<PAGE> 1
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
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 Securities' (NYSE symbol: IQM) 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, accelerated
mutual-fund industry 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 was also 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 $14.03 to $10.83 per share
during the fiscal year ended October 31, 1994. Based on this change and
reinvestment of tax-free dividends totaling $0.77 per share, the Trust's total
return for the fiscal year was -17.63 percent. Concurrently, the Trust's market
price on the New York Stock Exchange declined from $15.125 to $9.50 per share.
Based on this market change and reinvestment of dividends, the Trust's total
return for the fiscal year was -32.98 percent. The Trust began the fiscal year
trading at a 7.80 percent premium to NAV and closed at a 12.28 percent discount
to NAV.
PORTFOLIO STRUCTURE
As of October 31, 1994, the portfolio's long-term investments were
diversified among 12 municipal sectors and 50 credits. The three largest sectors
were industrial development/pollution control revenue, general obligation, and
water and sewer revenue bonds, representing 38 percent of net assets. The
average maturity and call protection of the Trust's long-term holdings was 22
years and 10 years, respectively. Bonds subject to the alternative minimum tax
(AMT) represented approximately 8 percent of net assets. At the end of the
period, the Trust had net assets in excess of $382 million.
- ---------------
* 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
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.............................................................. 23%
Aa or AA................................................................ 34
A or A.................................................................. 43
</TABLE>
THE IMPACT OF LEVERAGING
As reported previously, the Trust's common shares are leveraged. Leverage
was 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, 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, IQM purchased and retired $38 million in par amount of ARPS so
that $137 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, IQM had undistributed net investment income
of $0.066 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 further erode the cushion.
Declines in the dividend reserve may cause the Trust to adjust the common share
dividend.
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 1,144,000 shares of
common stock at a weighted average discount of 6.36 percent.
We appreciate your ongoing support of InterCapital Quality Municipal
Securities and look forward to continuing to serve your investment needs.
Very truly yours,
Charles A. Fiumefreddo
Chairman of the Board
<PAGE> 3
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (in Coupon Maturity
thousands) Rate Date Value
- ---------- ------ -------- ------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (88.3%)
GENERAL OBLIGATION (12.1%)
$ 10,000 Florida Board of Education, Cap Outlay Refg 1993 Ser
D.................................................... 5.125% 6/ 1/18 $ 8,044,500
5,000 De Kalb County, Georgia, Refg 1993..................... 5.25 1/ 1/20 4,081,700
10,000 Washington Suburban Sanitation District, Maryland,
Gen Constr Refg 1993 Second Ser...................... 5.25 6/ 1/14 8,430,200
New York City, New York,
10,000 1994 Ser D........................................... 5.75 8/15/08 8,887,800
5,000 1994 Ser C........................................... 5.50 10/ 1/10 4,243,800
15,000 Seattle, Washington, Refg Ser 1993..................... 5.65 1/ 1/20 12,726,150
- ---------- ------------
55,000 46,414,150
- ---------- ------------
EDUCATIONAL FACILITIES REVENUE (6.3%)
3,500 Georgetown University, District of Columbia, Ser
1993................................................. 5.25 4/ 1/13 2,886,800
Illinois Educational Facilities Authority,
4,695 Illinois Wesleyan University Ser 1993................ 5.70 9/ 1/23 3,867,835
4,955 Northwestern University Refg Ser 1993................ 5.375 12/ 1/21 3,957,410
Massachusetts Health & Educational Facilities
Authority,
10,000 Boston College Ser K................................. 5.25 6/ 1/18 8,140,300
