<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1996
Two World Trade Center, New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of InterCapital
Quality Municipal Securities (IQM) for the fiscal year ended October 31, 1996.
Stronger economic growth and the potential threat of inflation shifted the tone
of the fixed-income markets from bullish to bearish in early 1996. This change
in market psychology was confirmed in March by a surprisingly large increase in
payroll employment. The rise in interest rates between February and July may be
attributed to market weakness on the days that strong monthly employment
figures were reported. The bond market sporadically pushed long-term yields
higher, anticipating that the Federal Reserve Board might raise the
federal-funds rate. However, with slower growth in employment and overall
economic activity between August and October, the central bank left monetary
policy unchanged. As a result, by the end of October the fixed-income markets
had regained an optimistic outlook and rallied to levels not seen since
February.
MUNICIPAL MARKET CONDITIONS
Between February and July, 30-year insured revenue bond yields rose 75 basis
points from 5.40 percent to reach 6.15 percent in April and again in mid-June.
Subsequently, demand for municipal bonds improved and followed the trend of
U.S. Treasury securities toward lower yields. Insured bond yields reached 5.60
percent by the end of October. One-year municipal note yields declined
marginally from 3.80 percent to 3.70 percent over the past 12 months. In
October, the yield curve pickup for extending maturities from 1 to 30 years was
190 basis points.
The ratio of insured revenue bond yields to 30-year U.S. Treasury yields, moved
from 91 percent to 84 percent over the course of the fiscal year. A declining
ratio means that municipal bond prices outperformed U.S. Treasury prices. The
relative improvement in municipals occurred as flat tax proposals failed to
gain public support.
The municipal market also benefited from steady demand. In addition to regular
maturities and calls for redemption this year, it has been estimated
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1996, continued
that investors also faced the retirement of over $60 billion of debt that has
been previously refinanced. On the supply side, new issues increased 20 percent
to $147 billion over the calendar year to date.
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
(The chart below represents information which appears as a
graphic in the printed report)
A pie chart reflecting the credit quality of the portfolio ratings of
the Five Largest Sectors as of October 31, 1996.
SECTORS PERCENT
------- -------
All others 39%
General Obligation 15%
Water & Sewer 14%
IDR/PCR* 12%
Mortgage 11%
Hospital 9%
*Industrial Development/Pollution Control Revenue.
CREDIT RATINGS PERCENT
-------------- -------
A or A 40%
Aa or AA 32%
Aaa or AAA 24%
Baa or BBB 4%
PERFORMANCE
The Trust's net asset value (NAV) increased from $13.04 to $13.44 per share
during the fiscal year ended October 31, 1996. Based on this NAV change plus
reinvestment of tax-free dividends totaling $0.72 per share, the Trust's total
return was 9.98 percent. Over the same period, IQM's market price on the New
York Stock Exchange increased from $10.875 to $11.25 per share. Based on this
market price change and reinvestment of tax-free dividends, the Trust's total
return was 10.39 percent.
IQM began the fiscal year trading at a 17 percent discount to NAV and ended the
year trading at a 16 percent discount. Undistributed net investment income
available for dividends improved to $0.077 per share versus $0.047 per share a
year ago.
PORTFOLIO STRUCTURE
On October 31, 1996, the Trust's net assets of $365 million were diversified
among 13 long-term municipal sectors and 51 credits. The average maturity and
call protection of IQM's long-term portfolio were 21 and 8 years, respectively.
Throughout the fiscal year, high credit quality was maintained with 56 percent
of its long-term holdings rated double or triple "A."
THE IMPACT OF LEVERAGING
As discussed in previous reports, the total income available for distribution
to common shareholders includes incremental income provided by the Trust's
outstanding Auction Rate
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1996, continued
Preferred Shares (ARPS). 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
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.
Weekly ARPS yields ranged between 2.99 and 5.375 percent during the fiscal
year. Leverage contributed approximately $0.07 per share to common share
earnings during the fiscal year. Five ARPS series totaling $97 million and
representing 27 percent of net assets was outstanding.
