<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS October 31, 1997
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,
1997.
Stimulated by a resurgence of consumer spending in late 1996, the economy
grew at a rapid pace in the first quarter of 1997. This prompted the Federal
Reserve Board to tighten its monetary policy in March in a preemptive move
against a possible increase in the rate of inflation. Economic growth slowed
in the second quarter and the bond market rallied. In addition to more
moderate economic growth, low inflation and stable monetary policy, the bond
rally through July was supported by a shrinking federal budget deficit and a
strong dollar. However, by August the bond market retreated on fears that
stronger employment conditions might prompt the Federal Reserve Board to
tighten further. Yields declined in October when turmoil in the global stock
markets precipitated "flight-to-quality" demand for U.S. Treasuries.
BOND YIELDS 1994-1997
INSURED MUNICIPAL
30-YEAR INSURED 30-YEAR U.S. REVENUE YIELDS
MUNICIPAL TREASURY AS A PERCENTAGE OF U.S.
` REVENUE YIELDS YIELDS TREASURY YIELDS
-------------- ------ ---------------
December 1993 5.4 % 6.34% 85.17%
January 1994 5.4 6.24 86.54
February 1994 5.8 6.66 87.09
March 1994 6.4 7.09 90.27
April 1994 6.35 7.32 86.75
May 1994 6.25 7.43 84.12
June 1994 6.5 7.61 85.41
July 1994 6.25 7.39 84.57
August 1994 6.3 7.45 84.56
September 1994 6.55 7.81 83.87
October 1994 6.75 7.96 84.8
November 1994 7 8 87.5
December 1994 6.75 7.88 85.66
January 1995 6.4 7.7 83.12
February 1995 6.15 7.44 82.66
March 1995 6.15 7.43 82.77
April 1995 6.2 7.34 84.47
May 1995 5.8 6.68 87.09
June 1995 6.1 6.62 92.15
July 1995 6.1 6.86 88.92
August 1995 6 6.66 90.09
September 1995 5.95 6.48 91.82
October 1995 5.75 6.33 90.84
November 1995 5.5 6.14 89.58
December 1995 5.35 5.94 90.07
January 1996 5.4 6.03 89.55
February 1996 5.8 6.46 86.69
March 1996 5.85 6.66 87.84
April 1996 5.95 6.89 86.36
May 1996 6.05 6.99 86.55
June 1996 5.9 6.89 85.63
July 1996 5.85 6.97 83.93
August 1996 5.9 7.11 82.98
September 1996 5.7 6.93 82.25
October 1996 5.65 6.64 85.09
November 1996 5.5 6.35 86.61
December 1996 5.6 6.63 84.46
January 1997 5.7 6.79 83.95
February 1997 5.65 6.8 83.09
March 1997 5.9 7.1 83.1
April 1997 5.75 6.94 82.85
May 1997 5.65 6.91 81.77
June 1997 5.6 6.78 82.6
July 1997 5.3 6.3 84
August 1997 5.5 6.61 83
September 1997 5.4 6.4 84.4
October 1997 5.35% 6.15% 86.9 %
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
MUNICIPAL MARKET CONDITIONS
Municipal yields followed the trend of Treasury yields, but with less
volatility. Long-term insured revenue index yields increased from 5.65
percent to 5.90 percent between October 1996 and March 1997. The bond rally
over the past seven months pushed 30-year yields down to 5.35 percent
by the end of October 1997. Yields on one-year notes were little changed at
3.75 percent over the 12-month period. Consequently, the yield pickup for
extending maturities from 1 to 30 years narrowed from 190 basis points to 160
basis points.
The ratio of 30-year insured revenue bond yields to 30-year U.S. Treasury
yields rose from 83 percent at the end of March 1997 to 87 percent in
October. A rising ratio means that municipals have underperformed Treasuries
and have become relatively more attractive. Over the past four years,
this ratio has annually ranged from an average low of 83 percent to an average
high of 90 percent.
New-issue underwriting volume was slightly ahead in the first half of 1997.
The decline in interest rates subsequently led to a surge in refunding
activity. As a result, new-issue municipal volume was up 17 percent during
the first 10 months of 1997. Refundings accounted for more than 25 percent of
total volume.