3,000 Wentworth Institute of Technology Ser B
(Connie Lee Insured)................................. 5.50 10/ 1/23 2,435,370
3,500 Pennsylvania Higher Educational Facilities Authority,
Thomas Jefferson University 1993 Ser A............... 5.30 11/ 1/15 2,903,600
- ---------- ------------
29,650 24,191,315
- ---------- ------------
ELECTRIC REVENUE (6.4%)
5,900 South Carolina Public Service Authority, 1993 Refg Ser
A (MBIA Insured)..................................... 5.50 7/ 1/21 4,885,731
12,000 Chelan County Public Utility District #1, Washington,
Hydro Refg Ser 1993 G................................ 5.375 6/ 1/18 9,692,160
12,000 Snohomish County Public Utilities District #1,
Washington, Ser 1993 B (AMT)......................... 5.80 1/ 1/24 9,974,040
- ---------- ------------
29,900 24,551,931
- ---------- ------------
HOSPITAL REVENUE (7.8%)
8,000 Indiana Health & Educational Facilities Authority,
Wellborn Memorial Baptist Hospital Refg Ser 1993..... 5.50 7/ 1/14 6,630,880
3,980 Maine Health & Higher Educational Facilities Authority,
Ser 1993 D (FSA Insured)............................. 5.50 7/ 1/18 3,270,207
10,000 Missouri Health & Educational Facilities Authority,
Barnes Jewish Inc/Christian Health Services Ser 1993
A.................................................... 5.25 5/15/14 8,299,200
10,000 Fairfax County Industrial Development Authority,
Virginia, Inova Health System Foundation Refg Ser
1993 A............................................... 5.25 8/15/19 7,807,000
4,500 Wisconsin Health & Educational Facilities Authority,
Catholic Health Corp Ser 1993........................ 5.375 11/15/13 3,691,845
- ---------- ------------
36,480 29,699,132
- ---------- ------------
</TABLE>
<PAGE> 4
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (in Coupon Maturity
thousands) Rate Date Value
- ---------- ------ -------- ------------
<C> <S> <C> <C> <C>
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (14.2%)
$ 10,000 Valdez, Alaska, BP Pipeline Inc Ser 1993 B............. 5.50 % 10/ 1/28 $ 7,988,900
10,000 Hawaii Department of Budget & Finance, Hawaiian
Electric Co Inc Ser 1993 (AMT) (MBIA Insured)........ 5.45 11/ 1/23 8,138,900
5,000 Petersburg, Indiana, Indianapolis Power & Light Co Ser
1993 B............................................... 5.40 8/ 1/17 4,080,650
4,000 Calvert County, Maryland, Baltimore Gas & Electric Co
Refg Ser 1993........................................ 5.55 7/15/14 3,441,720
12,000 New York State Energy Research & Development Authority,
Consolidated Edison Co of New York Inc Refg Ser 1993
B.................................................... 5.25 8/15/20 9,471,240
5,000 Brazos River Authority, Texas, Houston Lighting & Power Co
Ser 1993 (MBIA Insured).............................. 5.60 12/ 1/17 4,295,200
7,750 Marshall County, West Virginia, Ohio Power Co Ser B
(MBIA Insured)....................................... 5.45 7/ 1/14 6,527,050
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser
1993 A............................................... 6.90 2/ 1/13 10,183,900
- ---------- ------------
63,750 54,127,560
- ---------- ------------
MORTGAGE REVENUE - MULTI-FAMILY (4.1%)
5,000 Illinois Housing Development Authority, 1993 Ser A..... 5.90 7/ 1/12 4,504,900
13,310 Wisconsin Housing & Economic Development Authority,
1993 Ser A........................................... 5.55 11/ 1/15 11,364,344
- ---------- ------------
18,310 15,869,244
- ---------- ------------
MORTGAGE REVENUE - SINGLE FAMILY (5.0%)
10,000 Alaska Housing Finance Corporation, Insured 1993 First Ser 5.90 12/ 1/33 8,363,000
3,830 Connecticut Housing Finance Authority, 1993 Subseries
F-1.................................................. 5.60 5/15/11 3,447,804
8,700 Kentucky Housing Corporation, Federally Insured or
Guaranteed Loans 1993 Ser B.......................... 5.40 7/ 1/14 7,430,409
- ---------- ------------
22,530 19,241,213
- ---------- ------------
PUBLIC FACILITIES REVENUE (8.6%)
12,000 California Public Works Board, Correctional 1993 Ser
D COPs .............................................. 5.375 6/ 1/18 9,519,120
4,000 Maine Municipal Bond Bank, 1993 Ser E.................. 5.30 11/ 1/13 3,302,320
5,000 St Paul Housing & Redevelopment Authority, Minnesota,
Civic Center Ser 1993................................ 5.45 11/ 1/13 4,285,700
