<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998
Two World Trade Center,
New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Morgan Stanley
Dean Witter Quality Municipal Securities (IQM) for the fiscal year ended
October 31, 1998.
On December 21, 1998, after the close of the period under review, the Trust
changed its name from InterCapital Quality Municipal Securities to Morgan
Stanley Dean Witter Quality Municipal Securities. Information on the name
change was mailed to shareholders in mid-December under separate cover.
Since our last report six months ago, global financial turmoil, including the
Russian currency crisis, has continued to affect the securities markets. This
led to a flight-to-quality rally for U.S. Treasury bonds, with yields falling
to 30-year lows. Municipal bond yields declined but lagged the downward trend
of Treasury yields.
The deflationary impact of the international financial crisis began to temper
U.S. economic growth prior to the summer's tumultuous market activity. Lower
commodity prices, cheaper imports and improved
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
Date AAA Ins Tsy % Relationship
- ---- ------- --- --------------
12/31/93 5.40% 6.34% 85.17%
01/31/94 5.40% 6.24% 86.54%
02/28/94 5.80% 6.66% 87.09%
03/31/94 6.40% 7.09% 90.27%
04/29/94 6.35% 7.32% 86.75%
05/31/94 6.25% 7.43% 84.12%
06/30/94 6.50% 7.61% 85.41%
07/29/94 6.25% 7.39% 84.57%
08/31/94 6.30% 7.45% 84.56%
09/30/94 6.55% 7.81% 83.87%
10/31/94 6.75% 7.96% 84.80%
11/30/94 7.00% 8.00% 87.50%
12/30/94 6.75% 7.88% 85.66%
01/31/95 6.40% 7.70% 83.12%
02/28/95 6.15% 7.44% 82.66%
03/31/95 6.15% 7.43% 82.77%
04/28/95 6.20% 7.34% 84.47%
05/31/95 5.80% 6.66% 87.09%
06/30/95 6.10% 6.62% 92.15%
07/31/95 6.10% 6.86% 88.92%
08/31/95 6.00% 6.66% 90.09%
09/29/95 5.95% 6.48% 91.82%
10/31/95 5.75% 6.33% 90.84%
11/30/95 5.50% 6.14% 89.58%
12/29/95 5.35% 5.94% 90.07%
01/31/96 5.40% 6.03% 89.55%
02/29/96 5.60% 6.46% 86.69%
03/29/96 5.85% 6.66% 87.84%
04/30/96 5.95% 6.89% 86.36%
05/31/96 6.05% 6.99% 86.55%
06/28/96 5.90% 6.89% 85.63%
07/31/96 5.85% 6.97% 83.93%
08/30/96 5.90% 7.11% 82.98%
09/30/96 5.70% 6.93% 82.25%
10/31/96 5.65% 6.64% 85.09%
11/29/96 5.50% 6.35% 86.61%
12/31/96 5.60% 6.63% 84.46%
01/31/97 5.70% 6.79% 83.95%
02/28/97 5.65% 6.80% 83.09%
03/31/97 5.90% 7.10% 83.10%
04/30/97 5.75% 6.94% 82.85%
05/30/97 5.65% 6.91% 81.77%
06/30/97 5.60% 6.78% 82.60%
07/30/97 5.30% 6.30% 84.13%
08/31/97 5.50% 6.61% 83.21%
09/30/97 5.40% 6.40% 84.38%
10/31/97 5.35% 6.15% 86.99%
11/30/97 5.30% 6.05% 87.60%
12/31/97 5.15% 5.92% 86.99%
01/31/98 5.15% 5.80% 88.79%
02/28/98 5.20% 5.92% 87.84%
03/31/98 5.25% 5.93% 88.53%
04/30/98 5.35% 5.95% 89.92%
05/29/98 5.20% 5.80% 89.66%
06/30/98 5.20% 5.65% 92.04%
07/31/98 5.18% 5.71% 90.72%
08/31/98 5.03% 5.27% 95.45%
09/30/98 4.95% 5.00% 99.00%
10/31/98 5.05% 5.16% 97.87%
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
productivity offset the potential inflationary impact of strong domestic
employment. With inflation held in check, the Federal Reserve Board provided
liquidity to the markets by lowering short-term interest rates. Since the end
of September, the Federal Reserve Open Market Committee cut the federal funds
rate 75 basis points from 5.50 percent to 4.75 percent in three separate moves.
