<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998
Two World Trade Center,
New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Morgan Stanley
Dean Witter Insured Municipal Securities (IMS) 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 Insured Municipal Securities to Morgan
Stanley Dean Witter Insured 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 activity. Lower
commodity prices, cheaper imports and improved productivity offset the
potential inflationary impact of strong domestic
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND
ACCURATE DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR
THE PURPOSE OF EDGAR FILING.]
[LINE CHART]
Date AAA Ins Tsy % Relationship
- ---- ------- --- --------------
12/31/93 5.40% 6.34% 85.17%
01/31/94 5.40 6.24 86.54%
02/28/94 5.80 6.66 87.09%
03/31/94 6.40 7.09 90.27%
04/29/94 6.35 7.32 86.75%
05/31/94 6.25 7.43 84.12%
06/30/94 6.50 7.61 85.41%
07/29/94 6.25 7.39 84.57%
08/31/94 6.30 7.45 84.56%
09/30/94 6.55 7.81 83.87%
10/31/94 6.75 7.96 84.80%
11/30/94 7.00 8.00 87.50%
12/30/94 6.75 7.88 85.66%
01/31/95 6.40 7.70 83.12%
02/28/95 6.15 7.44 82.66%
03/31/95 6.15 7.43 82.77%
04/28/95 6.20 7.34 84.47%
05/31/95 5.80 6.66 87.09%
06/30/95 6.10 6.62 92.15%
07/31/95 6.10 6.86 88.92%
08/31/95 6.00 6.66 90.09%
09/29/95 5.95 6.48 91.82%
10/31/95 5.75 6.33 90.84%
11/30/95 5.50 6.14 89.58%
12/29/95 5.35 5.94 90.07%
01/31/96 5.40 6.03 89.55%
02/29/96 5.60 6.46 86.69%
03/29/96 5.85 6.66 87.84%
04/30/96 5.95 6.89 86.36%
05/31/96 6.05 6.99 86.55%
06/28/96 5.90 6.89 85.63%
07/31/96 5.85 6.97 83.93%
08/30/96 5.90 7.11 82.98%
09/30/96 5.70 6.93 82.25%
10/31/96 5.65 6.64 85.09%
11/29/96 5.50 6.35 86.61%
12/31/96 5.60 6.63 84.46%
01/31/97 5.70 6.79 83.95%
02/28/97 5.65 6.80 83.09%
03/31/97 5.90 7.10 83.10%
04/30/97 5.75 6.94 82.85%
05/30/97 5.65 6.91 81.77%
06/30/97 5.60 6.78 82.60%
07/30/97 5.30 6.30 84.13%
08/31/97 5.50 6.61 83.21%
09/30/97 5.40 6.40 84.38%
10/31/97 5.35 6.15 86.99%
11/30/97 5.30 6.05 87.60%
12/31/97 5.15 5.92 86.99%
01/31/98 5.15 5.80 88.79%
02/28/98 5.20 5.92 87.84%
03/31/98 5.25 5.93 88.53%
04/30/98 5.35 5.95 89.92%
05/29/98 5.20 5.80 89.66%
06/30/98 5.20 5.65 92.04%
07/31/98 5.18 5.71 90.72%
08/31/98 5.03 5.27 95.45%
09/30/98 4.95 5.00 99.00%
10/31/98 5.05 5.16 97.87%
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
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.
PERFORMANCE
The Trust's net asset value (NAV) increased from $15.54 to $16.09 per share
during the fiscal year ended October 31, 1998 . Based on this NAV change plus
reinvestment of tax-free dividends of $0.8075 per share, the Trust's total NAV
return was 9.31 percent. IMS's price on the New York Stock Exchange moved from
$14.375 to $15.125 per share. Based on this change in market price plus
reinvestment of dividends, the Trust's total market return was 11.08 percent.
On October 31, 1998, the Trust traded at a 6 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 reduced from
$0.0675 per share to $0.065 per share, to more closely reflect the Trust's
anticipated income. The level of undistributed net investment income declined
from $0.083 to $0.074 per share. Subsequent to the end of the fiscal year, the
Trust declared a capital gain distribution of $0.186 per share.
2
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND
ACCURATE DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR
THE PURPOSE OF EDGAR FILING.]
