<PAGE> 1
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS October 31, 1995
DEAR SHAREHOLDER:
Bonds have rallied significantly since late last year. Progressive tightening of
monetary policy by the Federal Reserve Board over the 12 months through February
1995 led to slower economic growth and caused bonds to advance. The trend toward
lower long-term interest rates this year was also aided in July by a 25 basis
point reduction in the federal-funds rate (the interest rate banks charge each
other for overnight loans).
MUNICIPAL MARKET CONDITIONS
Long-term municipal bond yields declined from a high of 7.37 percent in November
1994 to 6.02 percent at the end of October 1995, as tracked by The Bond Buyer
Revenue Bond Index*. This 135 basis point decline in yield corresponded to an 11
percent price increase for callable municipal bonds with 30-year maturities.
Similarly, yields on 1-year municipal notes moved from 4.51 percent to 3.82
percent. The yield pickup for extending maturity from 1-to 30-years was 220
basis points.
Tax-exempt bonds began the year by outperforming U.S. Treasury bonds, but then
deteriorated on a relative basis. The ratio of the Revenue Bond Index yield to
the 30-year U.S. Treasury bond yield moved from 89 percent in December 1994 to
84 percent by the end of February 1995. A declining ratio means that municipal
bond prices have been stronger than U.S. Treasury prices. In the spring the
municipal market began to discount the risk of comprehensive changes in the tax
code created by flat tax rhetoric from Washington. This caused the yield ratio
to reach a high of 95 percent during the summer. Over the past 10 years, long
municipal yields have averaged 89 percent of U.S. Treasury yields.
- ---------------
*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 Investors Service, Inc., and AA+
to A- by Standard & Poor's Corp.
<PAGE> 2
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1995, continued
The municipal market continued to experience consolidation in 1995. Municipal
underwriting in the first 10 months of the year was down 16 percent from the
same period in 1994. This change followed a 44 percent drop in volume for all of
1994. The effect of lower volume and profitability was also apparent in the
decisions of several major dealers to withdraw from the municipal business.
TAX REFORM
Flat-tax advocates have generated increased publicity for their proposals and
have affected the municipal market since early 1995. Most of the discussion on
proposed tax-reform measures is based on theoretical concepts, containing broad
assumptions and lacking specific details. Basically, the various plans raise
questions about the fairness of changing from a progressive to a regressive tax
structure. Low flat-tax rate plans call for the elimination of deductions of
mortgage interest, charitable contributions, property taxes, and state and local
income taxes. Should politicians make tax reform a central issue in the 1996
elections, media coverage will expand from the financial page to the front page.
If that happens, municipal bonds could come under further pressure. For example,
when major tax reform turmoil occurred in 1986, municipal yields briefly
exceeded taxable yields.
In addition to the market risk associated with the flat-tax proposals, municipal
credits would also be negatively affected. If mortgage interest and property tax
deductions were eliminated, municipalities would experience a decline in their
property tax base. The loss of state and local income tax deductions would
increase the relative economic disadvantage that high-tax states already face.
The flat tax represents a shift in tax accountability from the federal to local
governments. Taxpayer recognition of the extent of changes under consideration
may impede the passage of comprehensive tax reform.
FUND PERFORMANCE
The net asset value (NAV) of InterCapital Quality Municipal Securities (IQM)
rose from $10.83 to $13.04 per share during the fiscal year ended October 31,
1995. Based on this NAV change plus reinvestment of tax-free dividends totaling
$0.74 per share, the Trust's total return was 29.28 percent. Over the same
period, IQM's market price on the New York Stock Exchange appreciated 14.5
percent from $9.50 to $10.875 per share. Based on this market price change and
reinvestment of tax-free dividends, the Trust's total return was 22.91 percent.
IQM began the fiscal year trading at a 12 percent discount to NAV and closed at
a 17 percent discount. Undistributed net investment income totaled $0.047 per
share on October 31, 1995 versus $0.066 per share a year ago.
