<PAGE> 1
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES Two World Trade Center,
New York, New York 10048
LETTER TO THE SHAREHOLDERS April 30, 1998
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of
InterCapital California Quality Municipal Securities (IQC) 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
BOND YIELDS 1994 - 1998
<TABLE>
<CAPTION>
Insured Municipal
30-Year 30-Year U.S. Revenue Yields
Insured Municipal Treasury as a Percentage of U.S.
Yields Yields Treasury Yields
<S> <C> <C> <C>
Dec '93 5.4 6.34 85.17%
5.4 6.24 86.54%
5.8 6.66 87.09%
6.4 7.09 90.27%
6.35 7.32 86.75%
6.25 7.43 84.12%
Jun '94 6.5 7.61 85.41%
6.25 7.39 84.57%
6.3 7.45 84.56%
6.55 7.81 83.87%
6.75 7.96 84.80%
7 8 87.50%
Dec '94 6.75 7.88 85.66%
6.4 7.7 83.12%
6.15 7.44 82.66%
6.15 7.43 82.77%
6.2 7.34 84.47%
5.8 6.66 87.09%
Jun '95 6.1 6.62 92.15%
6.1 6.86 88.92%
6 6.66 90.08%
5.95 6.48 91.82%
5.75 6.33 90.84%
5.5 6.14 89.56%
Dec '95 5.35 5.94 90.07%
5.4 6.03 89.55%
5.8 6.46 86.69%
5.85 6.66 87.84%
5.95 6.89 86.36%
6.05 6.99 86.55%
Jun '96 5.9 6.89 85.63%
5.85 6.97 83.93%
5.9 7.11 82.98%
5.7 6.93 82.25%
5.65 6.64 85.09%
5.5 6.35 86.61%
Dec '96 5.6 6.63 84.46%
5.7 6.79 83.95%
5.65 6.8 83.08%
5.9 7.1 83.10%
5.75 6.94 82.85%
5.65 6.91 81.77%
Jun '97 5.6 6.78 82.60%
5.3 6.3 84.00%
5.5 6.61 83.00%
5.4 6.4 84.40%
5.35 6.15 86.90%
5.3 6.05 87.60%
Dec '97 5.15 5.92 86.90%
Jan '98 5.15 5.8 88.80%
Feb.'98 5.2 5.92 87.80%
Mar '98 5.25 5.93 88.50%
Apr '98 5.35 5.95 89.90%
</TABLE>
<PAGE> 2
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
12 months the insured index yield has declined from 5.75 percent. 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 federal deficit has shrunk and the U.S. Treasury's
borrowing needs have declined. 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. Overall, refundings represented one-quarter of total new issues.
California new-issue underwriting represented 13 percent of national volume. For
the year-to-date, municipal underwriting is up 60 percent with refunding issues
comprising nearly one-third of the total.
PERFORMANCE
During the six-month period ended April 30, 1998, the Trust's net asset value
(NAV) increased from $13.90 to $14.03. Based on this NAV change plus
reinvestment of tax-free dividends totaling $0.36 per share, the Trust's total
NAV return was 3.70 percent. IQC's price on the New York Stock Exchange
increased from $12.6875 to $12.9375 per share. Based on this change in market
price plus reinvestment of dividends, the Trust's total market return was 4.77
percent. On April 30, 1998, IQC was trading at a 7.79 percent discount to NAV.
This means 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 $0.06 per share. The level of undistributed net investment
income increased from $0.124 to $0.131 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,
IQC purchased and retired 56,900 shares of common stock at a
2
<PAGE> 3
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
<TABLE>
<CAPTION>
LARGEST SECTORS as of April 30, 1998
(% of Net Assets)
<S> <C>
WATER & SEWER 29%
PUBLIC FACILITIES 14%
EDUCATION 13%
ALL OTHERS 13%
TAX ALLOCATIONS 9%
ELECTRIC 8%
HOSPITAL 7%
TRANSPORTATION 7%
</TABLE>
Portfolio structure is subject to change.
<TABLE>
<CAPTION>
CREDIT RATINGS as of April 30, 1998
(% of Total Long - Term Portfolio
<S> <C>
Aaa or AAA 43%
Aa or AA 37%
A or A 17%
Baa or BBC 3%
</TABLE>
As measured by Moody's Investors Services, Inc. or Standard & Poor's Corp.