PERFORMANCE
During the fiscal year ended October 31, 1997, the Trust's net asset value
(NAV) improved from $13.44 to $14.31. Based on this NAV change plus
reinvestment of tax-free dividends totaling $0.7225 per share, the Trust's
total NAV return was 13.18 percent. IQM's market price on the New York Stock
Exchange moved from $11.25 to $12.50 per share. Based on
LARGEST SECTORS AS OF OCTOBER 31, 1997
(% OF NET ASSETS)
General Obligation ............... 15%
Water & Sewer .................... 14%
IDR/PCR* ......................... 12%
Mortgage ..... ................... 11%
Hospital ......................... 11%
Education......................... 8%
Public Facilities ................ 8%
All Others ....................... 21%
*Industrial Development/Pollution Control Revenue
Portfolio Structure is subject to change.
CREDIT RATINGS AS OF OCTOBER 31, 1997
(% OF TOTAL LONG-TERM PORTFOLIO)
AAA or Aaa ........................ 26%
AA or Aa .......................... 35%
A or A ............................ 35%
BBB or Baa ........................ 4%
As measured by Standard & Poor's Corp. or Moody's Investors Service, Inc.
Portfolio structure is subject to change.
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
this change in market price plus reinvestment of tax-free dividends, the
Trust's total market return was 18.11 percent. On October 31, 1997, IQM
traded at a 13 percent discount to NAV.
Monthly dividends for the fourth quarter of 1997 were declared in September.
Over the past 12 months the level of undistributed net investment income
increased from $0.077 per share to $0.123 per share. Beginning with the
October 1997 payment, the monthly dividend was increased from $0.06 per share
to $0.0625 per share to more closely reflect the Trust's anticipated income.
PORTFOLIO STRUCTURE
IQM remained fully invested in long-term municipal bonds during the period.
Investments were diversified among 12 long-term sectors and 51 credits. The
Trust's weighted average maturity and call protection were 20 and 7 years,
respectively. Throughout the fiscal year, high credit quality was maintained
with nearly 60 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 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 shareholders depends on two
factors. The first factor is the amount of ARPS outstanding, while the second
is the spread between the portfolio's cost yield and ARPS expenses (ARPS
auction rate and expenses). The greater the spread and the amount of ARPS
outstanding, the greater the amount of incremental income available for
distribution to common shareholders. The level of net investment income
available for distribution to common shareholders varies with the level of
short-term interest rates.
During the fiscal year, ARPS leverage contributed approximately $0.07 per
share to common share earnings. Weekly ARPS yields ranged between 2.40 and
4.25 percent. Five ARPS series totaling $97 million and representing 27
percent of net assets were outstanding.
LOOKING AHEAD
So far this year, long-term municipal bonds have followed the trend of
Treasuries toward lower yields. The recent enactment of the Taxpayer Relief
Act of 1997 did not impact municipals directly and the long-term benefits of
tax-exempt income have remained intact.
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
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
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 twelve-month period ended October 31, 1997, the Trust purchased
and retired 1,303,600 shares of common stock at a weighted average market
discount of 14.15 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 May 20, 1997, 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:
Edwin J. Garn
For ............. 14,951,658
Withheld ........ 501,524
Wayne E. Hedien
For ............. 14,946,729
Withheld ........ 506,453
Michael E. Nugent
For ............. 14,941,820
Withheld ........ 511,362
Philip J. Purcell
For ............. 14,926,776
Withheld ........ 526,406
ELECTION OF TRUSTEE BY PREFERRED SHAREHOLDERS:
John R. Haire
For ............. 1,449
Withheld ........ 0
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Dr. Manuel H. Johnson and John L.
Schroeder.
