-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AGqxoiRyEkuwp7ztfxnYIjlq2GvZEYgPfg4GbxdpnpEzxubG4ytTKguVP1mrocMJ qd3jWeeJiNd40Yic5tPQtA== 0000950136-02-001894.txt : 20020625 0000950136-02-001894.hdr.sgml : 20020625 20020625171022 ACCESSION NUMBER: 0000950136-02-001894 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020430 FILED AS OF DATE: 20020625 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST CENTRAL INDEX KEY: 0000885125 IRS NUMBER: 136993836 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06591 FILM NUMBER: 02686786 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 FORMER COMPANY: FORMER CONFORMED NAME: INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST DATE OF NAME CHANGE: 19920929 FORMER COMPANY: FORMER CONFORMED NAME: INTERCAPITAL QUALITY MUNICIPAL INVESTMENT TRUST II DATE OF NAME CHANGE: 19600201 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL INCOME TRUST DATE OF NAME CHANGE: 19981221 N-30D 1 file001.txt SEMI-ANNUAL REPORT MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST LETTER TO THE SHAREHOLDERS [] APRIL 30, 2002 DEAR SHAREHOLDER: During the six-month period ended April 30, 2002, the U.S. economy began to recover from recession and the aftermath of September 11. Consumer spending and rebuilding of business inventories led an economic rebound in the first quarter of 2002. In spite of April's six percent unemployment rate, the relatively mild recession, which began in March 2001, is widely regarded as having ended. The economic turnaround was fueled by monetary and fiscal policies, which sought to stimulate growth. The Federal Reserve Board's aggressive monetary policy cut the benchmark federal funds rate by 475 basis points in 2001 to its current level of 1.75 percent. Congress provided fiscal stimulus by passing reductions in personal tax rates as well as a number of spending initiatives after the September attacks. The Fed's actions and the Treasury Department's cessation of the 30-year bond auction led to a bond-market rally that dropped long-term interest rates to 40-year lows at the end of October. Within the fixed-income market, yields on short maturities declined the most and the yield curve steepened. In November and December, as the economy improved, the bond market reversed course and yields increased. Demand for fixed-income investments revived in 2002, because of stock-market volatility and Federal Reserve Chairman Alan Greenspan's comments that the Fed would take a go-slow approach to tightening monetary policy. MUNICIPAL MARKET CONDITIONS The yield on the 30-year insured municipal bond index, which reached a low of 5.04 percent in October 2001, increased to 5.45 percent in March. As the Fed's outlook shifted to neutral, the index yield declined to 5.30 percent in April. Throughout the period, the slope of the municipal yield curve remained positive. The yield pick up for extending maturities from one to 30 years was 335 basis points versus 240 basis points last April. The ratio of municipal yields as a percentage of U.S. Treasury yields is used as a gauge of the relative value of municipals. A declining yield ratio indicates stronger relative performance by municipals. The ratio of 30-year municipal bond yields to 30-year Treasuries jumped to 104 percent in October 2001. By the end of April the ratio had returned to 94 percent. In the 10-year-maturity range, the ratio declined from 95 percent in October to 85 percent in April. New-issue volume increased 43 percent, to $286 billion, during 2001. State and local government infrastructure and cash flow needs have contributed to the surge in underwriting activity. Refunding issues, the most interest-rate- sensitive category of underwriting, represented almost one-quarter of the total. California, Florida, New York and Texas, the four states with the heaviest issuance, accounted for 33 percent of national volume. New-issue volume for the first four months of 2002 reached $87 billion. MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST LETTER TO THE SHAREHOLDERS [|] APRIL 30, 2002 CONTINUED [Line Chart] 30-Year Bond Yields 1997-2002 Insured Municipal Yields/U.S. Insured U.S. Treasury Yields Municipal Treasury (Ratio) Yields Yields ------- ------ ------ 84.46 5.60 6.63 83.95 5.70 6.79 83.09 5.65 6.80 83.10 5.90 7.10 82.85 5.75 6.94 81.77 5.65 6.91 "1997" 82.60 5.60 6.78 83.47 5.25 6.29 82.90 5.48 6.61 84.38 5.40 6.40 86.99 5.35 6.15 87.60 5.30 6.05 86.99 5.15 5.92 88.79 5.15 5.80 87.84 5.20 5.92 88.53 5.25 5.93 89.92 5.35 5.95 89.66 5.20 5.80 "1998" 92.04 5.20 5.65 90.72 5.18 5.71 95.45 5.03 5.27 99.00 4.95 5.00 97.87 5.05 5.16 98.81 5.00 5.06 99.02 5.05 5.10 98.23 5.00 5.09 91.40 5.10 5.58 91.47 5.15 5.63 91.87 5.20 5.66 90.91 5.30 5.83 "1999" 91.78 5.47 5.96 90.98 5.55 6.10 94.88 5.75 6.06 96.69 5.85 6.05 97.89 6.03 6.16 95.39 6.00 6.29 92.13 5.97 6.48 95.22 6.18 6.49 98.37 6.04 6.14 99.83 5.82 5.83 99.16 5.91 5.96 98.34 5.91 6.01 "2000" 98.98 5.84 5.90 99.13 5.73 5.78 99.12 5.62 5.67 97.45 5.74 5.89 97.58 5.65 5.79 98.93 5.55 5.61 96.52 5.27 5.46 96.36 5.30 5.50 99.25 5.27 5.31 96.69 5.26 5.44 94.13 5.45 5.79 93.91 5.4 5.75 "2001" 92.88 5.35 5.76 93.48 5.16 5.52 94.41 5.07 5.37 95.94 5.20 5.42 103.49 5.04 4.87 97.73 5.17 5.29 97.99 5.36 5.47 96.13 5.22 5.43 94.83 5.14 5.42 93.62 5.43 5.80 94.81 5.30 5.59 "2002" PERFORMANCE During the six-month period ended April 30, 2002, the net asset value (NAV) of Morgan Stanley Quality Municipal Income Trust (IQI) decreased from $15.91 to $15.17 per share. Based on this change, plus a reinvestment of tax-free dividends totaling $0.435 per share and capital gains totaling $0.394 per share, the Trust's total NAV return was 1.04 percent. IQI's value on the New York Stock Exchange decreased from $14.48 to $13.78 per share during this period. Based on this change plus reinvestment of dividends and distributions, IQI's total market return was 0.85 percent. As of April 30, 2002, IQI's share price was at a 9.16 percent discount to its NAV. Monthly dividends for the second quarter of 2002, declared in March, were unchanged at $0.0725 per share. The Trust's level of undistributed net investment income was $0.134 per share on April 30, 2002, versus $0.112 per share six months earlier. Current earnings continued to benefit from lower short-term borrowing costs of Auction Rate Preferred Shares (ARPS). 