7,000 Kansas City School District Building Corporation,
Missouri, Elementary Ser 1993 D (FGIC Insured)....... 5.00 2/ 1/14 5,702,620
Regional Convention & Sports Complex Authority,
Missouri,
2,000 Refg Ser B 1993...................................... 5.50 8/15/13 1,661,380
10,000 Refg Ser A 1993...................................... 5.60 8/15/17 8,485,400
- ---------- ------------
40,000 32,956,540
- ---------- ------------
</TABLE>
<PAGE> 5
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1994 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (in Coupon Maturity
thousands) Rate Date Value
- ---------- ------ -------- ------------
<C> <S> <C> <C> <C>
RESOURCE RECOVERY REVENUE (2.1%)
$ 9,000 Northeast Maryland Waste Disposal Authority, Montgomery
- ---------- County Ser 1993 A (AMT).............................. 6.30 % 7/ 1/16 $ 8,180,550
------------
TRANSPORTATION FACILITIES REVENUE (7.9%)
15,000 Chicago, Illinois, Chicago-O'Hare Intl Airport Refg
1993 Ser A........................................... 5.00 1/ 1/16 11,614,500
5,000 Wayne County, Michigan, Detroit Metropolitan Wayne
County Airport Sub Lien Ser 1993 C (MBIA Insured).... 5.25 12/ 1/13 4,159,100
4,000 Rhode Island Port Authority & Economic Development
Corporation, TF Green State Airport 1993 Ser A (AMT)
(FSA Insured)........................................ 5.25 7/ 1/23 3,094,240
10,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser
1993 (MBIA Insured).................................. 5.00 1/ 1/20 7,714,900
4,175 Virginia Transportation Board, US Route 58 Corridor Ser
1993 B............................................... 5.50 5/15/18 3,554,887
- ---------- ------------
38,175 30,137,627
- ---------- ------------
WATER & SEWER REVENUE (11.6%)
6,500 Phoenix Civic Improvement Corporation, Arizona,
Wastewater Refg Ser 1993............................. 5.00 7/ 1/18 5,049,850
5,000 Los Angeles County Sanitation Districts Financing
Authority, California, 1993 Ser A.................... 5.25 10/ 1/19 3,989,450
5,000 Atlanta, Georgia, Water & Sewer Ser 1993............... 5.00 1/ 1/15 4,019,250
Louisville & Jefferson County Metropolitan Sewer
District, Kentucky,
3,000 Ser 1993 A (MBIA Insured)............................ 5.50 5/15/21 2,507,490
5,000 Ser 1993 B (MBIA Insured)............................ 5.50 5/15/23 4,158,350
10,000 Massachusetts Water Resources Authority, 1993 Ser C.... 5.25 12/ 1/20 7,964,500
5,000 New York City Municipal Water Finance Authority, New York,
1994 Ser B........................................... 5.50 6/15/19 4,109,700
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993
(CGIC Insured)....................................... 5.50 6/15/14 8,524,900
5,000 Norfolk, Virginia, Water Ser 1993 (AMBAC Insured)...... 5.375 11/ 1/23 4,044,000
- ---------- ------------
54,500 44,367,490
- ---------- ------------
OTHER REVENUE (2.2%)
10,000 New York Local Government Assistance Corporation, Ser
- ---------- 1993 C............................................... 5.50 4/ 1/18 8,354,100
------------
407,295 TOTAL MUNICIPAL BONDS (IDENTIFIED COST $400,457,601)............. 338,090,852
- ---------- ------------
</TABLE>
<PAGE> 6
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
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 OBLIGATIONS (7.3%)
$ 14,800 Louisiana Offshore Terminal Authority, LOOP Inc Ser 1992 A
(Tender 11/1/94)..................................... 3.60 %* 9/ 1/08 $ 14,800,000
13,000 West Side Calhoun County Development Corporation,
- ---------- Texas, SOHIO Chem Co / BP - North America Ser 1985
(Tender 11/1/94)..................................... 3.40 * 12/ 1/15 13,000,000
------------
27,800 TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS
- ---------- (IDENTIFIED COST $27,800,000).................................. 27,800,000
------------
$435,095 TOTAL INVESTMENTS (IDENTIFIED COST $428,257,601) (a)............. 95.6% 365,890,852
==========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................... 4.4 16,687,255
----- ------------
NET ASSETS....................................................... 100.0% $382,578,107
===== ============
</TABLE>
- ---------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Variable or floating rate securities. Coupon rate shown reflects current
rate.