[PIE CHART] [PIE CHART]
LARGEST SECTORS AS OF CREDIT ENHANCEMENTS AS OF
OCTOBER 31, 1998 OCTOBER 31, 1998
(% OF NET ASSETS) (% OF TOTAL LONG-TERM PORTFOLIO)
ELECTRIC 24% MBIA 49%
TRANSPORTATION 16% AMBAC 30%
GENERAL OBLIGATION 13% FGIC 19%
HOSPITAL 12% CONNIE LEE 2%
WATER & SEWER 8% 100%
REFUNDED 8% AS MEASURED BY MOODY'S INVESTORS
ALL OTHER 19% SERVICE INC. OR STANDARD & POOR'S
TOTAL 100% CORP.
PORTFOLIO STRUCTURE IS SUBJECT PORTFOLIO STRUCTURE IS SUBJECT
TO CHANGE TO CHANGE
[BAR GRAPH]
CALL STRUCTURE AS OF OCTOBER 31, 1998 Weighted Average
(% OF TOTAL LONG-TERM PORTFOLIO) Call Protection: 6 Years
PERCENT CALLABLE
1998 0%
1999 0%
2000 0%
2001 0%
2002 5%
2003 17%
2004 65%
2005 0%
2006 0%
2007 0%
2008 4%
2009+ 9%
100%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE
3
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED 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 34
credits. As illustrated in the accompanying chart, the distribution of call
dates in the portfolio produced 6 years of weighted average call protection.
The Trust's weighted average maturity was 20 years. Average duration (a measure
of price volatility to interest rate changes) was 6 years. To assure the timely
payment of principal and interest, each position in the portfolio was backed by
triple "A" rated bond insurance.
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
transactions at a price not above market value or net asset value, whichever is
lower at the time of purchase. During the fiscal year, the Trust purchased and
retired 108,500 shares of common stock at a weighted average market discount of
6.25 percent.
We appreciate your ongoing support of Morgan Stanley Dean Witter Insured
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
4
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED 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 two separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
Edwin J. Garn
For ........................................................... 6,987,736
Withheld ...................................................... 114,277
John R. Haire
For ........................................................... 6,994,836
Withheld ...................................................... 107,177
Michael E. Nugent
For ........................................................... 7,006,389
Withheld ...................................................... 95,624
Philip J. Purcell
For ........................................................... 7,003,754
Withheld ...................................................... 98,259
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Wayne E. Hedien, Dr. Manuel H. Johnson
and John L. Schroeder.
(2) 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 ........................................................... 6,902,800
Against ....................................................... 15,665
Abstain ....................................................... 183,548
5
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (95.1%)
General Obligation (13.1%)
$ 3,920 Kodiak Island Borough, Alaska, Ser 1994 A (AMBAC) .............................. 5.50% 02/15/14 $ 4,147,870
3,000 California, Refg Dtd 10/01/98 (MBIA) ........................................... 4.50 10/01/28 2,785,890
3,000 Chicago, Illinois, Refg Ser 1993 B (AMBAC) ..................................... 5.125 01/01/22 3,075,870
8,000 Washoe County School District, Nevada, Ltd Tax Ser 04/01/94 A (MBIA) ........... 5.75 06/01/13 8,674,800
-------- ------------
17,920 18,684,430
-------- ------------
Educational Facilities Revenue (4.5%)
2,000 Chicago State University, Illinois, Ser 1994 (MBIA) ............................ 6.15 12/01/23 2,227,080
2,000 New York State Dormitory Authority, Fordham University Ser 1994 (FGIC).......... 5.50 07/01/23 2,095,340
2,000 Rhode Island Health & Educational Building Corporation, Providence
College Ser 1993 (MBIA) ........................................................ 5.60 11/01/22 2,118,580
-------- ------------
6,000 6,441,000
-------- ------------
Electric Revenue (24.1%)
4,000 Anchorage, Alaska, Refg Ser 1993 (MBIA) ........................................ 6.20 12/01/13 4,396,520
5,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA)**..... 6.00 01/01/24 5,504,450
3,000 Municipal Electric Authority of Georgia, Power Ser EE (AMBAC) .................. 6.00 01/01/22 3,296,790
5,000 Kansas City, Kansas, Utility Refg & Impr Ser 1994 (FGIC) ....................... 6.375 09/01/23 5,649,749
2,745 Piedmont Municipal Power Agency, South Carolina, Refg Ser 1993 (MBIA) .......... 5.375 01/01/25 2,914,916
4,000 Utah Municipal Power Agency, Refg Ser 1993 A (FGIC) ............................ 5.25 07/01/18 4,049,040
5,000 Bedford, Virginia, Hydro Ser 1994 (AMBAC) ...................................... 5.25 06/01/25 5,062,150
3,000 Tacoma, Washington, Refg 1994 (FGIC) ........................................... 6.25 01/01/15 3,316,530
-------- ------------
31,745 34,190,145
-------- ------------
