<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
Two World Trade Center
New York, New York 10048
DEAR SHAREHOLDER:
- --------------------------------------------------------------------------------
Strong economic growth in the fourth quarter of 1993 and a shift in Federal
Reserve Board monetary policy in February of 1994 caused the fixed-income
markets to reverse direction and led to the sharpest increase in interest rates
in more than six years. At the beginning of the year, market concerns about
inflation developed as the economy approached full employment and commodity
prices moved upward. The Federal Reserve Board responded by tightening monetary
policy. Since early February, the central bank has raised the federal-funds rate
- -- the interest rate banks charge each other for overnight loans -- 250 basis
points from 3.00 percent to 5.50 percent in six separate moves through November.
Between May and November, the discount rate -- the interest rate the Federal
Reserve charges member banks for loans -- increased 175 basis points to 4.75
percent.
During InterCapital California Quality Municipal Securities' (NYSE symbol:
IQC) fiscal year ended October 31, 1994, long-term municipal bond yields, as
measured by THE BOND BUYER Revenue Bond Index,* rose 139 basis points from 5.56
percent to 6.95 percent. In February and March yields jumped 89 basis points
from 5.50 percent to 6.39 percent in response to the Federal Reserve Board's
initial tightening and subsequent selling pressure. A semblance of stability
returned to the municipal bond market between June and August. After Labor Day,
however, continued economic growth, aggressive tax-loss selling, heavy
mutual-fund redemptions and excessive dealer inventory led to further municipal
market deterioration. The total yield increase of 139 basis points during the
fiscal year was equivalent to a 17 percent price decline for a 30-year municipal
bond. One-third of this price decline occurred in September and October.
The municipal market was also influenced by supply and demand conditions.
New-issue underwriting totaled a record $290 billion in 1993. The pace of
new-issue activity over the first 10 months of 1994, however, slowed 44 percent.
The estimated issuance for 1994 is $160 billion. By way of comparison, bond
maturities and calls for redemption are expected to reach $190 billion this year
resulting in a reduction in the amount of municipal debt outstanding. This
scarcity would normally be expected to improve the relative performance of
municipal bonds under stable-to-improving interest rate conditions.
PERFORMANCE
The Trust's net asset value (NAV) declined from $13.96 to $10.62 per share
during the fiscal year ended October 31, 1994. Based on this change and
reinvestment of tax-free dividends totaling $0.7425 per share, the Trust's total
return for the fiscal year was -19.11 percent. Concurrently, the Trust's market
price on the New York Stock Exchange declined from $15.00 to $9.75 per share.
Based on this market change and reinvestment of dividends, the Trust's total
return for the fiscal year was -30.89 percent. The Trust began the fiscal year
trading at 7.5 percent premium to NAV and closed at an 8.2 percent discount to
NAV.
PORTFOLIO STRUCTURE
As of October 31, 1994, the portfolio's long-term investments were
diversified among 12 municipal sectors and 37 credits. The three largest sectors
were water and sewer, educational facilities and public facilities revenue
bonds, representing 49 percent of net assets. The average maturity and call
protection of the Trust's long-term holdings was 24 years and 9 years,
respectively. Bonds subject to
- --------------
* THE BOND BUYER Revenue Bond Index is an arithmetic average of the yields of 25
selected municipal revenue bonds with 30-year maturities. Credit ratings of
these bonds range from Aa1 to Baa1 by Moody's and AA+ to A- by Standard &
Poor's.
<PAGE>
the alternative minimum tax (AMT) represented approximately 8 percent of net
assets. At the end of the period, the Trust had net assets in excess of $203
million.
The credit-quality ratings of the Trust's long-term portfolio as of October
31, 1994 are summarized below:
<TABLE>
<CAPTION>
Moody's or Standard & Poor's Rating Percent
- ---------------------------------------------------------------------- -------------
<S> <C>
Aaa or AAA............................................................ 38%
Aa or AA.............................................................. 33
A or A................................................................ 29
</TABLE>
On December 6, 1994, Orange County, California filed for protection under
federal bankruptcy law as the result of market losses in its pooled investment
fund. Only one of the Trust's holdings representing 3.7 percent of net assets
has been identified as a possible participant in the pool. This triple - A rated
bond is insured by AMBAC as to principal and interest in the event that the
issuer experiences difficulty in meeting debt service payments.