(a) The aggregate cost for federal income tax purposes is $428,257,601; the
aggregate gross and net unrealized depreciation is $62,366,749.
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............. 4.3%
Arizona............ 1.3
California......... 3.5
Connecticut........ 0.9
District of
Columbia......... 0.8
Florida............ 2.1
Georgia............ 2.1
Hawaii............. 2.1%
Illinois........... 6.3
Indiana............ 2.8
Kentucky........... 3.7
Louisiana.......... 3.9
Maryland........... 5.2
Massachusetts...... 4.8
Maine.............. 1.7%
Michigan........... 1.1
Minnesota.......... 1.1
Missouri........... 6.3
New York........... 9.2
Pennsylvania....... 3.0
Rhode Island....... 0.8
South Carolina..... 1.3%
Texas.............. 6.5
Virginia........... 4.0
Washington......... 8.5
Wisconsin.......... 6.6
West Virginia...... 1.7
----
Total.............. 95.6%
====
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 7
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1994
- -------------------------------------------
ASSET:
Investments in securities, at value
(identified cost $428,257,601) (Note 1).. $ 365,890,852
Cash....................................... 158,585
Receivable for:
Investments sold......................... 10,265,697
Interest................................. 7,621,773
Deferred organizational expenses (Note 1).. 28,171
Prepaid expenses........................... 40,652
-------------
TOTAL ASSETS......................... 384,005,730
-------------
LIABILITIES:
Payable for:
Shares of beneficial interest purchased:
Preferred.............................. 850,000
Common................................. 373,640
Investment management fee (Note 2)....... 121,599
Accrued expenses (Note 3).................. 82,384
-------------
TOTAL LIABILITIES.................... 1,427,623
-------------
NET ASSETS:
Preferred shares of beneficial interest
(1,000,000 shares authorized of non-
participating $.01 par value, 2,744
shares outstanding) (Note 4)............. 137,200,000
-------------
Common shares of beneficial interest
(unlimited shares authorized of $.01
par value, 22,663,113 shares outstanding)
(Note 5)................................. 318,093,801
Unrealized depreciation on investments..... (62,366,749)
Accumulated undistributed net investment
income................................... 1,501,903
Accumulated net realized loss on
investments.............................. (11,850,848)
-------------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS..................... 245,378,107
-------------
TOTAL NET ASSETS................... $ 382,578,107
=============
NET ASSET VALUE PER COMMON SHARE,
($245,378,107 divided by 22,663,113
common shares outstanding)................ $10.83
======
STATEMENT OF OPERATIONS
For the year ended October 31, 1994
- -------------------------------------------
INVESTMENT INCOME:
INTEREST INCOME.......................... $ 25,716,909
-------------
EXPENSES
Investment management fee (Note 2)..... 1,599,422
Auction commission fees................ 335,274
Professional fees...................... 158,283
Transfer agent fees and expenses
(Note 3)............................. 128,769
Auction agent fees..................... 80,000
Shareholder reports and notices........ 56,148
Registration fees...................... 38,149
Trustees' fees and expenses (Note 3)... 30,033
Organizational expenses (Note 1)....... 7,198
Other.................................. 17,349
-------------
TOTAL EXPENSES..................... 2,450,625
-------------
NET INVESTMENT INCOME............ 23,266,284
-------------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (Note 1):
Net realized loss on investments....... (11,850,848)
Net change in unrealized depreciation
on investments....................... (61,511,487)
-------------
NET LOSS ON INVESTMENTS............ (73,362,335)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS...... $ (50,096,051)
=============
</TABLE>
See Notes to Financial Statements
<PAGE> 8
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
period
September 29,
For the year 1993 through
ended October 31,
October 31, 1993
1994 (Note 1)
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income...................................................... $ 23,266,284 $ 678,364
