<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1998
Two World Trade Center, New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of
InterCapital Quality Municipal Securities (IQM) for the period ended April
30, 1998.
Since last fall domestic economic growth has been tempered by the
deflationary impact of the Asian financial crisis. U.S. employment conditions
strengthened and the unemployment rate declined to its lowest level since
1970. Inflation remained subdued despite the robust economy. In part this was
the result of productivity gains and the lower costs of oil and other
imports. Foreign currency turmoil strengthened the value of the U.S. dollar
and created demand for U.S. Treasury securities. Municipal bonds followed the
trend of Treasuries and yields declined to levels last seen 20 years ago. The
bond market rally was also aided by prospects of the first federal budget
surplus in more than two decades.
MUNICIPAL MARKET CONDITIONS
Long-term insured index yields ended April 1998 at 5.35 percent after
reaching a low of 5.15 percent in December and January. Over the past 12
months the insured index yield has declined from 5.75 percent.
[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.]
[LINE CHART]
MMD 30 YEAR AAA INSURED AND TREASURY YIELD
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%
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
The yield on one-year notes was 3.75 percent at the end of April 1998. Thus,
the yield pickup for extending maturities from 1 to 30 years was 160 basis
points.
The overall decline in interest rates led to an increase in new-issue
municipal volume. In contrast, the U.S. Treasury's borrowing needs declined
with the reduction in the deficit. Under these conditions, the municipal
rally lagged the rally in Treasuries. The ratio of municipal yields to
Treasury yields improved from 87 percent in October to almost 90 percent in
April. A year ago the ratio was a relatively rich 83 percent. A rising ratio
means that municipals have underperformed Treasuries but have become
relatively more attractive.
Total municipal volume increased 20 percent in 1997. New-issue supply totaled
$220 billion last year, with half the underwritings enhanced with bond
insurance. Refundings represented one-quarter of total new issues. For the
year-to-date, municipal underwriting is up 60 percent with refunding issues
comprising one-third of the total.
PERFORMANCE
During the six-month period ended April 30, 1998, the Trust's net asset value
(NAV) improved from $14.31 to $14.42. Based on this NAV change plus
reinvestment of tax-free dividends totaling $0.38 per share, the Trust's
total NAV return was 3.69 percent. IQM's price on the New York Stock Exchange
moved from $12.50 to $12.875 per share. Based on this change in market price
plus reinvestment of dividends, the Trust's total market return was 5.99
percent. On April 30, 1998, IQM was trading at a 10.71 percent discount to
NAV. This means that the market price of the common stock was lower than the
NAV.
Monthly dividends for the second quarter of 1998 were declared in March and
remained unchanged at $0.0625 per share. The level of undistributed net
investment income moved from $0.123 to $0.127 per share over the past six
months.
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. During the six-month period ended
April 30, 1998, IQM purchased and retired 200,300 shares of common stock at a
weighted average market discount of 10.47 percent. The Trust may also utilize
procedures to reduce or eliminate the amount of outstanding Auction Rate
Preferred Shares (ARPS), including their purchase in the open market or in
privately negotiated transactions.
2
<PAGE>
[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.]
[PIE CHART] [PIE CHART]
LARGEST SECTORS AS OF APRIL 30, 1998 CREDIT RATINGS AS OF APRIL 30, 1998
(% OF NET ASSETS) (% OF TOTAL LONG-TERM PORTFOLIO)
ALL OTHER 27% A or A 40%
WATER & SEWER 15% Aaa OR AAA 26%
GENERAL OBLIGATION 15% Aa or AA 34%
IDR/PCR* 13%
MORTGAGE 11%
HOSPITAL 11%
PUBLIC FACILITIES 8%
* INDUSTRIAL DEVELOPMENT/ AS MEASURED BY MOODY'S INVESTORS SERVICE
POLLUTION CONTROL REVENUE. INC. OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS PORTFOLIO STRUCTURE IS
SUBJECT TO CHANGE. SUBJECT TO CHANGE.