Portfolio structure is subject to change.
<TABLE>
<CAPTION>
CALL STRUCTURE AS OF APRIL 30, 1998
(% of Total Long - Term Portfolio) WEIGHTED ADVANTAGE
Percent Callable CALL PROTECTION: 6 YEARS
Years Bonds Callable
<S> <C>
1999 0%
2000 0%
2001 0%
2002 5%
2003 69%
2004 19%
2005 0%
2006 1%
2007 3%
2008 2%
2009+ 1%
</TABLE>
Portfolio structure is subject to change.
3
<PAGE> 4
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1998, continued
weighted average market discount of 7.51 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.
PORTFOLIO STRUCTURE
The Trust remained fully invested in long-term municipal bonds during the
period. Investments were diversified among 11 long-term sectors and 38 credits.
IQC's weighted average maturity and call protection were 22 and 6 years,
respectively. Throughout the fiscal period, high credit quality was maintained,
with 80 percent of IQC's long-term holdings rated double or triple "A."
THE IMPACT OF LEVERAGING
As discussed in previous reports, the total income available for distribution to
common shareholders includes incremental income provided by the Trust's
outstanding Auction Rate Preferred Shares (ARPS). ARPS dividends reflect
prevailing short-term interest rates on maturities normally ranging from one
week to one year. Incremental income to common shareholders depends on two
factors. The first 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 2.35 and 4.38
percent. IQC's three ARPS series totaled $55 million and represented 26 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.
4
<PAGE> 5
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1998, 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
5
<PAGE> 6
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (97.8%)
General Obligation (0.7%)
$ 1,375 California, Various Purpose Dtd 04/01/93.................... 5.90% 04/01/23 $ 1,435,142
- -------- -----------
Educational Facilities Revenue (12.5%)
California Educational Facilities Authority,
6,000 Carnegie Institute of Washington 1993 Ser A................ 5.60 10/01/23 6,108,960
1,500 Culinary Institute of America Ser 1993 (Connie Lee)........ 5.30 10/01/23 1,475,250
2,500 Pepperdine University 1993 Ser A (MBIA).................... 5.50 06/01/19 2,527,625
8,000 California Public Works Board, University of California Ser
1993 B..................................................... 5.50 06/01/14 8,149,840
University of California,
5,000 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs....... 5.50 11/01/14 5,064,300
3,000 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs....... 5.60 11/01/20 3,047,700
- -------- -----------
26,000 26,373,675
- -------- -----------
Electric Revenue (8.3%)
5,000 Los Angeles Department of Water & Power, Issue of 1993
(Secondary AMBAC).......................................... 5.375 09/01/23 5,001,100
8,000 Northern California Transmission Agency, California - Oregon
Transmission
Refg Ser 1993 A (MBIA)..................................... 5.25 05/01/20 7,897,280
5,000 Southern California Public Power Authority, Mead - Phoenix
1994 Ser A (AMBAC)......................................... 4.875 07/01/20 4,693,450
- -------- -----------
18,000 17,591,830
- -------- -----------
Hospital Revenue (6.7%)
4,000 Anaheim, Anaheim Memorial Hospital Association COPs
(AMBAC).................................................... 5.00 05/15/13 3,937,640
California Health Facilities Financing Authority,
3,000 Cedars Sinai Medical Center Ser 1997 A (MBIA).............. 5.25 08/01/27 2,925,330
5,000 Kaiser Permanente Ser 1985................................. 5.55 08/15/25 5,006,900
2,000 California Statewide Communities Development Authority,
Children's Hospital of Los Angeles Ser 1993 COPs (MBIA).... 6.00 06/01/13 2,205,520
- -------- -----------
14,000 14,075,390
- -------- -----------
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 8,201,200
-----------
Mortgage Revenue - Single Family (4.1%)
8,305 California Housing Finance Agency, Home 1993 Ser B.......... 5.65 08/01/14 8,534,882
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Public Facilities Revenue (14.1%)
$ 7,000 California Public Works Board, Corrections 1993 Ser D....... 5.375% 06/01/12 $ 7,059,080