<PAGE> 3
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1995, continued
PORTFOLIO STRUCTURE
On October 31, 1995, IQM's long-term portfolio was diversified among 11 specific
long-term municipal sectors and 51 credits. The three largest sectors -- general
obligation, industrial development/pollution control revenue and water & sewer
revenue bonds -- represented 42 percent of the portfolio. The average maturity
and call protection of the Trust's long-term holdings were 22 and 9 years,
respectively. Net assets exceeded $376 million.
The credit-quality ratings of the Trust's long-term portfolio are illustrated on
the right.
MOODY'S OR STANDARD & POOR'S CREDIT RATING AS OF OCTOBER 31, 1995
(% OF TOTAL LONG-TERM INVESTMENTS)
A or A 42%
Aa or AA 31%
Aaa or AAA 23%
Baa or BBB 4%
THE IMPACT OF LEVERAGING
As discussed in previous reports, the total income available for distribution to
common shareholders includes incremental income provided by Auction Rate
Preferred Share (ARPS) leverage. ARPS dividends reflect prevailing short-term
interest rates on maturities normally ranging from one week to one year.
Incremental income to common shares depends on two factors: first, the spread
between the interest earned on the long-term bonds in the established portfolio
of investments and the ARPS auction rate plus ARPS expenses; second, the amount
of ARPS outstanding. The greater the amount of ARPS outstanding, the greater the
amount of incremental income available for distribution to common shareholders.
The profitability of ARPS declined in 1994 and the first half of 1995. ARPS
yields have moved somewhat lower since the Federal Reserve Board's initial
easing in July 1995. A reduction in the amount of ARPS outstanding -- to control
the portfolio's price volatility last year -- also diminished incremental income
to common shares. Currently, $97 million in ARPS are outstanding. This
represents 26 percent of net assets.
LOOKING AHEAD
The slower pace of economic growth in 1995 and the Federal Reserve Board's
previous interest rate moves have improved bond-market expectations. The
decreasing supply of new issues, combined with
<PAGE> 4
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1995, continued
significant maturities and calls for redemption, should continue to be positive
for the municipal market. However, tax-reduction proposals are likely to
continue to receive publicity and may cloud the outlook for tax-exempt bonds.
With long-term municipal securities yielding more than 90 percent of the yield
on U.S. Treasuries, the market has already begun the process of discounting the
risk that a flat tax might eventually become law.
The Trust's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps to
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, when
appropriate, may 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. During the fiscal year ended October 31, 1995,
the Trust purchased and retired 1,247,900 shares of common stock at a weighted
average market discount of 12.29 percent. 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.
We appreciate your ongoing support of InterCapital Quality Municipal Securities
and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
- --------------------------
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 5
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 22, 1995, an annual meeting of the Trust's shareholders was held for the
purpose of voting on three separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES BY ALL SHAREHOLDERS:
<TABLE>
<S> <C>
Jack F. Bennett
For............................................................................................ 16,108,511
Withheld....................................................................................... 382,210
Michael Bozic
For............................................................................................ 16,114,058
Withheld....................................................................................... 376,663
</TABLE>
ELECTION OF TRUSTEE BY PREFERRED SHAREHOLDERS:
<TABLE>
<S> <C>
Charles A. Fiumefreddo
For............................................................................................ 1,083
Withheld....................................................................................... 10
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Edwin J. Garn, John R. Haire, Dr. Manuel H. Johnson, Paul Kolton, Michael E.
Nugent, Philip J. Purcell and John L. Schroeder.