[BAR GRAPH]
- -------------------------------------------------------------------------------
CALL STRUCTURE AS OF APRIL 30, 1998
(% OF TOTAL LONG-TERM PORTFOLIO) WEIGHTED AVERAGE
CALL PROTECTION: 6 YEARS
PERCENT CALLABLE
0% 0% 0% 0% 0% 65% 23% 0% 0% 6% 0% 6%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009+
YEAR CALLABLE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
- -------------------------------------------------------------------------------
3
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
PORTFOLIO STRUCTURE
The Trust remained fully invested in long-term municipal bonds during the
period. Investments were diversified among 12 long-term sectors and 51
individual credits. IQM's weighted average maturity was 20 years. The
distribution of call dates in the portfolio produced 6 years of weighted
average call protection. Throughout the fiscal period, high credit quality
was maintained, with 60 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 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 is the amount of
ARPS outstanding, the second 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 six-month period, ARPS leverage contributed approximately $0.03
per share to common share earnings. Weekly ARPS yields ranged between 2.40
and 5.00 percent. IQM's five ARPS series, totaled $97 million and represented
27 percent of net assets.
LOOKING AHEAD
The economic fundamentals are in place for another year of solid, albeit less
spectacular, domestic growth in 1998. Events in Asia have strengthened the
U.S. dollar and contributed to lower interest rates. The Asian financial
crisis seems likely to moderate U.S. economic growth and inflationary
pressures. While this outlook is favorable for municipal bonds it is possible
that the Federal Reserve Board may begin to tighten monetary policy if
capacity and labor constraints cause cost pressures to mount.
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
4
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (96.7%)
General Obligation (15.3%)
$ 5,000 Florida Board of Education, Capital Outlay Refg 1993 Ser D ...... 5.125% 06/01/18 $ 4,886,350
5,000 De Kalb County, Georgia, Refg 1993 .............................. 5.25 01/01/20 4,942,250
10,000 Washington Suburban Sanitation District, Maryland, Refg 1993
Second Ser ..................................................... 5.25 06/01/14 10,064,200
New York City, New York,
10,000 1994 Ser D ..................................................... 5.75 08/15/08 10,452,700
5,000 1994 Ser C ..................................................... 5.50 10/01/10 5,109,650
10,000 Metropolitan Government of Nashville & Davidson County,
Tennessee, Refg Ser 1997 ....................................... 5.125 05/15/25 9,652,400
10,000 Seattle, Washington, Refg Ser 1993 ............................. 5.65 01/01/20 10,199,300
- ----------- --------------
55,000 55,306,850
- ----------- --------------
Educational Facilities Revenue (7.2%)
3,500 District of Columbia, Georgetown University Ser 1993 ............ 5.25 04/01/13 3,524,045
Illinois Educational Facilities Authority,
4,695 Illinois Westleyan University Ser 1993 ......................... 5.70 09/01/23 4,821,906
4,955 Northwestern University Refg Ser 1993 .......................... 5.375 12/01/21 4,905,747
Massachusetts Health & Educational Facilities Authority,
10,000 Boston College Ser K ........................................... 5.25 06/01/18 9,805,000
2,100 Wentworth Institute of Technology Ser B (Connie Lee) ........... 5.50 10/01/23 2,113,881
995 Pennsylvania Higher Educational Facilities Authority, Thomas
Jefferson University 1993 Ser A (MBIA) ......................... 5.30 11/01/15 996,214
- ----------- --------------