2 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST LETTER TO THE SHAREHOLDERS [|] APRIL 30, 2002 CONTINUED PORTFOLIO STRUCTURE The Trust's total net assets of $652.1 million were diversified among 14 long-term sectors and 87 credits. At the end of April, the portfolio's average maturity was 19 years. Average duration, a measure of sensitivity to interest-rate changes, was 6.3 years. The accompanying charts provide current information on the portfolio's credit quality, maturity distribution, sector allocation and geographic concentration. Optional redemption provisions by year of the call and respective cost (book) yields are also charted. THE IMPACT OF LEVERAGING As discussed in previous shareholder reports, the total income available for distribution to common shareholders includes incremental income provided by the Trust's outstanding Auction Rate Preferred Shares. ARPS dividends reflect prevailing short-term interest rates on maturities normally ranging from one week to one year. Incremental income to common shareholders depends on two factors. The first factor is the amount of ARPS outstanding, while the second is the spread between the portfolio's cost yield and ARPS expenses (ARPS auction rate and expenses). The greater the spread and amount of ARPS outstanding, the greater the amount of incremental income available for distribution to common shareholders. The level of net investment income available for distribution to common shareholders varies with the level of short-term interest rates. ARPS leverage also increases the price volatility of common shares and has the effect of extending portfolio duration. During the six-month period, ARPS leverage contributed approximately $0.06 per share to common share earnings. IQI has five ARPS series totaling $208 million and representing 32 percent of total net assets. The yields on IQI's weekly ARPS series ranged between 1.00 percent and 2.00 percent. The yields on the series with auctions maturing in July 2002, September 2002 and January 2004 were 2.80 percent, 2.60 percent and 2.55 percent, respectively. LOOKING AHEAD The Federal Reserve Board's cautious approach toward tightening has helped stabilize the fixed-income markets. However, we believe that the economic recovery will eventually lead the Fed to raise short-term interest rates. Despite market uncertainty, we believe that the relationship between high-grade tax-exempt securities and Treasuries continues to favor municipal bonds as an attractive choice for tax-conscious investors. The Trust'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 Trust's shares. In addition, we would like to remind you that the Trustees have approved a procedure whereby the Trust 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. The Trust 3 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST LETTER TO THE SHAREHOLDERS [|] APRIL 30, 2002 CONTINUED 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. During the six-month period ended April 30, 2002 the Trust purchased and retired 460,800 shares of common stock at a weighted average market discount of 6.99 percent. We would like to take this opportunity to notify shareholders that in January 2002, Joseph R. Arcieri and Robert W. Wimmel joined James F. Willison as portfolio managers for the Trust. We appreciate your ongoing support of Morgan Stanley Quality Municipal Income Trust and look forward to continuing to serve your investment needs. Very truly yours, /s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin Charles A. Fiumefreddo Mitchell M. Merin Chairman of the Board President 4 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST LETTER TO THE SHAREHOLDERS [|] APRIL 30, 2002 CONTINUED [BAR CHART] LARGEST SECTORS AS OF APRIL 30, 2002 (% OF LONG-TERM PORTFOLIO) WATER & SEWER 21% MORTGAGE 14% TRANSPORTATION 13% GENERAL OBLIGATION 11% IDR/PCR* 9% ELECTRIC 8% HOSPITAL 7% REFUNDED 7% *INDUSTRIAL DEVELOPEMENT/POLLUTION CONTROL REVENUE. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. [PIE CHART] CREDIT RATINGS AS OF APRIL 30, 2002 (% OF LONG-TERM PORTFOLIO) Aaa or AAA 61% Aa or AA 26% A or A 7% Baa or BBB 5% Ba or BB 1% AS MEASURED BY MOODY'S INVESTORS SERVICE, INC. OR STANDARD & POOR'S CORP. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. [BAR CHART] DISTRTIBUTION BY MATURITY (% OF LONG-TERM PORTFOLIO) WEIGHTED AVERAGE MATURITY: 19 YEARS 1-5 YEARS 1.0% 5-10 YEARS 8.3% 10-20 YEARS 43.3% 20-30 YEARS 42.9% 30+ YEARS 4.5% PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. 5 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST LETTER TO THE SHAREHOLDERS [|] APRIL 30, 2002 CONTINUED [CHART] CALL AND COST (BOOK) YIELD STRUCTURE (BASED ON LONG-TERM PORTFOLIO) APRIL 30, 2002 PERCENT CALLABLE WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012+ - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- 28% 9% 3% 1% 0% 0% 5% 6% 16% 18% 14% YEARS BONDS CALLABLE COST (BOOK) YIELD* WEIGHTED AVERAGE BOOK YIELD: 5.9% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012+ - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- 6.6% 6.5% 6.5% 6.0% 6.0% 5.6% 5.7% 5.3% 5.5% * Cost or "book" yield is the annual income earned on a portfolio investment based on its original purchase price before the Trust's operating expenses. For example, the Trust is earning a book yield of 6.6% on 28% of the long-term portfolio that is callable in 2002. Portfolio structure is subject to change. 6 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST LETTER TO THE SHAREHOLDERS [|] APRIL 30, 2002 CONTINUED Geographic Summary of Investments Based on Market Value as a Percent of Total Investments Alabama ............. 1.4% Idaho .............. 1.5% Minnesota .......... 3.0% Pennsylvania ....... 1.7% Alaska .............. 1.6 Illinois ........... 4.1 Missouri ........... 4.6 Puerto Rico ........ 1.0 Arizona ............. 3.2 Indiana ............ 3.9 Montana ............ 1.0 South Carolina ..... 4.5 California .......... 0.9 Kansas ............. 0.5 Nevada ............. 0.3 South Dakota ....... 0.8 Colorado ............ 1.2 Kentucky ........... 0.8 New Jersey ......... 2.7 Texas .............. 13.6 Connecticut ......... 2.6 Maine .............. 0.5 New Mexico ......... 0.9 Virginia ........... 0.3 Florida ............. 3.6 Maryland ........... 1.4 New York ........... 6.3 Washington ......... 5.5 Georgia ............. 7.4 Massachusetts ...... 9.2 Ohio ............... 2.4 West Virginia ...... 1.6 Hawaii .............. 2.3 Michigan ........... 3.0 North Carolina ..... 0.7 ----- Total .............. 100.0% =====
