<PAGE> 1
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES Two World Trade Center,
New York, New York 10048
LETTER TO THE SHAREHOLDERS October 31, 1996
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of InterCapital
California Quality Municipal Securities (IQC) for the fiscal year ended October
31, 1996.
Stronger economic growth and the potential threat of inflation shifted the tone
of the fixed-income markets from bullish to bearish in early 1996. This change
in market psychology was confirmed in March by a surprisingly large increase in
payroll employment. The rise in interest rates between February and July may be
attributed to market weakness on the days that strong monthly employment figures
were reported. The bond market sporadically pushed long-term yields higher,
anticipating that the Federal Reserve Board might raise the federal-funds rate.
However, with slower growth in employment and overall economic activity between
August and October, the central bank left monetary policy unchanged. As a
result, by the end of October the fixed-income markets had regained an
optimistic outlook and rallied to levels not seen since February.
MUNICIPAL MARKET CONDITIONS
Between February and July, 30-year insured revenue bond yields rose 75 basis
points from 5.40 percent to reach 6.15 percent in April and again in mid-June.
Subsequently, demand for municipal bonds improved and followed the trend of U.S.
Treasury securities toward lower yields. Insured bond yields reached 5.60
percent by the end of October. One-year municipal note yields declined
marginally from 3.80 percent to 3.70 percent over the past 12 months. In
October, the yield curve pickup for extending maturities from 1 to 30 years was
190 basis points.
The ratio of insured revenue bond yields to 30-year U.S. Treasury yields, moved
from 91 percent to 84 percent over the course of the fiscal year. A declining
ratio means that municipal bond prices outperformed U.S. Treasury prices. The
relative improvement in municipals occurred as flat-tax proposals failed to
gain public support.
<PAGE> 2
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1996, continued
The municipal market also benefited from steady demand. In addition to regular
maturities and calls for redemption this year, it has been estimated that
investors also face the retirement of over $60 billion of debt that has been
previously refinanced. On the supply side, new issues increased 20 percent to
$147 billion over the calendar year to date.
PERFORMANCE
The Trust's net asset value (NAV) increased from $12.70 to $13.08 per share
during the fiscal year ended October 31, 1996. Based on this NAV change plus
reinvestment of tax-free dividends of $0.69 per share, the Trust's total return
was 9.65 percent. Over the same period, IQC's market price on the New York Stock
Exchange increased from $10.875 to $11.25 per share. Based on this market price
change and reinvestment of tax-free dividends, the Trust's total return was
10.13 percent.
IQC began and ended the fiscal year trading at a 14 percent discount to NAV.
Undistributed net investment income available for dividends improved to $0.077
per share versus $0.032 per share a year ago.
PORTFOLIO STRUCTURE
On October 31, 1996, the Trust's net assets of $205 million were diversified
among 11 long-term municipal sectors and 39 credits. The average maturity and
call protection of IQC's long-term portfolio were 23 and 7 years, respectively.
Throughout the fiscal year, high credit quality was maintained with 70 percent
of its long-term holdings rated double or triple "A."
CREDIT RATINGS AS OF OCTOBER 31, 1996
(% OF TOTAL LONG-TERM PORTFOLIO)
AAA OR AAA
38%
A OR A
24%
BAA OR BBB
6%
AA OR AA
32%
AS MEASURED BY STANDARD & POOR'S CORP. OR MOODY'S INVESTORS
SERVICE, INC.
FIVE LARGEST SECTORS AS OF OCTOBER 31, 1996
(% OF NET ASSETS)
EDUCATION
15%
WATER &
SEWER
28%
ALL OTHERS
26%
ELECTRIC
9%
TAX
ALLOCATION
12%
PUBLIC FACILITIES
10%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE
<PAGE> 3
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1996, continued
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 shares depends on two factors:
first, the spread between interest earned on the long-term bonds in the
established portfolio of investments and the ARPS auction rate plus ARPS
expenses; second, the amount of ARPS outstanding. The greater the amount of ARPS
outstanding, the greater the amount of incremental income available for
distribution to common shareholders.