LOOKING AHEAD
The balance between the supply of new issues and demand created by maturities
is expected to remain positive for the municipal market. Long-term insured
municipal securities currently yield 84 percent of U.S. Treasury securities and
may be expected to move in tandem with the Treasury market. Although municipal
performance relative to U.S. Treasury securities has improved, tax-exempts
could again be affected by market uncertainty if new tax reduction proposals
were to resurface.
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. Over the past fiscal year IQM purchased and
retired 1,486,100 shares of common stock at a weighted average market discount
of 15.38 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>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 27, 1996, 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:
Dr. Manuel H. Johnson
For ......................................................... 13,300,591
Withheld ................................................... 546,494
John L. Schroeder
For ......................................................... 13,298,541
Withheld ................................................... 548,544
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire, Michael
E. Nugent and Philip J. Purcell.
(2) CONTINUANCE OF THE CURRENTLY EFFECTIVE INVESTMENT MANAGEMENT AGREEMENT
WITH DEAN WITTER INTERCAPITAL INC.:
For ......................................................... 13,237,577
Against .................................................... 379,790
Abstain .................................................... 229,718
(3) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
For ......................................................... 13,102,890
Against .................................................... 587,986
Abstain .................................................... 156,209
In addition, a shareholder proposal to require the Trust to convert to an
open-end investment company failed to obtain the necessary quorum of a majority
of each of the common shares and preferred shares outstanding in order to be
presented at the meeting.
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.9%)
General Obligation (14.6%)
$10,000 Florida Board of Education, Capital Outlay Refg 1993 Ser D ..... 5.125% 06/01/18 $ 9,361,300
5,000 De Kalb County, Georgia, Refg 1993 ............................. 5.25 01/01/20 4,786,550
10,000 Washington Suburban Sanitation District, Maryland, Gen Constr
Refg 1993
Second Ser .................................................... 5.25 06/01/14 9,852,900
New York City, New York,
10,000 1994 Ser D .................................................... 5.75 08/15/08 9,847,800
5,000 1994 Ser C .................................................... 5.50 10/01/10 4,739,000
15,000 Seattle, Washington, Refg Ser 1993 ............................. 5.65 01/01/20 14,751,450
- ----------- --------------
55,000 53,339,000
- ----------- --------------
Educational Facilities Revenue (7.8%)
3,500 District of Columbia, Georgetown University Ser 1993 ........... 5.25 04/01/13 3,413,410
Illinois Educational Facilities Authority,
4,695 Illinois Wesleyan University Ser 1993 ......................... 5.70 09/01/23 4,587,391
4,955 Northwestern University Refg Ser 1993 ......................... 5.375 12/01/21 4,665,727
Massachusetts Health & Educational Facilities Authority,
10,000 Boston College Ser K .......................................... 5.25 06/01/18 9,624,800
3,000 Wentworth Institute of Technology Ser B (Connie Lee) .......... 5.50 10/01/23 2,814,810
3,500 Pennsylvania Higher Educational Facilities Authority, Thomas
Jefferson University 1993 Ser A ............................... 5.30 11/01/15 3,350,550
- ----------- --------------
29,650 28,456,688
- ----------- --------------
Electric Revenue (6.9%)
5,900 South Carolina Public Service Authority, 1993 Refg Ser A (MBIA) 5.50 07/01/21 5,698,810
10,000 Chelan County Public Utility District #1, Washington, Hydro Refg
Ser 1993 G .................................................... 5.375 06/01/18 9,646,900
10,000 Snohomish County Public Utilities District #1, Washington, Ser
1993 B (AMT) .................................................. 5.80 01/01/24 9,732,600
- ----------- --------------
25,900 25,078,310
- ----------- --------------
Hospital Revenue (9.0%)
8,000 Indiana Health & Educational Facilities Authority, Wellborn
Memorial Baptist Hospital Refg Ser 1993 ....................... 5.50 07/01/14 7,710,560