7 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST PORTFOLIO OF INVESTMENTS [|] APRIL 30, 2002 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ------------------------------------------------------------------------------------------------------------------------------ TAX-EXEMPT MUNICIPAL BONDS (138.5%) GENERAL OBLIGATION (15.7%) $ 3,500 Denver School Dist No 1, Colorado, Ser 1999 (FGIC) ..................... 5.25 % 12/01/16 $ 3,650,640 Hawaii, 5,000 1992 Ser BZ .......................................................... 6.00 10/01/10 5,655,250 8,000 1992 Ser BZ .......................................................... 6.00 10/01/11 9,070,480 10,000 Chicago, Illinois, Neighborhoods Alive 21 Ser 2001 A (FGIC) ............ 5.50 01/01/36 10,097,300 4,000 Cook County, Illinois, Ser 1992 C (FGIC) ............................... 6.00 11/15/09 4,513,560 10,000 South Carolina, Highway Ser 1999 A ..................................... 4.60 05/01/19 9,563,100 2,000 Houston, Texas, Refg Ser 2000 (FSA) .................................... 5.75 03/01/18 2,127,720 5,000 Houston Independent School District, Texas, Refg Ser 1999 A (PSF) ...... 5.25 02/15/18 5,076,600 5,000 Northside Independant School District, Texas, Building & Refg Ser 2001 (PSF) .................................................. 5.00 02/15/26 4,791,600 14,790 Washington, Ser 1993 A ................................................. 5.75 10/01/17 15,250,117 - --------- ------------ 67,290 69,796,367 - --------- ------------ EDUCATIONAL FACILITIES REVENUE (2.9%) Arizona Board of Regents, University of Arizona 1,650 Ser 2001 A COPs (Ambac) .............................................. 5.50 06/01/15 1,771,869 1,740 Ser 2001 A COPs (Ambac) .............................................. 5.50 06/01/16 1,855,153 1,835 Ser 2001 A COPs (Ambac) .............................................. 5.50 06/01/17 1,941,081 940 Ser 2001 A COPs (Ambac) .............................................. 5.50 06/01/18 989,369 5,000 Massachusetts Health & Educational Facilities Authority, Brandeis University, 1998 Ser I (MBIA) ........................................ 4.75 10/01/28 4,575,400 2,000 Ohio State University, General Receipts Ser 2002 A ..................... 5.125 12/01/31 1,962,560 - --------- ------------ 13,165 13,095,432 - --------- ------------ ELECTRIC REVENUE (11.7%) 10,000 Municipal Electric Authority of Georgia, Power 1992 Ser B (Secondary MBIA) ..................................................... 6.375 01/01/16 10,465,700 10,000 Long Island Power Authority, New York, Ser 2000 A (FSA) ................ 0.00 06/01/16 5,063,500 10,000 Hamilton!, Ohio, Refg 1992 Ser A (FGIC) ................................ 6.00 10/15/23 10,321,800 5,200 San Antonio, Texas, Electric & Gas Ser 2000 A .......................... 5.75 02/01/17 5,526,612 7,000 Energy Northwest, Washington, Columbia Refg Ser 2001 C (MBIA) .......... 5.75 07/01/18 7,471,520 Grant County Public Utility District #2, Washington, 5,000 Electric Refg Ser 2001 H (FSA) ....................................... 5.375 01/01/18 5,134,300 8,220 Priest Rapids Hydro Second Ser 1992 A ................................ 5.00 01/01/23 7,852,319 - --------- ------------ 55,420 51,835,751 - --------- ------------
See Notes to Financial Statements 8 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST PORTFOLIO OF INVESTMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------------------------- HOSPITAL REVENUE (9.6%) $ 5,000 Birmingham-Carraway Special Care Facilities Financing Authority, Alabama, Carraway Methodist Health Ser 1995 A (Connie Lee) .......... 5.875% 08/15/15 $ 5,231,500 Maryland Health & Higher Educational Facilities Authority, 5,000 University of Maryland Medical Ser 2001 ............................. 5.25 07/01/28 4,754,150 1,500 University of Maryland Medical Ser 2002 ............................. 6.00 07/01/32 1,535,385 9,250 Massachusetts Health & Educational Facilities Authority, Massachusetts General Hospital Ser F (Ambac) ........................ 6.00 07/01/15 9,711,760 10,000 Missouri Health & Educational Facilities Authority, Health Midwest Ser 1992 B (MBIA) ................................................... 6.25 02/15/22 10,224,600 3,000 Lorain County, Ohio, Catholic Healthcare Partners Ser 2001 A .......... 5.625 10/01/17 3,098,160 3,000 Philadelphia Hospitals & Higher Education Facilities Authority, Pennsylvania, Chestnut Hill Hospital Ser of 1992 .................... 6.375 11/15/11 3,035,190 5,000 South Dakota Health & Educational Facilities Authority, Queen of - ------- Peace Hospital Ser 1992 (MBIA) ...................................... 6.70 07/01/17 5,136,300 ------------ 41,750 42,727,045 - ------- ------------ INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (12.9%) 6,000 California Pollution Control Financing Authority, Keller Cannon Landfill Co/Browning-Ferris Industries Inc Ser 1992 (AMT) ........... 6.875 11/01/27 5,814,480 5,000 Citrus County, Florida, Florida Power Corp Refg Ser 1992 B ............ 6.35 02/01/22 5,113,600 5,000 Michigan Strategic Fund, Detroit Edison Co Ser 2001 C (AMT) ........... 5.65 09/01/29 4,902,700 15,000 Berkeley County, South Carolina, South Carolina Electric & Gas Co Ser 1984 ............................................................ 6.50 10/01/14 15,668,400 10,000 Brazos River Authority, Texas, Houston Lighting & Power Co Ser 1992 B (MBIA) ................................................... 6.375 04/01/12 10,374,700 5,000 Sabine River Authority, Texas, TXU Electric Co Refg Ser 2001 B (AMT) 5.75 05/01/30 5,049,900 10,000 Mason County, West Virginia, Appalachian Power Co Ser J ............... 6.60 10/01/22 10,228,400 - ------- ------------ 56,000 57,152,180 - ------- ------------ MORTGAGE REVENUE - MULTI-FAMILY (7.7%) 7,000 Illinois Housing Development Authority, Ser I ......................... 6.625 09/01/12 7,183,190 14,345 Michigan Housing Development Authority, Rental 1992 Ser A (Bifurcated FSA) .................................................... 6.50 04/01/23 14,733,606 Missouri Housing Development Commission, 5,305 Federally Insured Mortgage Loans Refg Ser 11/15/92 .................... 6.50 07/01/16 5,326,432 6,740 Federally Insured Mortgage Loans Refg Ser 11/15/92 .................... 6.60 07/01/24 6,767,634 - ------- ------------ 33,390 34,010,862 - ------- ------------