Weekly ARPS yields ranged between 2.32 and 5.125 percent during the fiscal year.
Leverage contributed approximately $0.07 per share to common share earnings
during the fiscal year. Three ARPS series totaling $55 million and representing
27 percent of net assets were outstanding.
LOOKING AHEAD
The balance between the supply of new issues and demand created by maturities is
expected to remain positive for the municipal market. Long-term insured
municipal securities currently yield 84 percent of U.S. Treasury securities and
may be expected to move in tandem with the Treasury market. Although municipal
performance relative to U.S. Treasury securities has improved, tax-exempts could
again be affected by market uncertainty if new tax reduction proposals were to
resurface.
The Trust's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps to
support the market value of the Trust's shares. In addition, we would like to
remind you that the Trustees have approved a procedure whereby the Trust, when
appropriate, may purchase shares in the open market or in privately negotiated
transactions at a price not above market value or net asset value, whichever is
lower at the time of purchase. Over the past fiscal year, IQC purchased and
retired 504,400 shares of common stock at a weighted average market discount of
14.12 percent. The Trust may also utilize procedures to reduce or eliminate the
amount of outstanding ARPS, including their purchase in the open market or in
privately negotiated transactions.
<PAGE> 4
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1996, continued
We appreciate your ongoing support of InterCapital California Quality Municipal
Securities and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
- ----------------------------
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 5
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 27, 1996, an annual meeting of the Trust's shareholders was held for the
purpose of voting on three separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Dr. Manuel H. Johnson
For................................................................. 7,969,941
Withheld............................................................ 151,217
John L. Schroeder
For................................................................. 7,971,552
Withheld............................................................ 149,606
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire,
Michael E. Nugent and Philip J. Purcell.
(2) CONTINUANCE OF THE CURRENTLY EFFECTIVE INVESTMENT MANAGEMENT AGREEMENT WITH
DEAN WITTER INTERCAPITAL INC.:
<TABLE>
<S> <C>
For................................................................. 7,835,158
Against............................................................. 85,627
Abstain............................................................. 200,373
</TABLE>
(3) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For................................................................. 7,917,748
Against............................................................. 40,193
Abstain............................................................. 163,217
</TABLE>
<PAGE> 6
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (97.7%)
General Obligation (2.0%)
$ 4,000 California, Various Purpose Dtd 04/01/93................................ 5.90% 04/01/23 $ 4,036,720
-------- ----------
Educational Facilities Revenue (14.6%)
California Educational Facilities Authority,
6,000 Carnegie Institute of Washington 1993 Ser A............................ 5.60 10/01/23 5,805,480
1,500 Culinary Institute of America Ser 1993 (Connie Lee).................... 5.30 10/01/23 1,381,155
2,500 Pepperdine University 1993 Ser A (MBIA)................................ 5.50 06/01/19 2,415,250
4,465 St Mary's College of California Refg Ser 1993.......................... 5.00 10/01/12 4,158,299
8,000 California Public Works Board, University of California Ser 1993 B...... 5.50 06/01/14 7,720,080
University of California,
5,750 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs................... 5.50 11/01/14 5,552,660
3,000 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs................... 5.60 11/01/20 2,881,530
-------- ----------
31,215 29,914,454
-------- ----------
Electric Revenue (8.8%)
6,000 Los Angeles Department of Water & Power, Issue of 1993.................. 5.375 09/01/23 5,623,680
8,375 Northern California Transmission Agency, California - Oregon
Transmission Refg Ser 1993 A (MBIA).................................... 5.25 05/01/20 7,838,916
5,000 Southern California Public Power Authority, Mead - Phoenix 1994 Ser A
(AMBAC)................................................................ 4.875 07/01/20 4,437,650
