.5 times the price change of bonds held in the portfolio. The common
stock's NAV per share reflects the full price change of the portfolio's
investments since the value of the preferred shares does not fluctuate.
As the bond market has eroded, the degree of leverage and volatility has
increased. The purchase and retirement of ARPS counteracts this trend. During
the fiscal year, IQI purchased and retired $39 million in par amount of ARPS so
that $241 million in ARPS remain outstanding. Additional ARPS purchases may
occur if the degree of leverage increases or ARPS profitability (spread)
declines significantly.
DIVIDEND RESERVES
At the end of the fiscal year, IQI had undistributed net investment income
of $0.131 per share available for future distributions. This dividend reserve or
"cushion" helped sustain the Trust's current monthly dividend. Higher yields in
future ARPS auctions and ARPS retirements may erode the cushion. Declines in the
dividend reserve may cause the Trust to adjust the common share dividend.
<PAGE> 3
LOOKING AHEAD
The overall direction of interest rates will primarily be determined by the
strength of the economy, the trend of inflation and the Federal Reserve Board's
responses. These conditions may continue to move interest rates higher through
mid-1995. Investor demand for municipal securities should be sustained by
significant bond maturities, calls for redemption and diminished new-issue
supply. Changing market conditions and the profitability of ARPS are among the
factors that will determine the Trust's future level of income and influence the
direction of the common stock market price.
The Trust's procedure for reinvestment of all dividends and distributions
on common shares is by purchase in the open market. This method helps to support
the market value of the Trust's shares. In addition, the Trustees have approved
a procedure whereby the Trust, when appropriate, purchases 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. The Trust may
also utilize procedures to reduce or eliminate the amount of outstanding ARPS,
including their purchase in the open market or in privately negotiated
transactions. Over the fiscal year, the Trust purchased 1,894,500 shares of
common stock at a weighted average discount of 8.32 percent.
We appreciate your ongoing support of InterCapital Quality Municipal Income
Trust and look forward to continuing to serve your investment needs.
Very truly yours,
Charles A. Fiumefreddo
Chairman of the Board
<PAGE> 4
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Coupon Maturity
thousands) Rate Date Value
- --------- ------ --------- -------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (94.0%)
GENERAL OBLIGATION (12.6%)
$ 20,000 Jefferson County School District # R-1, Colorado, Ser
1992 (AMBAC Insured)................................. 6.00 % 12/15/12 $ 18,942,400
7,500 District of Columbia, 1992 Ser B (MBIA Insured)........ 6.30 6/ 1/12 7,184,550
Hawaii,
5,000 1992 Ser BZ.......................................... 6.00 10/ 1/10 4,806,600
8,000 1992 Ser BZ.......................................... 6.00 10/ 1/11 7,639,920
4,000 Cook County, Illinois, Ser 1992 C (FGIC Insured)....... 6.00 11/15/09 3,798,560
Washoe County School District, Nevada, Ltd Tax
4,730 Ser 10/1/92 A (AMBAC Insured)........................ 6.25 4/ 1/11 4,611,372
8,100 Ser 10/1/92 A (AMBAC Insured)........................ 6.25 4/ 1/13 7,749,836
New York City, New York,
5,500 1993 Ser B........................................... 7.00 10/ 1/11 5,478,000
2,100 1993 Ser B........................................... 7.00 10/ 1/13 2,086,791
3,300 1993 Ser B........................................... 7.00 10/ 1/14 3,278,682
5,000 1993 Ser B........................................... 6.75 10/ 1/15 4,884,750
2,400 1992 Ser B........................................... 7.00 2/ 1/20 2,360,544
10,000 San Antonio, Texas, Refg Ser 1992...................... 5.75 8/ 1/13 8,963,200
15,000 Washington, Ser 1993 A................................. 5.75 10/ 1/17 13,183,050
