<PAGE> 1
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
Two World Trade Center
LETTER TO THE SHAREHOLDERS April 30, 1999 New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Morgan
Stanley Dean Witter California Quality Municipal Securities (IQC) for the period
ended April 30, 1999.
The financial markets have begun to recover from last year's global economic
difficulties. The turmoil which included the Asian crisis, the Russian debt
default and the rescue of a major U.S. hedge fund has given way to more normal
financial conditions. The major catalyst for this return to stability was the
liquidity provided by the Federal Reserve Board's 75 basis point reduction in
the federal-funds rate during the fourth quarter of 1998.
International economic problems precipitated a "flight to quality" rally in
fixed income securities and U.S. Treasury yields reached 30-year lows in October
1998. As the world markets recovered, foreign investors repatriated funds and
Treasury yields began to rise. Interest rates also rose in response to the
surprisingly robust domestic economic growth reported over the second half of
1998. The bond market became concerned that the central bank might become more
restrictive by taking back some of the liquidity provided during the crisis.
MUNICIPAL MARKET CONDITIONS
During 1998, municipal yields were less volatile than Treasury yields. This
pattern of stability continued into 1999. Long-term insured index yields stood
at 5.25 percent at the end of April, only 20 basis points higher than their
October 1998 levels. In contrast, Treasury bond yields rose 50 basis points from
5.15 to 5.65 percent. During the past six months, the yield pick up for
extending tax-exempt maturities from one to 30 years averaged 225 basis points.
The modest rally of municipals during 1998 created a favorable relative value
relationship to Treasuries. Municipals underperformed Treasuries and the ratio
of municipal yields to Treasury yields climbed to 99 percent by December. The
higher the ratio, the more attractive municipals are
<PAGE> 2
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
relative to Treasuries. Municipals have outperformed Treasuries this year and
the ratio declined to 92 percent by April. The high-to-low annual range of
municipal/Treasury yields ratios for the past five years has averaged 93 to 84
percent.
In addition to lagging 1998's Treasury rally, municipals also experienced a glut
of new-issue supply. Underwriting volume of $284 billion was up 28 percent from
the prior year and approached 1993's record. Issuers actively refinanced at
lower interest rates and refundings were 29 percent of the total volume. This
year's rise in interest rates has reduced the amount of refunding activity.
Refunding volume was down 42 percent in the first four months of 1999 while
total underwriting declined 22 percent.
PERFORMANCE
The Trust's net asset value (NAV) decreased from $14.67 to $14.51 per share for
the six-month period ended April 30, 1999. Based on this change plus
reinvestment of tax-free dividends totaling $0.375 per share the Trust's total
NAV return was 1.61 percent. IQC's value on the New York Stock Exchange
decreased from $14.1875 per share to $13.875 per share during the same period.
Based on this change
30-YEAR BOND YIELDS 1994-1999
<TABLE>
<CAPTION>
Insured
Municipal Yields
Insured U.S. as a Percentage of
Municipal Yields Treasury Yields U.S. Treasury Yields
---------------- ------------ ---------------------
<S> <C> <C> <C>
1994 5.40% 6.34% 85.17%
5.40 6.24 86.54
5.80 6.66 87.09
6.40 7.09 90.27
6.35 7.32 86.75
6.25 7.43 84.12
6.50 7.61 85.41
6.25 7.39 84.57
6.30 7.45 84.56
6.55 7.81 83.87
6.75 7.96 84.80
7.00 8.00 87.50
6.75 7.88 85.66
1995 6.40 7.70 83.12
6.15 7.44 82.66
6.15 7.43 82.77
6.20 7.34 84.47
5.80 6.66 87.09
6.10 6.62 92.15
6.10 6.86 88.92
6.00 6.66 90.09
5.95 6.48 91.82
5.75 6.33 90.84
5.50 6.14 89.58
5.35 5.94 90.07
1996 5.40 6.03 89.55
5.60 6.46 86.69
5.85 6.66 87.84
5.95 6.89 86.36
6.05 6.99 86.55
5.90 6.89 85.63
5.85 6.97 83.93
5.90 7.11 82.98
5.70 6.93 82.25
5.65 6.64 85.09
5.50 6.35 86.61
5.60 6.63 84.46
1997 5.70 6.79 83.95
5.65 6.80 83.09
5.90 7.10 83.10
5.75 6.94 82.85
5.65 6.91 81.77
5.60 6.78 82.60
5.30 6.30 84.13
5.50 6.61 83.21
5.40 6.40 84.38
5.35 6.15 86.99
5.30 6.05 87.60
5.15 5.92 86.99
1998 5.15 5.80 88.79
5.20 5.92 87.84
5.25 5.93 88.53
5.35 5.95 89.92
5.20 5.80 89.66
5.20 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
5.00 5.06 98.81
5.05 5.10 99.02
1999 5.00 5.09 98.23
5.10 5.58 91.40
5.15 5.63 91.47
5.20 5.66 91.87
</TABLE>
Source: Municipal Market Data - A Division of Thomas Financial Municipal Group
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
[LARGEST SECTORS PIE CHART]
(% of Net Assets)
<TABLE>
<S> <C>
WATER & SEWER 30%
PUBLIC FACLITIES 15%
EDUCATION 13%
TAX ALLOCATION 9%
ELECTRIC 8%
TRANSPORTION 8%
HOSPITAL 7%
</TABLE>
Portfolio structure in subject to change.