See Notes to Financial Statements 9 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST PORTFOLIO OF INVESTMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------------------- MORTGAGE REVENUE - SINGLE FAMILY (12.4%) $ 16,495 Connecticut Housing Finance Authority, 1992 Ser B .................. 6.70 % 11/15/12 $ 16,965,932 3,740 Georgia Housing & Finance Authority, Home Ownership 1992 Ser C...... 6.50 12/01/11 3,814,351 7,000 Idaho Housing & Finance Association, 2000 Ser E (AMT) .............. 6.00 01/01/32 7,176,330 875 Idaho Housing Agency, 1992 Ser E (AMT) ............................. 6.75 07/01/12 893,463 2,910 Maryland Community Development Administration, 2000 Ser D (AMT) 6.25 09/01/32 3,041,503 Minnesota Housing Finance Agency, 2,320 Ser 1992 D-1 ..................................................... 6.50 01/01/17 2,383,893 5,440 Ser 1992 CD-1 (AMT) .............................................. 6.75 07/01/23 5,577,686 1,755 Missouri Housing Development Commission, Homeownership, Ser 2000 B-1 (AMT) ............................................... 6.25 03/01/31 1,824,147 6,205 Montana Board of Housing, 2000 Ser B (AMT) ......................... 6.00 12/01/29 6,344,054 7,000 New Jersey Housing Mortgage Finance Agency, Home Buyer Ser 2000 CC (AMT) (MBIA) ......................................... 5.875 10/01/31 7,127,470 - -------- ------------ 53,740 55,148,829 - -------- ------------ NURSING & HEALTH RELATED FACILITIES REVENUE (2.6%) 11,250 Minneapolis & Saint Paul Housing & Redevelopment Authority, - -------- Minnesota, Group Health Plan Inc Ser 1992 ........................ 6.90 10/15/22 11,398,838 ------------ PUBLIC FACILITIES REVENUE (4.5%) 5,000 Phoenix Industrial Development Authority, Arizona, Capital Mall LLC Ser 2000 (Ambac) ................................................. 5.50 09/15/27 5,128,450 4,000 Orange County School Board, Florida, Ser 2001 A COPs (Ambac) ....... 5.25 08/01/14 4,269,600 7,370 Indianapolis Local Public Improvement Bond Bank, Indiana, Ser 1992 D ....................................................... 6.75 02/01/20 7,757,883 3,000 Albuquerque, New Mexico, Gross Receipts Refg Ser 1999 C ............ 5.25 07/01/17 3,069,900 - -------- ------------ 19,370 20,225,833 - -------- ------------ RECREATIONAL FACILITIES REVENUE (2.3%) 10,000 Atlanta Downtown Development Authority, Georgia, Underground - -------- Atlanta Refg Ser 1992 .............................................. 6.25 10/01/16 10,348,100 ------------ TRANSPORTATION FACILITIES REVENUE (17.8%) 3,000 Alaska International Airports, Ser 2002 B (Ambac) .................. 5.25 10/01/27 2,948,220 2,000 Arizona Transportation Board, Highway Refg Ser 2002 A .............. 5.25 07/01/19 2,068,700 3,000 Phoenix Civic Improvement Corporation, Arizona, Airport Ser 2002 B (AMT) (FGIC) (WI) ................................................ 5.25 07/01/32 2,933,130 4,000 Colorado Department of Transportation, Ser 2001 A (MBIA) ........... 5.50 06/15/16 4,285,800
See Notes to Financial Statements 10 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST PORTFOLIO OF INVESTMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ----------------------------------------------------------------------------------------------------------------------------- Dade County, Florida, $ 3,000 Aviation 1992 Ser B (AMT) (MBIA) ........................................ 6.55 % 10/01/13 $ 3,104,280 5,000 Aviation 1992 Ser B (AMT) (MBIA) ........................................ 6.60 10/01/22 5,187,050 5,000 Atlanta, Georgia, Airport Ser 2000 A (FGIC) ............................... 5.50 01/01/26 5,123,950 4,000 Regional Transportation Authority, Illinois, Refg Ser 1999 (FSA) .......... 5.75 06/01/21 4,371,200 7,500 Indiana Transportation Finance Authority, Ser 2000 ........................ 5.375 12/01/25 7,543,650 3,000 Kansas, Department of Transportation, Ser 2000 A .......................... 5.75 09/01/16 3,249,390 3,400 Maine Turnpike Authority, Ser 2000 (FGIC) ................................. 5.50 07/01/30 3,470,890 6,000 St Louis, Missouri, Lambert - St. Louis Int'l Airport Ser 2001 A (MBIA) .................................................................. 5.00 07/01/26 5,795,520 4,595 Nevada Department of Business and Industry, Las Vegas Monorail, 1st Tier Ser 2000 (Ambac) ............................................... 0.00 01/01/22 1,535,787 New Jersey Transportation Trust Fund Authority, 5,000 1998 Ser A (FSA) ........................................................ 4.50 06/15/19 4,725,350 5,000 1999 Ser A .............................................................. 5.75 06/15/20 5,512,700 6,000 Triborough Bridge & Tunnel Authority, New York, Ser 2001 A ................ 5.00 01/01/32 5,714,640 Houston, Texas, 6,000 Airport Sub Lien Ser 2000 A (AMT) (FSA) ................................. 5.875 07/01/17 6,322,200 5,000 Airport Sub Lien Ser 2000 A (AMT) (FSA) ................................. 5.625 07/01/30 5,040,250 - --------- ------------ 80,495 78,932,707 - --------- ------------ WATER & SEWER REVENUE (28.5%) 4,000 Birmingham, Alabama, Water & Sewer Ser 1998 A ............................. 4.75 01/01/21 3,754,480 3,800 Phoenix Civic Improvement Corporation, Arizona, Jr Lien Water Ser 2002 ................................................................ 