3,500 Maine Health & Higher Educational Facilities Authority, Ser 1993
D (FSA) ....................................................... 5.50 07/01/18 3,392,095
10,000 Missouri Health & Educational Facilities Authority, Barnes
Jewish Inc/ Christian Health Services Ser 1993 A .............. 5.25 05/15/14 9,558,200
10,000 Fairfax County Industrial Development Authority, Virginia, Inova
Health System Foundation Refg Ser 1993 A ...................... 5.25 08/15/19 9,392,600
3,000 Wisconsin Health & Educational Facilities Authority, Catholic
Health Corp Ser 1993 .......................................... 5.375 11/15/13 2,853,720
- ----------- --------------
34,500 32,907,175
- ----------- --------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
Industrial Development/Pollution Control Revenue (12.0%)
$10,000 Valdez, Alaska, BP Pipeline Inc Ser 1993 B ..................... 5.50 % 10/01/28 $ 9,516,900
10,000 Hawaii Department of Budget & Finance, Hawaiian Electric Co Inc
Ser 1993 (AMT) (MBIA) ......................................... 5.45 11/01/23 9,486,300
4,000 Calvert County, Maryland, Baltimore Gas & Electric Co Refg Ser
1993 .......................................................... 5.55 07/15/14 3,937,640
5,000 Brazos River Authority, Texas, Houston Lighting & Power Co Ser
1993 (MBIA) ................................................... 5.60 12/01/17 4,932,800
5,000 Marshall County, West Virginia, Ohio Power Co Ser B (MBIA) ..... 5.45 07/01/14 4,982,750
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A . 6.90 02/01/13 10,966,500
- ----------- --------------
44,000 43,822,890
- ----------- --------------
Mortgage Revenue -Multi-Family (4.9%)
5,000 Illinois Housing Development Authority, 1993 Ser A ............. 5.90 07/01/12 5,031,150
13,310 Wisconsin Housing & Economic Development Authority, 1993 Ser A . 5.55 11/01/15 12,781,992
- ----------- --------------
18,310 17,813,142
- ----------- --------------
Mortgage Revenue -Single Family (6.1%)
10,000 Alaska Housing Finance Corporation, 1993 First Ser ............. 5.90 12/01/33 9,822,200
3,830 Connecticut Housing Finance Authority, 1993 Subser F-1 ......... 5.60 05/15/11 3,811,080
8,700 Kentucky Housing Corporation, Federally Insured or Gtd Loans
1993 Ser B .................................................... 5.40 07/01/14 8,458,140
- ----------- --------------
22,530 22,091,420
- ----------- --------------
Public Facilities Revenue (8.1%)
12,000 California Public Works Board, Correctional 1993 Ser D COPs .... 5.375 06/01/18 11,277,720
4,000 Maine Municipal Bond Bank, 1993 Ser E .......................... 5.30 11/01/13 3,873,760
5,000 Kansas City School District Building Corporation, Missouri,
Elementary Ser 1993 D (FGIC) .................................. 5.00 02/01/14 4,686,250
10,000 Regional Convention & Sports Complex Authority, Missouri,
Refg Ser A 1993 ............................................... 5.60 08/15/17 9,759,200
- ----------- --------------
31,000 29,596,930
- ----------- --------------
Resource Recovery Revenue (2.8%)
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
- ----------- Ser 1993 A (AMT) .............................................. 6.30 07/01/16 10,185,900
--------------
Transportation Facilities Revenue (8.4%)
10,000 Chicago, Illinois, Chicago-O'Hare Int'l Airport Refg 1993 Ser A 5.00 01/01/16 9,244,200
5,000 Wayne County, Michigan, Detroit Metropolitan Wayne County
Airport Sub Lien Ser 1993 C (MBIA) ............................ 5.25 12/01/13 4,793,000
4,000 Rhode Island Port Authority & Economic Development Corporation,
TF Green State Airport 1993 Ser A (AMT) (FSA) ................. 5.25 07/01/23 3,622,680
10,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1993
(AMBAC) ....................................................... 5.00 01/01/20 9,105,200
4,175 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B . 5.50 05/15/18 4,051,921
- ----------- --------------
33,175 30,817,001
- ----------- --------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
Water & Sewer Revenue (13.9%)
$ 5,000 Phoenix Civic Improvement Corporation, Arizona, Wastewater Refg
Ser 1993 ...................................................... 5.00 % 07/01/18 $ 4,521,200
5,000 Los Angeles County Sanitation Districts Financing Authority,
California, 1993 Ser A ........................................ 5.25 10/01/19 4,683,550
5,000 Atlanta, Georgia, Water & Sewer Ser 1993 ....................... 5.00 01/01/15 4,649,550
