<PAGE> 1
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES Two World Trade Center,
New York, New York 10048
LETTER TO THE SHAREHOLDERS October 31, 1997
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, 1997.
Stimulated by a resurgence of consumer spending in late 1996, the economy grew
at a rapid pace in the first quarter of 1997. This prompted the Federal Reserve
Board to tighten its monetary policy in March in a preemptive move against a
possible increase in the rate of inflation. Economic growth slowed in the second
quarter and the bond market rallied. In addition to more moderate economic
growth, low inflation and stable monetary policy, the bond rally through July
was supported by a shrinking federal budget deficit and a strong dollar.
However, by August the bond market retreated on fears that stronger employment
conditions might prompt the Federal Reserve Board to tighten further. Yields
declined in October when turmoil in the global stock markets precipitated
"flight-to-quality" demand for U.S. Treasuries.
BOND YIELDS 1994-1997
<TABLE>
<CAPTION>
Insured Municipal Revenue
30-Year U.S. 30-Year Insured Yields as a Percentage
Treasury Yields Municipal Revenue Yields of U.S. Treasury Yields
<S> <C> <C> <C>
Dec '93 6.34 5.4 85.17%
6.24 5.4 86.54%
6.66 5.8 87.09%
7.09 6.4 90.27%
7.32 6.35 86.75%
7.43 6.25 84.12%
Jun '94 7.61 6.5 85.41%
7.39 6.25 84.57%
7.45 6.3 84.56%
7.81 6.55 83.87%
7.96 6.75 84.80%
8 7 87.50%
Dec '94 7.88 6.75 85.66%
7.7 6.4 83.12%
7.44 6.15 82.66%
7.43 6.15 82.77%
7.34 6.2 84.47%
6.66 5.8 87.09%
Jun '95 6.62 6.1 92.15%
6.86 6.1 88.92%
6.66 6 90.08%
6.48 5.95 91.82%
6.33 5.75 90.84%
6.14 5.5 89.56%
Dec '95 5.94 5.35 90.07%
6.03 5.4 89.55%
6.46 5.8 86.69%
6.66 5.85 87.84%
6.89 5.95 86.36%
6.99 6.05 86.55%
Jun '96 6.89 5.9 85.63%
6.97 5.85 83.93%
7.11 5.9 82.98%
6.93 5.7 82.25%
6.64 5.65 85.09%
6.35 5.5 86.61%
Dec '96 6.63 5.6 84.46%
6.79 5.7 83.95%
6.8 5.65 83.08%
7.1 5.9 83.10%
6.94 5.75 82.85%
6.91 5.65 81.77%
Jun '97 6.78 5.6 82.60%
6.3 5.3 84.00%
6.61 5.5 83.00%
6.4 5.4 84.40%
Oct '97 6.15 5.35 86.90%
</TABLE>
Source: Municipal Market Data
<PAGE> 2
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
MUNICIPAL MARKET CONDITIONS
Municipal yields followed the trend of Treasury yields, but with less
volatility. Long-term insured revenue index yields increased from 5.65 percent
to 5.90 percent between October 1996 and March 1997. The bond rally over the
past seven months pushed 30-year yields down to 5.35 percent by the end of
October 1997. Yields on one-year notes were little changed at 3.75 percent over
the 12-month period. Consequently, the yield pickup for extending maturities
from 1 to 30 years narrowed from 190 basis points to 160 basis points.
The ratio of 30-year insured revenue bond yields to 30-year U.S. Treasury yields
rose from 83 percent at the end of March 1997 to 87 percent in October. A rising
ratio means that municipals have underperformed Treasuries and have become
relatively more attractive. Over the past four years, this ratio has annually
ranged from an average low of 83 percent to an average high of 90 percent.
New-issue underwriting volume was slightly ahead in the first half of 1997. The
decline in interest rates subsequently led to a surge in refunding activity. As
a result, new-issue municipal volume was up 17 percent during the first 10
months of 1997. Refundings accounted for more than 25 percent of total volume.
PERFORMANCE
During the fiscal year ended October 31, 1997, the Trust's net asset value (NAV)
improved from $13.08 to $13.90. Based on this NAV change plus reinvestment of
tax-free dividends totaling $0.69 per share, the Trust's total NAV return
LARGEST SECTORS AS OF OCTOBER 31, 1997
(% OF NET ASSETS)
<TABLE>
<S> <C>
WATER & SEWER 29%
EDUCATION 14%
PUBLIC FACILITIES 10%
TAX ALLOCATION 9%
ELECTRIC 8%
TRANSPORTATION 8%
HOSPITAL 7%
ALL OTHERS 15%
</TABLE>
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CREDIT RATINGS AS OF OCTOBER 31, 1997
(% OF TOTAL LONG-TERM PORTFOLIO)
<TABLE>
<S> <C>
Aaa OR AAA 42%
Aa OR AA 35%
A OR A 20%
Baa OR BBB 3%
</TABLE>
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC.
OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
<PAGE> 3
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
was 12.70 percent. IQC's market price on the New York Stock Exchange moved from
$11.25 to $12.6875 per share. Based on this change in market price plus
reinvestment of tax-free dividends, the Trust's total market return was 19.60
percent. On October 31, 1997, IQC traded at a 9 percent discount to NAV.
Monthly dividends for the fourth quarter of 1997 were declared in September.
Over the past 12 months the level of undistributed net investment income
increased from $0.077 per share to $0.124 per share. Beginning with the October
1997 payment the monthly dividend was increased from $0.0575 per share to $0.06
per share to more closely reflect the Trust's anticipated income.
PORTFOLIO STRUCTURE
IQC remained fully invested in long-term municipal bonds during the period.
Investments were diversified among 11 long-term sectors and 38 credits. The
Trust's weighted average maturity and call protection were 22 and 7 years
respectively. Throughout the fiscal year, high credit quality was maintained
with 77 percent of its long-term holdings rated double or triple "A".
THE IMPACT OF LEVERAGING
As discussed in previous reports, the total income available for distribution to
common shareholders includes incremental income provided by the Trust's
outstanding Auction Rate Preferred Shares (ARPS). ARPS dividends reflect
prevailing short-term interest rates on maturities normally ranging from one
week to one year. Incremental income to common shareholders depends on two
factors. The first factor is the amount of ARPS outstanding, while the second is
the spread between the portfolio's cost yield and ARPS expenses (ARPS auction
rate and expenses). The greater the spread and the amount of ARPS outstanding,
the greater the amount of incremental income available for distribution to
common shareholders. The level of net investment income available for
distribution to common shareholders varies with the level of short-term interest
rates.
During the fiscal year, ARPS leverage contributed approximately $0.07 per share
to common share earnings. Weekly ARPS yields ranged between 2.00 and 5.125
percent. Three ARPS series totaling $55 million and representing 26 percent of
net assets were outstanding.
LOOKING AHEAD
So far this year, long-term municipal bonds have followed the trend of
Treasuries toward lower yields. The recent enactment of the Taxpayer Relief Act
of 1997 did not impact municipals directly and the long-term benefits of
tax-exempt income have remained intact.
<PAGE> 4
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1997, continued
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. During the 12-month period ended October 31,
1997, the Trust purchased and retired 284,700 shares of common stock at a
weighted average market discount of 11.42 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.
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 May 20, 1997, 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 BY ALL SHAREHOLDERS:
<TABLE>
<S> <C>
Edwin J. Garn
For........................................................................... 8,751,552
Withheld...................................................................... 330,752
Wayne E. Hedien
For........................................................................... 8,752,743
Withheld...................................................................... 329,561
Michael E. Nugent
For........................................................................... 8,752,652
Withheld...................................................................... 329,652
Philip J. Purcell
For........................................................................... 8,752,753
Withheld...................................................................... 329,551
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, John R. Haire, Dr. Manuel H. Johnson
and John L. Schroeder.