Hospital Revenue (12.2%)
3,000 Morgan County -- Decatur Health Care Authority, Alabama, Decatur
General Hospital Ser 1994 (Connie Lee) ......................................... 6.375 03/01/24 3,341,610
4,000 California Statewide Communities Development Authority, Sharp Health
Care COPs (MBIA) ............................................................... 6.00 08/15/24 4,405,400
3,000 Volusia County Health Facilities Authority, Florida, Memorial Health Refg
& Impr Ser 1994 (AMBAC) ........................................................ 5.75 11/15/20 3,198,510
3,000 Massachusetts Health & Educational Facilities Authority, Lahey Clinic
Medical Center Ser B (MBIA) .................................................... 5.375 07/01/23 3,054,420
3,000 New Hampshire Higher Educational & Health Facilities Authority,
Hitchcock Clinic Ser 1994 (MBIA) ............................................... 6.00 07/01/24 3,301,110
-------- ------------
16,000 17,301,050
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Development/Pollution Control Revenue (5.4%)
$ 5,550 Hawaii Department of Budget & Finance, Hawaiian Electric Co Inc
Ser 1992 (AMT) (MBIA) ....................................................... 6.55% 12/01/22 $ 6,130,641
1,500 Pennsylvania Industrial Development Authority, Ser 1994 (AMBAC) ............. 5.50 01/01/14 1,591,890
--------- -------------
7,050 7,722,531
--------- -------------
Mortgage Revenue -- Multi-Family (2.3%)
3,000 Los Angeles Community Redevelopment Agency, California,
--------- Refg Ser 1994 A (AMBAC) ..................................................... 6.55 01/01/27 3,204,570
Public Facilities Revenue (1.6%) -------------
2,000 Michigan Municipal Bond Authority, Ser 1994 A (FGIC) ........................ 6.00 12/01/13 2,216,840
--------- -------------
Transportation Facilities Revenue (16.3%)
5,000 San Francisco Airports Commission, California, San Francisco Int'l Airport
Second Ser Refg (MBIA) ...................................................... 6.75 05/01/20 5,631,850
3,000 Atlanta, Georgia, Airport Ser 1994 B (AMT) (AMBAC) .......................... 6.00 01/01/21 3,215,520
2,000 Hawaii, Airports Third Refg Ser of 1994 (AMT) (AMBAC) ....................... 5.75 07/01/09 2,164,240
Chicago Midway Airport, Illinois,
3,000 1994 Ser A (AMT) (MBIA) .................................................... 6.25 01/01/14 3,298,890
3,000 1994 Ser A (AMT) (MBIA) .................................................... 6.25 01/01/24 3,307,680
5,000 Regional Transportation Authority, Illinois, Ser 1994 A (AMBAC) ............. 6.25 06/01/24 5,558,250
--------- -------------
21,000 23,176,430
--------- -------------
Water & Sewer Revenue (7.6%)
2,000 East Bay Municipal Utility District, California, Water Ser 1998 (MBIA) ...... 4.75 06/01/34 1,910,780
4,000 Los Angeles, California, Wastewater Refg Ser 1993 A (MBIA) .................. 5.70 06/01/20 4,270,920
5,000 Charleston, South Carolina Refg Cap Improvement Ser 1998
(Secondary FGIC) (WI) ....................................................... 4.50 01/01/24 4,637,200
--------- -------------
11,000 10,818,900
--------- -------------
Refunded (8.0%)
5,000 Indianapolis, Indiana, Gas Utility Refg Ser 1994 A (AMBAC) .................. 5.875 06/01/04+ 5,566,450
2,255 Piedmont Municipal Power Agency, South Carolina, Refg Ser 1993 (MBIA)
(ETM) ....................................................................... 5.375 01/01/25 2,420,201
3,000 Wisconsin Health & Educational Facilities Authority, Marquette University
Ser 1994 (FGIC) ............................................................. 6.45 12/01/04+ 3,365,190
--------- -------------
10,255 11,351,841
--------- -------------
125,970 TOTAL TAX- EXEMPT MUNICIPAL BONDS (Identified Cost $121,184,953)............. 135,107,737
--------- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
PORTFOLIO OF INVESTMENTS October 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (6.4%)
$ 5,700 Missouri Health & Educational Facilities Authority, Washington University
Ser 1996 C (Demand 11/02/98) ............................................ 3.70*% 09/01/30 $ 5,700,000
3,400 Geisinger Authority, Pennsylvania, Geisinger Health Ser 1998 B
- -------- (Demand 11/02/98) ....................................................... 3.70* 08/15/28 3,400,000
------------
9,100 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
- -------- (Identified Cost $9,100,000)........................................................ 9,100,000
------------
$135,070 TOTAL INVESTMENTS (Identified Cost $130,284,953) (a) ............................... 101.5% 144,207,737
========
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS ..................................... (1.5) (2,074,888)
----- ------------
NET ASSETS ......................................................................... 100.0% $142,132,849
===== ============
</TABLE>
- -------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Security purchased on a "when-issued" basis.