(2) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE TRUST AND
DEAN WITTER INTERCAPITAL INC. IN CONNECTION WITH THE MERGER OF MORGAN
STANLEY GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
For ..... 14,420,151
Against . 354,462
Abstain . 678,569
(3) RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS INDEPENDENT
ACCOUNTANTS:
For ..... 14,746,152
Against . 190,158
Abstain . 516,872
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (96.8%)
General Obligation (15.2%)
$ 5,000 Florida Board of Education, Capital Outlay Refg 1993 Ser D ...... 5.125% 06/01/18 $ 4,890,900
5,000 De Kalb County, Georgia, Refg 1993 .............................. 5.25 01/01/20 4,980,150
10,000 Washington Suburban Sanitation District, Maryland, Gen Constr
Refg 1993 Second Ser ........................................... 5.25 06/01/14 10,030,500
New York City, New York,
10,000 1994 Ser D ..................................................... 5.75 08/15/08 10,386,600
5,000 1994 Ser C ..................................................... 5.50 10/01/10 5,050,850
10,000 Metropolitan Government of Nashville & Davidson County,
Tennessee, Refg Ser 1997 ...................................... 5.125 05/15/25 9,691,500
10,000 Seattle, Washington, Refg Ser 1993 ............................. 5.65 01/01/20 10,205,600
- ----------- --------------
55,000 55,236,100
- ----------- --------------
Educational Facilities Revenue (7.8%)
3,500 District of Columbia, Georgetown University Ser 1993 ............ 5.25 04/01/13 3,527,615
Illinois Educational Facilities Authority,
4,695 Illinois Wesleyan University Ser 1993 .......................... 5.70 09/01/23 4,753,687
4,955 Northwestern University Refg Ser 1993 .......................... 5.375 12/01/21 4,853,175
Massachusetts Health & Educational Facilities Authority,
10,000 Boston College Ser K ........................................... 5.25 06/01/18 9,814,500
2,100 Wentworth Institute of Technology Ser B (Connie Lee) ........... 5.50 10/01/23 2,079,861
3,500 Pennsylvania Higher Educational Facilities Authority, Thomas
Jefferson University 1993 Ser A ................................ 5.30 11/01/15 3,491,950
- ----------- --------------
28,750 28,520,788
- ----------- --------------
Electric Revenue (6.6%)
5,900 South Carolina Public Service Authority, 1993 Refg Ser A (MBIA) . 5.50 07/01/21 5,927,258
8,000 Chelan County Public Utility District #1, Washington, Hydro Refg
Ser 1993 G ..................................................... 5.375 06/01/18 7,955,280
10,000 Snohomish County Public Utilities District #1, Washington, Ser
1993 B (AMT) ................................................... 5.80 01/01/24 10,096,200
- ----------- --------------
23,900 23,978,738
- ----------- --------------
Hospital Revenue (10.6%)
8,000 Indiana Health & Educational Facilities Authority, Welborn
Memorial Baptist Hospital Refg Ser 1993 ........................ 5.50 07/01/14 8,029,120
3,500 Maine Health & Higher Educational Facilities Authority, Ser 1993
D (FSA) ........................................................ 5.50 07/01/18 3,506,895
4,000 Michigan Hospital Finance Authority, Detroit Medical Center Ser
1997 A (AMBAC) ................................................. 5.25 08/15/27 3,882,440
10,000 Missouri Health & Educational Facilities Authority, Barnes
Jewish Inc/Christian Health Services Ser 1993 A ................ 5.25 05/15/14 10,076,900
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
$ 10,000 Fairfax County Industrial Development Authority, Virginia, Inova
Health System Foundation Refg Ser 1993 A ....................... 5.25 % 08/15/19 $ 9,960,600
3,000 Wisconsin Health & Educational Facilities Authority, Catholic
Health Corp Ser 1993 ........................................... 5.375 11/15/13 2,998,320
- ----------- --------------
38,500 38,454,275
- ----------- --------------
Industrial Development/Pollution Control Revenue (12.4%)
10,000 Valdez, Alaska, BP Pipeline Inc Ser 1993 B ...................... 5.50 10/01/28 9,896,800
10,000 Hawaii Department of Budget & Finance, Hawaiian Electric Co Inc
Ser 1993 (AMT)(MBIA) ........................................... 5.45 11/01/23 9,795,900
4,000 Calvert County, Maryland, Baltimore Gas & Electric Co Refg Ser
1993 ........................................................... 5.55 07/15/14 4,067,000
5,000 Brazos River Authority, Texas, Houston Lighting & Power Co Ser
1993 (MBIA) .................................................... 5.60 12/01/17 5,096,700
5,000 Marshall County, West Virginia, Ohio Power Co Ser B (MBIA) ..... 5.45 07/01/14 5,092,600
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A .. 6.90 02/01/13 11,208,600
- ----------- --------------
44,000 45,157,600
- ----------- --------------