26,245 26,166,793
- ----------- --------------
Electric Revenue (6.7%)
5,900 South Carolina Public Service Authority, 1993 Refg Ser A (MBIA) . 5.50 07/01/21 5,948,616
8,000 Chelan County Public Utility District #1, Washington, Hydro Refg
Ser 1993 G ..................................................... 5.375 06/01/18 7,994,720
10,000 Snohomish County Public Utility District #1, Washington, Ser
1993 B (AMT) ................................................... 5.80 01/01/24 10,166,000
- ----------- --------------
23,900 24,109,336
- ----------- --------------
Hospital Revenue (10.6%)
8,000 Indiana Health & Educational Facilities Authority, Wellborn
Memorial Baptist Hospital Refg Ser 1993 ........................ 5.50 07/01/14 8,012,480
3,500 Maine Health & Higher Educational Facilities Authority, Ser 1993
D (FSA) ........................................................ 5.50 07/01/18 3,527,195
4,000 Michigan Hospital Finance Authority, Detroit Medical Center Ser
1997 A (AMBAC) ................................................. 5.25 08/15/27 3,894,680
10,000 Missouri Health & Educational Facilities Authority,
Barnes-Jewish Inc/ Christian Health Services Ser 1993 A ........ 5.25 05/15/14 10,108,000
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) 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 $ 9,986,500
3,000 Wisconsin Health & Educational Facilities Authority, Catholic
Health Corp Ser 1993 ........................................... 5.375 11/15/13 3,017,460
- ----------- --------------
38,500 38,546,315
- ----------- --------------
Industrial Development/Pollution Control Revenue (12.5%)
10,000 Valdez, Alaska, BP Pipeline Inc Ser 1993 B ...................... 5.50 10/01/28 10,017,600
10,000 Hawaii Department of Budget & Finance, Hawaiian Electric Co Inc
Ser 1993 (AMT)(MBIA) ........................................... 5.45 11/01/23 9,877,800
4,000 Calvert County, Maryland, Baltimore Gas & Electric Co Refg Ser
1993 ........................................................... 5.55 07/15/14 4,087,400
5,000 Brazos River Authority, Texas, Houston Lighting & Power Co Ser
1993 (MBIA) .................................................... 5.60 12/01/17 5,113,750
5,000 Marshall County, West Virginia, Ohio Power Co Ser B (MBIA) ...... 5.45 07/01/14 5,108,900
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A .. 6.90 02/01/13 11,196,700
- ----------- --------------
44,000 45,402,150
- ----------- --------------
Mortgage Revenue-Multi-Family (5.0%)
4,705 Illinois Housing Development Authority, 1993 Ser A .............. 5.90 07/01/12 4,838,810
13,310 Wisconsin Housing & Economic Development Authority, 1993 Ser A .. 5.55 11/01/15 13,280,452
- ----------- --------------
18,015 18,119,262
- ----------- --------------
Mortgage Revenue-Single Family (5.8%)
8,000 Alaska Housing Finance Corporation, 1997 Ser A (MBIA) ........... 6.00 06/01/27 8,341,760
3,830 Connecticut Housing Finance Authority, 1993 Subser F-1 .......... 5.60 05/15/11 3,905,719
8,700 Kentucky Housing Corporation, Federally Insured or Gtd Loans
1993 Ser B ..................................................... 5.40 07/01/14 8,896,533
- ----------- --------------
20,530 21,144,012
- ----------- --------------
Public Facilities Revenue (8.3%)
11,000 California Public Works Board, Correctional 1993 Ser D COPs ..... 5.375 06/01/18 10,966,010
4,000 Maine Municipal Bond Bank, 1993 Ser E ........................... 5.30 11/01/13 4,036,960
5,000 Kansas City School District Building Corporation, Missouri,
Elementary Ser 1993 D (FGIC) ................................... 5.00 02/01/14 4,924,650
10,000 Regional Convention & Sports Complex Authority, Missouri,
Refg Ser A 1993 ................................................ 5.60 08/15/17 10,160,500