(2) CONTINUANCE OF THE CURRENTLY EFFECTIVE INVESTMENT MANAGEMENT AGREEMENT:
<TABLE>
<S> <C>
For......................................................................................... 15,418,540
Against..................................................................................... 393,328
Abstain..................................................................................... 678,853
</TABLE>
(3) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................................................... 15,806,537
Against..................................................................................... 177,862
Abstain..................................................................................... 506,322
</TABLE>
<PAGE> 6
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (98.0%)
General Obligation (14.0%)
$ 10,000 Florida Board of Education, Cap Outlay Refg 1993 Ser D................... 5.125% 06/01/18 $ 9,310,200
5,000 De Kalb County, Georgia, Refg 1993....................................... 5.25 01/01/20 4,731,400
10,000 Washington Suburban Sanitation District, Maryland, Gen Constr
Refg 1993 Second Ser.................................................... 5.25 06/01/14 9,722,100
New York City, New York,
10,000 1994 Ser D.............................................................. 5.75 08/15/08 9,717,100
5,000 1994 Ser C.............................................................. 5.50 10/01/10 4,694,650
15,000 Seattle, Washington, Refg Ser 1993....................................... 5.65 01/01/20 14,613,150
- -------- ----------
55,000 52,788,600
- -------- ----------
Educational Facilities Revenue (7.5%)
3,500 District of Columbia, Georgetown University Ser 1993..................... 5.25 04/01/13 3,272,325
Illinois Educational Facilities Authority,
4,695 Illinois Wesleyan University Ser 1993................................... 5.70 09/01/23 4,517,388
4,955 Northwestern University Refg Ser 1993................................... 5.375 12/01/21 4,679,700
Massachusetts Health & Educational Facilities Authority,
10,000 Boston College Ser K.................................................... 5.25 06/01/18 9,371,600
3,000 Wentworth Institute of Technology Ser B (Connie Lee).................... 5.50 10/01/23 2,848,350
3,500 Pennsylvania Higher Educational Facilities Authority, Thomas Jefferson
University 1993 Ser A................................................... 5.30 11/01/15 3,334,205
- -------- ----------
29,650 28,023,568
- -------- ----------
Electric Revenue (6.6%)
5,900 South Carolina Public Service Authority, 1993 Refg Ser A (MBIA).......... 5.50 07/01/21 5,710,492
10,000 Chelan County Public Utility District #1, Washington, Hydro Refg Ser 1993
G....................................................................... 5.375 06/01/18 9,420,200
10,000 Snohomish County Public Utilities District #1, Washington, Ser 1993 B
(AMT)................................................................... 5.80 01/01/24 9,702,300
- -------- ----------
25,900 24,832,992
- -------- ----------
Hospital Revenue (8.9%)
8,000 Indiana Health & Educational Facilities Authority,
Wellborn Memorial Baptist Hospital Refg Ser 1993........................ 5.50 07/01/14 7,443,440
3,500 Maine Health & Higher Educational Facilities Authority, Ser 1993 D
(FSA)................................................................... 5.50 07/01/18 3,372,460
10,000 Missouri Health & Educational Facilities Authority,
Barnes Jewish Inc/Christian Health Services Ser 1993 A.................. 5.25 05/15/14 9,369,200
10,000 Fairfax County Industrial Development Authority, Virginia,
Inova Health System Foundation Refg Ser 1993 A.......................... 5.25 08/15/19 9,067,100
4,500 Wisconsin Health & Educational Facilities Authority, Catholic Health Corp
Ser 1993................................................................ 5.375 11/15/13 4,136,715
- -------- ----------
36,000 33,388,915
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1995, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Industrial Development/Pollution Control Revenue (14.0%)
$ 10,000 Valdez, Alaska, BP Pipeline Inc Ser 1993 B............................... 5.50 % 10/01/28 $ 9,312,200
10,000 Hawaii Department of Budget & Finance, Hawaiian Electric Co Inc Ser 1993
(AMT) (MBIA)............................................................ 5.45 11/01/23 9,439,200
4,000 Calvert County, Maryland, Baltimore Gas & Electric Co Refg Ser 1993...... 5.55 07/15/14 3,924,400
10,000 New York State Energy Research & Development Authority,
Consolidated Edison Co of New York Inc Refg Ser 1993 B.................. 5.25 08/15/20 9,109,700
5,000 Brazos River Authority, Texas, Houston Lighting & Power Co Ser 1993
(MBIA).................................................................. 5.60 12/01/17 4,937,350
5,000 Marshall County, West Virginia, Ohio Power Co Ser B (MBIA)............... 5.45 07/01/14 4,818,150