ELECTION OF TRUSTEE BY PREFERRED SHAREHOLDERS:
<TABLE>
<S> <C>
John R. Haire
For........................................................................... 585
Withheld...................................................................... 1
</TABLE>
(2) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE TRUST AND DEAN
WITTER INTERCAPITAL INC. IN CONNECTION WITH THE MERGER OF MORGAN STANLEY
GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<S> <C>
For........................................................................... 8,376,261
Against....................................................................... 210,261
Abstain....................................................................... 495,782
</TABLE>
(3) RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS INDEPENDENT
ACCOUNTANTS:
<TABLE>
<S> <C>
For........................................................................... 8,639,997
Against....................................................................... 53,772
Abstain....................................................................... 388,535
</TABLE>
<PAGE> 6
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1997
<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 (2.0%)
$ 4,000 California, Various Purpose Dtd 04/01/93................................ 5.90% 04/01/23 $ 4,175,280
- -------- ------------
Educational Facilities Revenue (14.3%)
California Educational Facilities Authority,
6,000 Carnegie Institute of Washington 1993 Ser A............................ 5.60 10/01/23 6,053,100
1,500 Culinary Institute of America Ser 1993 (Connie Lee).................... 5.30 10/01/23 1,445,520
2,500 Pepperdine University 1993 Ser A (MBIA)................................ 5.50 06/01/19 2,518,350
4,000 St Mary's College of California Refg Ser 1993.......................... 5.00 10/01/12 3,905,360
8,000 California Public Works Board, University of California Ser 1993 B...... 5.50 06/01/14 8,103,440
University of California,
5,000 UCLA Central Chiller/Cogeneration, Refg Ser 1993 COPs.................. 5.50 11/01/14 5,041,800
3,000 UCLA Central Chiller/Cogeneration, Refg Ser 1993 COPs.................. 5.60 11/01/20 3,013,440
- -------- ------------
30,000 30,081,010
- -------- ------------
Electric Revenue (8.3%)
5,000 Los Angeles Department of Water & Power, Issue of 1993 (Secondary
AMBAC)................................................................. 5.375 09/01/23 4,907,150
8,000 Northern California Transmission Agency, California - Oregon
Transmission Refg Ser 1993 A (MBIA).................................... 5.25 05/01/20 7,844,800
5,000 Southern California Public Power Authority, Mead - Phoenix 1994 Ser A
(AMBAC)................................................................ 4.875 07/01/20 4,640,300
- -------- ------------
18,000 17,392,250
- -------- ------------
Hospital Revenue (6.7%)
4,000 Anaheim, Anaheim Memorial Hospital Association COPs (AMBAC)............. 5.00 05/15/13 3,957,320
3,000 California Health Facilities Financing Authority, Cedars Sinai Medical
Center Ser 1997 A (MBIA)............................................... 5.25 08/01/27 2,937,840
5,000 California Health Facilities Financing Authority, Kaiser Permanente Ser
1985................................................................... 5.55 08/15/25 4,964,500
2,000 California Statewide Communities Development Authority, Children's
Hospital
of Los Angeles Ser 1993 COPs (MBIA).................................... 6.00 06/01/13 2,191,820
- -------- ------------
14,000 14,051,480
- -------- ------------
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 8,169,840
------------
Mortgage Revenue - Single Family (4.0%)
8,305 California Housing Finance Agency, Home 1993 Ser B...................... 5.65 08/01/14 8,435,472
- -------- ------------
Public Facilities Revenue (10.0%)
7,000 California Public Works Board, Corrections 1993 Ser D................... 5.375 06/01/12 7,049,490
6,000 Los Angeles Convention & Exhibition Center Authority, 1993 Refg
Ser A (MBIA)........................................................... 5.125 08/15/13 6,004,860
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
<C> <S> <C> <C> <C>
$ 5,000 Los Angeles County Public Works Financing Authority, Proj #IV (MBIA).... 5.25% 12/01/16 $ 5,003,000
3,000 Redding Joint Powers Financing Authority, 1993 Ser A.................... 5.50 01/01/13 2,990,580
- -------- ------------
21,000 21,047,930
- -------- ------------
Tax Allocation (9.3%)
6,870 Garden Grove Community Development Agency, Refg Issue of 1993........... 5.875 10/01/23 6,980,332
7,000 Rosemead Redevelopment Agency, Proj #1 Ser 1993 A....................... 5.60 10/01/33 6,935,390
6,000 San Jose Redevelopment Agency, Merged Area Ser 1993 (MBIA).............. 5.00 08/01/20 5,702,340
- -------- ------------
19,870 19,618,062
- -------- ------------
Transportation Facilities Revenue (7.7%)
5,000 Long Beach, Harbor Ser 1993 (AMT)....................................... 5.00 05/15/10 4,999,900
7,000 Los Angeles County Metropolitan Transportation Authority, Sales Tax
Refg Ser 1993-A (MBIA)................................................. 5.625 07/01/18 7,136,850
2,000 Los Angeles Harbor Department, Issue of 1996 Ser B (AMT) (MBIA)......... 5.375 11/01/19 1,973,340
2,000 San Diego County Regional Transportation Commission, Sales Tax
1994 Ser A (FGIC)...................................................... 4.75 04/01/08 2,011,360
- -------- ------------
16,000 16,121,450
- -------- ------------
Water & Sewer Revenue (29.3%)
8,000 California Department of Water Resources, Central Valley Ser L.......... 5.50 12/01/23 7,977,600
7,000 Eastern Municipal Water District, Ser 1993 A COPs (FGIC)................ 5.25 07/01/23 6,779,010
7,000 Los Angeles, Wastewater Refg Ser 1993-D (FGIC).......................... 5.20 11/01/21 6,822,130
8,000 Los Angeles County Sanitation Districts Financing Authority, 1993 Ser
A...................................................................... 5.25 10/01/19 7,816,400
3,000 Marin County Municipal Water District, Ser 1993......................... 5.65 07/01/23 3,040,680
Metropolitan Water District of Southern California,
5,000 Issue of 1992.......................................................... 5.50 07/01/13 5,111,450
3,000 Waterworks Ser C....................................................... 5.25 07/01/15 3,014,880
7,000 Moulton-Niguel Water District, 1993 COPs (AMBAC)........................ 5.30 09/01/23 6,788,810
2,500 Rancho Water District Financing Authority, Refg Ser 1994 (AMBAC)........ 5.00 08/15/14 2,455,250