5,000 California Statewide Communities Development Authority, The
J Paul Getty Trust COPs.................................... 5.00 10/01/23 4,771,500
4,000 Irvine Unified School District - Community Facilities
District #86-1, Special Tax Ser 1998 (AMBAC)............... 5.00 11/01/19 3,857,040
6,000 Los Angeles Convention & Exhibition Center Authority, 1993
Refg Ser A (MBIA).......................................... 5.125 08/15/13 5,990,100
5,000 Los Angeles County Public Works Financing Authority, Proj
#IV (MBIA)................................................. 5.25 12/01/16 5,005,950
3,000 Redding Joint Powers Financing Authority, 1993 Ser A........ 5.50 01/01/13 3,022,140
- -------- -----------
30,000 29,705,810
- -------- -----------
Tax Allocation Revenue (9.4%)
6,870 Garden Grove Community Development Agency, Refg Issue of
1993....................................................... 5.875 10/01/23 6,999,706
7,000 Rosemead Redevelopment Agency, Proj #1 Ser 1993 A........... 5.60 10/01/33 7,020,720
6,000 San Jose Redevelopment Agency, Merged Area Ser 1993
(MBIA)..................................................... 5.00 08/01/20 5,758,380
- -------- -----------
19,870 19,778,806
- -------- -----------
Transportation Facilities Revenue (7.4%)
5,000 Long Beach, Harbor Ser 1993 (AMT)........................... 5.00 05/15/10 5,003,150
7,000 Los Angeles County Metropolitan Transportation Authority,
Sales Tax Refg Ser 1993-A (MBIA)........................... 5.625 07/01/18 7,175,630
2,000 Los Angeles, Harbor Issue of 1996 Ser B (AMT) (MBIA)........ 5.375 11/01/19 1,976,140
1,500 San Francisco Bay Area Rapid Transit District, Sales Tax Ser
1998 (AMBAC)............................................... 4.75 07/01/23 1,378,155
- -------- -----------
15,500 15,533,075
- -------- -----------
Water & Sewer Revenue (29.4%)
8,000 California Department of Water Resources, Central Valley
Ser L ...................................................... 5.50 12/01/23 8,065,440
7,000 Eastern Municipal Water District, Ser 1993 A COPs (FGIC).... 5.25 07/01/23 6,865,320
7,000 Los Angeles, Wastewater Refg Ser 1993-D (FGIC).............. 5.20 11/01/21 6,842,150
8,000 Los Angeles County Sanitation Districts Financing Authority,
1993 Ser A................................................. 5.25 10/01/19 7,888,320
3,000 Marin County Municipal Water District, Ser 1993............. 5.65 07/01/23 3,056,340
Metropolitan Water District of Southern California,
5,000 Issue of 1992.............................................. 5.50 07/01/13 5,114,950
3,000 Waterworks Ser C........................................... 5.25 07/01/15 3,014,370
7,000 Mouton-Niguel Water District, 1993 COPs (AMBAC)............. 5.30 09/01/23 6,903,400
2,500 Rancho Water District Financing Authority, Refg Ser 1994
(AMBAC).................................................... 5.00 08/15/14 2,453,400
4,000 Sacramento County Sanitation Districts Financing Authority,
Ser 1993................................................... 5.00 12/01/16 3,891,280
8,000 San Diego Public Facilities Authority, Sewer Ser 1993 A..... 5.25 05/15/20 7,795,920
- -------- -----------
62,500 61,890,890
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Refunded (1.3%)
$ 2,625 California, Various Purpose Dtd 04/01/93.................... 5.90% 04/01/03+ $ 2,847,049
- -------- -----------
206,175 TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (Identified Cost
- -------- $202,780,778)................................................................... 205,967,749
-----------
CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL OBLIGATION (0.7%)
1,500 Newport Beach, Hoag Memorial Hospital/Presbyterian Ser 1992
- -------- (Demand 05/01/98)(Identified Cost $1,500,000).............. 4.20* 10/01/22 1,500,000
-----------
$207,675 TOTAL INVESTMENTS (Identified Cost $204,280,778) (a)................... 98.5% 207,467,749
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................... 1.5 3,180,384
----- -----------
NET ASSETS.............................................................. 100.0% $210,648,133
----- ===========
-----
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
+ Prerefunded to call date shown.
