<PAGE> 1
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES Two World
Trade Center
LETTER TO THE SHAREHOLDERS October 31, 1998 New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Morgan Stanley
Dean Witter California Quality Municipal Securities (IQC) for the fiscal year
ended October 31, 1998.
On December 21, 1998, after the close of the period under review, the Trust
changed its name from Intercapital California Quality Municipal Securities to
Morgan Stanley Dean Witter California Quality Municipal Securities. Information
on the name change was mailed to shareholders in mid-December under separate
cover.
Since our last report six months ago, global financial turmoil, including the
Russian currency crisis, has continued to affect the securities markets. This
led to a flight-to-quality rally for U.S. Treasury bonds, with yields falling to
30-year lows. Municipal bond yields declined but lagged the downward trend of
Treasury yields.
The deflationary impact of the international financial crisis began to temper
U.S. economic growth prior to the summer's tumultuous market
BOND YIELDS 1994-1998
<TABLE>
<CAPTION>
30-Year Insured 30-Year U.S. Insured Municipal Yields as a
Municipal Yields Treasury Yields Percentage of U.S. Treasury Yields
<S> <C> <C> <C>
1994 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
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 84.8
7 8.00 87.5
6.75 7.88 85.66
1995 6.4 7.70 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
6.1 6.62 92.15
6.1 6.86 88.92
6 6.66 90.09
5.95 6.48 91.82
5.75 6.33 90.84
5.5 6.14 89.58
5.35 5.94 90.07
1996 5.4 6.03 89.55
5.6 6.46 86.69
5.85 6.66 87.84
5.95 6.89 86.36
6.05 6.99 86.55
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
5.6 6.63 84.46
1997 5.7 6.79 83.95
5.65 6.80 83.09
5.9 7.10 83.1
5.75 6.94 82.85
5.65 6.91 81.77
5.6 6.78 82.6
5.3 6.30 84.13
5.5 6.61 83.21
5.4 6.40 84.38
5.35 6.15 86.99
5.3 6.05 87.6
5.15 5.92 86.99
1998 5.15 5.80 88.79
5.2 5.92 87.84
5.25 5.93 88.53
5.35 5.95 89.92
5.2 5.80 89.66
5.2 5.65 92.04
5.18 5.71 90.72
5.03 5.27 95.45
4.95 5.00 99.00
5.05 5.16 97.87
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
activity. Lower commodity prices, cheaper imports and improved productivity
offset the potential inflationary impact of strong domestic employment. With
inflation held in check, the Federal Reserve Board provided liquidity to the
markets by lowering short-term interest rates. Since the end of September, the
Federal Reserve Open Market Committee cut the federal funds rate 75 basis points
from 5.50 percent to 4.75 percent in three separate moves.
MUNICIPAL MARKET CONDITIONS
Municipal bond yields followed the downward trend of Treasury yields at a more
moderate pace. At the end of October, long-term insured municipal index yields
stood at 5.05 percent, index yields declined 30 basis points over the last 12
months. In contrast, 30-year U.S. Treasury bond yields fell 100 basis points
during the same period.
As municipals lagged the rally in Treasuries, the ratio of municipal yields to
Treasury yields rose sharply to 98 percent. (A rising ratio means that
municipals have underperformed Treasuries and have become more attractive on a
relative basis.) This increase was similar to the jump witnessed in 1986, when
tax-reform proposals threatened the favorable tax advantage of municipal bonds.
The overall decline in interest rates has led to a substantial increase in new
issue municipal volume. Municipal issuance is on a pace to challenge 1993's
underwriting record of $292 billion. Year-to-date, total municipal volume of
$234 billion is up 32 percent. Half the underwriting volume was enhanced with
bond insurance. Refundings represented 30 percent of total new issuance.
California new issue underwriting accounted for 12 percent of national volume.
PERFORMANCE
The Trust's net asset value (NAV) increased from $13.90 to $14.67 per share
during the fiscal year ended October 31, 1998. Based on this NAV change plus
reinvestment of tax-free dividends of $0.72 per share, the Trust's total NAV
return was 11.30 percent. IQC's price on the New York Stock Exchange moved from
$12.6875 to $14.1875 per share. Based on this change in market price plus
reinvestment of dividends, the Trust's total market return was 18.01 percent. On
October 31, 1998, the Trust traded at a 3.29 percent discount to NAV.
Monthly dividends for the fourth quarter of 1998 were declared in September.