- --------- -------------
100,630 94,968,255
- --------- -------------
EDUCATIONAL FACILITIES REVENUE (2.5%)
10,000 District of Columbia, Howard University Refg Ser
1992 A............................................... 6.75 10/ 1/12 9,999,200
2,500 University of Illinois, Auxiliary Ser 1991............. 5.75 4/ 1/22 2,134,450
1,000 New Hampshire Higher Educational & Health Facilities
Authority, University of New Hampshire Ser 1992 (MBIA
Insured)............................................. 6.25 7/ 1/20 926,690
Scranton-Lackawanna Health & Welfare Authority,
Pennsylvania,
3,000 University of Scranton 1992 Ser A.................... 6.40 3/ 1/07 2,949,540
3,300 University of Scranton 1992 Ser A.................... 6.50 3/ 1/13 3,180,012
- --------- -------------
19,800 19,189,892
- --------- -------------
ELECTRIC REVENUE (10.1%)
9,500 Orlando Utilities Commission, Florida, Ser 1991 A...... 5.50 10/ 1/26 7,876,735
10,000 Municipal Electric Authority of Georgia, Power 1992
Ser B................................................ 6.375 1/ 1/16 9,261,900
5,000 Hastings, Nebraska, Refg Ser 1992...................... 6.30 1/ 1/19 4,704,800
10,000 Hamilton! Ohio, Refg 1992 Ser A (FGIC Insured)......... 6.00 10/15/23 9,169,200
20,000 Piedmont Municipal Power Agency, South Carolina,
Refg 1992 Ser (MBIA Insured)......................... 6.375 1/ 1/25 18,365,600
8,080 South Carolina Public Service Authority, 1986 Refg
Ser C................................................ 7.30 7/ 1/21 8,190,776
Grant County Public Utility District #2, Washington,
8,220 Priest Rapids Hydro Second Ser 1992 A................ 5.00 1/ 1/23 6,136,148
8,000 Wanapum Hydro Second Ser 1992 A...................... 6.375 1/ 1/23 7,555,760
5,000 Wanapum Hydro Second Ser 1992 B (AMT)................ 6.75 1/ 1/23 4,912,750
- --------- -------------
83,800 76,173,669
- --------- -------------
</TABLE>
<PAGE> 5
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Coupon Maturity
thousands) Rate Date Value
- --------- ------ --------- -------------
<C> <S> <C> <C> <C>
HOSPITAL REVENUE (10.4%)
$ 5,000 Colorado Health Facilities Authority, Sisters of
Charity Health Care Systems Inc Ser 1992 A (AMBAC
Insured)............................................. 6.00 % 5/15/22 $ 4,591,750
6,000 Tampa, Florida, Allegany Health/St Joseph's Hospital
Ser 1991 (MBIA Insured).............................. 6.00 12/ 1/21 5,530,260
9,250 Massachusetts Health & Education Facilities Authority,
Massachusetts General Hospital Ser F (AMBAC
Insured)............................................. 6.00 7/ 1/15 8,520,174
10,000 Missouri Health & Education Facilities Authority,
Health Midwest Ser 1992 B (MBIA Insured)............. 6.25 2/15/22 9,474,000
10,000 New York State Medical Care Facilities Finance Agency,
The Mount Sinai Hospital - FHA Insured Mortgage 1992
Ser C................................................ 5.75 8/15/19 8,738,000
1,000 Akron, Bath & Copley Joint Township Hospital District,
Ohio, Summa Health Ser 1992 A........................ 6.25 11/15/07 974,750
4,500 Cuyahoga County, Ohio, Cleveland Clinic Foundation Refg
Ser 1992............................................. 5.50 11/15/11 3,874,005
10,000 Allegheny County Hospital Development Authority,
Pennsylvania, Presbyterian University Health
Ser 1992 A (MBIA Insured)............................ 6.25 11/ 1/23 9,295,300
5,000 Dauphin County General Authority, Pennsylvania, HAPSO
Group Inc/The Western Pennsylvania Hospital
Refg 1992 Ser A (MBIA Insured)....................... 6.25 7/ 1/16 4,744,100
3,000 Philadelphia Hospitals & Higher Education Facilities
Authority, Pennsylvania, Chestnut Hill Hospital
Ser of 1992.......................................... 6.375 11/15/11 2,857,770
5,000 South Dakota Health & Educational Facilities Authority,
Queen of Peace Hospital Ser 1992 (MBIA Insured)...... 6.70 7/ 1/17 4,899,500
15,000 Fredericksburg Industrial Development Authority, MWH
Medicorp Obligated Group Ser 1991 A & B
(FGIC Insured)....................................... 6.60 8/15/23 14,602,800