4,000 Sacramento County Sanitation Districts Financing Authority, Ser 1993.... 5.00 12/01/16 3,852,200
8,000 San Diego Public Facilities Authority, Ser 1993 A....................... 5.25 05/15/20 7,773,360
- -------- ------------
62,500 61,431,770
- -------- ------------
Other Revenue (2.3%)
5,000 California Statewide Communities Development Authority, The J Paul Getty
- -------- Trust COPs............................................................. 5.00 10/01/23 4,762,650
------------
206,675 TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $203,075,397)..................... 205,287,194
- --------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL OBLIGATION (0.2%)
$ 400 California Pollution Control Financing Authority, Pacific Gas & Electric
- -------- Co Ser 1996 F (Demand 11/03/97) (Identified Cost $400,000)............. 3.90% * 11/01/26 $ 400,000
------------
$207,075 TOTAL INVESTMENTS (Identified Cost $203,475,397) (a).................................. 98.0% 205,687,194
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.......................................... 2.0 4,303,219
----- ------------
NET ASSETS............................................................................. 100.0% $209,990,413
===== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes approximates identified cost. The aggregate gross
unrealized appreciation is $3,052,484 and the aggregate gross unrealized depreciation is $840,687,
resulting in net unrealized appreciation of $2,211,797.
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, 1997
ASSETS:
Investments in securities, at value
(identified cost $203,475,397)....................................... $205,687,194
Cash.................................................................. 1,193,627
Interest receivable................................................... 3,360,816
Deferred organizational expenses...................................... 7,098
Prepaid expenses and other assets..................................... 36,601
------------
TOTAL ASSETS...................................................... 210,285,336
------------
LIABILITIES:
Payable for:
Dividends to preferred shareholders............................... 101,412
Investment management fee......................................... 70,064
Common shares of beneficial interest repurchased.................. 25,560
Accrued expenses and other payables................................... 97,887
------------
TOTAL LIABILITIES................................................. 294,923
------------
NET ASSETS........................................................ $209,990,413
============
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, 11,151,113 shares outstanding)....................... 159,442,463
Net unrealized appreciation........................................... 2,211,797
Accumulated undistributed net investment income....................... 1,384,162
Accumulated net realized loss......................................... (8,048,009)
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS...................... 154,990,413
------------
TOTAL NET ASSETS.................................................. $209,990,413
============
NET ASSET VALUE PER COMMON SHARE
($154,990,413 divided by 11,151,113 common shares outstanding)....... $13.90
</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, 1997
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $11,329,298
-----------
EXPENSES
Investment management fee.............................................. 717,703
Auction commission fees................................................ 137,663
Professional fees...................................................... 103,011
Shareholder reports and notices........................................ 43,612
Auction agent fees..................................................... 31,579
Transfer agent fees and expenses....................................... 27,146
Registration fees...................................................... 24,496
Trustees' fees and expenses............................................ 14,711
Organizational expenses................................................ 7,787
Custodian fees......................................................... 4,484
Other.................................................................. 21,807
-----------
TOTAL EXPENSES..................................................... 1,133,999
Less: expense offset................................................... (4,365)
-----------
NET EXPENSES....................................................... 1,129,634
-----------
NET INVESTMENT INCOME.............................................. 10,199,664
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss...................................................... (1,187,791)
Net change in unrealized depreciation.................................. 9,463,319
-----------
NET GAIN........................................................... 8,275,528
-----------
NET INCREASE........................................................... $18,475,192
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 10,199,664 $ 10,448,231
Net realized loss.................................... (1,187,791) (112,902)
Net change in unrealized depreciation................ 9,463,319 3,042,883
------------ ------------
NET INCREASE..................................... 18,475,192 13,378,212
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME:
Preferred............................................ (1,889,600) (1,875,384)
Common............................................... (7,811,582) (8,064,705)
------------ ------------
TOTAL............................................ (9,701,182) (9,940,089)
------------ ------------
Decrease from transactions in common shares of
beneficial interest................................. (3,314,760) (5,520,981)
------------ ------------
NET INCREASE (DECREASE).......................... 5,459,250 (2,082,858)
NET ASSETS:
Beginning of period.................................. 204,531,163 206,614,021
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$1,384,162 and $885,680, respectively)........... $209,990,413 $204,531,163
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1997
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
<PAGE> 13
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1997, 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 year ended October 31, 1997 aggregated
$12,762,957 and $15,664,184, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager, is the Trust's
transfer agent. At October 31, 1997, the Trust had transfer agent fees and
expenses payable of approximately $200.