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A........... 6.90 02/01/13 10,876,800
- -------- ----------
54,000 52,417,800
- -------- ----------
Mortgage Revenue - Multi-Family (4.6%)
5,000 Illinois Housing Development Authority, 1993 Ser A....................... 5.90 07/01/12 4,957,700
13,310 Wisconsin Housing & Economic Development Authority, 1993 Ser A........... 5.55 11/01/15 12,354,875
- -------- ----------
18,310 17,312,575
- -------- ----------
Mortgage Revenue - Single Family (5.8%)
10,000 Alaska Housing Finance Corporation, 1993 First Ser....................... 5.90 12/01/33 9,548,800
3,830 Connecticut Housing Finance Authority, 1993 Subseries F-1................ 5.60 05/15/11 3,771,401
8,700 Kentucky Housing Corporation, Federally Insured or Gtd Loans 1993 Ser
B....................................................................... 5.40 07/01/14 8,430,909
- -------- ----------
22,530 21,751,110
- -------- ----------
Public Facilities Revenue (9.5%)
12,000 California Public Works Board, Correctional 1993 Ser D COPs.............. 5.375 06/01/18 10,981,440
4,000 Maine Municipal Bond Bank, 1993 Ser E.................................... 5.30 11/01/13 3,849,640
5,000 St Paul Housing & Redevelopment Authority, Minnesota, Civic Center Ser
1993.................................................................... 5.45 11/01/13 4,910,050
7,000 Kansas City School District Building Corporation, Missouri, Elementary
Ser 1993 D (FGIC)....................................................... 5.00 02/01/14 6,500,480
10,000 Regional Convention & Sports Complex Authority, Missouri, Refg Ser A
1993.................................................................... 5.60 08/15/17 9,633,800
- -------- ----------
38,000 35,875,410
- -------- ----------
Resource Recovery Revenue (2.4%)
9,000 Northeast Maryland Waste Disposal Authority, Montgomery County
- -------- Ser 1993 A (AMT)........................................................ 6.30 07/01/16 9,175,140
----------
Transportation Facilities Revenue (9.3%)
15,000 Chicago, Illinois, Chicago-O'Hare Intl Airport Refg 1993 Ser A........... 5.00 01/01/16 13,582,950
5,000 Wayne County, Michigan, Detroit Metropolitan Wayne County Airport
Sub Lien Ser 1993 C (MBIA).............................................. 5.25 12/01/13 4,807,850
4,000 Rhode Island Port Authority & Economic Development Corporation, 1993 Ser
A (AMT) (FSA)........................................................... 5.25 07/01/23 3,602,040
10,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1993 (MBIA)...... 5.00 01/01/20 9,074,700
4,175 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B........... 5.50 05/15/18 4,054,217
- -------- ----------
38,175 35,121,757
- -------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1995, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Water & Sewer Revenue (13.3%)
$ 5,000 Phoenix Civic Improvement Corporation, Arizona, Wastewater Refg Ser
1993.................................................................... 5.00 % 07/01/18 $ 4,593,050
5,000 Los Angeles County Sanitation Districts Financing Authority, California,
1993 Ser A.............................................................. 5.25 10/01/19 4,616,050
5,000 Atlanta, Georgia, Water & Sewer Ser 1993................................. 5.00 01/01/15 4,578,300
Louisville & Jefferson County Metropolitan Sewer District, Kentucky,
3,000 Ser 1993 A (MBIA)....................................................... 5.50 05/15/21 2,967,450
5,000 Ser 1993 B (MBIA)....................................................... 5.50 05/15/23 4,895,750
10,000 Massachusetts Water Resources Authority, 1993 Ser C...................... 5.25 12/01/20 9,264,800
5,000 New York City Municipal Water Finance Authority, New York, 1994 Ser B.... 5.50 06/15/19 4,734,300
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (CGIC)........... 5.50 06/15/14 9,638,400
5,000 Norfolk, Virginia, Water Ser 1993 (AMBAC)................................ 5.375 11/01/23 4,780,750
- -------- ----------
53,000 50,068,850
- -------- ----------
Other Revenue (2.1%)
8,000 New York Local Government Assistance Corporation, Ser 1993 C............. 5.50 04/01/18 7,690,960
- -------- ----------
387,565 TOTAL MUNICIPAL BONDS (Identified Cost $380,969,712)............................................. 368,447,677
- -------- -----------
SHORT-TERM MUNICIPAL OBLIGATION (0.2%)
800 Washington Health Care Facilities Authority, Sisters of Providence Ser
- -------- 1985 C (Demand 11/01/95) (Identified Cost $800,000)..................... 3.90 * 10/01/05 800,000
----------
$388,365 TOTAL INVESTMENTS (Identified Cost $381,769,712) (a).................................... 98.2% 369,247,677
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................ 1.8 6,909,898
---- ----------
NET ASSETS............................................................................... 100.0% $376,157,575
====== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate security.