5.00 07/01/26 3,736,920 6,000 Tampa Bay Water Authority, Florida, Ser 1998 B (FGIC) ..................... 4.75 10/01/27 5,569,500 10,000 Augusta, Georgia, Water and Sewerage Ser 2000 (FSA) ....................... 5.25 10/01/30 10,021,600 3,500 Clayton County Water Authority, Georgia, Ser 2001 ......................... 5.125 05/01/23 3,497,760 5,000 Douglasville-Douglas County Water & Sewer Authority, Georgia, Ser 1998 (FGIC) ......................................................... 4.50 06/01/23 4,529,150 10,000 Indiana Bond Bank, Revolving Fund Ser 2001 A .............................. 5.00 02/01/23 9,759,500 5,000 Louisville & Jefferson County Metropolitan Sewer District, Kentucky, Ser 1999 A (FGIC) ....................................................... 5.75 05/15/33 5,241,850 Massachusetts Water Resources Authority, 5,000 Refg 1992 Ser B ......................................................... 5.50 11/01/15 5,155,550 10,000 1998 Ser A (FSA) ........................................................ 4.50 08/01/22 9,082,400 5,000 2000 Ser A (FGIC) ....................................................... 5.75 08/01/39 5,244,450 3,000 Rio Rancho, New Mexico, Water & Wastewater Refg Ser 1999 (Ambac) ................................................................. 5.25 05/15/19 3,038,670
See Notes to Financial Statements 11 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST PORTFOLIO OF INVESTMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------------------------- $ 20,000 New York City Municipal Water Finance Authority, New York, Ser 2001 B ......................................................... 5.00 % 06/15/26 $ 19,319,200 4,500 Charlotte, North Carolina, Water & Sewer Ser 2001 .................... 5.125 06/01/26 4,490,505 4,000 Western Carolina Regional Sewer Authority, South Carolina, Ser 2001 (FSA) ..................................................... 5.375 03/01/18 4,137,560 10,000 Austin, Texas, Water & Wastewater Refg Ser 2001 A (FSA) .............. 5.125 05/15/27 9,730,300 5,000 Houston, Texas, Water & Sewer Refg Ser 2002 (FSA) .................... 5.00 12/01/30 4,724,050 13,960 San Antonio, Texas, Water & Refg Ser 2001 (FGIC) ..................... 5.00 05/15/26 13,394,201 2,000 Fairfax County Water Authority, Virginia, Refg Ser 1992 .............. 6.00 04/01/22 2,143,840 - --------- ------------ 129,760 126,571,486 - --------- ------------ OTHER REVENUE (0.4%) 2,000 Philadelphia, Pennsylvania, Gas Works First Ser 1998 B (FSA) ......... 5.00 07/01/28 1,913,540 - --------- ------------ REFUNDED (9.5%) 10,000 Massachusetts, Ser 2000 C ............................................ 5.75 10/01/10+ 11,255,400 14,285 Massachusetts Water Pollution Abatement Trust, Ser 1998 A (ETM) ...... 4.75 08/01/18 14,188,148 10,000 New York State Medical Care Facilities Agency, The Mount Sinai Hospital - FHA Insured Mortgage 1992 Ser C** ....................... 5.75 02/15/08+ 10,849,500 5,000 Dauphin County General Authority, Pennsylvania, HAPSO Group Inc/ The Western Pennsylvania Hospital Refg 1992 Ser A (MBIA) (ETM)...... 6.25 07/01/16 5,728,500 - --------- ------------ 39,285 42,021,548 - --------- ------------ 612,915 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Cost $588,090,577)............................................. 615,178,518 - --------- ------------ SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (6.9%) 7,500 Alaska Housing Finance Corporation, Gen Hsg 1992 Ser A ............... 6.60 12/01/02+ 7,695,000 1,600 Idaho Health Facilities Authority, St Lukes Regional Medical Center Ser 2000 (FSA) (Demand 05/01/02) ................................... 1.65* 07/01/30 1,600,000 6,000 Puerto Rico Highway & Transportation Authority, Refg Ser V ........... 6.625 07/01/02+ 6,141,600 Harris County Health Facilities Development Corporation, Texas, 1,600 Methodist Hospital Ser 1994 (Demand 05/01/02) ...................... 1.70* 12/01/26 1,600,000 13,500 St Luke's Episcopal Hospital Ser 2001 B (Demand 05/01/02) .......... 1.70* 02/15/31 13,500,000 - --------- ------------ 30,200 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (Cost $30,200,209)............................. 30,536,600 - --------- ------------ $ 643,115 TOTAL INVESTMENTS (Cost $618,290,786) (a) ....................................... 145.4% 645,715,118 ========= OTHER ASSETS IN EXCESS OF LIABILITIES ........................................... 1.4 6,401,524 PREFERRED SHARES OF BENEFICIAL INTEREST ......................................... (46.8) (208,000,000) ----- ------------ NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS .................................... 100.0% $444,116,642 ===== ============
See Notes to Financial Statements 12 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST PORTFOLIO OF INVESTMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED - ------------ Note: The categories of investments are shown as a percentage of net assets applicable to common shareholders. AMT Alternative Minimum Tax. COPs Certificates of Participation. ETM Escrowed to maturity. PSF Texas Permanent School Fund Guarantee Program. WI Security purchased on a "when-issued" basis. + Prerefunded to call date shown. * Current coupon of variable rate demand obligation. ** A portion of this security has been segregated in connection with the purchase of a "when-issued" security. (a) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $29,144,235 and the aggregate gross unrealized depreciation is $1,719,903, resulting in net unrealized appreciation of $27,424,332. Bond Insurance: - --------------- Ambac Ambac Assurance Corporation. Connie Lee Connie Lee Insurance Company - a wholly owned subsidiary of Ambac Assurance Corporation. FGIC Financial Guaranty Insurance Company. FSA Financial Security Assurance Inc. MBIA Municipal Bond Investors Assurance Corporation. Geographic Summary of Investments Based on Market Value as a Percent of Net Assets Applicable to Common Shareholders Alabama ............. 2.0% Idaho ............... 2.2% Minnesota ........... 4.4% Pennsylvania ....... 2.4% Alaska .............. 2.4 Illinois ............ 5.9 Missouri ............ 6.7 Puerto Rico ........ 1.4 Arizona ............. 4.6 Indiana ............. 5.6 Montana ............. 1.4 South Carolina ..... 6.6 California .......... 1.3 Kansas .............. 0.7 Nevada .............. 0.4 South Dakota ....... 1.2 Colorado ............ 1.8 Kentucky ............ 1.2 New Jersey .......... 3.9 Texas .............. 19.7 Connecticut ......... 3.8 Maine ............... 0.8 New Mexico .......... 1.4 Virginia ........... 0.5 Florida ............. 5.2 Maryland ............ 2.1 New York ............ 9.2 Washington ......... 8.0 Georgia ............. 10.8 Massachusetts ....... 13.3 Ohio ................ 3.5 West Virginia ...... 2.3 Hawaii .............. 3.3 Michigan ............ 4.4 ----- North Carolina ...... 1.0 Total .............. 145.4% =====