<PAGE> 14
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 1997 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$4,752. At October 31, 1997, the Trust had an accrued pension liability of
$26,127 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 3.00% 11/04/97 2.50% - 4.10%
2 240 12,000 3.70 11/06/97 2.00 - 4.375
3 600 30,000 3.739 01/06/98 2.80 - 5.125
</TABLE>
- ---------------------
* As of October 31, 1997.
** For the year ended October 31, 1997.
Subsequent to October 31, 1997 and up through December 5, 1997, the Trust paid
dividends to each of the Series 1 through 3 at rates ranging from 2.35% to 3.85%
in the aggregate amount of $162,669.
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.
<PAGE> 15
INTERCAPITAL CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1997, 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, 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
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
========== ======= ============
</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 September 23, 1997, the Trust declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ----------------- ------------------
<S> <C> <C>
$0.06 November 7, 1997 November 21, 1997
$0.06 December 5, 1997 December 19, 1997
</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 PERIOD
FOR THE YEAR ENDED OCTOBER 31** SEPTEMBER 29, 1993*
------------------------------------- THROUGH
1997 1996 1995 1994 OCTOBER 31, 1993**
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period................... $ 13.08 $ 12.70 $ 10.62 $ 13.96 $ 14.06
------- ------ ------- ----- ------
Net investment income................................. 0.91 0.89 0.88 0.95 0.03
Net realized and unrealized gain (loss)............... 0.74 0.26 2.07 (3.25) (0.10)
------- ------ ------- ----- ------
Total from investment operations...................... 1.65 1.15 2.95 (2.30) (0.07)
------- ------ ------- ----- ------
Less dividends from:
Net investment income.............................. (0.69) (0.69) (0.74) (0.74) --
Common share equivalent of dividends paid to
preferred shareholders............................ (0.17) (0.16) (0.17) (0.18) --
------- ------ ------- ----- ------
Total dividends....................................... (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........................ $ 13.90 $ 13.08 $ 12.70 $ 10.62 $ 13.96
======= ====== ======= ===== ======
Market value, end of period........................... $ 12.688 $ 11.25 $ 10.875 $ 9.75 $ 15.00
======= ====== ======= ===== ======
TOTAL INVESTMENT RETURN+.............................. 19.60% 10.13% 19.73% (30.89)% --
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses........................................ 0.76% 0.78%(2) 0.84%(2) 0.93% 0.52%(1)
Net investment income before preferred stock
dividends............................................ 6.82% 7.02% 7.57% 7.63% 2.32%(1)
Preferred stock dividends............................. 1.26% 1.26% 1.48% 1.43% N/A
Net investment income available to common
shareholders......................................... 5.56% 5.76% 6.09% 6.20% 2.32%(1)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............... $209,990 $204,531 $206,614 $203,662 $176,317
Asset coverage on preferred shares at end of period... 382% 372% 376% 281% N/A
Portfolio turnover rate............................... 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) Annualized.
(2) Does not reflect the effect of expense offset 0.01%.
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, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four 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, 1997 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 5, 1997
1997 FEDERAL TAX NOTICE (unaudited)
For the year ended October 31, 1997, all of the Trust's
dividends from net investment income received by both common
and preferred shareholder classes were exempt interest
dividends, excludable from gross income for Federal income tax
purposes.
<PAGE> 18
(This Page Intentionally Left Blank)
<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
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
- ---------------------------------------------
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
INTERCAPITAL
CALIFORNIA
QUALITY
MUNICIPAL
SECURITIES
Annual Report
October 31, 1997