Beginning with the October 1998 dividend, the monthly dividend was raised from
$0.06 per share to $0.0625 per share, to more closely reflect the Trust's
anticipated income. The level of undistributed net investment income increased
from $0.124 to $0.136 per share.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
<TABLE>
<CAPTION>
LARGEST SECTORS as of October 31, 1998 (% of Net Assets)
<S> <C>
Water & Sewer 30%
Public Facilities 16%
Education 13%
Tax Allocation 9%
Electric 8%
Hospital 7%
Transportation 7%
All Others 10%
Portfolio structure is subject to change.
</TABLE>
<TABLE>
<CAPTION>
CREDIT RATINGS as of October 31, 1998
(% of Total Long-Term Portfolio)
<S> <C>
Aaa or AAA 45%
Aa or AA 37%
A or A 15%
Baa or BBB 3%
As measured by Moody's Investors Service, Inc. or
Standard & Poor's Corp.
Portfolio structure is subject to change.
</TABLE>
<TABLE>
<CAPTION>
CALL STRUCTURE as of October 31, 1998
(% of Total Long-Term Portfolio)
WEIGHTED AVERAGE
CALL PROTECTION: 5 YEARS
Years Bonds Callable Percent Callable
<S> <C>
1999 0%
2000 0%
2001 0%
2002 5%
2003 68%
2004 18%
2005 0%
2006 1%
2007 3%
2008 4%
2009+ 1%
Portfolio structure is subject to change.
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
PORTFOLIO STRUCTURE
The Trust remained fully invested in long-term municipal bonds during the fiscal
year. Investments were diversified among 10 long-term sectors and 39 credits. As
illustrated in the accompanying chart, the distribution of call dates in the
portfolio produced 5 years of weighted average call protection.
The Trust's weighted average maturity was 21 years. Average duration (a measure
of price volatility to interest rate changes) was 6 years. Throughout the fiscal
period, high credit quality was maintained, with over 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 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 12-month period, ARPS leverage contributed approximately $0.06 per
share to common share earnings. Weekly ARPS yields ranged between 2.35 and 4.38
percent. Three ARPS series totaling $55 million represented 25 percent of net
assets.
LOOKING AHEAD
Global economic conditions seem likely to keep inflationary pressures under
control and have contributed to lower interest rates. The fixed-income markets
have also begun to anticipate the possibility of additional monetary easing by
the Fed. With the municipal relationship to Treasuries more favorable than it
has been in the last 10 years, the outlook for municipal bonds is positive.
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
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
transactions at a price not above market value or net asset value, whichever is
lower at the time of purchase. The Trust may also utilize procedures to reduce
or eliminate the amount of outstanding ARPS, including their purchase in the
open market or in privately negotiated transactions. During the fiscal year, the
Trust purchased and retired 109,300 shares of common stock at a weighted average
market discount of 7.28 percent.
We appreciate your ongoing support of Morgan Stanley Dean Witter 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
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 23, 1998, 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 TRUSTEE BY ALL SHAREHOLDERS:
Michael Bozic
For......................................................... 9,112,086
Withheld.................................................... 184,779
(2) ELECTION OF TRUSTEE BY PREFERRED SHAREHOLDERS:
Charles A. Fiumefreddo
For......................................................... 883
Withheld.................................................... 10
The following Trustees were not standing for reelection at this meeting: Edwin
J. Garn, John R. Haire, Wayne E. Hedien, Dr. Manuel H. Johnson, Michael E.
Nugent, Philip J. Purcell and John L. Schroeder.