- ----------- --------------
30,000 30,088,120
- ----------- --------------
Resource Recovery Revenue (2.9%)
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ............................................... 6.30 07/01/16 10,613,600
- ----------- --------------
Transportation Facilities Revenue (5.7%)
5,000 Chicago, Illinois, Chicago-O'Hare Int'l Airport Refg 1993 Ser A . 5.00 01/01/16 4,817,800
5,000 Wayne County, Michigan, Detroit Metropolitan Wayne County
Airport Sub Lien Ser 1993 C (MBIA) ............................. 5.25 12/01/13 5,005,950
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
$ 2,000 Rhode Island Port Authority & Economic Development Corporation,
TF Green State Airport 1993 Ser A (AMT)(FSA) ................... 5.25 % 07/01/23 $ 1,916,380
5,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1993
(AMBAC) ........................................................ 5.00 01/01/20 4,776,700
4,175 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B .. 5.50 05/15/18 4,216,124
- ----------- --------------
21,175 20,732,954
- ----------- --------------
Water & Sewer Revenue (14.5%)
5,000 Phoenix Civic Improvement Corporation, Arizona, Wastewater
Refg Ser 1993 .................................................. 5.00 07/01/18 4,827,150
5,000 Los Angeles County Sanitation Districts Financing Authority,
California, 1993 Ser A ......................................... 5.25 10/01/19 4,930,200
5,000 Atlanta, Georgia, Water & Sewer Ser 1993 ........................ 5.00 01/01/15 4,883,600
Louisville & Jefferson County Metropolitan Sewer District,
Kentucky,
3,000 Ser 1993 A (MBIA) .............................................. 5.50 05/15/21 3,026,040
5,000 Ser 1993 B (MBIA) .............................................. 5.50 05/15/23 5,043,400
10,000 Massachusetts Water Resources Authority, 1993 Ser C ............. 5.25 12/01/20 9,817,900
5,000 New York City Municipal Water Finance Authority, New York, 1994
Ser B .......................................................... 5.50 06/15/19 5,023,050
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (FSA) ... 5.50 06/15/14 10,128,600
5,000 Norfolk, Virginia, Water Ser 1993 (AMBAC) ....................... 5.375 11/01/23 5,001,500
- ----------- --------------
53,000 52,681,440
- ----------- --------------
Other Revenue (2.2%)
8,000 New York Local Government Assistance Corporation, Ser 1993 C .... 5.50 04/01/18 8,059,040
- ----------- --------------
348,365 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $343,172,391) ..................... 350,969,872
- ----------- --------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (1.5%)
3,900 East Baton Rouge Parish, Louisiana, Exxon Corp Ser 1989
(Demand 05/01/98) .............................................. 4.20 * 03/01/22 3,900,000
1,500 Harris County Health Facilities Development Corporation, Texas,
Methodist Hospital Ser 1994 (Demand 05/01/98) .................. 4.25 * 12/01/25 1,500,000
- ----------- --------------
5,400 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
(Identified Cost $5,400,000) ........................................................ 5,400,000
- ----------- --------------
$353,765 TOTAL INVESTMENTS (Identified Cost $348,572,391) (a) ..................... 98.2% 356,369,872
===========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......................... 1.8 6,363,758
--------------
NET ASSETS .............................................................. 100.0% $362,733,630
===== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
- --------------
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
$7,917,890 and the aggregate gross unrealized depreciation is
$120,409, resulting in net unrealized appreciation of $7,797,481.