- --------- -------------
83,750 78,102,409
- --------- -------------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (6.9%)
6,000 California Pollution Control Financing Authority,
Keller Cannon Landfill Co/Browning-Ferris Industries
Inc Ser 1992 (AMT)................................... 6.875 11/ 1/27 5,662,020
5,000 Citrus County, Florida, Florida Power Corp Refg Ser
1992 B............................................... 6.35 2/ 1/22 4,781,400
3,500 St Lucie County, Florida, Florida Power & Light Co Ser
1991 (AMT)........................................... 7.15 2/ 1/23 3,545,045
5,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987
(AMT) (MBIA Insured)................................. 6.65 6/ 1/17 4,851,950
15,000 Berkeley County, South Carolina, South Carolina
Electric & Gas Co Ser 1984........................... 6.50 10/ 1/14 14,338,650
10,000 Brazos River Authority, Texas, Houston Lighting & Power
Co Ser 1992 B (MBIA Insured)......................... 6.375 4/ 1/12 9,708,000
10,000 Mason County, West Virginia, Appalachian Power Co
Ser J................................................ 6.60 10/ 1/22 9,214,100
- --------- -------------
54,500 52,101,165
- --------- -------------
</TABLE>
<PAGE> 6
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Coupon Maturity
thousands) Rate Date Value
- --------- ------ --------- -------------
<C> <S> <C> <C> <C>
MORTGAGE REVENUE - MULTI-FAMILY (5.7%)
$ 7,000 Illinois Housing Development Authority, Ser I.......... 6.625% 9/ 1/12 $ 6,810,230
20,000 Michigan Housing Development Authority, Rental 1992 Ser
A (Bifurcated FSA Insured)........................... 6.50 4/ 1/23 18,725,400
Missouri Housing Development Commission,
7,845 Federally Insured Mortgage Loans Refg Ser 11/15/92... 6.50 7/ 1/16 7,510,646
10,000 Federally Insured Mortgage Loans Refg Ser 11/15/92... 6.60 7/ 1/24 9,489,500
- --------- -------------
44,845 42,535,776
- --------- -------------
MORTGAGE REVENUE - SINGLE FAMILY (9.1%)
7,500 Alaska Housing Finance Corporation, Gen Hsg 1992 Ser A
(Crossover Refunded)................................. 6.60 12/ 1/23 7,907,025
20,000 Connecticut Housing Finance Authority, 1992 Ser B...... 6.70 11/15/12 19,751,800
9,325 Georgia Housing & Finance Authority, Home Ownership
1992 Ser C........................................... 6.50 12/ 1/11 9,182,701
1,400 Idaho Housing Agency, 1992 Ser E (AMT)................. 6.75 7/ 1/12 1,378,566
Minnesota Housing & Finance Agency,
3,460 Ser 1992 D - 1....................................... 6.50 1/ 1/17 3,322,500
7,480 Ser 1992 CD - 1 (AMT)................................ 6.75 7/ 1/23 7,230,991
20,360 Virginia Housing Development Authority, 1992 Ser B
SubSer B - 2 (AMT)................................... 6.80 7/ 1/21 19,513,228
- --------- -------------
69,525 68,286,811
- --------- -------------
NURSING & HEALTH RELATED FACILITIES REVENUE (2.3%)
6,265 University of Michigan, Medical Service Plan Ser
1991................................................. 6.50 12/ 1/21 5,995,981
11,250 Minneapolis & Saint Paul Housing & Redevelopment
Authority, Minnesota, Group Health Plan Inc Ser
1992................................................. 6.90 10/15/22 10,944,338
- --------- -------------
17,515 16,940,319
- --------- -------------
PUBLIC FACILITIES REVENUE (5.1%)
9,800 Orlando, Florida, Cap Impr Refg Ser 1992............... 6.00 10/ 1/22 8,880,956
10,000 Atlanta Downtown Development Authority, Georgia,
Underground Atlanta Refg Ser 1992.................... 6.25 10/ 1/16 9,519,000
5,000 Illinois, Civic Center Ser 1990 A (AMBAC Insured)...... 6.00 12/15/15 4,601,550
7,370 Indianapolis Local Public Improvement Bond Bank,
Indiana, Ser 1992 D.................................. 6.75 2/ 1/20 7,026,484
8,550 Maine Municipal Bond Bank, 1992 Ser E.................. 6.25 11/ 1/12 8,023,662
- --------- -------------
40,720 38,051,652
- --------- -------------
RESOURCE RECOVERY REVENUE (2.8%)
17,235 Broward County, Florida, Broward Waste Energy Co North
Ser 1984............................................. 7.95 12/ 1/08 18,558,648