* 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 $3,733,212 and the aggregate gross
unrealized depreciation is $546,241, resulting in net
unrealized appreciation of $3,186,971.
</TABLE>
<TABLE>
<CAPTION>
Bond Insurance:
- ---------------
<C> <S>
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
8
<PAGE> 9
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $204,280,778).......... $207,467,749
Cash..................................... 62,049
Interest receivable...................... 3,345,770
Deferred organizational expenses......... 3,239
Prepaid expenses and other assets........ 48,525
-----------
TOTAL ASSETS......................... 210,927,332
-----------
LIABILITIES:
Payable for:
Dividends to preferred
shareholders........................ 90,000
Investment management fee............ 69,532
Common shares of beneficial interest
repurchased......................... 25,810
Accrued expenses and other payables...... 93,857
-----------
TOTAL LIABILITIES.................... 279,199
-----------
NET ASSETS........................... $210,648,133
===========
COMPOSITION OF 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, 11,094,213 shares outstanding)... 158,697,450
Net unrealized appreciation.............. 3,186,971
Accumulated undistributed net investment
income.................................. 1,452,082
Accumulated net realized loss............ (7,688,370)
-----------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS........................ 155,648,133
-----------
TOTAL NET ASSETS..................... $210,648,133
===========
NET ASSET VALUE PER COMMON SHARE
($155,648,133 divided by 11,094,213
common shares outstanding).............. $14.03
===========
STATEMENT OF OPERATIONS
For the six months ended April 30, 1998
(unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................ $5,586,890
---------
EXPENSES
Investment management fee.................. 370,148
Auction commission fees.................... 67,577
Professional fees.......................... 48,173
Shareholder reports and notices............ 22,605
Transfer agent fees and expenses........... 13,132
Auction agent fees......................... 12,811
Registration fees.......................... 12,123
Trustees' fees and expenses................ 7,681
Custodian fees............................. 4,994
Organizational expenses.................... 3,859
Other...................................... 11,027
---------
TOTAL EXPENSES......................... 574,130
Less: expense offset....................... (4,947)
---------
NET EXPENSES........................... 569,183
---------
NET INVESTMENT INCOME.................. 5,017,707
---------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain.......................... 359,639
Net change in unrealized appreciation...... 975,174
---------
NET GAIN............................... 1,334,813
---------
NET INCREASE............................... $6,352,520
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
APRIL 30, ENDED
1998 OCTOBER 31, 1997
- --------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 5,017,707 $ 10,199,664
Net realized gain (loss)............................. 359,639 (1,187,791)
Net change in unrealized appreciation/depreciation... 975,174 9,463,319
------------ ------------
NET INCREASE..................................... 6,352,520 18,475,192
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Preferred............................................ (944,578) (1,889,600)
Common............................................... (4,005,209) (7,811,582)
----------- ------------
TOTAL............................................ (4,949,787) (9,701,182)
----------- ------------
Decrease from transactions in common shares of
beneficial interest................................. (745,013) (3,314,760)
----------- ------------
NET INCREASE..................................... 657,720 5,459,250
NET ASSETS:
Beginning of period.................................. 209,990,413 204,531,163
----------- ------------
END OF PERIOD
(Including undistributed net investment income of
$1,452,082 and $1,384,162, respectively)......... $210,648,133 $209,990,413
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited)
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
11
<PAGE> 12
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
investment income and net realized capital gains are determined in accordance
with federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they exceed
net investment income and net realized capital gains for tax purposes, they are
reported as distributions of paid-in-capital.
E. ORGANIZATIONAL EXPENSES -- 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 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 six months ended April 30, 1998 aggregated
$5,324,750 and $6,018,560, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent.
12
<PAGE> 13
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended April 30, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,416. At April 30, 1998, the Trust had an accrued pension liability of
$28,076 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 IN RESET RANGE OF
SERIES SHARES* THOUSANDS* RATE* DATE DIVIDEND RATES**
- ------ ------- ------------- ----- ----------- ----------------
<S> <C> <C> <C> <C> <C>
1 260 $13,000 3.40% 05/05/98 2.35% - 4.00%
2 240 12,000 3.58 05/07/98 2.50 - 4.375
3 600 30,000 3.65 07/07/98 3.65 - 3.739
</TABLE>
- ---------------------
* As of April 30, 1998.