(a) The aggregate cost for federal income tax purposes is $381,769,712; the aggregate gross unrealized
appreciation is $27,762 and the aggregate gross unrealized depreciation is $12,549,797, resulting in net
unrealized depreciation of $12,522,035.
</TABLE>
Bond Insurance:
<TABLE>
<C> <S>
AMBAC AMBAC Indemnity Corporation.
CGIC Capital Guaranty Insurance Company.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1995, continued
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
October 31, 1995
<TABLE>
<S> <C>
Alaska............. 5.0%
Arizona............ 1.2
California......... 4.1
Connecticut........ 1.0
District of
Columbia.......... 0.9
Florida............ 2.5
Georgia............ 2.5
Hawaii............. 2.5
Illinois........... 7.4
Indiana............ 2.0%
Kentucky........... 4.3
Maine.............. 1.9
Maryland........... 6.1
Massachusetts...... 5.7
Michigan........... 1.3
Minnesota.......... 1.3
Missouri........... 6.8
New York........... 9.5
Pennsylvania....... 3.4%
Rhode Island....... 1.0
South Carolina..... 1.5
Texas.............. 3.7
Virginia........... 4.8
Washington......... 9.2
West Virginia...... 1.3
Wisconsin.......... 7.3
---
Total.............. 98.2%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
ASSETS:
Investments in securities, at value
(identified cost $381,769,712)....................................... $369,247,677
Cash.................................................................. 62,658
Interest receivable................................................... 7,210,129
Deferred organizational expenses...................................... 20,973
Prepaid expenses...................................................... 48,551
------------
TOTAL ASSETS...................................................... 376,589,988
------------
LIABILITIES:
Payable for:
Common shares of beneficial interest purchased.................... 209,070
Investment management fee......................................... 115,037
Dividends to preferred shareholders............................... 10,932
Accrued expenses...................................................... 97,374
------------
TOTAL LIABILITIES................................................. 432,413
------------
NET ASSETS:
Preferred shares of beneficial interest (1,000,000 shares authorized
of non-participating of $.01 par value, 1,940 shares outstanding).... 97,000,000
------------
Common shares of beneficial interest (unlimited shares authorized of
$.01 par value, 21,415,213 shares outstanding)....................... 305,339,519
Net unrealized depreciation........................................... (12,522,035)
Accumulated undistributed net investment income....................... 1,000,430
Accumulated net realized loss......................................... (14,660,339)
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS...................... 279,157,575
------------
TOTAL NET ASSETS.................................................. $376,157,575
============
NET ASSET VALUE PER COMMON SHARE
($279,157,575 divided by 21,415,213 common shares outstanding)....... $13.04
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended October 31, 1995
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $21,676,428
-----------
EXPENSES:
Investment management fee.............................................. 1,266,219
Auction commission fees................................................ 254,555
Transfer agent fees and expenses....................................... 126,468
Professional fees...................................................... 109,500
Auction agent fees..................................................... 75,279
Shareholder reports and notices........................................ 55,147
Registration fees...................................................... 37,458
Trustees' fees and expenses............................................ 26,149
Custodian fees......................................................... 18,478
Organizational expenses................................................ 7,198
Other.................................................................. 46,799
-----------
TOTAL EXPENSES BEFORE EXPENSE OFFSET............................... 2,023,250
LESS: EXPENSE OFFSET............................................... (18,340)
-----------
TOTAL EXPENSES AFTER EXPENSE OFFSET................................ 2,004,910
-----------
NET INVESTMENT INCOME.............................................. 19,671,518
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss...................................................... (2,809,491)
Net change in unrealized depreciation.................................. 49,844,714
-----------
NET GAIN........................................................... 47,035,223
-----------