2,500 Union County Utilities Authority, New Jersey, Solid
Waste 1991 Ser A (AMT)............................... 7.20 6/15/14 2,473,775
- --------- -------------
19,735 21,032,423
- --------- -------------
</TABLE>
<PAGE> 7
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Coupon Maturity
thousands) Rate Date Value
- --------- ------ --------- -------------
<C> <S> <C> <C> <C>
TRANSPORTATION FACILITIES REVENUE (13.5%)
$ 10,000 Los Angeles County Transportation Commission,
California, Sales Tax Second Sr Ser 1992 - A
(Prerefunded)........................................ 6.75 % 7/ 1/19 $ 10,806,700
Dade County, Florida, Aviation,
3,000 1992 Ser B (MBIA Insured)............................ 6.55 10/ 1/13 2,967,750
5,000 1992 Ser B (MBIA Insured) (AMT)...................... 6.60 10/ 1/22 4,905,900
13,250 Chicago, Illinois, Chicago O'Hare Int'l Airport - Int'l
Terminal Ser 1992 (AMT) (MBIA Insured)............... 6.75 1/ 1/12 13,257,154
20,000 Illinois Toll Highway Authority, Priority 1992 Ser A... 6.375 1/ 1/15 18,657,200
15,000 St Louis, Missouri, Lambert - St Louis Int'l Airport
Ser 1992 (AMT) (FGIC Insured)........................ 6.00 7/ 1/08 14,603,100
25,000 Clark County, Nevada, Las Vegas - McCarran Int'l
Airport Passenger Facility Charge 1992 Ser B (AMT)... 6.25 7/ 1/22 22,082,500
Puerto Rico Highway & Transportation Authority,
6,000 Refg Ser V........................................... 6.625 7/ 1/12 5,940,780
7,115 Ser T................................................ 6.625 7/ 1/18 6,952,209
1,885 Ser T (Prerefunded).................................. 6.625 7/ 1/18 2,022,511
- --------- -------------
106,250 102,195,804
- --------- -------------
WATER & SEWER REVENUE (10.5%)
10,000 Central Coast Water Authority, California, Ser 1992
(AMBAC Insured)...................................... 6.50 10/ 1/14 9,889,300
Massachusetts Water Resources Authority,
15,000 1992 Ser B........................................... 5.50 11/ 1/15 12,687,900
15,000 1990 Ser A (Prerefunded)............................. 6.50 12/ 1/19 15,946,050
20,000 New York City Municipal Water Finance Authority, New
York, Ser 1993 A..................................... 6.00 6/15/17 17,951,000
8,000 Houston, Texas, Water & Sewer Lien Jr Refg Ser 1991 C
(AMBAC Insured)...................................... 6.375 12/ 1/17 7,695,920
6,000 Fairfax County Water Authority, Virginia, Refg Ser
1992................................................. 6.00 4/ 1/22 5,475,600
8,915 Roanoke County, Virginia, Water Ser 1991 (FGIC Insured)
(Prerefunded)........................................ 6.50 7/ 1/21 9,463,362
- --------- -------------
82,915 79,109,132
- --------- -------------
OTHER REVENUE (2.5%)
New York Local Government Assistance Corporation,
2,000 Ser 1991 A........................................... 7.125 4/ 1/11 2,057,780
15,000 Ser 1991 C (Prerefunded)............................. 7.00 4/ 1/21 16,414,800
- --------- -------------
17,000 18,472,580
- --------- -------------
740,985 TOTAL MUNICIPAL BONDS
- --------- (IDENTIFIED COST $722,964,360).............................................. 707,159,887
-------------
</TABLE>
<PAGE> 8
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Coupon Maturity
thousands) Rate Date Value
- --------- ------ --------- -------------
<C> <S> <C> <C> <C>
SHORT-TERM MUNICIPAL OBLIGATION (1.3%)
$ 9,800 Salt Lake County, Utah, Service Station Holdings
- --------- British Petroleum Ser 1994 (Tender 11/1/94)
(Identified Cost $9,800,000)......................... 3.70 %* 2/11/08 $ 9,800,000
-------------
$ 750,785 TOTAL INVESTMENTS (IDENTIFIED COST $732,764,360)(a)........... 95.3% 716,959,887
=========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................ 4.7 35,719,614
----- -------------
NET ASSETS.................................................... 100.0% $ 752,679,501
===== =============
</TABLE>
- ---------------
AMT Alternative Minimum Tax.
* Variable or floating rate security. Coupon rate shown reflects current rate.