Mortgage Revenue -Multi-Family (5.0%)
5,000 Illinois Housing Development Authority, 1993 Ser A .............. 5.90 07/01/12 5,109,950
13,310 Wisconsin Housing & Economic Development Authority, 1993 Ser A .. 5.55 11/01/15 13,175,702
- ----------- --------------
18,310 18,285,652
- ----------- --------------
Mortgage Revenue -Single Family (5.8%)
8,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA) .......... 6.00 06/01/27 8,262,720
3,830 Connecticut Housing Finance Authority, 1993 Subser F-1 .......... 5.60 05/15/11 3,886,301
8,700 Kentucky Housing Corporation, Federally Insured or Gtd Loans
1993 Ser B ..................................................... 5.40 07/01/14 8,779,344
- ----------- --------------
20,530 20,928,365
- ----------- --------------
Public Facilities Revenue (8.2%)
11,000 California Public Works Board, Correctional 1993 Ser D COPs .... 5.375 06/01/18 10,857,990
4,000 Maine Municipal Bond Bank, 1993 Ser E .......................... 5.30 11/01/13 4,029,040
5,000 Kansas City School District Building Corporation, Missouri,
Elementary Ser 1993 D (FGIC) ................................... 5.00 02/01/14 4,906,900
10,000 Regional Convention & Sports Complex Authority, Missouri,
Refg Ser A 1993 ................................................ 5.60 08/15/17 10,112,200
- ----------- --------------
30,000 29,906,130
- ----------- --------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
Resource Recovery Revenue (2.9%)
$ 10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ............................................... 6.30 % 07/01/16 $ 10,596,600
- ----------- --------------
Transportation Facilities Revenue (5.7%)
5,000 Chicago, Illinois, Chicago-O'Hare Int'l Airport Refg 1993 Ser A . 5.00 01/01/16 4,809,100
5,000 Wayne County, Michigan, Detroit Metropolitan Wayne County
Airport Sub Lien Ser 1993 C (MBIA) ............................. 5.25 12/01/13 4,983,650
2,000 Rhode Island Port Authority & Economic Development Corporation,
TF Green State Airport 1993 Ser A (AMT)(FSA) ................... 5.25 07/01/23 1,912,980
5,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1993
(AMBAC) ........................................................ 5.00 01/01/20 4,755,350
4,175 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B .. 5.50 05/15/18 4,205,603
- ----------- --------------
21,175 20,666,683
- ----------- --------------
Water & Sewer Revenue (14.4%)
5,000 Phoenix Civic Improvement Corporation, Arizona, Wastewater Refg
Ser 1993 ....................................................... 5.00 07/01/18 4,824,800
5,000 Los Angeles County Sanitation Districts Financing Authority,
California, 1993 Ser A ........................................ 5.25 10/01/19 4,885,250
5,000 Atlanta, Georgia, Water & Sewer Ser 1993 ....................... 5.00 01/01/15 4,881,450
Louisville & Jefferson County Metropolitan Sewer District,
Kentucky,
3,000 Ser 1993 A (MBIA) .............................................. 5.50 05/15/21 3,016,470
5,000 Ser 1993 B (MBIA) .............................................. 5.50 05/15/23 5,027,450
10,000 Massachusetts Water Resources Authority, 1993 Ser C ............. 5.25 12/01/20 9,725,800
5,000 New York City Municipal Water Finance Authority, New York, 1994
Ser B ......................................................... 5.50 06/15/19 4,993,400
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (FSA) ... 5.50 06/15/14 10,092,200
5,000 Norfolk, Virginia, Water Ser 1993 (AMBAC) ....................... 5.375 11/01/23 4,961,950
- ----------- --------------
53,000 52,408,770
- ----------- --------------
Other Revenue (2.2%)
8,000 New York Local Government Assistance Corporation, Ser 1993 C .... 5.50 04/01/18 7,970,400
- ----------- --------------
351,165 TOTAL MUNICIPAL BONDS (Identified Cost $345,917,569) ............ 352,110,101
- ----------- --------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL OBLIGATION (1.4%)
$ 5,000 East Baton Rouge Parish, Louisiana, Exxon Corp Ser 1993 (Demand
11/03/97) .....................................................
- -----------
(Identified Cost $5,000,000) ................................... 4.00*% 03/01/22 $ 5,000,000
--------------
$356,165 TOTAL INVESTMENTS (Identified Cost $350,917,569) (a) ........... 98.2% 357,110,101
===========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .................. 1.8 6,398,822
---------- --------------
NET ASSETS ..................................................... 100.0% $363,508,923
========== ==============
</TABLE>
- ------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$6,615,456 and the aggregate gross unrealized depreciation is
$422,924, resulting in net unrealized appreciation of
$6,192,532.
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.