-------- ----------
19,375 17,900,246
-------- ----------
Hospital Revenue (6.4%)
4,000 Anaheim, Anaheim Memorial Hospital Association COPs (AMBAC)............. 5.00 05/15/13 3,767,920
5,000 California Health Facilities Financing Authority, Kaiser Permanente Ser
1985................................................................... 5.55 08/15/25 4,771,800
California Statewide Communities Development Authority,
2,000 Children's Hospital of Los Angeles Ser 1993 COPs (MBIA)................ 6.00 06/01/13 2,118,980
2,500 Motion Picture & Television Fund COPs (AMBAC).......................... 5.375 01/01/20 2,396,025
-------- ----------
13,500 13,054,725
-------- ----------
Industrial Development/Pollution Control Revenue (3.9%)
8,000 California Pollution Control Financing Authority, Pacific Gas & Electric
-------- Co 1993 Ser B (AMT).................................................... 5.85 12/01/23 7,994,160
----------
Mortgage Revenue - Single Family (4.0%)
8,305 California Housing Finance Agency, Home 1993 Ser B...................... 5.65 08/01/14 8,185,325
-------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Public Facilities Revenue (10.0%)
$ 7,000 California Public Works Board, Corrections 1993 Ser D................... 5.375% 06/01/12 $ 6,794,830
6,400 Los Angeles Convention & Exhibition Center Authority, 1993 Refg Ser A
(MBIA)................................................................. 5.125 08/15/13 6,158,912
5,000 Los Angeles County Public Works Financing Authority, Multiple Capital
Project #IV (MBIA)..................................................... 5.25 12/01/16 4,744,150
3,000 Redding Joint Powers Financing Authority, 1993 Ser A.................... 5.50 01/01/13 2,851,800
-------- ----------
21,400 20,549,692
-------- ----------
Tax Allocation (11.7%)
6,870 Garden Grove Community Development Agency, Refg Issue of 1993........... 5.875 10/01/23 6,631,268
Los Angeles Community Redevelopment Financing Authority,
3,750 Grand Central Square 1993 Ser A (AMT).................................. 5.85 12/01/26 3,424,912
2,155 Grand Central Square 1993 Ser A (AMT).................................. 5.75 12/01/13 2,062,313
7,000 Rosemead Redevelopment Agency, Project #1 Ser 1993 A.................... 5.60 10/01/33 6,318,970
6,000 San Jose Redevelopment Agency, Merged Area Ser 1993 (MBIA).............. 5.00 08/01/20 5,456,580
-------- ----------
25,775 23,894,043
-------- ----------
Transportation Facilities Revenue (6.6%)
5,000 Long Beach, Harbor Ser 1993 (AMT)....................................... 5.00 05/15/10 4,731,400
7,000 Los Angeles County Metropolitan Transportation Authority, Sales Tax Refg
Ser 1993-A (MBIA)...................................................... 5.625 07/01/18 6,900,320
2,000 San Diego County Regional Transportation Commission, Sales Tax 1994 Ser
A (FGIC)............................................................... 4.75 04/01/08 1,908,240
-------- ----------
14,000 13,539,960
-------- ----------
Water & Sewer Revenue (27.5%)
8,000 California Department of Water Resources, Central Valley Ser L.......... 5.50 12/01/23 7,694,800
7,250 Eastern Municipal Water District, Ser 1993 A COPs (FGIC)................ 5.25 07/01/23 6,748,663
7,000 Los Angeles, Wastewater Refg Ser 1993-D (FGIC).......................... 5.20 11/01/21 6,492,710
8,000 Los Angeles County Sanitation Districts Financing Authority, 1993 Ser
A...................................................................... 5.25 10/01/19 7,493,680
3,000 Marin County Municipal Water District, Ser 1993......................... 5.65 07/01/23 2,915,250
5,000 Metropolitan Water District of Southern California, Issue of 1992....... 5.50 07/01/13 4,929,900
7,000 Moulton-Niguel Water District, 1993 COPs (AMBAC)........................ 5.30 09/01/23 6,562,220
2,500 Rancho Water District Financing Authority, Refg Ser 1994 (AMBAC)........ 5.00 08/15/14 2,334,875
4,000 Sacramento County Sanitation Districts Financing Authority, Ser 1993.... 5.00 12/01/16 3,649,600
8,000 San Diego Public Facilities Authority, Ser 1993 A....................... 5.25 05/15/20 7,428,960
-------- ----------
59,750 56,250,658
-------- ----------
Other Revenue (2.2%)
5,000 California Statewide Communities Development Authority, The J Paul Getty
-------- Trust COPs............................................................. 5.00 10/01/23 4,514,650
----------
210,320 TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $207,086,155)....................... 199,834,633
-------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL OBLIGATIONS (0.7%)
$ 1,000 California Pollution Control Financing Authority, Shell Oil Co 1991