(3) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP (THE SUCCESSOR
FIRM TO PRICE WATERHOUSE LLP AS OF JULY 1, 1998) AS THE TRUST'S INDEPENDENT
ACCOUNTANTS:
For......................................................... 9,061,768
Against..................................................... 16,172
Abstain..................................................... 218,925
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998
<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 (0.7%)
$ 1,375 California, Various Purpose Dtd 04/01/93.................... 5.90 % 04/01/23 $ 1,469,325
- -------- -----------
EDUCATIONAL FACILITIES REVENUE (12.6%)
California Educational Facilities Authority,
6,000 Carnegie Institute of Washington 1993 Ser A................ 5.60 10/01/23 6,351,900
1,500 Culinary Institute of America Ser 1993 (Connie Lee)........ 5.30 10/01/23 1,514,625
2,500 Pepperdine University 1993 Ser A (MBIA).................... 5.50 06/01/19 2,616,375
8,000 California Public Works Board, University of California Ser
1993 B..................................................... 5.50 06/01/14 8,592,960
University of California,
5,000 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs....... 5.50 11/01/14 5,146,200
3,000 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs....... 5.60 11/01/20 3,116,010
- -------- -----------
26,000 27,338,070
- -------- -----------
ELECTRIC REVENUE (8.4%)
5,000 Los Angeles Department of Water & Power, Issue of 1993
(Secondary AMBAC).......................................... 5.375 09/01/23 5,147,900
8,000 Northern California Transmission Agency, California - Oregon
Transmission Refg Ser 1993 A (MBIA)........................ 5.25 05/01/20 8,145,360
5,000 Southern California Public Power Authority, Mead - Phoenix
1994 Ser A (AMBAC)......................................... 4.875 07/01/20 4,878,750
- -------- -----------
18,000 18,172,010
- -------- -----------
HOSPITAL REVENUE (6.7%)
4,000 Anaheim, Anaheim Memorial Hospital Association COPs
(AMBAC).................................................... 5.00 05/15/13 4,070,280
California Health Facilities Financing Authority,
3,000 Cedars Sinai Medical Center Ser 1997 A (MBIA).............. 5.25 08/01/27 3,071,580
5,000 Kaiser Permanente Ser 1985................................. 5.55 08/15/25 5,102,800
2,000 California Statewide Communities Development Authority,
Children's Hospital of Los Angeles Ser 1993 COPs (MBIA).... 6.00 06/01/13 2,304,280
- -------- -----------
14,000 14,548,940
- -------- -----------
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 8,469,600
-----------
MORTGAGE REVENUE - SINGLE FAMILY (4.0%)
8,305 California Housing Finance Agency, Home 1993 Ser B.......... 5.65 08/01/14 8,644,674
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUBLIC FACILITIES REVENUE (15.5%)
$ 3,000 Alameda County, Alameda County Medical Center, Ser 1998
(MBIA)..................................................... 5.00 % 06/01/23 $ 2,983,050
7,000 California Public Works Board, Corrections 1993 Ser D....... 5.375 06/01/12 7,244,650
5,000 California Statewide Communities Development Authority, The
J Paul Getty Trust COPs.................................... 5.00 10/01/23 4,964,550
4,000 Irvine Unified School District - Community Facilities
District #86-1, Special Tax Ser 1998 (AMBAC)............... 5.00 11/01/19 4,017,920
6,000 Los Angeles Convention & Exhibition Center Authority, 1993
Refg Ser A (MBIA).......................................... 5.125 08/15/13 6,174,840
5,000 Los Angeles County Public Works Financing Authority, Proj
#IV (MBIA)................................................. 5.25 12/01/16 5,136,600
3,000 Redding Joint Powers Financing Authority, 1993 Ser A........ 5.50 01/01/13 3,140,730
- -------- -----------
33,000 33,662,340
- -------- -----------
TAX ALLOCATION REVENUE (8.9%)
6,870 Garden Grove Community Development Agency, Refg Issue of
1993....................................................... 5.875 10/01/23 7,197,218
7,000 Rosemead Redevelopment Agency, Proj #1 Ser 1993 A........... 5.60 10/01/33 7,280,140
5,000 San Jose Redevelopment Agency, Merged Area Ser 1993
(MBIA)..................................................... 5.00 08/01/20 5,008,650
- -------- -----------
18,870 19,486,008
- -------- -----------
TRANSPORTATION FACILITIES REVENUE (7.4%)
5,000 Long Beach, Harbor Ser 1993 (AMT)........................... 5.00 05/15/10 5,167,850
7,000 Los Angeles County Metropolitan Transportation Authority,
Sales Tax Refg Ser 1993-A (MBIA)........................... 5.625 07/01/18 7,358,330
2,000 Los Angeles, Harbor Issue of 1996 Ser B (AMT) (MBIA)........ 5.375 11/01/19 2,056,880
1,500 San Francisco Bay Area Rapid Transit District, Sales Tax Ser
1998 (AMBAC)............................................... 4.75 07/01/23 1,449,150
- -------- -----------
15,500 16,032,210
- -------- -----------
WATER & SEWER REVENUE (29.6%)
8,000 California Department of Water Resources, Central Valley Ser
L.......................................................... 5.50 12/01/23 8,304,960
7,000 Eastern Municipal Water District, Ser 1993 A COPs (FGIC).... 5.25 07/01/23 7,125,510
7,000 Los Angeles, Wastewater Refg Ser 1993-D (FGIC).............. 5.20 11/01/21 7,110,740
8,000 Los Angeles County Sanitation Districts Financing Authority,
1993 Ser A................................................. 5.25 10/01/19 8,134,160
3,000 Marin County Municipal Water District, Ser 1993............. 5.65 07/01/23 3,161,340
Metropolitan Water District of Southern California,
5,000 Issue of 1992.............................................. 5.50 07/01/13 5,355,750
3,000 Waterworks Ser C........................................... 5.25 07/01/15 3,129,510
7,000 Moulton-Niguel Water District, 1993 COPs (AMBAC)............ 5.30 09/01/23 7,160,510
2,500 Rancho Water District Financing Authority, Refg Ser 1994
(AMBAC).................................................... 5.00 08/15/14 2,546,650
4,000 Sacramento County Sanitation Districts Financing Authority,
Ser 1993................................................... 5.00 12/01/16 4,037,840
8,000 San Diego Public Facilities Authority, Sewer Ser 1993 A..... 5.25 05/15/20 8,132,560
- -------- -----------
62,500 64,199,530
- -------- -----------
205,550 TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $202,135,155)...... 212,022,707
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL OBLIGATION (0.7%)
$ 1,400 Newport Beach, Hoag Memorial Hospital/Presbyterian Ser 1992
- -------- (Demand 11/02/98) (Identified Cost $1,400,000)............. 3.60*% 10/01/22 $ 1,400,000
------------
$206,950 TOTAL INVESTMENTS (Identified Cost $203,535,155) (a)................... 98.4% 213,422,707
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................... 1.6 3,528,379
----- ------------
NET ASSETS.............................................................. 100.0% $216,951,086
</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 $9,887,552.