[CREDIT RATINGS PIE CHART]
<TABLE>
<CAPTION>
CREDIT RATINGS AS OF APRIL 30,1999
(% of Total Long-Term Portfolio)
<S> <C>
Aaa or AAA 45%
Aa or AA 37%
A or A 15%
Baa or BBB 3%
</TABLE>
As measured by Moody's Investors Service, Inc. or Standard & Poor's Corp.
Portfolio structure is subject to change.
CALL STRUCTURE as of April 30, 1999
(% of Total Long-Term Portfolio)
Percent Callable
Portfolio structure is subject to change.
WEIGHTED AVERAGE
CALL PROTECTION: 5 YEARS
[CALL STRUCTURE BAR CHART]
<TABLE>
<CAPTION>
Years Bonds Percent
Callable Callable
- ----------- --------
<S> <C>
1999 0.00%
2000 0.00%
2001 0.00%
2002 5.00%
2003 68.00%
2004 17.00%
2005 0.00%
2006 1.00%
2007 3.00%
2008 4.00%
2009 1.00%
2010+ 1.00%
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
plus reinvestment of tax-free dividends, IQC's total market return was 0.40
percent. As of April 30, 1999, IQC's share price was a 4.38 percent discount to
its NAV.
Monthly dividends for the second quarter of 1999 remained $0.0625 per share. The
Trust's level of undistributed net investment income was $0.128 per share on
April 30, 1999, versus $0.136 per share on October 31, 1998.
PORTFOLIO STRUCTURE
The Trust's investments were diversified among 10 long-term sectors and 40
credits. At the end of April, the portfolio's average maturity was 20 years.
Portfolio duration, a measure of sensitivity to interest-rate changes, was 6.1
years. The accompanying charts provide current information on the portfolio's
call structure, largest sectors and mix of credit ratings.
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 the ARPS expenses (ARPS
auction rate and expenses). The greater the spread and the larger 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 this six month period, ARPS leverage contributed approximately $0.03 per
share to common share earnings. Weekly ARPS yields ranged between 2.15 and 4.75
percent. Three ARPS series totaling $55 million represented 25.6 percent of net
assets.
ARPS leverage also increases the price volatility of common shares and has the
effect of extending portfolio duration.
LOOKING AHEAD
The combination of a flight to quality and the flood of new municipal
issues made the municipal-to-Treasury yield relationship more favorable late
last year than it had been in the previous 10 years. Although municipals have
thus far outperformed Treasuries in 1999, we believe that
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
municipals still offer investors considerable value versus their historical
relationship to Treasuries.
The Trust's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps 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. 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.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is also the President and Chief Operating Officer of
Asset Management of Morgan Stanley Dean Witter & Co. and President, Chief
Executive Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the
Trust's Investment Manager. He also serves as Chairman, Chief Executive Officer
and Director of Morgan Stanley Dean Witter Distributors Inc. and Morgan Stanley
Dean Witter Trust FSB.