Net realized loss on investments........................................... (11,850,848) --
Net change in unrealized depreciation on investments....................... (61,511,487) (855,262)
------------- -------------
Net decrease in net assets resulting from operations................... (50,096,051) (176,898)
------------- -------------
Dividends to preferred shareholders from net investment income............... (4,439,878) --
Dividends to common shareholders from net investment income.................. (18,002,867) --
------------- -------------
Total dividends........................................................ (22,442,745) --
------------- -------------
Net increase (decrease) from transactions in shares of beneficial interest
(Notes 4 & 5):
Common..................................................................... (16,066,208) 334,060,000
Preferred.................................................................. 137,200,000 --
------------- -------------
Total transactions..................................................... 121,133,792 334,060,000
------------- -------------
Total increase......................................................... 48,594,996 333,883,102
NET ASSETS:
Beginning of period.......................................................... 333,983,111 100,009
------------- -------------
END OF PERIOD (including undistributed net investment income of $1,501,903
and $678,364, respectively)................................................. $ 382,578,107 $ 333,983,111
============= =============
</TABLE>
See Notes to Financial Statements
<PAGE> 9
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- InterCapital Quality Municipal
Securities (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 3, 1993 and had
no operations other than those relating to organizational matters and the
issuance of 7,113 common shares of beneficial interest to Dean Witter
InterCapital Inc. (the "Investment Manager") for $100,009. The Trust commenced
operations on September 29, 1993.
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.
E. Organizational and Offering Expenses -- The Investment Manager paid the
organizational and offering expenses of the Trust's common shares in the
amounts of $36,000 and $537,034,
<PAGE> 10
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
respectively, and $332,829 in offering expenses of the Trust's preferred
shares. The organizational expenses have been reimbursed by the Trust for
the full amount thereof. Such expenses 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 TRANSACTIONS 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 $292,298,260 and
$85,022,159, 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 $12,800.
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 Trustees' fees and expenses in the
Statement of Operations amounted to $9,946. At October 31, 1994, the Trust had
an accrued pension liability of $9,920 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
$2,625,000 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 16,
1993, the Trust issued 3,500 shares of Auction Rate Preferred Shares ("Preferred
Shares") consisting of 700 shares each of Series 1 through 5 for gross total
proceeds of $175,000,000. 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> 11
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
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>
1 256 $12,800,000
2 100 5,000,000
3 300 15,000,000
4 100 5,000,000
---- -----------
Total 756 $37,800,000
==== ===========
</TABLE>
Dividends, which are cumulative, are reset through auction procedures.
<TABLE>
<CAPTION>
Reset Range of
Shares* Series Rate* Date Dividend Rates**
---- ------- ------- -------- -----------------
<S> <C> <C> <C> <C>
444 1 3.00 % 11/7/94 1.00 % - 3.47 %
600 2 3.233 11/1/94 2.00 - 3.39
400 3 3.33 11/2/94 1.84 - 3.625
600 4 3.41 2/6/95 2.699 - 3.41
700 5 3.624 11/7/94 2.90 - 3.624
</TABLE>
- ---------------
* As of October 31, 1994.
** For the period ended October 31, 1994.
Subsequent to October 31, 1994 and up through December 12, 1994, the Trust
paid dividends to each of the Series 1, 2, 3, and 5 at rates ranging from 2.875%
to 3.05%, 3.00% to 3.80%, 2.875% to 3.59% and 3.19% to 3.803%, respectively, and
Series 4 at a rate of 3.41%, in the aggregate amount of $558,595.