MUNICIPAL MARKET CONDITIONS
Municipal bond yields followed the downward trend of Treasury yields at a more
moderate pace. At the end of October, long-term insured municipal index yields
stood at 5.05 percent, index yields declined 30 basis points over the last 12
months. In contrast, 30-year U.S. Treasury bond yields fell 100 basis points
during the same period.
As municipals lagged the rally in Treasuries, the ratio of municipal yields to
Treasury yields rose sharply to 98 percent. (A rising ratio means that
municipals have underperformed Treasuries and have become more attractive on a
relative basis.) This increase was similar to the jump witnessed in 1986, when
tax-reform proposals threatened the favorable tax advantage of municipal bonds.
The overall decline in interest rates has led to a substantial increase in new
issue municipal volume. Municipal issuance is on a pace to challenge 1993's
underwriting record of $292 billion. Year-to-date, total municipal volume of
$234 billion is up 32 percent. Half the underwriting volume was enhanced with
bond insurance. Refundings represented 30 percent of total new issuance.
PERFORMANCE
The Trust's net asset value (NAV) increased from $14.31 to $14.99 per share
during the fiscal year ended October 31, 1998. Based on this NAV change plus
reinvestment of tax-free dividends of $0.7525 per share, the Trust's total NAV
return was 10.89 percent. IQM's price on the New York Stock Exchange moved from
$12.50 to $13.9375 per share. Based on this change in market price plus
reinvestment of dividends, the Trust's total market return was 18.04 percent.
On October 31, 1998, the Trust traded at a 7 percent discount to NAV.
Monthly dividends for the fourth quarter of 1998 were declared in September.
Beginning with the October 1998 dividend, the monthly dividend was raised from
$0.0625 per share to $0.065 per share, to more closely reflect the Trust's
anticipated income. The level of undistributed net investment income increased
from $0.123 to $0.133 per share.
2
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
Category
- --------
TRANSPORTATION -
GENERAL OBLIGATION 16%
ELECTRIC -
REFUNDED -
WATER & SEWER 14%
MORTGAGE 12%
HOSPITAL 11%
PUBLIC FAC. 8%
TAX ALLOCATION -
IDR/PCR 13%
EDUCATION -
ALL OTHER 26%
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND
ACCURATE DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR
THE PURPOSE OF EDGAR FILING.]
Call Dates
- ----------
1998 0%
1999 0%
2000 0%
2001 0%
2002 2%
2003 63%
2004 21%
2005 0%
2006 0%
2007 6%
2008 1%
2009+ 7%
100%
Wghtd Avg Call Protec: 6
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND
ACCURATE DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR
THE PURPOSE OF EDGAR FILING.]
Ratings
Moody's/S&P
- --------------
Aaa/AAA 28%
Aa/AA 38%
A/A 34%
Baa/BBB
Ba/BB
NR
TOTALS 100%
3
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
PORTFOLIO STRUCTURE
The Trust remained fully invested in long-term municipal bonds during the
fiscal year. Investments were diversified among 12 long-term sectors and 52
credits. As illustrated in the accompanying chart, the distribution of call
dates in the portfolio produced 6 years of weighted average call protection.
The Trust's weighted average maturity was 19 years. Average duration (a measure
of price volatility to interest rate changes) was 6 years. Throughout the
fiscal period, high credit quality was maintained, with over 65 percent of
IQM's 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 12-month period, ARPS leverage contributed approximately $0.07 per
share to common share earnings. Weekly ARPS yields ranged between 2.40 and 5.00
percent. Five ARPS series totaling $97 million represented 26 percent of net
assets.
LOOKING AHEAD
Global economic conditions seem likely to keep inflationary pressures under
control and have contributed to lower interest rates. The fixed-income markets
have also begun to anticipate the possibility of additional monetary easing by
the Fed. With the municipal relationship to Treasuries more favorable than it
has been in the last 10 years, the outlook for municipal bonds is positive.