THE IMPACT OF LEVERAGING
As reported previously, the Trust's common shares are leveraged. Leverage
was created through the issuance of Auction Rate Preferred Shares (ARPS). The
ARPS's auction periods normally range between one week and one year. Proceeds
from ARPS underwritings were used to purchase additional long-term municipal
bonds. Following the payment of ARPS dividends, the common shares earn
incremental income when the portfolio yield is higher than the costs of the ARPS
(yield plus operating and remarketing expenses). Although rising short-term
interest rates have narrowed the yield spread this year, ARPS continue to
provide positive incremental income to common shareholders.
The leveraged capital structure of closed-end municipal bond funds
additionally impacts NAV. ARPS normally account for one-third of a fund's
underwritten capital structure. This produces a volatility factor for common
shares of 1.5 times the price change of bonds held in the portfolio. The common
stock's NAV per share reflects the full price change of the portfolio's
investments since the value of the preferred shares does not fluctuate.
As the bond market has eroded, the degree of leverage and volatility has
increased. The purchase and retirement of ARPS counteracts this trend. During
the fiscal year, IQC purchased and retired $18 million in par amount of ARPS, so
that $72 million in ARPS remain outstanding. Additional ARPS purchases may occur
if the degree of leverage increases or ARPS profitability (spread) declines
significantly.
DIVIDEND RESERVES
At the end of the fiscal year, IQC had undistributed net investment income
of $0.054 per share available for future distributions. This dividend reserve or
"cushion" helped sustain the Trust's current monthly dividend. Higher yields in
future ARPS auctions and ARPS retirements may further erode the cushion.
Declines in the dividend reserve may cause the Trust to adjust the common share
dividend.
LOOKING AHEAD
The overall direction of interest rates will primarily be determined by the
strength of the economy, the trend of inflation and the Federal Reserve Board's
responses. These conditions may continue to move interest rates higher through
mid-1995. Investor demand for municipal securities should be sustained by
significant bond maturities, calls for redemption and diminished new-issue
supply. Changing market conditions and the profitability of ARPS are among the
factors that will determine the Trust's future level of income and influence the
direction of the common stock market price.
The Trust's procedure for reinvestment of all dividends and distributions on
common shares is to purchase in the open market. This method helps to support
the market value of the Trust's shares. In
<PAGE>
addition, the Trustees have approved a procedure whereby the Trust, when
appropriate, purchases 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 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. Over the fiscal year, the
Trust purchased 262,200 shares of common stock at a weighted average discount of
5.1 percent.
We appreciate your ongoing support of InterCapital California Quality
Municipal Securities and look forward to continuing to serve your investment
needs.
Very truly yours,
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- ---------- --------- ---------------
<C> <S> <C> <C> <C>
CALIFORNIA EXEMPT MUNICIPAL BONDS (89.4%)
GENERAL OBLIGATION (2.1%)
$ 4,850 California, Various Purpose Dtd 4/1/93.............................. 5.90 % 4/ 1/23 $ 4,243,556
---------------
- -----------
EDUCATIONAL FACILITIES REVENUE (13.0%)
California Educational Facilities Authority,
6,000 Carnegie Institute of Washington Ser 1993 A....................... 5.60 10/ 1/23 5,021,520
900 Culinary Institute of America Ser 1993 (Connie Lee Insured)....... 5.25 10/ 1/13 738,567
1,500 Culinary Institute of America Ser 1993 (Connie Lee Insured)....... 5.30 10/ 1/23 1,207,275
2,500 Pepperdine University 1993 Ser A (MBIA Insured)................... 5.50 6/ 1/19 2,103,725
4,465 St Mary's College of California Refg Ser 1993..................... 5.00 10/ 1/12 3,560,570
8,000 California Public Works Board, University of California Ser 1993
B................................................................. 5.50 6/ 1/14 6,648,720
University of California, UCLA Central Chiller/Cogeneration
5,750 Refg Ser 1993 COPs................................................ 5.50 11/ 1/14 4,828,678
3,000 Refg Ser 1993 COPs................................................ 5.60 11/ 1/20 2,461,770
---------------
- -----------
26,570,825
32,115
---------------
- -----------
ELECTRIC REVENUE (7.5%)
6,000 Los Angeles Department of Water & Power, Issue of 1993.............. 5.375 9/ 1/23 4,835,460
8,375 Northern California Transmission Agency, California-Oregon
Transmission Refg Ser 1993 A (MBIA Insured)....................... 5.25 5/ 1/20 6,718,592