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 /S/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1999 (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 $ 1,460,374
- -------- -----------
Educational Facilities Revenue (12.6%)
California Educational Facilities Authority,
6,000 Carnegie Institute of Washington 1993 Ser A................ 5.60 10/01/23 6,289,260
1,500 Culinary Institute of America Ser 1993 (Connie Lee)........ 5.30 10/01/23 1,500,735
2,500 Pepperdine University 1993 Ser A (MBIA).................... 5.50 06/01/19 2,588,625
8,000 California Public Works Board, University of California Ser
1993 B..................................................... 5.50 06/01/14 8,438,880
University of California,
5,000 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs....... 5.50 11/01/14 5,128,950
3,000 UCLA Central Chiller/Cogeneration Refg Ser 1993 COPs....... 5.60 11/01/20 3,092,160
- -------- -----------
26,000 27,038,610
- -------- -----------
Electric Revenue (8.4%)
5,000 Los Angeles Department of Water & Power, Issue of 1993
(Secondary AMBAC).......................................... 5.375 09/01/23 5,114,000
8,000 Northern California Transmission Agency, California - Oregon
Transmission Refg Ser 1993 A (MBIA)........................ 5.25 05/01/20 8,098,480
5,000 Southern California Public Power Authority, Mead - Phoenix
1994 Ser A (AMBAC)......................................... 4.875 07/01/20 4,823,650
- -------- -----------
18,000 18,036,130
- -------- -----------
Hospital Revenue (6.7%)
4,000 Anaheim, Anaheim Memorial Hospital Association COPs
(AMBAC).................................................... 5.00 05/15/13 4,042,480
California Health Facilities Financing Authority,
3,000 Cedars Sinai Medical Center Ser 1997 A (MBIA).............. 5.25 08/01/27 3,040,110
5,000 Kaiser Permanente Ser 1985................................. 5.55 08/15/25 5,060,300
2,000 California Statewide Communities Development Authority,
Children's Hospital of Los Angeles Ser 1993 COPs (MBIA).... 6.00 06/01/13 2,281,120
- -------- -----------
14,000 14,424,010
- -------- -----------
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 8,381,760
- -------- -----------
Mortgage Revenue - Single Family (4.0%)
8,305 California Housing Finance Agency, Home 1993 Ser B.......... 5.65 08/01/14 8,596,007
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Public Facilities Revenue (15.1%)
$ 3,000 Alameda County, Alameda County Medical Center Ser 1998
(MBIA)..................................................... 5.00 % 06/01/23 $ 2,946,270
7,000 California Public Works Board, Corrections 1993 Ser D....... 5.375 06/01/12 7,277,340
4,000 California Statewide Communities Development Authority, The
J Paul Getty Trust COPs.................................... 5.00 10/01/23 3,936,640
4,000 Irvine Unified School District - Community Facilities
District #86-1, Special Tax Ser 1998 (AMBAC)............... 5.00 11/01/19 3,989,840
6,000 Los Angeles Convention & Exhibition Center Authority, 1993
Refg Ser A (MBIA).......................................... 5.125 08/15/13 6,133,800
5,000 Los Angeles County Public Works Financing Authority, Proj IV
(MBIA)..................................................... 5.25 12/01/16 5,108,550
3,000 Redding Joint Powers Financing Authority, 1993 Ser A........ 5.50 01/01/13 3,121,890
- -------- -----------
32,000 32,514,330
- -------- -----------
Tax Allocation Revenue (8.5%)
6,870 Garden Grove Community Development Agency, Refg Issue of
1993....................................................... 5.875 10/01/23 7,161,838
7,000 Rosemead Redevelopment Agency, Proj #1 Ser 1993 A........... 5.60 10/01/33 7,235,620
4,000 San Jose Redevelopment Agency, Merged Area Ser 1993
(MBIA)..................................................... 5.00 08/01/20 3,932,880
- -------- -----------
17,870 18,330,338
- -------- -----------
Transportation Facilities Revenue (8.3%)
2,000 Alameda Corridor Transportation Authority, Sr Lien Ser 1999
A (MBIA)................................................... 5.25 10/01/21 2,043,900
5,000 Long Beach, Harbor Ser 1993 (AMT)........................... 5.00 05/15/10 5,128,100
7,000 Los Angeles County Metropolitan Transportation Authority,
Sales Tax Refg Ser 1993-A (MBIA)........................... 5.625 07/01/18 7,289,520
2,000 Los Angeles, Harbor Issue of 1996 Ser B (AMT) (MBIA)........ 5.375 11/01/19 2,038,000
1,500 San Francisco Bay Area Rapid Transit District, Sales Tax Ser
1998 (AMBAC)............................................... 4.75 07/01/23 1,425,435
- -------- -----------
17,500 17,924,955
- -------- -----------
Water & Sewer Revenue (29.6%)
8,000 California Department of Water Resources, Central Valley Ser
L.......................................................... 5.50 12/01/23 8,251,440
7,000 Eastern Municipal Water District, Ser 1993 A COPs (FGIC).... 5.25 07/01/23 7,061,810
7,000 Los Angeles, Wastewater Refg Ser 1993-D (FGIC).............. 5.20 11/01/21 7,069,160
8,000 Los Angeles County Sanitation Districts Financing Authority,
1993 Ser A................................................. 5.25 10/01/19 8,082,080
3,000 Marin County Municipal Water District, Ser 1993............. 5.65 07/01/23 3,139,440
Metropolitan Water District of Southern California,
5,000 Issue of 1992.............................................. 5.50 07/01/13 5,321,450
3,000 Waterworks Ser C........................................... 5.25 07/01/15 3,112,650
7,000 Moulton-Niguel Water District, 1993 COPs (AMBAC)............ 5.30 09/01/23 7,097,160
2,500 Rancho Water District Financing Authority, Refg Ser 1994
(AMBAC).................................................... 5.00 08/15/14 2,531,800
4,000 Sacramento County Sanitation Districts Financing Authority,