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
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
ASSETS:
Investments in securities, at value
(identified cost $203,535,155)............................. $213,422,707
Cash........................................................ 145,474
Interest receivable......................................... 3,546,770
Prepaid expenses and other assets........................... 107,749
------------
TOTAL ASSETS............................................ 217,222,700
------------
LIABILITIES:
Payable for:
Dividends to preferred shareholders..................... 95,736
Investment management fee............................... 75,230
Accrued expenses and other payables......................... 100,648
------------
TOTAL LIABILITIES....................................... 271,614
------------
NET ASSETS.............................................. $216,951,086
============
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, 11,041,813 shares
outstanding)............................................... 157,997,503
Net unrealized appreciation................................. 9,887,552
Accumulated undistributed net investment income............. 1,502,529
Accumulated net realized loss............................... (7,436,498)
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS............ 161,951,086
------------
TOTAL NET ASSETS........................................ $216,951,086
============
NET ASSET VALUE PER COMMON SHARE
($161,951,086 divided by 11,041,813 common shares
outstanding)............................................... $14.67
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $11,210,454
-----------
EXPENSES
Investment management fee................................... 749,021
Auction commission fees..................................... 145,638
Professional fees........................................... 94,411
Transfer agent fees and expenses............................ 40,135
Shareholder reports and notices............................. 26,400
Registration fees........................................... 24,454
Auction agent fees.......................................... 22,524
Trustees' fees and expenses................................. 21,745
Custodian fees.............................................. 10,221
Organizational expenses..................................... 7,098
Other....................................................... 26,065
-----------
TOTAL EXPENSES.......................................... 1,167,712
Less: expense offset........................................ (10,129)
-----------
NET EXPENSES............................................ 1,157,583
-----------
NET INVESTMENT INCOME................................... 10,052,871
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 611,511
Net change in unrealized appreciation....................... 7,675,755
-----------
NET GAIN................................................ 8,287,266
-----------
NET INCREASE................................................ $18,340,137
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER 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, 1998 OCTOBER 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $10,052,871 $10,199,664
Net realized gain (loss)............................. 611,511 (1,187,791)
Net change in unrealized appreciation/depreciation... 7,675,755 9,463,319
------------ ------------
NET INCREASE..................................... 18,340,137 18,475,192
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Preferred............................................ (1,917,382) (1,889,600)
Common............................................... (8,017,122) (7,811,582)
------------ ------------
TOTAL............................................ (9,934,504) (9,701,182)
------------ ------------
Decrease from transactions in common shares of
beneficial interest................................. (1,444,960) (3,314,760)
------------ ------------
NET INCREASE..................................... 6,960,673 5,459,250
NET ASSETS:
Beginning of period.................................. 209,990,413 204,531,163
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$1,502,529 and $1,384,162, respectively)......... $216,951,086 $209,990,413
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter California Quality Municipal Securities (the
"Trust"), formerly InterCapital California Quality Municipal Securities (the
Trust changed its name effective December 21, 1998), 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.
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
E. ORGANIZATIONAL EXPENSES -- Morgan Stanley Dean Witter Advisors Inc. (the
"Investment Manager"), formerly Dean Witter InterCapital Inc., 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 were
deferred and fully amortized as of September 29, 1998.
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, 1998 aggregated
$8,532,977 and $10,159,999, respectively.