Louisville & Jefferson County Metropolitan Sewer District,
Kentucky,
3,000 Ser 1993 A (MBIA) ............................................. 5.50 05/15/21 2,928,900
5,000 Ser 1993 B (MBIA) ............................................. 5.50 05/15/23 4,877,250
10,000 Massachusetts Water Resources Authority, 1993 Ser C ............ 5.25 12/01/20 9,451,400
5,000 New York City Municipal Water Finance Authority, New York, 1994
Ser B ......................................................... 5.50 06/15/19 4,775,650
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (FSA) .. 5.50 06/15/14 9,866,200
5,000 Norfolk, Virginia, Water Ser 1993 (AMBAC) ...................... 5.375 11/01/23 4,770,800
- ----------- --------------
53,000 50,524,500
- ----------- --------------
Other Revenue (2.1%)
8,000 New York Local Government Assistance Corporation, Ser 1993 C ... 5.50 04/01/18 7,660,160
- ----------- --------------
Refunded (1.3%)
5,000 St Paul Housing & Redevelopment Authority, Minnesota, Civic
- ----------- Center Ser 1993 (ETM) ......................................... 5.45 11/01/03 4,884,700
--------------
370,065 TOTAL MUNICIPAL BONDS (Identified Cost $364,315,489) ............................... 357,177,816
- ----------- --------------
SHORT-TERM MUNICIPAL OBLIGATION (0.3%)
1,000 East Baton Rouge Parish, Louisiana, Exxon Corp Ser 1993
- ----------- (Demand 11/01/96) (Identified Cost $1,000,000) ................. 3.60* 03/01/22 1,000,000
--------------
$371,065 TOTAL INVESTMENTS (Identified Cost $365,315,489) (a) .................... 98.2% 358,177,816
===========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......................... 1.8 6,680,606
--------------
NET ASSETS .............................................................. 100.0% $364,858,422
========== ==============
</TABLE>
- ------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to Maturity.
* Current coupon of variable rate security.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation was
$443,553 and the aggregate gross unrealized depreciation was
$7,581,226, resulting in net unrealized depreciation of
$7,137,673.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
October 31, 1996
Alaska 5.3%
Arizona 1.2
California 4.4
Connecticut 1.0
District of Columbia 0.9
Florida 2.6
Georgia 2.6
Hawaii 2.6
Illinois 6.4
Indiana 2.1
Kansas 1.3
Kentucky 4.5
Louisiana 0.3
Maine 2.0
Maryland 6.6
Massachusetts 6.0
Michigan 1.3
Minnesota 1.3
Missouri 5.3
New York 7.4
Pennsylvania 3.6
Rhode Island 1.0
South Carolina 1.6
Texas 3.8
Virginia 5.0
Washington 9.4
West Virginia 1.4
Wisconsin 7.3
-------
Total 98.2%
=======
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $365,315,489) ....................................... $358,177,816
Cash .................................................................. 56,696
Interest receivable ................................................... 6,975,572
Deferred organizational expenses ...................................... 13,756
Prepaid expenses ...................................................... 32,970
--------------
TOTAL ASSETS ........................................................ 365,256,810
--------------
LIABILITIES:
Payable for:
Common shares of beneficial interest repurchased ..................... 173,215
Investment management fee ............................................ 118,601
Accrued expenses ...................................................... 106,572
--------------
TOTAL LIABILITIES ................................................... 398,388
--------------
NET ASSETS:
Preferred shares of beneficial interest (1,000,000 shares authorized
of non-participating $.01 par value, 1,940 shares outstanding) ...... 97,000,000
--------------
Common shares of beneficial interest (unlimited shares authorized of
$.01 par value, 19,929,113 shares outstanding) ....................... 288,832,769
Net unrealized depreciation ........................................... (7,137,673)
Accumulated undistributed net investment income ....................... 1,539,578
Accumulated net realized loss ......................................... (15,376,252)
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS ........................ 267,858,422
--------------
TOTAL NET ASSETS .................................................... $364,858,422
==============
NET ASSET VALUE PER COMMON SHARE
($267,858,422 divided by 19,929,113 common shares outstanding) ...... $ 13.44
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
NET INVESTMENT INCOME:
INTEREST INCOME ........................ $20,875,751
-------------
EXPENSES
Investment management fee .............. 1,296,790
Auction commission fees ................ 239,500
Professional fees ...................... 117,708
Transfer agent fees and expenses ...... 98,375
Auction agent fees ..................... 45,037
Shareholder reports and notices ....... 35,980
Registration fees ...................... 32,915
Trustees' fees and expenses ............ 20,740
Custodian fees ......................... 18,456
Organizational expenses ................ 7,217
Other .................................. 43,053
-------------
TOTAL EXPENSES BEFORE EXPENSE OFFSET 1,955,771
LESS: EXPENSE OFFSET ................ (18,192)
-------------
TOTAL EXPENSES AFTER EXPENSE OFFSET . 1,937,579
-------------
NET INVESTMENT INCOME ................ 18,938,172
-------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized loss ...................... (715,913)
Net change in unrealized depreciation . 5,384,362
-------------
NET GAIN ............................. 4,668,449
-------------
NET INCREASE ........................... $23,606,621
=============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ............................ $ 18,938,172 $ 19,671,518
Net realized loss ................................ (715,913) (2,809,491)
Net change in unrealized depreciation ............ 5,384,362 49,844,714
---------------- ----------------
NET INCREASE ................................... 23,606,621 66,706,741
---------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME:
Preferred ........................................ (3,457,244) (3,902,385)
Common ........................................... (14,941,780) (16,270,606)
---------------- ----------------
TOTAL .......................................... (18,399,024) (20,172,991)
---------------- ----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
Preferred ........................................ -- (40,200,000)
Common ........................................... (16,506,750) (12,754,282)
---------------- ----------------
TOTAL .......................................... (16,506,750) (52,954,282)
---------------- ----------------
NET DECREASE ................................... (11,299,153) (6,420,532)
NET ASSETS:
Beginning of period .............................. 376,157,575 382,578,107
---------------- ----------------
END OF PERIOD
(Including undistributed net investment income
of $1,539,578 and $1,000,430, respectively) .... $364,858,422 $376,157,575
================ ================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996
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'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 3, 1993 and commenced operations on
September 29, 1993.
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 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
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996, 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.
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 with Dean Witter InterCapital
Inc., 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
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 the proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended October 31, 1996
aggregated $1,002,220 and $16,999,860, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At October 31, 1996, the Trust had transfer agent fees
and expenses payable of approximately $7,200.
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, 1996
included in Trustees' fees
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
and expenses in the Statement of Operations amounted to $5,868. At October 31,
1996, the Trust had an accrued pension liability of $22,238 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.
Dividends, which are cumulative, are reset through auction procedures.
AMOUNT IN RANGE OF
SERIES SHARES* THOUSANDS* RATE* RESET DATE DIVIDEND RATES**
- -------- --------- --------------- --------- ---------- ----------------
1 340 $17,000 3.45 % 11/04/96 3.00% - 4.90 %
2 300 15,000 3.34 11/05/96 3.00 - 4.60
3 300 15,000 3.35 11/06/96 2.99 - 5.375
4 600 30,000 3.40 11/04/96 3.00 - 5.125
5 400 20,000 3.349 11/04/96 3.00 - 5.00
- ------------
* As of October 31, 1996.
** For the year ended October 31, 1996.
Subsequent to October 31, 1996 and up through December 9, 1996, the Trust paid
dividends to Series 1 through 5 at rates ranging from 3.00% to 3.75% in the
aggregate amount of $313,371.