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
may, when appropriate, purchase shares in the open market or in privately
negotiated transactions at a price not above market value or net asset value,
whichever is lower at the time of purchase. The Trust
4
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
may also utilize procedures to reduce or eliminate the amount of outstanding
ARPS, including their purchase in the open market or in privately negotiated
transactions. During the fiscal year, the Trust purchased and retired 350,700
shares of common stock at a weighted average market discount of 10.25 percent.
We appreciate your ongoing support of Morgan Stanley Dean Witter 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
5
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 23, 1998, 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 TRUSTEE BY ALL SHAREHOLDERS:
Michael Bozic
<TABLE>
<S> <C>
For .............. 14,191,443
Withheld ......... 288,946
</TABLE>
(2) ELECTION OF TRUSTEE BY PREFERRED SHAREHOLDERS:
Charles A. Fiumefreddo
<TABLE>
<S> <C>
For .............. 1,364
Withheld ......... 0
</TABLE>
The following Trustees were not standing for reelection at this meeting: Edwin
J. Garn, John R. Haire, Wayne E. Hedien, Dr. Manuel H. Johnson, Michael E.
Nugent, Philip J. Purcell and John L. Schroeder.
(3) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP (THE SUCCESSOR
FIRM TO PRICE WATERHOUSE LLP AS OF JULY 1, 1998) AS THE TRUST'S
INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For ............. 14,120,544
Against ......... 71,035
Abstain ......... 288,810
</TABLE>
6
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (97.2%)
General Obligation (15.4%)
$ 5,000 Florida Board of Education, Capital Outlay Refg 1993 Ser D .............. 5.125% 06/01/18 $ 5,034,750
5,000 De Kalb County, Georgia, Refg 1993 ...................................... 5.25 01/01/20 5,080,200
10,000 Washington Suburban Sanitation District, Maryland, Refg 1993 Second Ser.. 5.25 06/01/14 10,498,500
New York City, New York,
10,000 1994 Ser D .............................................................. 5.75 08/15/08 10,680,600
5,000 1994 Ser C .............................................................. 5.50 10/01/10 5,260,400
10,000 Metropolitan Government of Nashville & Davidson County, Tennessee,
Refg Ser 1997 ........................................................... 5.125 05/15/25 9,949,500
10,000 Seattle, Washington, Refg Ser 1993 ...................................... 5.65 01/01/20 10,459,400
-------- ------------
55,000 56,963,350
-------- ------------
Educational Facilities Revenue (7.0%)
3,500 District of Columbia, Georgetown University Ser 1993 .................... 5.25 04/01/13 3,611,335
Illinois Educational Facilities Authority,
4,695 Illinois Wesleyan University Ser 1993 ................................... 5.70 09/01/23 4,938,436
4,955 Northwestern University Refg Ser 1993 ................................... 5.375 12/01/21 5,058,559
Massachusetts Health & Educational Facilities Authority,
10,000 Boston College Ser K .................................................... 5.25 06/01/18 10,116,000
2,100 Wentworth Institute of Technology Ser B (Connie Lee) .................... 5.50 10/01/23 2,175,600
-------- ------------
25,250 25,899,930
-------- ------------
Electric Revenue (6.7%)
5,900 South Carolina Public Service Authority, 1993 Refg Ser A (MBIA) ......... 5.50 07/01/21 6,165,913
8,000 Chelan County Public Utility District #1, Washington, Hydro Refg
Ser 1993 G .............................................................. 5.375 06/01/18 8,211,360
10,000 Snohomish County Public Utility District #1, Washington,
--------
Ser 1993 B (AMT) ........................................................ 5.80 01/01/24 10,587,400
-------- ------------
23,900 24,964,673
-------- ------------
Hospital Revenue (10.7%)
8,000 Indiana Health & Educational Facilities Authority, Wellborn Memorial
Baptist Hospital Refg Ser 1993 .......................................... 5.50 07/01/14 8,154,800
3,500 Maine Health & Higher Educational Facilities Authority, Ser 1993 D (FSA) 5.50 07/01/18 3,639,475
4,000 Michigan Hospital Finance Authority, Detroit Medical Center Ser 1997 A
(AMBAC) ................................................................. 5.25 08/15/27 4,035,760
10,000 Missouri Health & Educational Facilities Authority, Barnes-Jewish Inc/
Christian Health Services Ser 1993 A .................................... 5.25 05/15/14 10,477,500