(Demand 11/01/96)...................................................... 3.50*% 10/01/08 $ 1,000,000
400 California Statewide Communities Development Authority, St Joseph Health
-------- COPs (Demand 11/01/96)................................................. 3.50* 07/01/24 400,000
----------
1,400 TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL OBLIGATIONS
-------- (Identified Cost $1,400,000).................................................................... 1,400,000
----------
$211,720 TOTAL INVESTMENTS (Identified Cost $208,486,155) (a)..................................... 98.4% 201,234,633
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................................... 1.6 3,296,530
---- ----------
NET ASSETS............................................................................... 100.0% $204,531,163
====== ============
</TABLE>
- ---------------------
<TABLE>
<S> <C>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate security.
(a) The aggregate cost for federal income tax purposes approximates identified cost. The aggregate gross
unrealized appreciation was $76,746 and the aggregate gross unrealized depreciation was $7,328,268,
resulting in net unrealized depreciation of $7,251,522.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
ASSETS:
Investments in securities, at value
(identified cost $208,486,155)....................................... $201,234,633
Interest receivable................................................... 3,475,332
Cash.................................................................. 39,865
Deferred organizational expenses...................................... 14,885
Prepaid expenses and other assets..................................... 23,096
----------
TOTAL ASSETS...................................................... 204,787,811
----------
LIABILITIES:
Payable for:
Common shares of beneficial interest repurchased.................. 90,240
Investment management fee......................................... 66,514
Accrued expenses...................................................... 99,894
----------
TOTAL LIABILITIES................................................. 256,648
----------
NET ASSETS:
Preferred shares of beneficial interest (1,000,000 shares authorized
of non-participating $.01 par value, 1,100 shares outstanding)....... 55,000,000
----------
Common shares of beneficial interest (unlimited shares authorized of
$.01 par value, 11,435,813 shares outstanding)....................... 162,757,223
Net unrealized depreciation........................................... (7,251,522)
Accumulated undistributed net investment income....................... 885,680
Accumulated net realized loss......................................... (6,860,218)
----------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS...................... 149,531,163
----------
TOTAL NET ASSETS.................................................. $204,531,163
============
NET ASSET VALUE PER COMMON SHARE
($149,531,163 divided by 11,435,813 common shares outstanding)....... $13.08
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $11,598,122
---------
EXPENSES
Investment management fee.............................................. 717,519
Auction commission fees................................................ 138,041
Professional fees...................................................... 117,988
Transfer agent fees and expenses....................................... 46,870
Shareholder reports and notices........................................ 27,046
Auction agent fees..................................................... 26,961
Registration fees...................................................... 25,092
Trustees' fees and expenses............................................ 18,952
Servicing fees......................................................... 12,001
Custodian fees......................................................... 10,715
Organizational expenses................................................ 7,817
Other.................................................................. 11,459
---------
TOTAL EXPENSES BEFORE EXPENSE OFFSET............................... 1,160,461
LESS: EXPENSE OFFSET............................................... (10,570)
---------
TOTAL EXPENSES AFTER EXPENSE OFFSET................................ 1,149,891
---------
NET INVESTMENT INCOME.............................................. 10,448,231
---------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss...................................................... (112,902)
Net change in unrealized depreciation.................................. 3,042,883
---------
NET GAIN........................................................... 2,929,981