Ser 1993................................................... 5.00 12/01/16 4,013,160
8,000 San Diego Public Facilities Authority, Sewer Ser 1993 A..... 5.25 05/15/20 8,082,240
- -------- -----------
62,500 63,762,390
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$205,550 TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $202,331,710)...... $210,468,904
- -------- ------------
CALIFORNIA TAX-EXEMPT SHORT TERM MUNICIPAL OBLIGATIONS
(0.6%)
300 California Economic Development Financing Authority,
California Independent System Operator Corp 1998 Ser A
(Demand 05/03/99).......................................... 4.20*% 04/01/08 300,000
1,100 California Statewide Communities Development Authority, John
- -------- Muir/ Mt Diablo Health Ser 1997 COPs (AMBAC) (Demand
05/03/99).................................................. 4.10* 08/15/27 1,100,000
------------
1,400 TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM INVESTMENTS (Identified Cost
- -------- $1,400,000).................................................................... 1,400,000
------------
$206,950 TOTAL INVESTMENTS (Identified Cost $203,731,710) (a)................... 98.4% 211,868,904
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................... 1.6 3,336,194
----- ------------
NET ASSETS.............................................................. 100.0% $ 215,205,098
====== ============
</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 $8,140,949 and the aggregate gross
unrealized depreciation is $3,755, resulting in net
unrealized appreciation of $8,137,194.
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
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1999 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $203,731,710).......... $211,868,904
Cash..................................... 79,648
Interest receivable...................... 3,480,858
Prepaid expenses and other assets........ 41,360
------------
TOTAL ASSETS......................... 215,470,770
------------
LIABILITIES:
Payable for:
Dividends to preferred
shareholders........................ 95,736
Investment management fee............ 72,565
Accrued expenses and other payables...... 97,371
------------
TOTAL LIABILITIES.................... 265,672
------------
NET ASSETS........................... $215,205,098
============
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.............. 8,137,194
Accumulated undistributed net investment
income.................................. 1,411,084
Accumulated net realized loss............ (7,340,683)
------------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS........................ 160,205,098
------------
TOTAL NET ASSETS..................... $215,205,098
============
NET ASSET VALUE PER COMMON SHARE
($160,205,098 divided by 11,041,813
common shares outstanding).............. $14.51
============
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended April 30, 1999
(unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME........................... $ 5,555,452
-----------
EXPENSES
Investment management fee................. 376,237
Auction commission fees................... 86,811
Professional fees......................... 47,864
Transfer agent fees and expenses.......... 18,025
Auction agent fees........................ 13,737
Shareholder reports and notices........... 13,657
Trustees' fees and expenses............... 8,991
Registration fees......................... 7,335
Custodian fees............................ 4,644
Other..................................... 14,342
-----------
TOTAL EXPENSES........................ 591,643
Less: expense offset...................... (4,604)
-----------
NET EXPENSES.......................... 587,039
-----------
NET INVESTMENT INCOME................. 4,968,413
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain......................... 95,815
Net change in unrealized appreciation..... (1,750,358)
-----------
NET LOSS.............................. (1,654,543)
-----------
NET INCREASE.............................. $ 3,313,870
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
APRIL 30, ENDED
1999 OCTOBER 31, 1998
- --------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 4,968,413 $ 10,052,871
Net realized gain.................................... 95,815 611,511
Net change in unrealized appreciation................ (1,750,358) 7,675,755
------------ ------------
NET INCREASE..................................... 3,313,870 18,340,137
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Preferred............................................ (919,265) (1,917,382)
Common............................................... (4,140,593) (8,017,122)
------------ ------------
TOTAL DIVIDENDS.................................. (5,059,858) (9,934,504)
------------ ------------
Decrease from transactions in common shares of
beneficial interest................................. -- (1,444,960)
------------ ------------
NET INCREASE (DECREASE).......................... (1,745,988) 6,960,673
NET ASSETS:
Beginning of period.................................. 216,951,086 209,990,413
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$1,411,084 and $1,502,529, respectively)......... $215,205,098 $216,951,086
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter 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
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (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.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), 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, 1999 aggregated
$2,048,180 and $1,982,500, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At April 30, 1999, the Fund had transfer agent fees
and expenses payable of approximately $2,800.