5,000 Southern California Public Power Authority, Mead-Phoenix 1994 Ser A
(AMBAC Insured)................................................... 4.875 7/ 1/20 3,774,700
---------------
- -----------
15,328,752
19,375
---------------
- -----------
HOSPITAL REVENUE (5.5%)
4,000 Anaheim, Anaheim Memorial Hospital Association COPs (AMBAC
Insured).......................................................... 5.00 5/15/13 3,220,200
5,000 California Health Facilities Financing Authority, Kaiser Permanente
Ser 1985.......................................................... 5.55 8/15/25 4,061,500
California Statewide Communities Development Authority,
2,000 Children's Hospital of Los Angeles Ser 1993 COPs (MBIA Insured)... 6.00 6/ 1/13 1,882,560
2,500 Motion Picture & Television Fund COPs (AMBAC Insured)............. 5.375 1/ 1/20 2,044,800
---------------
- -----------
11,209,060
13,500
---------------
- -----------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (3.4%)
8,000 California Pollution Control Financing Authority, Pacific
Gas & Electric Co 1993 Ser B (AMT)................................ 5.85 12/ 1/23 6,827,600
---------------
- -----------
MORTGAGE REVENUE - MULTI-FAMILY (2.5%)
Los Angeles Community Redevelopment Financing Authority, Grand
Central Square
2,155 1993 Ser A (AMT).................................................. 5.75 12/ 1/13 1,896,077
3,750 1993 Ser A (AMT).................................................. 5.85 12/ 1/26 3,180,412
---------------
- -----------
5,076,489
5,905
---------------
- -----------
MORTGAGE REVENUE - SINGLE FAMILY (4.1%)
9,630 California Housing Finance Agency, Home 1993 Ser B.................. 5.65 8/ 1/14 8,378,196
---------------
- -----------
</TABLE>
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- ---------- --------- ---------------
<C> <S> <C> <C> <C>
PUBLIC FACILITIES REVENUE (9.5%)
$ 7,000 California Public Works Board, Corrections 1993 Ser D............... 5.375% 6/ 1/12 $ 5,803,140
6,400 Los Angeles Convention & Exhibition Center Authority, 1993 Refg Ser
A (MBIA Insured).................................................. 5.125 8/15/13 5,227,328
7,000 Los Angeles County Public Works Financing Authority, Multiple
Capital Proj # IV (MBIA Insured).................................. 5.25 12/ 1/16 5,706,400
3,000 Redding Joint Powers Financing Authority, 1993 Ser A................ 5.50 1/ 1/13 2,565,540
---------------
- -----------
19,302,408
23,400
---------------
- -----------
TAX ALLOCATION (8.2%)
6,870 Garden Grove Community Development Agency, Refg Issue of 1993....... 5.875 10/ 1/23 5,863,957
7,000 Rosemead Redevelopment Agency, Proj #1 Ser 1993 A................... 5.60 10/ 1/33 5,610,780
6,700 San Jose Redevelopment Agency, Merged Area Ser 1993 (MBIA Insured).. 5.00 8/ 1/20 5,169,117
---------------
- -----------
16,643,854
20,570
---------------
- -----------
TRANSPORTATION FACILITIES REVENUE (5.0%)
5,000 Long Beach, Harbor Ser 1993 (AMT)................................... 5.00 5/15/10 4,173,650
7,000 Los Angeles County Metropolitan Transportation Authority,
Sales Tax Refg Ser 1993 A (MBIA Insured).......................... 5.625 7/ 1/18 6,008,730
---------------
- -----------
10,182,380
12,000
---------------
- -----------
WATER & SEWER REVENUE (26.5%)
8,000 California Department of Water Resources, Central Valley Ser L...... 5.50 12/ 1/23 6,558,880
7,250 Eastern Municipal Water District, Ser 1993 A COPs (FGIC Insured).... 5.25 7/ 1/23 5,755,848
7,000 Los Angeles, Wastewater Refg Ser 1993-D (FGIC Insured).............. 5.20 11/ 1/21 5,544,210
8,000 Los Angeles County Sanitation Districts Financing Authority, 1993
Ser A............................................................. 5.25 10/ 1/19 6,383,120
3,000 Marin County Municipal Water District, Ser 1993..................... 5.65 7/ 1/23 2,540,370
10,000 Metropolitan Water District of Southern California, Issue of 1992... 5.50 7/ 1/13 8,644,900
8,800 Moulton Niguel Water District, 1993 COPs (AMBAC Insured)............ 5.30 9/ 1/23 7,065,432
2,500 Rancho Water District Financing Authority, Refg Ser 1994 (AMBAC
Insured).......................................................... 5.00 8/15/14 1,988,700
4,000 Sacramento County Sanitation Districts Financing Authority, Ser
1993.............................................................. 5.00 12/ 1/16 3,129,240
8,000 San Diego Public Facilities Authority, Ser 1993 A................... 5.25 5/15/20 6,352,320
---------------
- -----------
53,963,020
66,550
---------------
- -----------
OTHER REVENUE (2.1%)
5,750 California Statewide Communities Development Authority, The J Paul
Getty Trust COPs.................................................. 5.00 10/ 1/23 4,371,380
---------------
- -----------
TOTAL CALIFORNIA EXEMPT MUNICIPAL BONDS
221,645 (IDENTIFIED COST $218,210,247)...........................................................