---------
NET INCREASE........................................................... $13,378,212
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1996 1995
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................... $ 10,448,231 $ 10,717,343
Net realized loss................................... (112,902) (1,012,101)
Net change in unrealized depreciation............... 3,042,883 25,818,322
----------- -----------
NET INCREASE.................................... 13,378,212 35,523,564
----------- -----------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME:
Preferred........................................... (1,875,384) (2,097,393)
Common.............................................. (8,064,705) (8,908,824)
----------- -----------
TOTAL........................................... (9,940,089) (11,006,217)
----------- -----------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
Preferred........................................... -- (17,250,000)
Common.............................................. (5,520,981) (4,315,688)
----------- -----------
TOTAL........................................... (5,520,981) (21,565,688)
----------- -----------
NET INCREASE (DECREASE)......................... (2,082,858) 2,951,659
NET ASSETS:
Beginning of period................................. 206,614,021 203,662,362
----------- -----------
END OF PERIOD
(Including undistributed net investment income
of $885,680 and $377,538, respectively)......... $204,531,163 $206,614,021
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996
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's
investment objective is to provide current income which is exempt from both
federal and California income taxes. 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
<PAGE> 13
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
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 -- Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses of the Trust's common shares in the
amount of $39,000 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, the Trust pays the Investment
Manager a management fee, calculated weekly and payable monthly, by applying the
annual rate of 0.35% to the Trust's average weekly net assets.
Under the terms of the Agreement, 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 proceeds from sales of portfolio securities, excluding short-term
investments, for the year ended October 31, 1996 aggregated $4,920,873.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At October 31, 1996, the Trust had transfer agent fees
and expenses payable of approximately $4,000.
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
<PAGE> 14
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
five years of service. Aggregate pension costs for the year ended October 31,
1996 included in Trustees' fees and expenses in the Statement of Operations
amounted to $1,333. At October 31, 1996, the Trust had an accrued pension
liability of $22,308 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 3 Auction Rate
Preferred Shares ("Preferred Shares") which have a liquidation value of $50,000
per share plus the redemption premium, if any, plus accumulated but unpaid
dividends, whether or not declared, thereon to the date of distribution. The
Trust may redeem such shares, in whole or in part, at the original purchase
price of $50,000 per share plus accumulated but unpaid dividends, whether or not
declared, thereon to the date of redemption.
Dividends, which are cumulative, are reset through auction procedures.
<TABLE>
<CAPTION>
AMOUNT RESET RANGE OF
SERIES SHARES* IN THOUSANDS* RATE* DATE DIVIDEND RATES**
- ------ ------- ------------- ----- -------- ----------------
<S> <C> <C> <C> <C> <C>
1 260 $13,000 2.85% 11/04/96 2.32% - 5.00 %
2 240 12,000 3.183 11/06/96 2.50 - 4.90
3 600 30,000 2.85 11/04/96 2.32 - 5.125
</TABLE>
- ---------------------
* As of October 31, 1996.
** For the year ended October 31, 1996.
Subsequent to October 31, 1996 and up through December 9, 1996, the Trust paid
dividends to each of the Series 1 through 3 at rates ranging from 2.50% to 3.50%
in the aggregate amount of $191,658.
The Trust is subject to certain restrictions relating to the preferred shares.
Failure to comply with these restrictions could preclude the Trust from
declaring any distributions to common shareholders or purchasing common shares
and/or could trigger the mandatory redemption of preferred shares at liquidation
value.
The preferred shares, which are entitled to one vote per share, generally vote
with the common shares but vote separately as a class to elect two Trustees and
on any matters affecting the rights of the preferred shares.