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
April 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Alaska 5.1%
Arizona 1.3
California 4.4
Connecticut 1.1
District of Columbia 1.0
Florida 1.3
Georgia 2.7
Hawaii 2.7
Illinois 5.3
Indiana 2.2
Kentucky 4.7%
Louisiana 1.1
Maine 2.1
Maryland 6.8
Massachusetts 6.0
Michigan 2.5
Missouri 6.9
New York 7.9
Pennsylvania 3.1
Rhode Island 0.5
South Carolina 1.6%
Tennessee 2.7
Texas 3.1
Virginia 5.3
Washington 7.8
West Virginia 1.4
Wisconsin 7.6
----
Total 98.2%
====
</TABLE>
- -----------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $348,572,391) ......... $356,369,872
Cash .................................... 17,732
Interest receivable ..................... 6,574,764
Deferred organizational expenses ....... 2,995
Prepaid expenses ........................ 126,166
------------
TOTAL ASSETS .......................... 363,091,529
------------
LIABILITIES:
Payable for:
Dividends to preferred shareholders .. 149,586
Investment management fee ............. 119,659
Accrued expenses ........................ 88,654
------------
TOTAL LIABILITIES ..................... 357,899
------------
NET ASSETS ............................ $362,733,630
============
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, 18,425,213 shares
outstanding) ........................... 270,919,567
Net unrealized appreciation ............. 7,797,481
Accumulated undistributed net investment
income ................................. 2,340,378
Accumulated net realized loss ........... (15,323,796)
------------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS ......................... 265,733,630
------------
TOTAL NET ASSETS ...................... $362,733,630
============
NET ASSET VALUE PER COMMON SHARE
($265,733,630 divided by 18,425,213
common shares outstanding) ............. $14.42
======
</TABLE>
STATEMENT OF OPERATIONS
For the six months ended April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ....................... $ 9,688,759
-----------
EXPENSES
Investment management fee ............. 638,429
Auction commission fees ............... 132,062
Professional fees ..................... 52,499
Transfer agent fees and expenses ..... 32,542
Auction agent fees .................... 21,449
Shareholder reports and notices ...... 19,428
Registration fees ..................... 12,236
Trustees' fees and expenses ........... 9,216
Custodian fees ........................ 8,307
Organizational expenses ............... 3,567
Other ................................. 19,541
-----------
TOTAL EXPENSES ...................... 949,276
Less: expense offset .................. (8,228)
-----------
NET EXPENSES ........................ 941,048
-----------
NET INVESTMENT INCOME ............... 8,747,711
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ..................... 188,350
Net change in unrealized appreciation 1,604,949
-----------
NET GAIN ............................ 1,793,299
-----------
NET INCREASE .......................... $10,541,010
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1998 OCTOBER 31, 1997
- -------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .............................. $ 8,747,711 $ 18,111,306
Net realized gain (loss) ........................... 188,350 (135,894)
Net change in unrealized appreciation/depreciation 1,604,949 13,330,205
------------ ------------
NET INCREASE ..................................... 10,541,010 31,305,617
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME:
Preferred .......................................... (1,740,774) (3,427,332)
Common ............................................. (6,957,501) (13,932,610)
------------ ------------
TOTAL ............................................ (8,698,275) (17,359,942)
------------ ------------
Decrease from transactions in common shares of
beneficial interest ............................... (2,618,028) (15,295,174)
------------ ------------
NET DECREASE ..................................... (775,293) (1,349,499)
NET ASSETS:
Beginning of period ................................ 363,508,923 364,858,422
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$2,340,378 and $2,290,942, respectively) ........ $362,733,630 $363,508,923
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited)
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
11
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) 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 proceeds from sales of portfolio securities, excluding short-term
investments, for the six months ended April 30, 1998 aggregated $2,958,667.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager,
is the Trust's transfer agent. At April 30, 1998, the Trust had transfer
agent fees and expenses payable of approximately $1,600.
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 six
months ended April 30, 1998 included in Trustees'
12
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
fees and expenses in the Statement of Operations amounted to $2,276. At April
30, 1998, the Trust had an accrued pension liability of $28,073 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 IN RESET RANGE OF
SERIES SHARES* THOUSANDS* RATE* DATE DIVIDEND RATES**
------ ------- ---------- ----- ---- ----------------
<S> <C> <C> <C> <C> <C>
1 340 $17,000 4.35% 05/05/98 3.00% - 4.50%
2 300 15,000 2.40 05/06/98 2.40 - 4.50
3 300 15,000 4.20 05/07/98 3.00 - 5.00
4 600 30,000 3.70 01/05/99 3.68 - 3.70
5 400 20,000 3.55 07/07/98 3.40 - 4.25
</TABLE>
- ------------
* As of April 30, 1998.