182,097,520
---------------
- -----------
</TABLE>
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- ---------- --------- ----------------
<C> <S> <C> <C> <C>
CALIFORNIA EXEMPT SHORT-TERM MUNICIPAL OBLIGATIONS (6.6%)
$ 4,000 California Health Facilities Financing Authority, St Joseph Health
Ser B (Tender 11/1/94)............................................ 3.45 %* 7/ 1/09 $ 4,000,000
9,500 Orange County Sanitation Districts, Capital Impr COPs Ser 1990-92 A
(Tender 11/1/94).................................................. 3.45 * 8/ 1/15 9,500,000
---------------
- -----------
TOTAL CALIFORNIA EXEMPT SHORT-TERM MUNICIPAL OBLIGATIONS (IDENTIFIED COST $13,500,000).....
13,500 13,500,000
---------------
$ 235,145 TOTAL INVESTMENTS (IDENTIFIED COST $231,710,247)(A).................. 96.0% 195,597,520
- -----------
- -----------
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES....................... 4.0 8,064,842
---------- -------------
NET ASSETS........................................................... 100.0% $203,662,362
---------- -------------
---------- -------------
<FN>
- ----------------
AMT ALTERNATIVE MINIMUM TAX.
COPS CERTIFICATES OF PARTICIPATION.
* VARIABLE OR FLOATING RATE SECURITIES. COUPON RATE SHOWN REFLECTS
CURRENT RATE.
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $231,710,247; THE
AGGREGATE GROSS AND NET UNREALIZED DEPRECIATION
IS $36,112,727.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $231,710,247) (Note
1)...................................... $ 195,597,520
Cash...................................... 121,807
Receivable for:
Investments sold........................ 5,070,712
Interest................................ 3,685,310
Deferred organizational expenses (Note
1)...................................... 30,520
Prepaid expenses and other assets......... 31,163
-------------
TOTAL ASSETS...................... 204,537,032
-------------
LIABILITIES:
Payable for:
Shares of beneficial interest purchased:
Preferred............................. 700,000
Common................................ 29,715
Investment management fee (Note 2)...... 64,067
Accrued expenses and other payables (Note
3)...................................... 80,888
-------------
TOTAL LIABILITIES................. 874,670
-------------
NET ASSETS:
Preferred shares of beneficial interest
(1,000,000 shares authorized of non-
participating $.01 par value, 1,445
shares outstanding) (Note 4)............ 72,250,000
-------------
Common shares of beneficial interest
(unlimited shares authorized of $.01 par
value, 12,369,913 shares outstanding)
(Note 5)................................ 172,593,892
Net unrealized depreciation on
investments............................. (36,112,727)
Accumulated undistributed net investment
income.................................. 666,412
Accumulated net realized loss on
investments............................. (5,735,215)
-------------
NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS.............. 131,412,362
-------------
TOTAL NET ASSETS.................. $ 203,662,362
-------------
-------------
NET ASSET VALUE PER COMMON SHARE,
($131,412,362 divided by 12,369,913
common shares outstanding)..............