10,000 Fairfax County Industrial Development Authority, Virginia, Inova Health
System Foundation Refg Ser 1993 A ....................................... 5.25 08/15/19 10,452,400
3,000 Wisconsin Health & Educational Facilities Authority, Catholic Health Corp
Ser 1993 ................................................................ 5.375 11/15/13 3,071,370
-------- ------------
38,500 39,831,305
-------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Development/Pollution Control Revenue (13.3%)
$ 10,000 Valdez, Alaska, BP Pipeline Inc Ser 1993 B ................................. 5.50% 10/01/28 $ 10,201,100
10,000 Hawaii Department of Budget & Finance, Hawaiian Electric Co Inc
Ser 1993 (AMT) (MBIA) ...................................................... 5.45 11/01/23 10,215,700
4,000 Calvert County, Maryland, Baltimore Gas & Electric Co Refg Ser 1993 ........ 5.55 07/15/14 4,314,880
2,500 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) ............ 6.30 12/01/14 2,723,075
5,000 Brazos River Authority, Texas, Houston Lighting & Power Co Ser 1993
(MBIA) ..................................................................... 5.60 12/01/17 5,246,200
5,000 Marshall County, West Virginia, Ohio Power Co Ser B (MBIA) ................. 5.45 07/01/14 5,394,300
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A ............. 6.90 02/01/13 11,250,700
-------- ------------
46,500 49,345,955
-------- ------------
Mortgage Revenue - Multi-Family (5.0%)
4,705 Illinois Housing Development Authority, 1993 Ser A ......................... 5.90 07/01/12 4,899,646
13,310 Wisconsin Housing & Economic Development Authority, 1993 Ser A ............. 5.55 11/01/15 13,476,907
-------- ------------
18,015 18,376,553
-------- ------------
Mortgage Revenue - Single Family (6.6%)
8,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA) ...................... 6.00 06/01/27 8,482,080
3,830 Connecticut Housing Finance Authority, 1993 Subser F-1 ..................... 5.60 05/15/11 3,952,483
8,700 Kentucky Housing Corporation, Federally Insured or Gtd Loans 1993 Ser B 5.40 07/01/14 9,012,852
3,000 Virginia Housing Development Authority, 1992 Ser A ......................... 7.10 01/01/25 3,110,280
-------- ------------
23,530 24,557,695
-------- ------------
Public Facilities Revenue (8.4%)
11,000 California Public Works Board, Correctional 1993 Ser D COPs ................ 5.375 06/01/18 11,353,100
4,000 Maine Municipal Bond Bank, 1993 Ser E ...................................... 5.30 11/01/13 4,195,760
5,000 Kansas City School District Building Corporation, Missouri, Elementary
Ser 1993 D (FGIC) .......................................................... 5.00 02/01/14 5,072,500
10,000 Regional Convention & Sports Complex Authority, Missouri, Refg
Ser A 1993 ................................................................. 5.60 08/15/17 10,434,700
-------- ------------
30,000 31,056,060
-------- ------------
Resource Recovery Revenue (2.9%)
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
--------
Ser 1993 A (AMT) ........................................................... 6.30 07/01/16 10,732,400
------------
Transportation Facilities Revenue (5.4%)
5,000 Wayne County, Michigan, Detroit Metropolitan Wayne County Airport
Sub Lien Ser 1993 C (MBIA) ................................................. 5.25 12/01/13 5,234,450
3,000 Pennsylvania Turnpike Commission, Ser A 1998 (AMBAC) ....................... 4.75 12/01/27 2,867,850
3,000 North Texas Tollway Authority, Dallas North Tollway Ser 1998 (FGIC) ........ 4.75 01/01/29 2,856,720
5,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1993 (AMBAC) ....... 5.00 01/01/20 4,929,000
4,175 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B ............. 5.50 05/15/18 4,318,370
-------- ------------
20,175 20,206,390
-------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Water & Sewer Revenue (14.4%)
$ 4,000 Phoenix Civic Improvement Corporation, Arizona, Wastewater
Refg Ser 1993 .............................................................. 5.00% 07/01/18 $ 4,012,360
5,000 Los Angeles County Sanitation Districts Financing Authority, California,
1993 Ser A ................................................................. 5.25 10/01/19 5,083,850
5,000 Atlanta, Georgia, Water & Sewer Ser 1993 ................................... 5.00 01/01/15 5,044,650
Louisville & Jefferson County Metropolitan Sewer District, Kentucky,
3,000 Ser 1993 A (MBIA) .......................................................... 5.50 05/15/21 3,135,480