** For the six months ended April 30, 1998.
Subsequent to April 30, 1998 and up through June 5, 1997 the Trust paid
dividends to Series 1 through 5 at rates ranging from 2.40% to 4.35%, in the
aggregate amount of $471,350.
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.
13
<PAGE>
INTERCAPITAL QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) 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, 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 10.47%)* ..... (200,300) (2,003) (2,616,025)
---------- -------- ------------
Balance, April 30, 1998 ................... 18,425,213 $184,252 $270,735,315
========== ======== ============
</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 will be 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 March 24, 1998, the Trust declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ---- ----
<S> <C> <C>
$0.0625 May 8, 1998 May 22, 1998
$0.0625 June 5, 1998 June 19, 1998
</TABLE>
14
<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 SIX FOR THE YEAR ENDED OCTOBER 31** SEPTEMBER 29, 1993*
MONTHS ENDED ---------------------------------------- THROUGH
APRIL 30, 1998** 1997 1996 1995 1994 OCTOBER 31, 1993**
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <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 $ 14.06
------- ------ ------ ------- ------- -------
Net investment income ......................... 0.48 0.95 0.92 0.90 0.99 0.03
Net realized and unrealized gain (loss) ....... 0.08 0.69 0.23 2.15 (3.15) (0.04)
------- ------ ------ ------- ------- -------
Total from investment operations .............. 0.56 1.64 1.15 3.05 (2.16) (0.01)
------- ------ ------ ------- ------- -------
Less dividends from:
Net investment income ........................ (0.38) (0.72) (0.72) (0.74) (0.77) --
Common share equivalent of dividends paid
to preferred shareholders .................. (0.09) (0.18) (0.17) (0.18) (0.19) --
------- ------ ------ ------- ------- -------
Total dividends ............................... (0.47) (0.90) (0.89) (0.92) (0.96) --
------- ------ ------ ------- ------- -------
Anti-dilutive effect of acquiring
treasury shares ............................. 0.02 0.13 0.14 0.08 0.04 --
------- ------ ------ ------- ------- -------
Offering costs charged against capital ........ -- -- -- -- (0.12) (0.02)
------- ------ ------ ------- ------- -------
Net asset value, end of period ................ $ 14.42 $14.31 $13.44 $ 13.04 $ 10.83 $ 14.03
======= ====== ====== ======= ======= =======
Market value, end of period ................... $12.875 $12.50 $11.25 $10.875 $ 9.50 $15.125
======= ====== ====== ======= ======= =======
TOTAL INVESTMENT RETURN+ ...................... 5.99%(1) 18.11% 10.39% 22.91% (32.98)% 0.83%(1)
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:
Total expenses ................................ 0.71%(2)(3) 0.71% 0.72%(3) 0.77%(3) 0.83% 0.48%(2)
Net investment income before preferred stock
dividends .................................... 6.52%(2) 6.87% 6.94% 7.48% 7.85% 2.51%(2)
Preferred stock dividends ..................... 1.30%(2) 1.30% 1.27% 1.48% 1.50% N/A
Net investment income available to common
shareholders ................................. 5.22%(2) 5.57% 5.67% 6.00% 6.35% 2.51%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ....... $362,734 $363,509 $364,858 $376,158 $382,578 $333,983
Asset coverage on preferred shares at
end of period ............................... 373% 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
15
<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
- -----------------------
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
The financial statements included herein have been taken from the records of
the Trust without examination by the independent accountants and accordingly
they do not express an opinion thereon.
INTERCAPITAL
QUALITY
MUNICIPAL
SECURITIES
SEMIANNUAL REPORT
APRIL 30, 1998