$10.62
-------------
-------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME:
INTEREST INCOME......................... $ 13,327,254
-------------
EXPENSES
Investment management fee (Note 2).... 835,135
Professional fees..................... 190,251
Auction commission fees............... 182,450
Transfer agent fees and expenses (Note
3).................................. 60,940
Auction agent fees.................... 48,000
Shareholder reports and notices....... 33,382
Registration fees..................... 28,986
Trustees' fees and expenses (Note
3).................................. 28,701
Custodian fees........................ 24,278
Organizational expenses (Note 1)...... 7,796
Other................................. 12,269
-------------
TOTAL EXPENSES.................... 1,452,188
-------------
NET INVESTMENT INCOME........... 11,875,066
-------------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (Note 1):
Net realized loss on investments...... (5,735,215)
Net change in unrealized depreciation
on investments...................... (34,922,493)
-------------
NET LOSS ON INVESTMENTS........... (40,657,708)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS..... $ (28,782,642)
-------------
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 29, 1993
FOR THE YEAR THROUGH
ENDED OCTOBER 31, 1993
OCTOBER 31, 1994 (NOTE 1)
---------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income................................................. $ 11,875,066 $ 338,023
Net realized loss on investments...................................... (5,735,215) --
Net change in unrealized depreciation on investments.................. (34,922,493) (1,190,234)
---------------- -------------------
Net decrease in net assets resulting from operations.............. (28,782,642) (852,211)
---------------- -------------------
Dividends to preferred shareholders from net investment income.......... (2,231,747) --
Dividends to common shareholders from net investment income............. (9,314,930) --
---------------- -------------------
Total dividends................................................... (11,546,677) --
---------------- -------------------
Net increase (decrease) from transactions in shares of beneficial
interest
(Notes 4 & 5):
Common................................................................ (4,575,617) 177,069,500
Preferred............................................................. 72,250,000 --
---------------- -------------------
Total transactions................................................ 67,674,383 177,069,500
---------------- -------------------
Total increase.................................................... 27,345,064 176,217,289
NET ASSETS:
Beginning of period..................................................... 176,317,298 100,009
---------------- -------------------
END OF PERIOD (including undistributed net investment income of $666,412
and
$338,023, respectively).............................................. $ 203,662,362 $ 176,317,298
---------------- -------------------
---------------- -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- InterCapital California Quality
Municipal Securities (the "Trust") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, closed-end management investment
company. The Trust was organized as a Massachusetts business trust on March 3,
1993 and had no operations other than those relating to organizational matters
and the issuance of 7,113 common shares of beneficial interest to Dean Witter
InterCapital Inc. (the "Investment Manager") for $100,009. The Trust commenced
operations on September 29, 1993.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued for the
Trust by an outside independent pricing service approved by the Trustees.
The pricing service has informed the Trust that in valuing the Trust's
portfolio securities, it uses both a computerized matrix of tax-exempt
securities and evaluations by its staff, in each case based on information
concerning market transactions and quotations from dealers which reflect the
bid side of the market each day. The Trust's portfolio securities are thus
valued by reference to a combination of transactions and quotations for the
same or other securities believed to be comparable in quality, coupon,
maturity, type of issue, call provisions, trading characteristics and other
features deemed to be relevant. Short-term debt securities having a maturity
date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt
securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined on the identified cost
method. The Trust amortizes premiums and discounts on securities purchased
over the life of the respective securities. Interest income is accrued
daily.
C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records
dividends and distributions to its shareholders on the ex-dividend date. The
amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their 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 AND OFFERING EXPENSES -- The Investment Manager paid the
organizational and offering expenses of the Trust's common shares in the
amounts of $39,000 and $423,576,
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
respectively, and paid $253,310 in offering expenses of the Trust's
preferred shares. The organizational expenses have been reimbursed by the
Trust 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. Offering expenses have been
reimbursed by the Trust and were charged to capital at the time of issuance
of the Trust's respective shares.
2. INVESTMENT MANAGEMENT AGREEMENT -- Pursuant to an Investment Management
Agreement, the Trust pays its Investment Manager a management fee, calculated
weekly and payable monthly, by applying the annual rate of 0.35% to the Trust's
average weekly net assets.
Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Manager maintains certain of the Trust's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Trust who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Trust.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES -- The cost of
purchases and proceeds from sales of portfolio securities, excluding short-term
investments, for the year ended October 31, 1994 aggregated $153,712,781 and
$41,802,335, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At October 31, 1994, the Trust had transfer agent fees
and expenses payable of approximately $10,000.