<PAGE> 15
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1996, continued
5. COMMON SHARES OF BENEFICIAL INTEREST
Transactions in common shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- ---------- ------------
<S> <C> <C> <C>
Balance, October 31, 1994...................................................... 12,369,913 $123,699 $172,470,193
Treasury shares purchased and retired (weighted average discount 10.73%)*...... (429,700) (4,297) (4,311,391)
--------- ------- -----------
Balance October 31, 1995....................................................... 11,940,213 119,402 168,158,802
Treasury shares purchased and retired (weighted average discount 14.12%)*...... (504,400) (5,044) (5,515,937)
--------- ------- -----------
Balance, October 31, 1996...................................................... 11,435,813 $114,358 $162,642,865
========= ======= ===========
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
At October 31, 1996, the Trust had a net capital loss carryover of approximately
$6,860,000 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 TOTAL
- ------ ------ ---- ------
<S> <C> <C> <C>
$5,735 $1,012 $113 $6,860
</TABLE>
7. DIVIDENDS TO COMMON SHAREHOLDERS
The Trust declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------- --------- ------------------ -------------------
<S> <C> <C> <C>
October 30, 1996 $0.0575 November 8, 1996 November 22, 1996
November 26, 1996 $0.0575 December 6, 1996 December 20, 1996
</TABLE>
<PAGE> 16
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 YEAR ENDED FOR THE PERIOD
OCTOBER 31** SEPTEMBER 29, 1993*
--------------------------- THROUGH
1996 1995 1994++ OCTOBER 31, 1993**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................... $12.70 $ 10.62 $13.96 $14.06
----- ------ ----- ----------
Net investment income......................................... 0.89 0.88 0.95 0.03
Net realized and unrealized gain (loss)....................... 0.26 2.07 (3.25) (0.10)
----- ------ ----- ----------
Total from investment operations.............................. 1.15 2.95 (2.30) (0.07)
----- ------ ----- ----------
Less dividends from:
Net investment income...................................... (0.69) (0.74) (0.74) --
Common share equivalent of dividends paid to preferred
shareholders.............................................. (0.16) (0.17) (0.18) --
----- ------ ----- ----------
Total dividends............................................... (0.85) (0.91) (0.92) --
Anti-dilutive effect of acquiring treasury shares............. 0.08 0.04 0.01 --
Offering costs charged against capital........................ -- -- (0.13) (0.03)
----- ------ ----- ----------
Net asset value, end of period................................ $13.08 $ 12.70 $10.62 $13.96
====== ======= ====== ==========
Market value, end of period................................... $11.25 $10.875 $ 9.75 $15.00
====== ======= ====== ==========
TOTAL INVESTMENT RETURN+...................................... 10.13% 19.73% (30.89)% --
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses before expense offset.......................... 0.78%(4) 0.84%(3) 0.93% 0.52%(2)
Net investment income before preferred stock dividends........ 7.02% 7.57%(3) 7.63% 2.32%(2)
Preferred stock dividends..................................... 1.26% 1.48% 1.43% N/A
Net investment income available to common shareholders........ 5.76% 6.09% 6.18% 2.55%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands....................... $204,531 $206,614 $203,662 $176,317
Asset coverage on preferred shares at end of period........... 372% 376% 281% N/A
Portfolio turnover rate....................................... -- 1% 20% --
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* Commencement of operations.
** The per share amounts were computed using an average number of shares outstanding during the period.
+ Total investment return is based upon the current market value on the last day of each period reported. Dividends are
assumed to be reinvested at the prices obtained under the Trust's dividend reinvestment plan. Total investment return does
not reflect brokerage commissions.
++ Restated for comparative purposes.
(1) Not annualized.
(2) Annualized.
(3) The above expense and net investment ratios would have been 0.83% and 7.58%, respectively, after expense offset, which
reflect 0.01% effect for custody cash credits.
(4) The above expense ratio would have been 0.77%, after expense offset, which reflects 0.01% effect for custody cash credits.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 17
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, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for the
three years in the period then ended and for the period September 29, 1993
(commencement of operations) through October 31, 1993, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 9, 1996
--------------------------------------------------------------------
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended October 31, 1996, the Trust paid the
following per share amounts from tax-exempt income: $0.69 to
the common shareholders, $1,659 to Series 1 preferred
shareholders, $1,686 to Series 2 preferred shareholders and
$1,718 to Series 3 preferred shareholders.
<PAGE> 18
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<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
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
DEAN WITTER
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES FUND
[PHOTO]
ANNUAL REPORT
OCTOBER 31, 1996