+ Prerefunded to call date shown
* Current coupon of variable rate demand obligation.
** A portion of this security is segregated in connection with the
purchase of a "when-issued" security.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$14,041,392 and the aggregate gross unrealized depreciation is
$118,608, resulting in net unrealized appreciation of
$13,922,784.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
- -------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
October 31, 1998
Alabama ........ 2.4% Kansas .......... 4.0% Rhode Island .... 1.5%
Alaska ......... 6.0 Massachusetts ... 2.1 South Carolina .. 7.0
California ..... 19.5 Michigan ........ 1.6 Utah .............. 2.8
Florida ........ 2.3 Missouri ...... 4.0 Virginia ......... 3.6
Georgia ....... 4.6 Nevada .......... 6.1 Washington ...... 2.3
Hawaii ......... 5.8 New Hampshire ... 2.3 Wisconsin ......... 2.4
Illinois ....... 12.3 New York ........ 1.5 -----
Indiana ........ 3.9 Pennsylvania .... 3.5 Total ............. 101.5%
=====
- -------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
<TABLE>
<S> <C>
ASSETS :
Investments in securities, at value
(identified cost $130,284,953).......................................... $144,207,737
Cash ..................................................................... 118,138
Interest receivable ...................................................... 2,571,521
Deferred organizational expenses ......................................... 2,891
Prepaid expenses ......................................................... 4,505
------------
TOTAL ASSETS .......................................................... 146,904,792
------------
LIABILITIES :
Payable for:
Investments purchased ................................................. 4,661,075
Investment management fee ............................................. 49,302
Accrued expenses ......................................................... 61,566
------------
TOTAL LIABILITIES ..................................................... 4,771,943
------------
NET ASSETS ............................................................ $142,132,849
============
COMPOSITION OF NET ASSETS :
Preferred shares of beneficial interest (1,000,000 shares authorized of
non-participating $.01 par value, none issued) ......................... --
------------
Common shares of beneficial interest (unlimited shares authorized of
$.01 par value, 8,831,513 shares outstanding) .......................... $125,918,218
Net unrealized appreciation .............................................. 13,922,784
Accumulated undistributed net investment income .......................... 649,241
Accumulated undistributed net realized gain .............................. 1,642,606
------------
TOTAL NET ASSETS ...................................................... $142,132,849
============
NET ASSET VALUE PER COMMON SHARE
($142,132,849 divided by 8,831,513 common shares outstanding) .......... $16.09
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ............................... $ 7,742,018
-----------
EXPENSES
Investment management fee ..................... 493,374
Professional fees ............................. 45,663
Transfer agent fees and expenses .............. 39,425
Trustees' fees and expenses ................... 26,734
Shareholder reports and notices ............... 17,972
Registration fees ............................. 16,417
Organizational expenses ....................... 8,793
Custodian fees ................................ 7,729
Other ......................................... 11,843
-----------
TOTAL EXPENSES ............................. 667,950
Less: expense offset .......................... (7,715)
-----------
NET EXPENSES ............................... 660,235
-----------
NET INVESTMENT INCOME ...................... 7,081,783
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ............................. 1,800,280
Net change in unrealized appreciation ......... 3,097,313
-----------
NET GAIN ................................... 4,897,593
-----------
NET INCREASE .................................. $11,979,376
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
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 .............................. $ 7,081,783 $ 7,239,473
Net realized gain .................................. 1,800,280 131,121
Net change in unrealized appreciation .............. 3,097,313 3,794,121
------------ ------------
NET INCREASE .................................... 11,979,376 11,164,715
Dividends to common shareholders from net investment
income ........................................... (7,175,503) (7,321,738)
Decrease from transactions in common shares of
beneficial interest .............................. (1,611,680) (3,143,148)
------------ ------------
NET INCREASE .................................... 3,192,193 699,829
NET ASSETS:
Beginning of period ................................ 138,940,656 138,240,827
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$649,241 and $742,961, respectively) ............ $142,132,849 $138,940,656
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Insured Municipal Securities (the "Trust"), formerly
InterCapital Insured Municipal Securities (the Trust changed its name effective
December 21, 1998), is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
Trust's investment objective is to provide current income which is exempt from
federal income tax. The Trust was organized as a Massachusetts business trust
on October 14, 1993 and commenced operations on February 28, 1994.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service has
informed the Trust that in valuing the portfolio securities, it uses both a
computerized matrix of tax-exempt securities and evaluations by its staff, in
each case based on information concerning market transactions and quotations
from dealers which reflect the bid side of the market each day. The portfolio
securities are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Trust amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment
12
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
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 $44,000
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, 1998
aggregated $9,398,710 and $14,782,690, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager,
is the Trust's transfer agent. At October 31, 1998, the Trust had transfer
agent fees and expenses payable of approximately $300.