(a) The aggregate cost for federal income tax purposes is $732,764,360; the
aggregate gross unrealized appreciation is $5,201,107 and the aggregate
gross unrealized depreciation is $21,005,580, resulting in net unrealized
depreciation of $15,804,473.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Alaska............. 1.1%
California......... 3.5
Colorado........... 3.1
Connecticut........ 2.6
District of
Columbia.......... 2.3
Florida............ 7.6
Georgia............ 3.7
Hawaii............. 1.7
Idaho.............. 0.2%
Illinois........... 6.5
Indiana............ 0.9
Maine.............. 1.1
Massachusetts...... 4.9
Michigan........... 3.3
Minnesota.......... 2.9
Missouri........... 5.5
Nebraska........... 0.6%
Nevada............. 5.2
New Hampshire...... 0.1
New Jersey......... 0.3
New York........... 8.4
Ohio............... 1.9
Pennsylvania....... 3.1
Puerto Rico........ 2.0
South Carolina..... 5.4%
South Dakota....... 0.7
Texas.............. 3.5
Utah............... 1.3
Virginia........... 6.5
Washington......... 4.2
West Virginia...... 1.2
----
Total.............. 95.3%
====
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 9
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1994
- --------------------------------------------
ASSETS:
Investments in securities, at value
(identified cost $732,764,360) (Note 1)... $ 716,959,887
Cash........................................ 390,230
Receivable for:
Investments sold.......................... 22,851,167
Interest.................................. 13,216,783
Deferred organizational expenses (Note 1)... 32,048
Prepaid expenses............................ 306,998
-------------
TOTAL ASSETS.......................... 753,757,113
-------------
LIABILITIES:
Payable for:
Common shares of beneficial interest
purchased............................... 733,110
Investment management fee (Note 2)........ 239,939
Accrued expenses (Note 3)................... 104,563
-------------
TOTAL LIABILITIES..................... 1,077,612
-------------
NET ASSETS:
Preferred shares of beneficial interest
(1,000,000 shares authorized of non-
participating $.01 par value, 4,825 shares
outstanding) (Note 4)..................... 241,250,000
-------------
Common shares of beneficial interest
(unlimited shares authorized of $.01 par
value, 37,562,613 shares outstanding)
(Note 5).................................. 523,048,221
Net unrealized depreciation on
investments............................... (15,804,473)
Accumulated undistributed net investment
income.................................... 4,933,610
Accumulated net realized loss on
investments............................... (747,857)
-------------
NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS................ 511,429,501
-------------
TOTAL NET ASSETS.................... $ 752,679,501
=============
NET ASSET VALUE PER COMMON SHARE
($511,429,501 divided by 37,562,613
common shares outstanding)................. $13.62
======
STATEMENT OF OPERATIONS
For the year ended October 31, 1994
- --------------------------------------------
INVESTMENT INCOME:
INTEREST INCOME........................... $ 52,668,011
-------------
EXPENSES
Investment management fee (Note 2)...... 3,034,081
Auction commission fees................. 819,097
Transfer agent fees and expenses
(Note 3).............................. 243,109
Professional fees....................... 115,406
Auction agent fees...................... 81,985
Shareholder reports and notices......... 78,320
Registration fees....................... 35,866
Trustees' fees and expenses (Note 3).... 29,424
Organizational expenses (Note 1)........ 10,994
Other................................... 54,638
-------------
TOTAL EXPENSES...................... 4,502,920
-------------
NET INVESTMENT INCOME............. 48,165,091
-------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS (Note 1):
Net realized loss on investments........ (747,857)
Net change in unrealized appreciation on
investments........................... (105,098,168)
-------------
NET LOSS ON INVESTMENTS............. (105,846,025)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS........ $ (57,680,934)
=============
</TABLE>
See Notes to Financial Statements
<PAGE> 10
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year For the year
ended ended
October 31, 1994 October 31, 1993
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.......................................................... $ 48,165,091 $ 48,188,896
Net realized gain (loss) on investments........................................ (747,857) 1,259,985
Net change in unrealized appreciation on investments........................... (105,098,168) 97,226,437
---------------- ----------------
Net increase (decrease) in net assets resulting from operations............ (57,680,934) 146,675,318
---------------- ----------------
Dividends to preferred shareholders from net investment income................... (8,532,844) (8,158,203)
Dividends and distributions to common shareholders from:
Net investment income.......................................................... (40,390,228) (35,839,484)
Net realized gain on investments............................................... (1,218,012) --
---------------- ----------------
Total dividends and distributions.......................................... (50,141,084) (43,997,687)
---------------- ----------------
Increase (decrease) from transactions in shares of beneficial interest (Notes 4 &
5):
Common......................................................................... (25,658,544) (6,118,244)
Preferred...................................................................... (38,750,000) 280,000,000
---------------- ----------------
Total transactions......................................................... (64,408,544) 273,881,756
---------------- ----------------
Total increase (decrease).................................................. (172,230,562) 376,559,387
NET ASSETS:
Beginning of period.............................................................. 924,910,063 548,350,676
---------------- ----------------
END OF PERIOD (including undistributed net investment income of $4,933,610 and
$5,691,591, respectively)....................................................... $752,679,501 $924,910,063
================ ================
</TABLE>
See Notes to Financial Statements
<PAGE> 11
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- InterCapital Quality Municipal
Income Trust (the "Trust") is registered under the Investment Company Act of
1940, as amended, as a diversified, closed-end management investment company.