5,000 Ser 1993 B (MBIA) .......................................................... 5.50 05/15/23 5,237,250
10,000 Massachusetts Water Resources Authority, 1993 Ser C ........................ 5.25 12/01/20 10,058,400
5,000 New York City Municipal Water Finance Authority, New York, 1994 Ser B ...... 5.50 06/15/19 5,179,100
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (FSA) .............. 5.50 06/15/14 10,596,200
5,000 Norfolk, Virginia, Water Ser 1993 (AMBAC) .................................. 5.375 11/01/23 5,133,400
-------- ------------
52,000 53,480,690
-------- ------------
Other Revenue (1.4%)
5,000 New York Local Government Assistance Corporation, Ser 1993 C ............... 5.50 04/01/18 5,236,150
-------- ------------
347,870 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $343,230,519) ................................ 360,651,151
-------- ------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATION (1.1%)
4,000 Illinois Health Facilities Authority, Northwestern Memorial Hospital
--------
Ser 1995 (Demand 11/02/98) (Identified Cost $4,000,000) .................... 3.70* 08/15/25 4,000,000
------------
$351,870 TOTAL INVESTMENTS (Identified Cost $347,230,519) (a) .............................. 98.3% 364,651,151
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .................................... 1.7 6,375,778
-------- ------------
NET ASSETS ........................................................................ 100.0% $371,026,929
======== ============
</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 $17,476,339 and the aggregate gross unrealized
depreciation is $55,707, resulting in net unrealized appreciation of
$17,420,632.
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
9
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998
- -------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
October 31, 1998
<TABLE>
<S> <C>
Alaska ....................... 5.0%
Arizona ...................... 1.1
California .................. 4.4
Connecticut .................. 1.1
District of Columbia ......... 1.0
Florida ...................... 1.4
Georgia ...................... 2.7
Hawaii ....................... 2.8
Illinois .................... 5.1
Indiana .................... 2.2%
Kentucky ..................... 4.7
Maine ...................... 2.1
Maryland .................... 6.9
Massachusetts ............... 6.0
Michigan ..................... 2.5
Missouri ..................... 7.0
Nevada ..................... 0.7
New York .................... 7.1
Pennsylvania ................. 3.6%
South Carolina ............... 1.7
Tennessee .................... 2.7
Texas ...................... 3.5
Virginia .................... 6.2
Washington ................. 7.9
West Virginia ................ 1.4
Wisconsin .................... 7.5
----
Total ....................... 98.3%
====
</TABLE>
- -------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $347,230,519).......................................... $ 364,651,151
Cash ..................................................................... 231,403
Interest receivable ...................................................... 6,537,798
Prepaid expenses ......................................................... 77,405
-------------
TOTAL ASSETS .......................................................... 371,497,757
-------------
LIABILITIES:
Payable for:
Dividends to preferred shareholders ................................... 160,962
Investment management fee ............................................. 128,729
Common shares of beneficial interest repurchased ...................... 69,525
Accrued expenses ......................................................... 111,612
-------------
TOTAL LIABILITIES ..................................................... 470,828
-------------
NET ASSETS ............................................................ $ 371,026,929
=============
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, 18,274,813 shares outstanding).......................... 268,913,286
Net unrealized appreciation .............................................. 17,420,632
Accumulated undistributed net investment income .......................... 2,427,764
Accumulated net realized loss ............................................ (14,734,753)
-------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS .......................... 274,026,929
-------------
TOTAL NET ASSETS ...................................................... $ 371,026,929
=============