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At October 31, 1998, the Fund had transfer agent
fees and expenses payable of approximately $1,424.
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, 1998 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$7,117. At October 31, 1998, the Trust had an accrued pension liability of
$32,310 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% 11/03/98 2.35% - 4.35%
2 240 12,000 3.35 11/05/98 2.50 - 4.38
3 600 30,000 3.64 11/02/98 3.64 - 3.74
</TABLE>
- ---------------------
* As of October 31, 1998.
** For the year ended October 31, 1998.
Subsequent to October 31, 1998 and up through December 21, 1998, the Trust paid
dividends to each of the Series 1 through 3 at rates ranging from 2.45% to 3.64%
in the aggregate amount of $283,488.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
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.
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 7.28%)*........................................... (109,300) (1,093) (1,443,867)
---------- -------- ------------
Balance, October 31, 1998................................... 11,041,813 $110,418 $157,887,085
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
During the year ended October 31, 1998, the Trust utilized approximately
$612,000 of its net capital loss carryover. At October 31, 1998, the Trust had a
net capital loss carryover of approximately $7,436,000 which may be used to
offset future capital gains to the extent provided by regulations, which is
available through October 31 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- ------------------------------------------------------
2002 2003 2004 2005
------- -------- -------- --------
<S> <C> <C> <C>
$5,123 $1,012 $113 $1,188
====== ====== ==== ======
</TABLE>
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
7. DIVIDENDS TO COMMON SHAREHOLDERS
On September 29, 1998, the Trust declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ---------------- -----------------
<S> <C> <C>
$0.0625 November 6, 1998 November 20, 1998
$0.0625 December 4, 1998 December 18, 1998
</TABLE>
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER 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 OCTOBER 31*
-----------------------------------------------------------
1998 1997 1996 1995 1994
<S> <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
---------- ---------- -------- ----------- --------
Net investment income....................................... 0.91 0.91 0.89 0.88 0.95
Net realized and unrealized gain (loss)..................... 0.74 0.74 0.26 2.07 (3.25)
---------- ---------- -------- ----------- --------
Total from investment operations............................ 1.65 1.65 1.15 2.95 (2.30)
---------- ---------- -------- ----------- --------
Less dividends from:
Net investment income...................................... (0.72) (0.69) (0.69) (0.74) (0.74)
Common share equivalent of dividends paid to preferred
shareholders............................................. (0.17) (0.17) (0.16) (0.17) (0.18)
---------- ---------- -------- ----------- --------
Total dividends............................................. (0.89) (0.86) (0.85) (0.91) (0.92)
---------- ---------- -------- ----------- --------
Anti-dilutive effect of acquiring treasury shares........... 0.01 0.03 0.08 0.04 0.01
---------- ---------- -------- ----------- --------
Offering costs charged against capital...................... -- -- -- -- (0.13)
---------- ---------- -------- ----------- --------
Net asset value, end of period.............................. $ 14.67 $ 13.90 $ 13.08 $ 12.70 $ 10.62
========== ========== ======== =========== ========
Market value, end of period................................. $ 14.188 $ 12.688 $ 11.25 $ 10.875 $ 9.75
========== ========== ======== =========== ========
TOTAL INVESTMENT RETURN+.................................... 18.01% 19.60% 10.13% 19.73% (30.89)%
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses.............................................. 0.74%(1) 0.76% 0.78%(1) 0.84%(1) 0.93%
Net investment income before preferred stock dividends...... 6.32% 6.82% 7.02% 7.57% 7.63%
Preferred stock dividends................................... 1.21% 1.26% 1.26% 1.48% 1.43%
Net investment income available to common shareholders...... 5.11% 5.56% 5.76% 6.09% 6.20%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $216,951 $209,990 $204,531 $206,614 $203,662
Asset coverage on preferred shares at end of period......... 394% 382% 372% 376% 281%
Portfolio turnover rate..................................... 4% 6% -- 1% 20%
</TABLE>
- ---------------------
* 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) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER 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 Morgan Stanley Dean Witter
California Quality Municipal Securities (the " Trust"), formerly InterCapital
California Quality Municipal Securities, at October 31, 1998, 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 five years in the period then ended, 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, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 21, 1998
--------------------------------------------------------------------
1998 FEDERAL TAX NOTICE (unaudited)
For the year ended October 31, 1998, 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.
19
<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
- -------------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTS
- -------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- -------------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
MORGAN STANLEY
DEAN WITTER
CALIFORNIA QUALITY
MUNICIPAL
INVESTMENT SECURITIES
Annual Report
October 31, 1998