See Notes to Financial Statements 13 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 2002 (UNAUDITED)
ASSETS: Investments in securities, at value (cost $618,290,786) ...................................................... $ 645,715,118 Cash ...................................................................... 20,293 Interest receivable ....................................................... 9,580,929 Prepaid expenses .......................................................... 617,085 ------------- TOTAL ASSETS ............................................................ 655,933,425 ------------- LIABILITIES: Payable for: Investments purchased ................................................... 2,897,312 Dividends to preferred shareholders ..................................... 369,342 Investment management fee ............................................... 243,057 Common shares of beneficial interest repurchased ........................ 199,263 Accrued expenses .......................................................... 107,809 ------------- TOTAL LIABILITIES ....................................................... 3,816,783 ------------- Preferred shares of beneficial interest (1,000,000 shares authorized of non-participating $.01 par value, 4,160 shares outstanding).............. 208,000,000 ------------- NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS ............................ $ 444,116,642 ============= COMPOSITION OF NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS: Common shares of beneficial interest (unlimited shares authorized of $.01 par value, 29,282,020 shares outstanding) ....................... $ 409,751,425 Net unrealized appreciation ............................................... 27,424,332 Accumulated undistributed net investment income ........................... 3,924,510 Accumulated undistributed net realized gain ............................... 3,016,375 ------------- NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS ............................ $ 444,116,642 ============= NET ASSETS VALUE PER COMMON SHARE, ($444,116,642 divided by 29,282,020 common shares outstanding)............. $15.17 ======
See Notes to Financial Statements 14 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST FINANCIAL STATEMENTS CONTINUED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2002 (UNAUDITED)
NET INVESTMENT INCOME: INTEREST INCOME ............................................... $ 18,130,070 ------------- EXPENSES Investment management fee ..................................... 1,145,114 Auction commission fees ....................................... 372,574 Transfer agent fees and expenses .............................. 59,527 Professional fees ............................................. 29,898 Auction agent fees ............................................ 19,756 Custodian fees ................................................ 15,003 Shareholder reports and notices ............................... 14,157 Registration fees ............................................. 11,090 Trustees' fees and expenses ................................... 10,800 Other ......................................................... 24,460 ------------- TOTAL EXPENSES .............................................. 1,702,379 Less: expense offset .......................................... (14,935) ------------- NET EXPENSES ................................................ 1,687,444 ------------- NET INVESTMENT INCOME ....................................... 16,442,626 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain ............................................. 3,016,401 Net change in unrealized appreciation ......................... (13,881,398) ------------- NET LOSS .................................................... (10,864,997) ------------- Dividends to preferred shareholders from net investment income (3,518,370) ------------- NET INCREASE .................................................. $ 2,059,259 =============
See Notes to Financial Statements 15 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST FINANCIAL STATEMENTS CONTINUED STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED APRIL 30, 2002 OCTOBER 31, 2001 -------------- ---------------- (unaudited) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ...................................................... $ 16,442,626 $ 35,230,882 Net realized gain .......................................................... 3,016,401 11,698,710 Net change in unrealized appreciation ...................................... (13,881,398) 10,834,159 Dividends to preferred shareholders from net investment income ............. (3,518,370) (8,079,452) ------------- ------------- NET INCREASE ............................................................. 2,059,259 49,684,299 ------------- ------------- DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM: Net investment income ...................................................... (12,842,583) (26,347,810) Net realized gain .......................................................... (11,698,701) (3,847,396) ------------- ------------- TOTAL DIVIDENDS AND DISTRIBUTIONS ........................................ (24,541,284) (30,195,206) ------------- ------------- Decrease from transactions in common shares of beneficial interest ......... (6,503,910) (14,261,185) ------------- ------------- NET INCREASE (DECREASE) .................................................. (28,985,935) 5,227,908 NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS: Beginning of period ........................................................ 473,102,577 467,874,669 ------------- ------------- END OF PERIOD (Including accumulated undistributed net investment income of $3,924,510 and $3,324,769, respectively)................................................... $ 444,116,642 $ 473,102,577 ============= =============