NET INCREASE........................................................... $66,706,741
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1995 1994
------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 19,671,518 $ 23,266,284
Net realized loss................................. (2,809,491) (11,850,848)
Net change in unrealized depreciation............. 49,844,714 (61,511,487)
------------ ------------
NET INCREASE (DECREASE)....................... 66,706,741 (50,096,051)
------------ ------------
DIVIDENDS FROM NET INVESTMENT INCOME:
Preferred......................................... (3,902,385) (4,439,878)
Common............................................ (16,270,606) (18,002,867)
------------ ------------
TOTAL......................................... (20,172,991) (22,442,745)
------------ ------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
Preferred......................................... (40,200,000) 137,200,000
Common............................................ (12,754,282) (16,066,208)
------------ ------------
TOTAL......................................... (52,954,282) 121,133,792
------------ ------------
TOTAL INCREASE (DECREASE)..................... (6,420,532) 48,594,996
NET ASSETS:
Beginning of period............................... 382,578,107 333,983,111
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $1,000,430 and $1,501,903, respectively)... $376,157,575 $382,578,107
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 13
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1995
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 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 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 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
<PAGE> 14
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued
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 EXPENSES -- Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses of the Trust's common shares in the
amount of $36,000 which have been reimbursed for the full amount thereof. Such
expenses have been deferred and are being amortized by the straight-line method
over a period not to exceed five years from the commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Trust pays 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, in addition to managing the Trust's
investments, 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, 1995 aggregated $- 0 -
and $16,743,196, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At October 31, 1995, the Trust had transfer agent fees
and expenses payable of approximately $9,100.
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 year ended October 31, 1995 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$7,391. At October 31, 1995, the Trust had an accrued pension liability of
$17,075 which is included in accrued expenses in the Statement of Assets and
Liabilities.
<PAGE> 15
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued
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. 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.
For the year ended October 31, 1995, the Trust purchased and retired preferred
shares as follows:
<TABLE>
<CAPTION>
SERIES SHARES AMOUNT
- -------- -------- -----------
<S> <C> <C>
1 104 $ 5,200,000
2 300 15,000,000
3 100 5,000,000
5 300 15,000,000
</TABLE>
Dividends, which are cumulative, are reset through auction procedures.
<TABLE>
<CAPTION>
RANGE OF
SHARES* SERIES RATE* RESET DATE DIVIDEND RATES**
- ------- ------- ----- ---------- ----------------
<S> <C> <C> <C> <C>
340 1 3.92% 11/06/95 2.88% - 5.88%
300 2 3.83 11/07/95 3.00 - 6.15
300 3 3.85 11/01/95 2.88 - 6.20
600 4 3.95 11/06/95 3.41 - 4.38
400 5 3.92 11/06/95 3.19 - 6.00
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* As of October 31, 1995.
** For the year ended October 31, 1995.
</TABLE>
Subsequent to October 31, 1995 and up through December 8, 1995, the Trust paid
dividends to each of the Series 1 through 5 at rates ranging from 3.44% to
4.05%, respectively, in the aggregate amount of $372,963.
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
<PAGE> 16
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued
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:
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR EXCESS OF
SHARES VALUE PAR VALUE
---------- -------- ------------
<S> <C> <C> <C>
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
Treasury shares purchased and retired (weighted average discount
12.29%)*............................................................... (1,247,900) (12,479) (12,741,803)
---------- -------- ------------
Balance, October 31, 1995............................................... 21,415,213 $214,152 $305,125,367
========== ======== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* The Trustees have voted to retire the shares purchased.