NET ASSET VALUE PER COMMON SHARE
($274,026,929 divided by 18,274,813 common shares outstanding).......... $14.99
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ............................... $19,448,588
-----------
EXPENSES
Investment management fee ..................... 1,289,496
Auction commission fees ....................... 281,361
Professional fees ............................. 97,675
Transfer agent fees and expenses .............. 81,313
Shareholder reports and notices ............... 44,123
Auction agent fees ............................ 40,966
Registration fees ............................. 24,670
Trustees' fees and expenses ................... 20,226
Custodian fees ................................ 16,627
Organizational expenses ....................... 6,562
Other ......................................... 43,497
-----------
TOTAL EXPENSES ............................. 1,946,516
Less: expense offset .......................... (16,484)
-----------
NET EXPENSES ............................... 1,930,032
-----------
NET INVESTMENT INCOME ...................... 17,518,556
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ............................. 777,393
Net change in unrealized appreciation ......... 11,228,100
-----------
NET GAIN ................................... 12,005,493
-----------
NET INCREASE .................................. $29,524,049
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................... $ 17,518,556 $ 18,111,306
Net realized gain (loss) ................................ 777,393 (135,894)
Net change in unrealized appreciation/depreciation ...... 11,228,100 13,330,205
------------- -------------
NET INCREASE ......................................... 29,524,049 31,305,617
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME:
Preferred ............................................... (3,489,086) (3,427,332)
Common .................................................. (13,892,648) (13,932,610)
------------- -------------
TOTAL ................................................ (17,381,734) (17,359,942)
------------- -------------
Decrease from transactions in common shares of
beneficial interest ................................... (4,624,309) (15,295,174)
------------- -------------
NET INCREASE (DECREASE) .............................. 7,518,006 (1,349,499)
NET ASSETS:
Beginning of period ..................................... 363,508,923 364,858,422
------------- -------------
END OF PERIOD
(Including undistributed net investment income of
$2,427,764 and $2,290,942, respectively).............. $ 371,026,929 $ 363,508,923
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Quality Municipal Securities (the "Trust"), formerly
InterCapital Quality Municipal Securities (the Trust changed its name effective
December 21, 1998), 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.
14
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
E. ORGANIZATIONAL EXPENSES -- Morgan Stanley Dean Witter Advisors Inc. (the
"Investment Manager"), formerly Dean Witter InterCapital Inc., 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 were
deferred and fully amortized as of September 29, 1998.
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, 1998
aggregated $11,541,660 and $15,037,825, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager,
is the Trust's transfer agent. At October 31, 1998, the Trust had transfer
agent fees and expenses payable of approximately $2,700.
15
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
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, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $6,980. At October 31, 1998, the Trust had an accrued pension liability of
$32,310 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 though 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 IN RESET RANGE OF
SERIES SHARES* THOUSANDS* RATE* DATE DIVIDEND RATES**
------ ------- ---------- ----- ---- ----------------
<S> <C> <C> <C> <C> <C>
1 340 $17,000 3.40 % 11/03/98 3.00% - 4.50%
2 300 15,000 3.10 11/04/98 2.40 - 4.50
3 300 15,000 3.10 11/05/98 3.00 - 5.00
4 600 30,000 3.70 01/05/99 3.68 - 3.70
5 400 20,000 3.63 07/06/99 3.40 - 4.25
</TABLE>
- ---------------
* As of October 31, 1998.
** For the year ended October 31, 1998.
Subsequent to October 31, 1998 and up through December 21, 1998, the Trust paid
dividends to Series 1 through 5 at rates ranging from 2.50% to 3.70%, in the
aggregate amount of $505,840.
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.