See Notes to Financial Statements 16 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST NOTES TO FINANCIAL STATEMENTS [|] APRIL 30, 2002 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley 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's investment objective is to provide current income which is exempt from federal income tax. The Trust was organized as a Massachusetts business trust on March 12, 1992 and commenced operations on September 29, 1992. 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. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS - Portfolio securities are valued by an outside independent pricing service approved by the Trustees. The pricing service has informed the Trust that in valuing the 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 portfolio securities are thus valued by reference to a combination of transactions and quotations for the same or other securities believed to be comparable in quality, coupon, maturity, type of issue, call provisions, trading characteristics and other features deemed to be relevant. Short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. The Trust amortizes premiums and accretes discounts 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 substantially all of its taxable and nontaxable income to its shareholders. Accordingly, no federal income tax provision is required. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - 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 17 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST NOTES TO FINANCIAL STATEMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED 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. 2. INVESTMENT MANAGEMENT AGREEMENT Pursuant to an Investment Management Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Manager") the Trust pays the Investment Manager a management fee, calculated weekly and payable monthly, by applying the annual rate of 0.35% to the Trust's weekly total net assets. 3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended April 30, 2002 aggregated $52,560,211 and $68,787,830, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager, is the Trust's transfer agent. At April 30, 2002, the Trust had transfer agent fees and expenses payable of approximately $5,000. The Trust has an unfunded noncontributory defined benefit pension plan covering all independent Trustees of the Trust who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on years of service and compensation during the last five years of service. Aggregate pension costs for the six months ended April 30, 2002 included in Trustees' fees and expenses in the Statement of Operations amounted to $3,893. At April 30, 2002, the Trust had an accrued pension liability of $47,979 which is included in accrued expenses in the Statement of Assets and Liabilities 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. The Trust has issued Series 1 through 5 Auction Rate Preferred Shares ("Preferred Shares") which 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. 18 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST NOTES TO FINANCIAL STATEMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED Dividends, which are cumulative, are reset through auction procedures.
AMOUNT IN RESET RANGE OF SERIES SHARES* THOUSANDS* RATE* DATE DIVIDEND RATES** - -------- --------- ------------ ---------- ---------- ----------------- 1 1,120 $56,000 2.60% 09/04/02 2.60% 2 400 20,000 1.10 05/02/02 1.00 - 2.00 3 1,120 56,000 2.80 07/05/02 2.80 4 1,120 56,000 2.55 01/08/04 2.55 - 2.75 5 400 20,000 1.65 05/03/02 1.10 - 1.85
- ------------ * As of April 30, 2002. ** For the six months ended April 30, 2002. Subsequent to April 30, 2002 and up through June 7, 2002, the Trust paid dividends to Series 1 through 5 at rates ranging from 1.10% to 2.80% in the aggregate amount of $819,186. 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. 5. COMMON SHARES OF BENEFICIAL INTEREST Transactions in common shares of beneficial interest were as follows:
CAPITAL PAID IN PAR EXCESS OF SHARES VALUE PAR VALUE -------------- ----------- --------------- Balance, October 31, 2000 ............................................... 30,738,920 $307,389 $ 430,205,500 Treasury shares purchased and retired (weighted average discount 8.01%)* (996,100) (9,961) (14,251,224) Reclassification due to permanent book/tax differences .................. - - 3,631 ---------- -------- ------------- Balance, October 31, 2001 ............................................... 29,742,820 297,428 415,957,907 Treasury shares purchased and retired (weighted average discount 6.99%)* (460,800) (4,608) (6,499,302) ---------- -------- ------------- Balance, April 30, 2002 ................................................. 29,282,020 $292,820 $ 409,458,605 ========== ======== =============
- ------------ * The Trustees have voted to retire the shares purchased. 19 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST NOTES TO FINANCIAL STATEMENTS [|] APRIL 30, 2002 (UNAUDITED) CONTINUED 6. DIVIDENDS TO COMMON SHAREHOLDERS On March 26, 2002, the Trust declared the following dividends from net investment income:
AMOUNT RECORD PAYABLE PER SHARE DATE DATE - -------------- -------------- -------------- $ 0.0725 May 3, 2002 May 17, 2002 $ 0.0725 June 7, 2002 June 21, 2002