13
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, 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, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $13,596. At October 31, 1998, the Trust had an accrued pension liability of
$13,596 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 preferred shares 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.
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, 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 .............................. 9,168,013 $ 91,680 $130,577,794
Treasury shares purchased and retired (weighted
average discount 9.37%)* ............................. (228,000) (2,280) (3,140,868)
Reclassification due to permanent book/tax difference .. -- -- 3,572
--------- -------- ------------
Balance, October 31, 1997 .............................. 8,940,013 89,400 127,440,498
Treasury shares purchased and retired (weighted
average discount 6.25%)* ............................. (108,500) (1,085) (1,610,595)
--------- -------- ------------
Balance, October 31, 1998 .............................. 8,831,513 $ 88,315 $125,829,903
========= ======== ============
</TABLE>
- --------------
* The Trustees have voted to retire the shares purchased.
14
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
6. 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>
$0.065 November 6, 1998 November 20, 1998
$0.065 December 4, 1998 December 18, 1998
</TABLE>
7. FEDERAL INCOME TAX STATUS
During the year ended October 31, 1998, the Trust utilized all of its net
capital loss carryover of approximately $158,000.
15
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED 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** FEBRUARY 28, 1994*
----------------------------------------------------- THROUGH
1998 1997 1996 1995 OCTOBER 31, 1994**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .................. $15.54 $15.08 $14.91 $13.20 $14.06
------ ------ ------ ------ ------
Net investment income ................................. 0.80 0.80 0.80 0.79 0.44
Net realized and unrealized gain (loss) ............... 0.55 0.43 0.11 1.58 (0.93)
------ ------ ------ ------ ------
Total from investment operations ...................... 1.35 1.23 0.91 2.37 (0.49)
------ ------ ------ ------ ------
Less dividends from net investment income ............. (0.81) (0.81) (0.81) (0.75) (0.38)
------ ------ ------ ------ ------
Anti-dilutive effect of acquiring treasury shares ..... 0.01 0.04 0.07 0.09 0.05
------ ------ ------ ------ ------
Offering costs charged against capital ................ -- -- -- -- (0.04)
------ ------ ------ ------ ------
Net asset value, end of period ........................ $16.09 $15.54 $15.08 $14.91 $13.20
====== ====== ====== ====== ======
Market value, end of period ........................... $15.125 $14.375 $13.125 $12.625 $11.125
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+ .............................. 11.08% 16.12% 10.52% 20.61% (23.56)%(1)
RATIOS TO AVERAGE NET ASSETS:
Total expenses ........................................ 0.47% 0.47% 0.49%(3) 0.54%(3) 0.51%(2)
Net investment income ................................. 5.02% 5.27% 5.32% 5.51% 4.69%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............... $142,133 $138,941 $138,241 $141,738 $132,377
Portfolio turnover rate ............................... 7% -- 1% -- --
</TABLE>
- -------------
* Commencement of operations.
** The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total investment return is based upon the current market value on the
last day of each period reported. Dividends are assumed to be reinvested
at the prices obtained under the Trust's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER INSURED MUNICIPAL SECURITIES
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER INSURED 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 Insured
Municipal Securities (the "Trust"), formerly InterCapital Insured 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 four years in
the period then ended and for the period February 28, 1994 (commencement of
operations) through October 31, 1994, 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 and brokers, 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 were exempt interest dividends, excludable from gross income
for Federal income tax purposes.
- -------------------------------------------------------------------------------
17
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<PAGE>
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<PAGE>
TRUSTEES
- -------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- -------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- --------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- --------------------------
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
INSURED
MUNICIPAL
SECURITIES
ANNUAL REPORT
OCTOBER 31, 1998