</TABLE>
6. FEDERAL INCOME TAX STATUS
At October 31, 1995, the Trust had a net capital loss carryover of approximately
$14,660,000 of which $11,851,000 will be available through October 31, 2002 and
$2,809,000 will be available through October 31, 2003 which may be used 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>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
October 31, 1995 $ 0.06 November 10, 1995 November 24, 1995
November 28, 1995 $ 0.06 December 8, 1995 December 22, 1995
</TABLE>
<PAGE> 17
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued
8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
10/31/95 7/31/95 4/30/95 1/31/95
------------------- ---------------- ------------------- -----------------
PER PER PER PER
TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE
-------- ------ ------ ----- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income................ $ 5,363 $ 0.25 $5,424 $0.25 $ 5,315 $ 0.24 $ 5,574 $0.25
Net investment income.................. 4,867 0.23 4,926 0.22 4,823 0.22 5,056 0.23
Net realized and unrealized gain....... 13,694 0.66 5,857 0.29 15,065 0.69 12,419 0.59
</TABLE>
<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)................................ (30,689) (1.31) 4,029 0.17 (57,675) (2.43) 10,973 0.46
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* Amounts in thousands.
</TABLE>
<PAGE> 18
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 FOR THE SEPTEMBER
YEAR YEAR 29, 1993*
ENDED ENDED THROUGH
OCTOBER OCTOBER OCTOBER
31, 31, 31,
1995** 1994**++ 1993**
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................................ $ 10.83 $14.03 $ 14.06
-------- ------ --------
Net investment income....................................................... 0.90 0.99 0.03
Net realized and unrealized gain (loss)..................................... 2.15 (3.15) (0.04)
-------- ------ --------
Total from investment operations............................................ 3.05 (2.16) (0.01)
-------- ------ --------
Less dividends from:
Net investment income.................................................... (0.74) (0.77) --
Common share equivalent of dividends paid to preferred shareholders...... (0.18) (0.19) --
-------- ------ --------
Total dividends............................................................. (0.92) (0.96) --
Anti-dilutive effect of acquiring treasury shares........................... 0.08 0.04 --
Offering costs charged against capital...................................... -- (0.12) (0.02)
-------- ------ --------
Net asset value, end of period.............................................. $ 13.04 $10.83 $ 14.03
======== ====== ========
Market value, end of period................................................. $ 10.875 $ 9.50 $ 15.125
======== ====== ========
TOTAL INVESTMENT RETURN+.................................................... 22.91% (32.98)% 0.83%(1)
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses before expense offset........................................ 0.77%(3) 0.83% 0.48%(2)
Net investment income before preferred stock dividends...................... 7.48%(3) 7.85% 2.51%(2)
Preferred stock dividends................................................... 1.48% 1.50% N/A
Net investment income available to common shareholders...................... 6.00% 6.35% 2.51%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................................... $376,158 $382,578 $333,983
Asset coverage on preferred shares at end of period......................... 388% 278% N/A
Portfolio turnover rate..................................................... -- 21% --
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* 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 are
assumed to be reinvested at the prices obtained under the Trust's dividend reinvestment plan. Total investment return does
not reflect brokerage commissions.
++ Restated for comparative purposes.
(1) Not annualized.
(2) Annualized.
(3) The above expense and net investment income ratios would have been 0.76% and 7.48%, respectively, which reflects 0.01%
effect for custody cash credits.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 19
INTERCAPITAL 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, 1995, the results of its operations for
the year then ended, and the changes in its net assets for each of the two years
in the period then ended and the financial highlights for the two years 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 at October
31, 1995 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 8, 1995
--------------------------------------------------------------------
1995 Federal Tax Notice (unaudited)
During the year ended October 31, 1995, the Trust paid the
following per share amounts from tax-exempt income: $0.74 to
common shareholders, $1,947 to Series 1 preferred
shareholders, $1,932 to Series 2 preferred shareholders,
$1,923 to Series 3 preferred shareholders, $2,046 to Series 4
preferred shareholders and $2,107 to Series 5 preferred
shareholders.
<PAGE> 20
TRUSTEES
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
DEAN WITTER
INTERCAPITAL
QUALITY
MUNICIPAL
SECURITIES
[PHOTO]
ANNUAL REPORT
OCTOBER 31, 1995