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
October 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Alaska 5.0%
Arizona 1.3
California 4.3
Connecticut 1.1
District of Columbia 1.0
Florida 1.3
Georgia 2.7
Hawaii 2.7
Illinois 5.4
Indiana 2.2
Kentucky 4.6%
Louisiana 1.4
Maine 2.1
Maryland 6.8
Massachusetts 5.9
Michigan 2.4
Missouri 7.0
New York 7.8
Pennsylvania 3.7
Rhode Island 0.5
South Carolina 1.6%
Tennessee 2.7
Texas 2.7
Virginia 5.3
Washington 7.8
West Virginia 1.4
Wisconsin 7.5
------
Total 98.2%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $350,917,569) ....................................... $357,110,101
Cash .................................................................. 229,347
Interest receivable ................................................... 6,432,116
Deferred organizational expenses ...................................... 6,562
Prepaid expenses ...................................................... 43,401
--------------
TOTAL ASSETS ........................................................ 363,821,527
--------------
LIABILITIES:
Payable for:
Investment management fee ........................................... 121,544
Dividends to preferred shareholders ................................. 99,816
Accrued expenses ...................................................... 91,244
--------------
TOTAL LIABILITIES ................................................... 312,604
--------------
NET ASSETS .......................................................... $363,508,923
==============
COMPOSITION OF 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, 18,625,513 shares outstanding) ....................... 273,537,595
Net unrealized appreciation ........................................... 6,192,532
Accumulated undistributed net investment income ....................... 2,290,942
Accumulated net realized loss ......................................... (15,512,146)
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS ........................ 266,508,923
--------------
TOTAL NET ASSETS .................................................... $363,508,923
==============
NET ASSET VALUE PER COMMON SHARE
($266,508,923 divided by 18,625,513 common shares outstanding) ...... $14.31
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 1997
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ........................ $19,976,041
-------------
EXPENSES
Investment management fee .............. 1,262,524
Auction commission fees ................ 242,763
Professional fees ...................... 112,222
Transfer agent fees and expenses ...... 66,216
Auction agent fees ..................... 45,590
Shareholder reports and notices ....... 40,623
Registration fees ...................... 26,115
Trustees' fees and expenses ............ 19,154
Custodian fees ......................... 17,770
Organizational expenses ................ 7,194
Other .................................. 42,126
-------------
TOTAL EXPENSES ....................... 1,882,297
Less: expense offset ................... (17,562)
-------------
NET EXPENSES ......................... 1,864,735
-------------
NET INVESTMENT INCOME ................ 18,111,306
-------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized loss ...................... (135,894)
Net change in unrealized depreciation . 13,330,205
-------------
NET GAIN ............................. 13,194,311
-------------
NET INCREASE ........................... $31,305,617
=============
</TABLE>
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, 1997 OCTOBER 31, 1996
- ------------------------------------------------ ---------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ........................... $ 18,111,306 $ 18,938,172
Net realized loss ............................... (135,894) (715,913)
Net change in unrealized depreciation ........... 13,330,205 5,384,362
---------------- ----------------
NET INCREASE .................................. 31,305,617 23,606,621
---------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET
INVESTMENT INCOME:
Preferred ....................................... (3,427,332) (3,457,244)
Common .......................................... (13,932,610) (14,941,780)
---------------- ----------------
TOTAL ......................................... (17,359,942) (18,399,024)
---------------- ----------------
Decrease from transactions in common shares of
beneficial interest ............................ (15,295,174) (16,506,750)
---------------- ----------------
NET DECREASE .................................. (1,349,499) (11,299,153)
NET ASSETS:
Beginning of period ............................. 364,858,422 376,157,575
---------------- ----------------
END OF PERIOD
(Including undistributed net investment income
of $2,290,942 and $1,539,578, respectively) .. $363,508,923 $364,858,422
================ ================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1997
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, 1997, 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 the Investment Manager,
the Trust pays the Investment Manager a management fee, calculated weekly and
payable monthly, by applying the annual rate of 0.35% to the Trust's weekly
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, 1997
aggregated $21,536,120 and $39,855,000, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager, is the Trust's
transfer agent. At October 31, 1997, the Trust had transfer agent fees and
expenses payable of approximately $1,100.
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, 1997 included in Trustees' fees
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
and expenses in the Statement of Operations amounted to $4,958. At October
31, 1997, the Trust had an accrued pension liability of $26,263 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.