16
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
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
EXCESS OF
SHARES PAR VALUE PAR VALUE
------ --------- ---------
<S> <C> <C> <C>
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
Treasury shares purchased and retired (weighted average discount 10.25%)* (350,700) (3,507) (4,620,802)
---------- --------- -------------
Balance, October 31, 1998 ................................................ 18,274,813 $ 182,748 $ 268,730,538
========== ========= =============
</TABLE>
- ---------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
During the year ended October 31, 1998, the Trust utilized approximately
$777,000 of its net capital loss carryover. At October 31, 1998, the Trust had
a net capital loss carryover of approximately $14,735,000, which may be used to
offset future capital gains to the extent provided by regulations, which will
be available through October 31 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- --------------------------------------------
2002 2003 2004 2005
---- ---- ---- ----
<S> <C> <C> <C>
$11,074 $2,809 $716 $136
======= ====== ==== ====
</TABLE>
7. DIVIDENDS TO COMMON SHAREHOLDERS
On September 29, 1998, the Trust declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ----------------- -----------------
<S> <C> <C>
$0.065 November 6, 1998 November 20, 1998
$0.065 December 4, 1998 December 18, 1998
</TABLE>
17
<PAGE>
MORGAN STANLEY DEAN WITTER 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 YEAR ENDED OCTOBER 31*
-------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................... $14.31 $13.44 $13.04 $10.83 $14.03
------ ------ ------ ------ ------
Net investment income .......................................... 0.95 0.95 0.92 0.90 0.99
Net realized and unrealized gain (loss) ........................ 0.64 0.69 0.23 2.15 (3.15)
------ ------ ------ ------ ------
Total from investment operations ............................... 1.59 1.64 1.15 3.05 (2.16)
------ ------ ------ ------ ------
Less dividends from:
Net investment income ......................................... (0.75) (0.72) (0.72) (0.74) (0.77)
Common share equivalent of dividends paid to preferred
shareholders ................................................. (0.19) (0.18) (0.17) (0.18) (0.19)
------ ------ ------ ------ ------
Total dividends ................................................ (0.94) (0.90) (0.89) (0.92) (0.96)
------ ------ ------ ------ ------
Anti-dilutive effect of acquiring treasury shares .............. 0.03 0.13 0.14 0.08 0.04
------ ------ ------ ------ ------
Offering costs charged against capital ......................... -- -- -- -- (0.12)
------ ------ ------ ------ ------
Net asset value, end of period ................................. $14.99 $14.31 $13.44 $13.04 $10.83
====== ====== ====== ====== ======
Market value, end of period .................................... $13.938 $12.50 $11.25 $10.875 $9.50
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+ ....................................... 18.04% 18.11% 10.39% 22.91% (32.98)%
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses ................................................. 0.72%(1) 0.71% 0.72%(1) 0.77%(1) 0.83%
Net investment income before preferred stock dividends ......... 6.46% 6.87% 6.94% 7.48% 7.85%
Preferred stock dividends ...................................... 1.29% 1.30% 1.27% 1.48% 1.50%
Net investment income available to common shareholders ......... 5.17% 5.57% 5.67% 6.00% 6.35%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........................ $371,027 $363,509 $364,858 $376,158 $382,578
Asset coverage on preferred shares at end of period ............ 382% 374% 376% 388% 278%
Portfolio turnover rate ........................................ 3% 6% --++ -- 21%
</TABLE>
- -------------
* 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) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
MORGAN STANLEY DEAN WITTER QUALITY MUNICIPAL SECURITIES
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER 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 Morgan Stanley Dean Witter Quality
Municipal Securities (the "Trust"), formerly InterCapital Quality Municipal
Securities, at October 31, 1998, 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 five years in
the period then ended, 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, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 21, 1998
- -------------------------------------------------------------------------------
1998 FEDERAL TAX NOTICE (unaudited)
For the year ended October 31, 1998, 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.
- -------------------------------------------------------------------------------
19
<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
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
MORGAN STANLEY
DEAN WITTER
QUALITY
MUNICIPAL
SECURITIES
ANNUAL REPORT
OCTOBER 31, 1998