The Trust was organized as a Massachusetts business trust on March 12, 1992 and
commenced operations on September 29, 1992.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- Portfolio securities are valued for the
Trust by an outside independent pricing service approved by the Trustees.
The pricing service has informed the Trust that in valuing the Trust's
portfolio securities, it uses both a computerized matrix of tax-exempt
securities and evaluations by its staff, in each case based on information
concerning market transactions and quotations from dealers which reflect
the bid side of the market each day. The Trust's portfolio securities are
thus valued by reference to a combination of transactions and quotations
for the same or other securities believed to be comparable in quality,
coupon, maturity, type of issue, call provisions, trading characteristics
and other features deemed to be relevant. Short-term debt securities having
a maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt
securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined on the identified cost
method. The Trust amortizes premiums and discounts on securities purchased
over the life of the respective securities. Interest income is accrued
daily.
C. Federal Income Tax Status -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
D. Dividends and Distributions to Shareholders -- The Trust records
dividends and distributions to its shareholders on the ex-dividend date.
The amount of dividends and distributions from net investment income and
net realized capital gains are determined in accordance with federal income
tax regulations which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in
nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment
income and net realized capital gains for financial reporting purposes but
not for tax purposes are reported as dividends in excess of net investment
income or distributions in excess of net realized capital gains. To the
extent they exceed net investment income and net realized capital gains for
tax purposes, they are reported as distributions of paid-in-capital.
<PAGE> 12
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
E. Organizational and Offering Expenses -- Dean Witter InterCapital Inc.
(the "Investment Manager") paid the organizational and offering expenses of
the Trust's common shares in the amounts of $55,000 and $670,362,
respectively and $453,881 in offering expenses of the Trust's preferred
shares. Organizational expenses have been reimbursed by the Trust of the
full amount thereof and are being amortized by the straight-line method
over a period not to exceed five years from the commencement of operations.
Offering expenses have been reimbursed by the Trust and were charged to
capital at the time of issuance of the Trust's respective shares.
2. INVESTMENT MANAGEMENT AGREEMENT -- Pursuant to an Investment Management
Agreement, the Trust pays its Investment Manager a management fee, calculated
weekly and payable monthly, by applying the annual rate of 0.35% to the Trust's
average weekly net assets.
Under the terms of the Agreement, the Investment Manager maintains certain
of the Trust's books and records and furnishes, at its own expense, office
space, facilities, equipment, clerical, bookkeeping and certain legal services
and pays the salaries of all personnel, including officers of the Trust who are
employees of the Investment Manager. The Investment Manager also bears the cost
of telephone services, heat, light, power and other utilities provided to the
Trust.
3. SECURITY TRANSACTION AND TRANSACTIONS WITH AFFILIATES -- The cost of
purchases and proceeds from sales of portfolio securities, excluding short-term
investments, for the year ended October 31, 1994 aggregated $17,006,250 and
$111,886,005, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At October 31, 1994, the Trust had transfer agent fees
and expenses payable of approximately $22,400.
On January 1, 1994, the Trust adopted an unfunded noncontributory defined
benefit pension plan covering all independent Trustees of the Trust who will
have served as an independent Trustee for at least five years at the time of
retirement. Benefits under this plan are based on years of service and
compensation during the last five years of service. Aggregate pension costs for
the year ended October 31, 1994, included in Trustee's fees and expenses in the
Statement of Operations amounted to $9,946. At October 31, 1994, the Trust had
an accrued pension liability of $9,848 which is included in accrued expenses in
the Statement of Assets and Liabilities.
Dean Witter Distributors Inc., the Trust's principal underwriter and an
affiliate of the Investment Manager, has informed the Trust that it received
$4,900,000 in underwriting discounts and commissions in connection with the
offering of the preferred shares.