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> 12
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
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 (Note 1)................................... 7,113 $ 71 $ 99,938
Shares issued at close of public offering on
September 29, 1993*.............................. 21,000,000 210,000 294,482,000
Shares issued on October 12, 1993 and October 27,
1993 to cover over-allotment..................... 2,800,000 28,000 39,340,000
----------- --------- -------------
Balance, October 31, 1993.......................... 23,807,113 238,071 333,921,938
Adjustment to estimated offering costs associated
with the initial public offering of the common
shares........................................... 30,966
Offering costs and underwriting discounts
associated with the issuance of preferred
shares........................................... (2,957,829)
Treasury shares purchased and retired (weighted
average discount 6.36%)**........................ (1,144,000) (11,440) (13,127,905)
----------- --------- -------------
Balance, October 31, 1994.......................... 22,663,113 $ 226,631 $ 317,867,170
========== ========= =============
</TABLE>
- ---------------
* Net of estimated offering costs of $568,000.
** 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 $11,851,000 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 $0.07 November 11, 1994 November 25, 1994
November 29, 1994 $0.07 December 9, 1994 December 23, 1994
</TABLE>
<PAGE> 13
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
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..... $ 6,554 $ 0.28 $ 6,635 $ 0.28 $ 6,744 $ 0.29 $ 5,784 $ 0.24
Net investment income....... 5,902 0.25 6,025 0.26 6,121 0.26 5,218 0.22
Net realized and unrealized
gain (loss) on
investments............... (30,689) (1.31) 4,029 0.17 (57,675) (2.43) 10,973 0.46
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended*
----------------
10/31/93**
----------------
Per
Total Share
------ -------
<S> <C> <C>
Total investment income..................................................... $ 809 $ 0.03
Net investment income....................................................... 678 0.03
Unrealized loss on investments.............................................. (855) (0.04)
</TABLE>
- ---------------
* Totals expressed in thousands of dollars.
** For the period September 29, 1993 (commencement of operations) through
October 31, 1993.
<PAGE> 14
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected ratios and per share data for a common share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
For the
period
For the September
year 29, 1993*
ended through
October October
31, 31,
1994** 1993**
--------- ---------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 14.03 $ 14.06
--------- ---------
Net investment income.................................. 0.99 0.03
Net realized and unrealized loss on investments........ (3.11) (0.04)
--------- ---------
Total from investment operations....................... (2.12) (0.01)
--------- ---------
Less dividends and other charges:
Dividends from net investment income................. (0.77) --
Common share equivalent of dividends paid to
preferred shareholders............................ (0.19) --
Offering costs charged against capital............... (0.12) (0.02)
--------- ---------
Total dividends and other charges...................... (1.08) (0.02)
--------- ---------
Net asset value, end of period......................... $ 10.83 $ 14.03
========= =========
Market value, end of period............................ $ 9.50 $ 15.125
========= =========
TOTAL INVESTMENT RETURN+............................... (32.98)% 0.83%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $ 382,578 $ 333,983
Ratios to average net assets of common shareholders:
Total expenses....................................... 0.83% 0.48%(2)
Net investment income before preferred stock
dividends......................................... 7.85% 2.51%(2)
Preferred stock dividends............................ 1.50% N/A
Net investment income available to common
shareholders...................................... 6.35% 2.51%(2)
Asset coverage on preferred shares at end of period.... 278% N/A
Portfolio turnover rate................................ 21% 0%(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> 15
INTERCAPTIAL QUALITY MUNICIPAL SECURITIES
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of InterCapital Quality Municipal Securities
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
Securities (the "Trust") at October 31, 1994, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for the year then ended and for the period September 29, 1993
(commencement of operations) through October 31, 1993, 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: $0.77 to common shareholders, $1,206
to series 1 preferred shareholders, $1,221 to series 2 preferred
shareholders, $1,221 to series 3 preferred shareholders, $1,376 to series
4 preferred shareholders, and $1,420 to series 5 preferred shareholders.
- ------------------------------------------------------------------------------
<PAGE> 16
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
SECURITIES
Annual Report
October 31, 1994