<TABLE>
<CAPTION>
AMOUNT RESET RANGE OF
SERIES SHARES* IN THOUSANDS* RATE* DATE DIVIDEND RATES**
- -------- --------- --------------- ------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
1 340 $17,000 3.20% 11/04/97 2.95% -4.00%
2 300 15,000 3.70 11/05/97 2.40 -4.25
3 300 15,000 3.50 11/06/97 2.50 -4.25
4 600 30,000 3.68 01/06/98 2.50 -4.19
5 400 20,000 3.58 11/04/97 3.00 -4.19
</TABLE>
- ------------
* As of October 31, 1997.
** For the year ended October 31, 1997.
Subsequent to October 31, 1997 and up through December 5, 1997, the Trust
paid dividends to Series 1 through 5 at rates ranging from 3.00% to 3.85%, in
the aggregate amount of $413,077.
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, 1997, 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, 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
Treasury shares purchased and retired (weighted average discount 14.15%)* (1,303,600) (13,036) (15,282,138)
------------- ---------- --------------
Balance, October 31, 1997 ................................................ 18,625,513 $186,255 $273,351,340
============= ========== ==============
</TABLE>
- ------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
At October 31, 1997, the Trust had a net capital loss carryover of
approximately $15,512,000, which may be used to offset future capital gains
to the extent provided by regulations, which is available through October 31
of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- ----------------------------------
2002 2003 2004 2005
- --------- -------- ------ ------
<S> <C> <C> <C>
$11,851 $2,809 $716 $136
========= ======== ====== ======
</TABLE>
7. DIVIDENDS TO COMMON SHAREHOLDERS
On September 23, 1997, the Trust declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
------------------- -------------------- ---------------------
<S> <C> <C>
$0.0625 November 7, 1997 November 21, 1997
$0.0625 December 5, 1997 December 19, 1997
</TABLE>
<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
1997 1996 1995 1994 OCTOBER 31, 1993**
- ------------------------------------------------------- --------- --------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................... $13.44 $13.04 $ 10.83 $ 14.03 $ 14.06
--------- --------- ---------- ---------- -------------------
Net investment income................................... 0.95 0.92 0.90 0.99 0.03
Net realized and unrealized gain (loss) ................ 0.69 0.23 2.15 (3.15) (0.04)
--------- --------- ---------- ---------- -------------------
Total from investment operations........................ 1.64 1.15 3.05 (2.16) (0.01)
--------- --------- ---------- ---------- -------------------
Less dividends from:
Net investment income.................................. (0.72) (0.72) (0.74) (0.77) --
Common share equivalent of dividends paid to preferred
shareholders........................................... (0.18) (0.17) (0.18) (0.19) --
--------- --------- ---------- ---------- -------------------
Total dividends ........................................ (0.90) (0.89) (0.92) (0.96) --
--------- --------- ---------- ---------- -------------------
Anti-dilutive effect of acquiring treasury shares ...... 0.13 0.14 0.08 0.04 --
--------- --------- ---------- ---------- -------------------
Offering costs charged against capital.................. -- -- -- (0.12) (0.02)
--------- --------- ---------- ---------- -------------------
Net asset value, end of period.......................... $14.31 $13.44 $ 13.04 $ 10.83 $ 14.03
========= ========= ========== ========== ===================
Market value, end of period............................. $12.50 $11.25 $10.875 $ 9.50 $15.125
========= ========= ========== ========== ===================
TOTAL INVESTMENT RETURN+................................ 18.11% 10.39% 22.91% (32.98)% 0.83%(1)
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses ......................................... 0.71% 0.72%(3) 0.77%(3) 0.83% 0.48%(2)
Net investment income before preferred stock dividends 6.87% 6.94% 7.48% 7.85% 2.51%(2)
Preferred stock dividends .............................. 1.30% 1.27% 1.48% 1.50% N/A
Net investment income available to common shareholders 5.57% 5.67% 6.00% 6.35% 2.51%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands................. $363,509 $364,858 $376,158 $382,578 $333,983
Asset coverage on preferred shares at end of period .... 374% 376% 388% 278% N/A
Portfolio turnover rate ................................ 6% --++ -- 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.
++ Less than 0.5%
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
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, 1997, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights
for each of the four 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, 1997 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, 1997
- -------------------------------------------------------------------------------
1997 FEDERAL TAX NOTICE (unaudited)
For the year ended October 31, 1997, all of the Trust's dividends from net
investment income received by both common and preferred shareholder classes
were exempt interest dividends, excludable from gross income for Federal income
tax purposes.
- -------------------------------------------------------------------------------
<PAGE>
TRUSTEES
- ----------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- ----------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- ----------------------------------------------
Dean Witter Trust FSB
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, 1997