4. PREFERRED SHARES OF BENEFICIAL INTEREST -- The Trust is authorized to issue
up to 1,000,000 non-participating preferred shares of beneficial interest having
a par value of $.01 per share, in one or more series, with rights as determined
by the Trustees, without approval of the common shareholders. On November 12,
1992, the Trust issued 1,120 shares each of Series 1 through 5 Auction Rate
Preferred Shares ("Preferred Shares") for gross total proceeds of $280,000,000.
Underwriting discounts and commissions were charged to capital at the time of
issuance. The preferred shares have a liquidation value of $50,000 per share
plus the redemption premium, if any, plus accumulated but unpaid dividends
(whether or not declared) thereon to the date of distribution. The Trust may
redeem such shares, in whole or in part, at the original purchase price of
$50,000 per share plus accumulated but unpaid dividends (whether or not
declared) thereon to the date of redemption.
<PAGE> 13
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
During the year ended October 31, 1994, the Trust purchased and retired
preferred shares as follows:
<TABLE>
<CAPTION>
Series Shares Amount
- ------ ----- ------------
<S> <C> <C>
2 328 $16,400,000
5 447 22,350,000
---- ------------
Total 775 $38,750,000
==== ============
</TABLE>
Dividends, which are cumulative, are reset through auction procedures.
<TABLE>
<CAPTION>
Ranges of
Reset Dividend
Shares* Series Rate* Date Rates**
- ------ ------ ---- --------- ---------------
<S> <C> <C> <C> <C>
1,120 1 3.69% 5/1/95 2.97% - 3.75%
792 2 2.95 11/2/94 1.84 - 3.70
1,120 3 3.39 2/1/95 2.75 - 3.39
1,120 4 3.85 7/5/95 2.93 - 3.85
673 5 3.05 11/3/94 2.85 - 3.50
</TABLE>
- ---------------
* As of October 31, 1994.
** For the year ended October 31, 1994.
Subsequent to October 31, 1994 and up through December 12, 1994, the Trust
paid dividends to Series 1, 3 and 4 at a rate of 3.69%, 3.39% and 3.85%,
respectively, and to each of the Series 2 and 5 at rates ranging from 2.875% to
3.65%, and 2.95% to 3.80%, respectively in the aggregate amount of $1,186,135.
The Trust is subject to certain restrictions relating to the preferred
shares. Failure to comply with these restrictions could preclude the Trust from
declaring any distributions to common shareholders or purchasing common shares
and/or could trigger the mandatory redemption of preferred shares at liquidation
value.
The preferred shares, which are entitled to one vote per share, generally
vote with the common shares but vote separately as a class to elect two Trustees
and on any matters affecting the rights of the preferred shares.
<PAGE> 14
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
5. COMMON SHARES OF BENEFICIAL INTEREST -- Transactions in common shares of
beneficial interest were as follows:
<TABLE>
<CAPTION>
Capital Paid
in
Excess of
Shares Par Value Par Value
----------- --------- -------------
<S> <C> <C> <C>
Balance, October 31, 1992*........................... 39,507,113 $ 395,071 $ 554,429,938
----------- --------- -------------
Offering costs and underwriting discounts associated
with the issuance of preferred shares.............. (5,379,244)
Treasury shares purchased and retired (weighted
average discount 6.04%)**.......................... (50,000) (500) (738,500)
----------- --------- -------------
Balance, October 31, 1993............................ 39,457,113 394,571 548,312,194
Treasury shares purchased and retired (weighted
average discount 8.32%)**.......................... (1,894,500) (18,945) (25,639,599)
----------- --------- -------------
Balance, October 31, 1994............................ 37,562,613 $ 375,626 $ 522,672,595
========== ========= =============
</TABLE>
- ---------------
* Net of offering costs of $670,362.
** The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS -- At October 31, 1994, the Trust had a net
capital loss carryover of approximately $747,900 which will be available through
October 31, 2002, to offset future capital gains, to the extent provided by
regulations.