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
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
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, 1999 included in Trustees' fees and expenses in
the Statement of Operations amounted to $3,012. At April 30, 1999, the Trust had
an accrued pension liability of $34,552 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>
1 240 $13,000 2.00 % 05/03/99 2.15% - 3.60%
2 260 12,000 3.023 05/05/99 2.50 - 4.75
3 600 30,000 3.64 07/02/99 3.64
</TABLE>
- ---------------------
* As of April 30, 1999.
** For the six months ended April 30, 1999.
Subsequent to April 30, 1999 and up through June 4, 1999, the Trust paid
dividends to each of the Series 1 through 3 at rates ranging from 2.00% to 3.64%
in the aggregate amount of $158,747.
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
MORGAN STANLEY DEAN WITTER CALIFORNIA QUALITY MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (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
PAR EXCESS OF
SHARES VALUE PAR VALUE
---------- -------- ------------
<S> <C> <C> <C>
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 and April 30, 1999................ 11,041,813 $110,418 $157,887,085
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
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>
7. DIVIDENDS TO COMMON SHAREHOLDERS
On March 30, 1999, the Trust declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ------------ -------------
<S> <C> <C>
$0.0625 May 7, 1999 May 21, 1999
$0.0625 June 4, 1999 June 18, 1999
</TABLE>
14
<PAGE> 15
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 SIX FOR THE YEAR ENDED OCTOBER 31,*
MONTHS ENDED ----------------------------------------------------------------
APRIL 30, 1999* 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value beginning of period....... $ 14.67 $ 13.90 $ 13.08 $12.70 $ 10.62 $13.96
------- ------- ------- ------ ------- ------
Income (loss) from investment operations:
Net investment income.................... 0.45 0.91 0.91 0.89 0.88 0.95
Net realized and unrealized gain
(loss)................................. (0.15) 0.74 0.74 0.26 2.07 (3.25)
------- ------- ------- ------ ------- ------
Total income (loss) from investment
operations............................... 0.30 1.65 1.65 1.15 2.95 (2.30)
------- ------- ------- ------ ------- ------
Less dividends from:
Net investment income.................... (0.38) (0.72) (0.69) (0.69) (0.74) (0.74)
Common share equivalent of dividends paid
to preferred shareholders.............. (0.08) (0.17) (0.17) (0.16) (0.17) (0.18)
------- ------- ------- ------ ------- ------
Total dividends........................... (0.46) (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............ $ 14.51 $ 14.67 $ 13.90 $13.08 $ 12.70 $10.62
======= ======= ======= ====== ======= ======
Market value, end of period............... $13.875 $14.188 $12.688 $11.25 $10.875 $ 9.75
======= ======= ======= ====== ======= ======
TOTAL RETURN+............................. 0.40%(1) 18.01% 19.60% 10.13% 19.73% (30.89)%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:
Total expenses............................ 0.74%(2)(3) 0.74%(1) 0.76% 0.78%(1) 0.84%(3) 0.93%
Net investment income before preferred
stock dividends.......................... 6.20%(2) 6.32% 6.82% 7.02% 7.57% 7.63%
Preferred stock dividends................. 1.15%(2) 1.21% 1.26% 1.26% 1.48% 1.43%
Net investment income available to common
shareholders............................. 5.05%(2) 5.11% 5.56% 5.76% 6.09% 6.20%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands... $215,205 $216,951 $209,990 $204,531 $206,614 $203,662
Asset coverage on preferred shares at end
of period................................ 391% 394% 382% 372% 376% 281%
Portfolio turnover rate................... 1%(1) 4% 6% -- 1% 20%
</TABLE>
- ---------------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total 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 of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 16
TRUSTEES
- -------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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
- -------------------------------
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
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.
MORGAN STANLEY
DEAN WITTER
CALIFORNIA
QUALITY
MUNICIPAL
SECURITIES
SEMIANNUAL REPORT
APRIL 30, 1999