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>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
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, 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
Treasury shares purchased and retired (weighted average discount 15.38%)* (1,486,100) (14,861) (16,491,889)
------------- ---------- --------------
Balance, October 31, 1996 ................................................ 19,929,113 $199,291 $288,633,478
============= ========== ==============
</TABLE>
- ------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
At October 31, 1996, the Trust had a net capital loss carryover of
approximately $15,376,000 to offset future capital gains to the extent provided
by regulations, which will be available through October 31 of the following
years:
AMOUNTS IN THOUSANDS
- -------------------------------------
2002 2003 2004 TOTAL
- --------- -------- ------ --------
$11,851 $2,809 $716 $15,376
========= ======== ====== ========
7. DIVIDENDS TO COMMON SHAREHOLDERS
The Trust declared the following dividends from net investment income:
AMOUNT PER PAYABLE
DECLARATION DATE SHARE RECORD DATE DATE
- ---------------- ----------- ---------------- -----------------
October 30, 1996 $0.06 November 8, 1996 November 22, 1996
November 26, 1996 $0.06 December 6, 1996 December 20, 1996
<PAGE>
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 YEAR ENDED OCTOBER 31** SEPTEMBER 29, 1993*
---------------------------------- THROUGH
1996 1995 1994++ OCTOBER 31, 1993**
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................ $13.04 $ 10.83 $14.03 $ 14.06
---------- ---------- ---------- -------------------
Net investment income ............................................... 0.92 0.90 0.99 0.03
Net realized and unrealized gain (loss) ............................. 0.23 2.15 (3.15) (0.04)
---------- ---------- ---------- -------------------
Total from investment operations .................................... 1.15 3.05 (2.16) (0.01)
---------- ---------- ---------- -------------------
Less dividends from:
Net investment income .............................................. (0.72) (0.74) (0.77) --
Common share equivalent of dividends paid to preferred shareholders (0.17) (0.18) (0.19) --
---------- ---------- ---------- -------------------
Total dividends ..................................................... (0.89) (0.92) (0.96) --
Anti-dilutive effect of acquiring treasury shares ................... 0.14 0.08 0.04 --
Offering costs charged against capital .............................. -- -- (0.12) (0.02)
---------- ---------- ---------- -------------------
Net asset value, end of period ...................................... $13.44 $ 13.04 $10.83 $ 14.03
========== ========== ========== ===================
Market value, end of period ......................................... $11.25 $10.875 $ 9.50 $15.125
========== ========== ========== ===================
TOTAL INVESTMENT RETURN+ ........................................... 10.39% 22.91% (32.98)% 0.83%(1)
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses before expense offset ................................ 0.72%(4) 0.77%(3) 0.83% 0.48%(2)
Net investment income before preferred stock dividends ............. 6.94% 7.48% 7.85% 2.51%(2)
Preferred stock dividends ........................................... 1.27% 1.48% 1.50% N/A
Net investment income available to common shareholders ............. 5.67% 6.00% 6.35% 2.51%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............................. $364,858 $376,158 $382,578 $333,983
Asset coverage on preferred shares at end of period ................. 376% 388% 278% N/A
Portfolio turnover rate ............................................. -- ++++ -- 21% --
</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 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.
++++ Less than 0.5%
(1) Not annualized.
(2) Annualized.
(3) The above expense ratio would have been 0.76% after expense offset,
which reflects 0.01% effect for custody cash credits.
(4) The above expense ratio would have been 0.71% after expense offset,
which reflects 0.01% effect for custody cash credits.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
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, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for the three years in the
period 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, 1996 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 9, 1996
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended October 31, 1996, the Trust paid the following per
share amounts from tax-exempt income: $0.72 to common shareholders, $1,760
to Series 1 preferred shareholders, $1,802 to Series 2 preferred
shareholders, $1,820 to Series 3 preferred shareholders, $1,782 to Series 4
preferred shareholders and $1,785 to Series 5 preferred shareholders.
<PAGE>
INTERCAPITAL QUALITY
MUNICIPAL SECURITIES
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
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
Haborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANT
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, 1996