On January 1, 1994, the Trust adopted an unfunded noncontributory defined
benefit pension plan covering all independent Trustees of the Trust who will
have served as an independent Trustee 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, 1994, included in Trustees' fees and expenses in the
Statement of Operations amounted to $10,000. At October 31, 1994, the Trust had
an accrued pension liability of $9,974 which is included in accrued expenses in
the Statement of Assets and Liabilities.
Dean Witter Distributors Inc., the Trust's principal underwriter and an
affiliate of the Investment Manager, has informed the Trust that it received
approximately $1,350,000 in underwriting discounts and commissions in connection
with the offering of the preferred shares.
4. PREFERRED SHARES OF BENEFICIAL INTEREST -- The Trust is authorized to issue
up to 1,000,000 non-participating preferred shares of beneficial interest having
a par value of $.01 per share, in one or more series, with rights as determined
by the Trustees, without approval of the common shareholders. On November 16,
1993, the Trust issued 1,800 shares of Auction Rate Preferred Shares ("Preferred
Shares") consisting of 600 shares each of Series 1 through 3 for gross total
proceeds of $90,000,000. Underwriting discounts and commissions were charged to
capital at the time of issuance. The preferred shares have a liquidation value
of $50,000 per share plus the redemption premium, if any, plus accumulated but
unpaid dividends (whether or not declared) thereon to the date of distribution.
The Trust may redeem such shares, in whole or in part, at the original purchase
price of $50,000 per share plus accumulated but unpaid dividends (whether or not
declared) thereon to the
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
date of redemption. During the year ended October 31, 1994, the Trust purchased
and retired 146 shares of Series 1 and 209 shares of Series 2 amounting to
$7,300,000 and $10,450,000, respectively.
Dividends, which are cumulative, are reset through auction procedures.
<TABLE>
<CAPTION>
RANGE OF DIVIDEND
SHARES* SERIES RATE* RESET DATE RATES**
----------- --------- ----------- ---------- ------------------
<S> <C> <C> <C> <C>
454 1 2.75 % 11/7/94 2.00% - 3.375%
391 2 3.192 11/2/94 1.00 - 3.30
600 3 3.43 2/6/95 2.65 - 3.43
<FN>
- --------------
* AS OF OCTOBER 31, 1994.
** FOR THE YEAR ENDED OCTOBER 31, 1994.
</TABLE>
Subsequent to October 31, 1994 and up through December 5, 1994, the Trust
paid dividends to each of the Series 1 through 3 at rates ranging from 2.25% to
3.05%, 2.625% to 3.192% and 3.43% respectively, in the aggregate amount of
$264,175.
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, 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 (Note 1)............................................ 7,113 $ 71 $ 99,938
Shares issued at close of public offering on September 29,
1993*...................................................... 11,500,000 115,000 161,137,000
Shares issued on October 12, 1993 and October 27, 1993 to
cover over-allotment....................................... 1,125,000 11,250 15,806,250
----------- ---------- ---------------
Balance, October 31, 1993................................... 12,632,113 126,321 177,043,188
Adjustment to estimated offering cost associated with the
public offering of the common shares....................... 14,424
Offering costs and underwriting discounts associated with
the issuance of preferred shares........................... (1,603,310)
Treasury shares purchased and retired (weighted average
discount 5.05%)**.......................................... (262,200) (2,622) (2,984,109)
----------- ---------- ---------------
Balance, October 31, 1994................................... 12,369,913 $ 123,699 $ 172,470,193
----------- ---------- ---------------
----------- ---------- ---------------
<FN>
- --------------
* NET OF ESTIMATED OFFERING COSTS OF $438,000.
** THE TRUSTEES HAVE VOTED TO RETIRE THE SHARES PURCHASED.
</TABLE>
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. FEDERAL INCOME TAX STATUS -- At October 31, 1994, the Trust had net capital
loss carryovers of approximately $5,735,000 all of which will be available
through October 31, 2002, which may be used to offset future capital gains to
the extent provided by regulations.