7. EXPENSE OFFSET The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by the Trust. 8. RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS The Trust may invest a portion of its assets in residual interest bonds, which are inverse floating rate municipal obligations. The prices of these securities are subject to greater market fluctuations during periods of changing prevailing interest rates than are comparable fixed rate obligations. At April 30, 2002, the Trust did not hold positions in residual interest bonds. 9. CHANGE IN ACCOUNTING POLICY Effective November 1, 2001, the Trust has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, related to premiums and discounts on debt securities. The cumulative effect of this accounting change had no impact on the net assets of the Trust, but resulted in a $518,068 increase in the cost of securities and a corresponding increase to undistributed net investment income based on securities held as of October 31, 2001. The effect of this change for the six months ended April 30, 2002 was to increase net investment income by $101,979; decrease unrealized appreciation by $10,882 and decrease net realized gains by $91,097. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change. 10. CHANGE IN FINANCIAL STATEMENT CLASSIFICATION FOR PREFERRED SHARES In accordance with the provisions of EITF D-98, "Classification and Measurement of Redeemable Securities", effective for the current reporting period, the Trust has reclassified its Preferred Shares out of the composition of net assets section on the Statement of Assets and Liabilities. In addition, dividends to preferred shareholders are now classified as a component of operations on the Statement of Operations, the Statement of Changes in Net Assets and the Financial Highlights. Additionally, the categories of investments on the Portfolio of Investments are shown as a percentage of net assets applicable to common shareholders. Prior year amounts have been reclassified to conform to this period's presentation. This change has no impact on the net assets applicable to common shareholders of the Trust. 20 MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST FINANCIAL HIGHLIGHTS Selected ratios and per share data for a common share of beneficial interest outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31 MONTHS ENDED ------------------------------------------------------------ APRIL 30, 2002 2001 2000 1999 1998 1997 -------------- -------- -------- -------- -------- -------- (unaudited) SELECTED PER SHARE DATA: Net asset value, beginning of period. .......... $ 15.91 $ 15.22 $ 14.88 $ 16.26 $ 15.91 $ 15.44 -------- -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income* ........................ 0.56 1.16 1.17 1.16 1.19 1.20 Net realized and unrealized gain (loss) ....... (0.37) 0.76 0.26 (1.36) 0.34 0.51 Common share equivalent of dividends paid to preferred shareholders* ...................... (0.12) (0.27) (0.26) (0.22) (0.23) (0.23) -------- -------- -------- -------- -------- -------- Total income (loss) from investment operations . 0.07 1.65 1.17 (0.42) 1.30 1.48 -------- -------- -------- -------- -------- -------- Less dividends and distributions from: Net investment income. ........................ (0.44) (0.87) (0.93) (0.93) (0.93) (0.99) Net realized gain ............................. (0.39) (0.13) - (0.05) (0.03) (0.03) -------- -------- -------- -------- -------- -------- Total dividends and distributions .............. (0.83) (1.00) (0.93) (0.98) (0.96) (1.02) -------- -------- -------- -------- -------- -------- Anti-dilutive effect of acquiring treasury shares* ............................. 0.02 0.04 0.10 0.02 0.01 0.01 -------- -------- -------- -------- -------- -------- Net asset value, end of period ................. $ 15.17 $ 15.91 $ 15.22 $ 14.88 $ 16.26 $ 15.91 ======== ======== ======== ======== ======== ======== Market value, end of period .................... $ 13.78 $ 14.48 $ 13.313 $ 13.25 $ 15.75 $ 14.875 ======== ======== ======== ======== ======== ======== TOTAL RETURN+ .................................. 0.85%(1) 16.59% 7.51% (10.21)% 12.66% 8.84% RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS: Expenses (before expense offset) ............... 0.76%(2)(3) 0.74% 0.75%(3) 0.73% 0.71%(3) 0.70%(3) Net investment income before preferred stock dividends ..................................... 7.35%(2)(4) 7.47% 7.83% 7.32% 7.35% 7.68% Preferred stock dividends ...................... 1.57%(2) 1.71% 1.74% 1.42% 1.45% 1.47% Net investment income available to common shareholders .................................. 5.78%(2)(4) 5.76% 6.09% 5.90% 5.90% 6.21% SUPPLEMENTAL DATA: Net assets applicable to common shareholders, end of period, in thousands. .................. $444,117 $473,103 $467,875 $487,179 $542,329 $534,504 Asset coverage on preferred shares at end of period. ....................................... 313% 325% 324% 333% 360% 356% Portfolio turnover rate. ....................... 8%(1) 19% 15% 21% 2% 2%
- ------------ * The per share amounts were computed using an average number of common shares outstanding during the period. + Total 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 return does not reflect brokerage commissions. (1) Not annualized. (2) Annualized. (3) Does not reflect the effect of expense offset of 0.01%. (4) Effective November 1, 2001, the Trust has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, related to premiums and discounts on debt securities. The effect of this change for the six months ended April 30, 2002 was to increase the ratio of net investment income to average net assets by 0.05%. The Financial Highlights data presented in this table for prior periods has not been restated to reflect this change. See Notes to Financial Statements 21 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Michael E. Nugent Philip J. Purcell John L. Schroeder OFFICERS Charles A. Fiumefreddo Chairman and Chief Executive Officer Mitchell M. Merin President Barry Fink Vice President, Secretary and General Counsel James F. Willison Vice President Joseph R. Arcieri Vice President Robert W. Wimmel Vice President Thomas F. Caloia Treasurer TRANSFER AGENT Morgan Stanley Trust Haborside Financial Center - Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Trust without examination by the independent auditors and accordingly they do not express an opinion thereon. 37954 Morgan Stanley Logo [IMAGE] MORGAN STANLEY QUALITY MUNICIPAL INCOME TRUST SEMIANNUAL REPORT APRIL 30, 2002 -----END PRIVACY-ENHANCED MESSAGE-----