7. DIVIDENDS TO COMMON SHAREHOLDERS -- The Trust has declared the following
dividends from net investment income:
<TABLE>
<CAPTION>
Amount
per
Declaration Date Share Record Date Payable Date
- ------------------ -------- ------------------ ------------------
<S> <C> <C> <C>
November 1, 1994 $ 0.0825 November 11, 1994 November 25, 1994
November 29, 1994 $ 0.0825 December 9, 1994 December 23, 1994
</TABLE>
<PAGE> 15
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
8. SELECTED QUARTERLY FINANCIAL DATA -- (unaudited)
<TABLE>
<CAPTION>
Quarters Ended*
-------------------------------------------------------------------------------------
10/31/94 7/31/94 4/30/94 1/31/94
-------------------- ------------------ -------------------- ------------------
Per Per Per Per
Total Share Total Share Total Share Total Share
--------- ------- -------- ------ --------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income... $ 13,220 $ 0.34 $ 12,842 $ 0.33 $ 13,038 $ 0.34 $ 13,568 $ 0.35
Net investment income..... 12,069 0.31 11,766 0.31 11,934 0.30 12,396 0.32
Net realized and
unrealized gain (loss)
on investments.......... (44,296) (1.11) 9,135 0.24 (77,138) (1.96) 6,453 0.16
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended*
-------------------------------------------------------------------------------------
10/31/93 7/31/93 4/30/93 1/31/93
-------------------- ------------------ -------------------- ------------------
Per Per Per Per
Total Share Total Share Total Share Total Share
--------- ------- -------- ------ --------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income... $ 13,682 $ 0.35 $ 13,417 $ 0.34 $ 13,500 $ 0.34 $ 11,879 $ 0.30
Net investment income..... 12,517 0.32 12,406 0.31 12,382 0.31 10,884 0.28
Net realized and
unrealized gain on
investments............. 25,269 0.64 14,922 0.38 25,090 0.64 33,205 0.84
</TABLE>
- ---------------
* Totals expressed in thousands of dollars.
<PAGE> 16
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected ratios and per share data for a common share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
For the
period
September
29, 1992*
For the year ended through
October 31, October
---------------------- 31,
1994** 1993** 1992**
--------- --------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 16.34 $ 13.88 $ 14.06
--------- --------- ---------
Net investment income...................... 1.24 1.22 0.04
Net realized and unrealized (loss) gain on
investments.............................. (2.67) 2.50 (0.20)
--------- --------- ---------
Total from investment operations........... (1.43) 3.72 (0.16)
--------- --------- ---------
Less dividends and other charges:
Dividends from net investment
income................................ (1.04) (0.91) --
Common share equivalent of dividends paid
to preferred shareholders............. (0.22) (0.21) --
Distributions to common shareholders..... (0.03)
Offering costs charged against capital... -- (0.14) (0.02)
--------- --------- ---------
Total dividends and other charges.......... (1.29) (1.26) (0.02)
--------- --------- ---------
Net asset value, end of period............. $ 13.62 $ 16.34 $ 13.88
========= ========= =========
Market value, end of period................ $ 11.875 $ 15.875 $ 15.125
========= ========= =========
TOTAL INVESTMENT RETURN+................... (19.30)% 11.41% 0.83%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $ 752,680 $ 924,910 $ 548,350
Ratios to average net assets of common
shareholders:
Total expenses........................... 0.75% 0.71% 0.42%(2)
Net investment income before preferred
stock dividends....................... 8.06% 7.95% 3.29%(2)
Preferred stock dividends................ 1.43% 1.35% N/A
Net investment income available to common
shareholders.......................... 6.63% 6.60% 3.29%(2)
Asset coverage on preferred shares at end
of period................................ 311% 330% N/A
Portfolio turnover rate.................... 2% 4% 4%(1)
</TABLE>
- ---------------
* Commencement of operations.
** The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total investment return is based upon the current market value on the last
day of each period reported. Dividends and distributions are assumed to be
reinvested at the prices obtained under the Trust's dividend reinvestment
plan. Total investment return does not reflect sales charges or brokerage
commissions.
(1) Not annualized.
(2) Annualized.
See Notes to Financial Statements
<PAGE> 17
INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of InterCapital Quality Municipal Income Trust
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of InterCapital Quality Municipal
Income Trust (the "Trust") at October 31, 1994, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the two years
in the period then ended and for the period September 29, 1992 (commencement of
operations) through October 31, 1992, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit 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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at October 31, 1994, by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
December 12, 1994
- ------------------------------------------------------------------------------
1994 FEDERAL TAX NOTICE (unaudited)
During the year ended October 31, 1994, the Trust paid the following per share
amounts from tax - exempt income: $1.04 to common shareholders, $1,527 to series
1 preferred shareholders, $1,231 to series 2 preferred shareholders, $1,368 to
series 3 preferred shareholders, $1,581 to series 4 preferred shareholders,
$1,412 to series 5 preferred shareholders.
- ------------------------------------------------------------------------------
<PAGE> 18
(This Page Intentionally Left Blank)
<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
INTERCAPITAL
QUALITY
MUNICIPAL
INCOME
TRUST
Annual Report
October 31, 1994