** For the six months ended April 30, 1998.
Subsequent to April 30, 1998 and up through June 5, 1998, the Trust paid
dividends to each of the Series 1 through 3 at rates ranging from 3.00% to 4.35%
in the aggregate amount of $182,104.
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.
13
<PAGE> 14
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1998 (unaudited) continued
The preferred shares, which are entitled to one vote per share, generally vote
with the common shares but vote separately as a class to elect two Trustees and
on any matters affecting the rights of the preferred shares.
5. COMMON SHARES OF BENEFICIAL INTEREST
Transactions in common shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, October 31, 1996................................... 11,435,813 $114,358 $162,642,865
Treasury shares purchased and retired (weighted average
discount 11.42%)*.......................................... (284,700) (2,847) (3,311,913)
---------- -------- ------------
Balance, October 31, 1997................................... 11,151,113 111,511 159,330,952
Treasury shares purchased and retired (weighted average
discount 7.51%)*........................................... (56,900) (569) (744,444)
---------- -------- ------------
Balance, April 30, 1998..................................... 11,094,213 $110,942 $158,586,508
========== ======== ============
</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
$8,048,000 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 2005
-------- -------- -------- --------
<S> <C> <C> <C>
$5,735 $1,012 $113 $1,188
====== ====== ==== ======
</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>
$0.06 May 8, 1998 May 22, 1998
$0.06 June 5, 1998 June 19, 1998
</TABLE>
14
<PAGE> 15
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
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............................. $ 13.90 $ 13.08 $12.70 $ 10.62 $13.96 $14.06
------- ------- ------ ------- ------ ------
Net investment income............... 0.46 0.91 0.89 0.88 0.95 0.03
Net realized and unrealized gain
(loss)............................. 0.12 0.74 0.26 2.07 (3.25) (0.10)
------- ------- ------ ------- ------ ------
Total from investment operations.... 0.58 1.65 1.15 2.95 (2.30) (0.07)
------- ------- ------ ------- ------ ------
Less dividends from:
Net investment income............ (0.36) (0.69) (0.69) (0.74) (0.74) --
Common share equivalent of
dividends paid to preferred
shareholders.................... (0.09) (0.17) (0.16) (0.17) (0.18) --
------- ------- ------ ------- ------ ------
Total dividends..................... (0.45) (0.86) (0.85) (0.91) (0.92) --
------- ------- ------ ------- ------ ------
Anti-dilutive effect of acquiring
treasury shares.................... -- 0.03 0.08 0.04 0.01 --
------- ------- ------ ------- ------ ------
Offering costs charged against
capital............................ -- -- -- -- (0.13) (0.03)
------- ------- ------ ------- ------ ------
Net asset value, end of period...... $ 14.03 $ 13.90 $13.08 $ 12.70 $10.62 $13.96
======= ======= ====== ======= ====== ======
Market value, end of period......... $12.938 $12.688 $11.25 $10.875 $ 9.75 $15.00
======= ======= ====== ======= ====== ======
TOTAL INVESTMENT RETURN+............ 4.77%(1) 19.60% 10.13% 19.73% (30.89)% --
RATIOS TO AVERAGE NET ASSETS OF
COMMON SHAREHOLDERS:
Total expenses...................... 0.73%(2) 0.76% 0.78%(3) 0.84%(3) 0.93% 0.52%(2)
Net investment income before
preferred stock dividends.......... 6.40%(2) 6.82% 7.02% 7.57% 7.63% 2.32%(2)
Preferred stock dividends........... 1.20%(2) 1.26% 1.26% 1.48% 1.43% N/A
Net investment income available to
common shareholders................ 5.20%(2) 5.56% 5.76% 6.09% 6.20% 2.32%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.......................... $210,648 $209,990 $204,531 $206,614 $203,662 $176,317
Asset coverage on preferred shares
at end of period................... 382% 382% 372% 376% 281% N/A
Portfolio turnover rate............. 3%(1) 6% -- 1% 20% --
</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.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 16
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
CALIFORNIA
QUALITY
MUNICIPAL
SECURITIES
Semiannual Report
April 30, 1998