7. DIVIDENDS TO COMMON SHAREHOLDERS -- The Trust declared the following
dividends from net investment income --
<TABLE>
<CAPTION>
DECLARATION AMOUNT PER RECORD PAYABLE
DATE SHARE DATE DATE
- ----------------------- ----------------- ----------------------- -----------------------
<S> <C> <C> <C>
November 1, 1994 $ .0675 November 11, 1994 November 25, 1994
November 29, 1994 $ .0675 December 9, 1994 December 23, 1994
</TABLE>
8. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED*
----------------------------------------------------------------------------------------
10/31/94 7/31/94 4/30/94 1/31/94
--------------------- -------------------- --------------------- --------------------
TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
---------- --------- --------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income.................. $ 3,465 $ 0.28 $ 3,431 $ 0.28 $ 3,466 $ 0.27 $ 2,965 $ 0.24
Net investment income.................... 3,086 0.25 3,052 0.24 3,112 0.25 2,625 0.21
Net realized and unrealized gain (loss)
on investments.......................... (16,186) (1.30) 2,742 0.23 (32,314) (2.57) 5,100 0.40
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED*
--------------------
10/31/93**
--------------------
TOTAL PER SHARE
--------- ---------
<S> <C> <C>
Total investment income....................................................................... $ 414 $ 0.03
Net investment income......................................................................... 338 0.03
Net realized and unrealized loss on investments............................................... (1,190) (0.10)
<FN>
- --------------
* TOTALS EXPRESSED IN THOUSANDS OF DOLLARS.
** FOR THE PERIOD SEPTEMBER 29, 1993 (COMMENCEMENT OF OPERATIONS) THROUGH
OCTOBER 31, 1993.
</TABLE>
<PAGE>
INTERCAPITAL CALIFORNIA 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
SEPTEMBER
FOR THE YEAR 29,1993*
ENDED THROUGH
OCTOBER 31, OCTOBER 31,
1994** 1993**
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 13.96 $ 14.06
----------------- -----------------
Net investment income....................................... 0.95 0.03
Net realized and unrealized loss on investments............. (3.24) (0.10)
----------------- -----------------
Total from investment operations............................ (2.29) (0.07)
----------------- -----------------
Less dividends and other charges:
Net investment income (0.74) --
Common share equivalent of dividends paid to preferred
shareholders............................................. (0.18) --
Offering costs charged against capital.................... (0.13) (0.03)
----------------- -----------------
Total dividends and other charges........................... (1.05) (0.03)
----------------- -----------------
Net asset value, end of period.............................. $ 10.62 $ 13.96
----------------- -----------------
----------------- -----------------
Market value, end of period................................. $ 9.75 $ 15.00
----------------- -----------------
----------------- -----------------
TOTAL INVESTMENT RETURN+.................................... (30.89)% 0%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $203,662 $176,317
Ratios to average net assets of common shareholders:
Expenses.................................................. 0.93% 0.52%(2)
Net investment income before preferred stock dividends.... 7.63% 2.32%(2)
Preferred stock dividends................................. 1.43% N/A
Net investment income available to common shareholders.... 6.18% 2.55%(2)
Asset coverage on preferred shares at end of period......... 281% N/A
Portfolio turnover rate..................................... 20% 0%(1)
<FN>
- ----------------
* 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 AND DISTRIBUTIONS, IF ANY, ARE
ASSUMED TO BE REINVESTED AT THE PRICES OBTAINED UNDER THE TRUST'S DIVIDEND
REINVESTMENT PLAN. TOTAL INVESTMENT RETURN DOES NOT REFLECT SALES CHARGES
OR BROKERAGE COMMISSIONS.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of InterCapital California 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 California Quality
Municipal Securities (the "Trust") at October 31, 1994, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year 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 owned at October 31, 1994 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
New York, New York
December 5, 1994
1994 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended October 31, 1994, the Trust paid the following per share
amounts from tax-exempt income; $0.7425 to the common shareholders, $1,249 to
Series 1 preferred shareholders, $1,228 to Series 2 preferred shareholders and
$1,384 to Series 3 preferred shareholders.
<PAGE>
TRUSTEES
- -------------------------------------------------
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo INTERCAPITAL
Edwin J. Garn CALIFORNIA
John R. Haire QUALITY
Dr. Manuel H. Johnson MUNICIPAL
Paul Kolton SECURITIES
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- -------------------------------------------------
Charles A. Fiumefreddo
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Sheldon Curtis
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
James F. Willison
VICE PRESIDENT
Thomas F. Caloia
TREASURER
TRANSFER AGENT
- -------------------------------------------------
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- -------------------------------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- -------------------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
ANNUAL REPORT
OCTOBER 31, 1994